Declaring dividends is a positive signal, it tells shareholders the company is profitable and financially healthy. But before any payment is made, there are critical compliance and audit considerations that directors and business owners must be aware of.
From an audit perspective, dividend declaration isn’t just a boardroom decision, it’s also a matter of financial prudence, legal compliance, and documentation.
What Is a Dividend?
A dividend is a distribution of a company’s retained earnings to its shareholders. In Malaysia, dividends are generally declared by the Board of Directors and must comply with:
- The Companies Act 2016
- Applicable financial reporting standards
- The company’s articles of association
From an Audit Perspective: What Must Be Checked?
1. Availability of Profits
Auditors will first confirm whether the company has sufficient retained earnings or profits to declare dividends. According to Section 132 of the Companies Act 2016 (Malaysia):
“A company may only make a distribution to the shareholders out of profits available, if the company is solvent.”
This means:
- Dividends cannot be paid from capital
- Dividends must be paid from retained earnings or current year profit
Auditor’s Role:
- Verify accumulated profits from audited financial statements
- Ensure accurate computation of retained earnings (after tax and adjustments)
2. Solvency Test
Even if profits exist, the company must pass the solvency test after declaring dividends.
The solvency test confirms:
- The company can pay its debts when they fall due, and
- Assets exceed liabilities after the dividend distribution
Auditor’s Role:
- Review updated management accounts post-dividend proposal
- Assess liquidity ratios and working capital sufficiency
- Consider going concern assumptions
3. Board Resolutions & Documentation
Dividend declarations must be properly authorized. Auditors will check:
- Board resolution approving the dividend amount and date
- Minutes of meetings
- Dividend vouchers or notices to shareholders
4. Tax Implications & Withholding
Auditors will confirm whether:
- The company is subject to tax on profits before distribution
- Withholding tax applies (especially for dividends paid to non-residents)
- Section 108 tax credit (if any) has been properly accounted for (although no longer in use post-2008, some companies still carry historical balances)
Auditor’s Role:
- Verify compliance with tax provisions
- Ensure any required withholding tax has been recorded and reported to LHDN
5. Accounting Entries & Disclosure
Dividends must be recorded correctly in the books and disclosed in the financial statements under:
- Statement of Changes in Equity
- Notes to the Financial Statements
Auditor’s Role:
- Confirm accurate journal entries (e.g. Dr Retained Earnings / Cr Dividend Payable)
- Check payment records and bank transactions
- Verify disclosures comply with MFRS/IFRS standards
Common Audit Issues with Dividend Declarations
Issue | Risk |
Declaring dividends from current profits without considering accumulated losses | Non-compliance with Companies Act |
No formal board approval or documentation | Governance risk |
Solvency test not performed or documented | Legal liability for directors |
Declaring dividends while company is under financial stress | Going concern risk |
Misclassification in accounts | Financial reporting errors |
Best Practices Before Declaring Dividends
✅ Prepare up-to-date management accounts
✅ Check retained earnings are sufficient
✅ Perform and document solvency test
✅ Ensure board resolution is properly drafted and signed
✅ Consult auditors before finalizing dividend declaration