Singapore is known for its business-friendly regulatory environment, and one of the key ways it supports small and medium-sized enterprises (SMEs) is through audit exemption for qualifying companies. The criteria for audit exemption are carefully defined to reduce the compliance burden on smaller companies while maintaining transparency and accountability in financial reporting.
What Is Audit Exemption?
Audit exemption allows certain companies to forgo the statutory requirement to have their financial statements audited annually. This initiative is designed to ease the compliance costs and administrative burden for smaller entities, especially startups and SMEs that may not have complex financial operations.
Evolution of the Audit Exemption Framework
Previously, only Exempt Private Companies (EPCs) with annual revenue not exceeding S$5 million could qualify for audit exemption. An EPC refers to a private limited company with no more than 20 shareholders and no corporate shareholders.
In 2015, the audit exemption regime in Singapore was enhanced with the introduction of the “small company” concept. This broadened the eligibility criteria and made audit exemption available to a larger group of businesses.
Current Criteria for Audit Exemption
Under the current framework, a company can qualify as a “small company” and be exempted from audit if it meets the following conditions:
1. Private Company Status
The company must be a private company throughout the financial year. This means it should not be a public company or a company that has more than 50 shareholders.
2. Quantitative Criteria
The company must meet at least two of the following three criteria for the immediate past two consecutive financial years:
- Total annual revenue of not more than S$10 million;
- Total assets of not more than S$10 million;
- Number of employees of not more than 50.
If the company is part of a group, both the individual company and the group must meet the criteria. The group must also qualify as a “small group” based on consolidated figures.
Definition of a Small Group
A group is considered a “small group” if it meets at least two out of the same three quantitative criteria on a consolidated basis for the immediate past two consecutive financial years.
The idea is to ensure that companies cannot circumvent the exemption rules by creating complex group structures while still operating at a large scale.
Application of Audit Exemption to New and Existing Companies
Existing Companies
Companies incorporated before the implementation of the new rules are allowed a transitional period. They must meet the small company criteria in either the first or second financial year starting from the date the new rules took effect. If they qualify, they will be eligible for audit exemption from the following financial year.
New Companies
For newly incorporated companies, the assessment is based on the first or second financial year after incorporation. If the company meets the criteria in either of those years, it will be eligible for audit exemption from the following year.
When Does a Company Lose Its Audit Exemption Status?
A company will cease to be eligible for audit exemption if:
- It is no longer a private company at any time during the financial year;
- It fails to meet at least two of the three quantitative criteria for the immediate past two consecutive financial years.
Similarly, a group will lose its audit exemption if the group as a whole fails to meet the criteria for a small group over the same two-year period.
Ongoing Obligations Despite Audit Exemption
Even if a company qualifies for audit exemption, it is still required to comply with other statutory obligations. These include:
- Preparing a full set of financial statements in accordance with the Singapore Financial Reporting Standards (SFRS). These statements must include a directors’ statement and explanatory notes.
- Filing annual returns with the Accounting and Corporate Regulatory Authority (ACRA) within the stipulated deadline.
- Filing corporate income tax returns and Estimated Chargeable Income (ECI) with the Inland Revenue Authority of Singapore (IRAS).
While these documents do not need to be audited, they must still be accurate and prepared in a timely and professional manner. Many companies choose to engage accounting professionals even if an audit is not required.
Shareholder Rights and Audit Requirements
It is important to note that audit exemption is not absolute. Shareholders holding at least 5% of the company’s voting rights can request that an audit be carried out, even if the company qualifies for exemption.
This mechanism helps protect the interests of minority shareholders who may want assurance that the company’s financials have been independently verified.
Benefits of Audit Exemption for SMEs
The introduction of audit exemption for small companies offers several practical benefits for SMEs:
1. Cost Savings
Avoiding the cost of annual audit fees can be a significant relief for small businesses, allowing them to channel funds toward growth and operations.
2. Time Efficiency
The process of auditing can be time-consuming and resource-intensive. Exemption allows business owners to focus on strategic priorities.
3. Simplified Compliance
The compliance requirements for unaudited companies are generally less demanding. However, businesses must still maintain proper accounting records.
4. Startup Friendliness
Audit exemption makes it easier for startups to manage their finances and regulatory obligations during their early growth stages.
Caution for Growing Companies
Businesses should be cautious not to become complacent simply because they are currently exempt from audits. As revenue and operations grow, companies may exceed the thresholds and lose their exemption status.
When planning for expansion, it is wise to consider when an audit may become mandatory again and to start preparing accordingly by ensuring that accounting systems and controls are robust.
Conclusion
Audit exemption is a valuable compliance relief mechanism for SMEs in Singapore, reflecting the country’s pro-business regulatory environment. By meeting the criteria for audit exemption, private companies can reduce operational costs and simplify compliance while still maintaining proper financial documentation.
However, the exemption comes with responsibilities. Companies must still prepare full sets of financial statements, file annual returns, and submit tax filings. It is also important to stay updated on the latest regulatory changes to ensure continued compliance.
For SMEs that are growing or looking to scale, working with professional accounting and compliance firms remains a prudent choice—even when audits are not legally required.