Family businesses form an essential part of the Malaysian economy, and it is estimated that family businesses contribute more than half of Malaysia’s Gross Domestic Product. These businesses are the backbone of the economy, not only responsible in creating employment to general public at large but also instrumental in providing goods and services and stimulating consumer spending and drive demand.
Despite its importance to the economy and some stood the test of time, many family businesses, especially those in the “Small and Medium Enterprise” category, fail to keep its accounting records and bookkeeping up to date. Many still practice cash-base transactions without keeping sufficient accounting records and continue assessing the health of the business or performance by simply quantifying the amount of money left in the bank account, while others had invested in high-cost accounting software but struggle to execute proper journal accounting entries and maintaining proper ledgers to form a meaningful document, largely due to the hiring of unqualified or bogus accountants. Accounting software is designed to be manned by qualified accountant as it requires precise input and correct classification of financial data based on accepted accounting principles, a misconception that still exist among business owners that they truly believe the said software can solve accounting matters on a stand-alone basis. This issue relates to the idea in computing and software, where an incorrect or poor-quality input will produce faulty output.
Family businesses must seriously acknowledge that accounting and bookkeeping are equally important as the business itself. It was recently reported by Lembaga Hasil Dalam Negeri (LHDN) of the Penang Branch that sole proprietorships in Penang have the highest non-compliance rate on tax evasion matters (The Star, 18th September 2023), and their accounts are not well-maintained compared to other types of businesses.
Here, we listed some common issues facing or will be facing family businesses with no proper accounting and bookkeeping.
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- Can be subjected to tax audit investigation by Lembaga Hasil Dalam Negeri (LHDN). May lead to legal action, force settlement of income tax arrears and summons,
- Can be subjected to tax audit investigation on Sales & Service Tax matters by Royal Malaysian Customs. May lead to legal action, force settlement of Sales & Service Tax arrears and summons,
- In the absence of accounting records, tax arrears will be determined based on the best judgement of the authorities. This no longer equates the actual amount should a proper accounting records is maintained,
- Unable to fulfill yearly statutory audit requirement imposed by Suruhanjaya Syarikat Malaysia (SSM) and can be subjected to summons,
- In breach of Section 245 of Companies Act 2016, Section 82 of Income Tax Act 1967 and Section 24 of Sales Tax Act 2018. These Acts imposed mandatory requirement for accounting records and accounting entries to be kept and made. The company and every officer can be fined up to RM500,000 or imprisonment of up to 3 years, or both for non-compliance,
- Force settlement or payment demanded by authorities on tax arrears (both, undeclared and under declared) and penalties accumulated over many years as described above may lead to potential loss of available assets or cash accumulated over the years. Bankruptcy and mandatory liquidation are likely in these events,
- Unable to apply various grants and tax benefits offered by various authorities that can improve cashflows,
- Unable to track the financial performance of the business that can lead to inability to settle debts of financial institutions and creditors and
- The introduction of e-invoicing by LHDN for all businesses by July 2025, may require all businesses in Malaysia to maintain proper accounting and bookkeeping records. In view that all sales and purchase invoices are required to be validated at LHDN’s portal, any inconsistency of business records in the accounting ledger against those records validated with LHDN for tax submission purposes may trigger tax audit investigation by authorities.
Proper accounting and bookkeeping are essential for business, thus avoiding unnecessary summons and legal actions issued by the authorities that can increase overall business operational costs. Furthermore, it helps considerably in tracking the profitability of the businesses over period of time. Based on the above, we strongly suggest business owners to take a step back and rectify the weaknesses of the accounting and bookkeeping function of their respective businesses to avoid serious and costly implication in the future. Outsourcing the accounting function to public accounting firm licensed by Malaysian Institute of Accountants is highly recommended in the absence of qualified in-house accountant. In Malaysia, the accounting profession is regulated by Malaysian Institute of Accountants (MIA) and only public accounting firm with a valid public practice license issued by MIA can provide accounting services to the general public and businesses in Malaysia.
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