The term ‘Audit trail’ has not been defined in the Companies Act, 2013 (Act) or the Companies (Accounts) Rules, 2014 (“Accounts Rules”), It implies a chronological record of the changes that have been made to the data. The Ministry of Corporate Affairs (“MCA”), in its continuing drive to improve transparency and reinforce the integrity of financial reporting, has amended the Accounts Rules requiring companies to ensure that the accounting software used to maintain books of accounts has the following features and attributes:
Records an audit trail of each and every transaction;
Creates an edit log of each change made in the books of account along with the date when such changes were made;
Ensuring that the audit trail is not disabled.
The Companies (Audit and Auditor) Rules, 2014 (“Audit Rules”) have been correspondingly amended wherein auditors are now required to report, as part of the auditor’s report (in the section ‘Report on Other Legal and Regulatory Requirements’, as to whether,
(a) the accounting software used by the company being audited has the feature of recording audit trail (edit logs),
(b) the audit trail feature was operational throughout the financial year and had not been “tampered” with and
(c) such audit trails have been retained for the period as statutorily prescribed.
The MCA has notified that the aforesaid amendments will be effective from April 1, 2023, which implies that the accounting software employed by companies will need to be compliant with the Accounts Rules from FY 2023-24 onwards. The requirement was initially made applicable for the financial year commencing on or after the 1st day of April 2021, however the applicability was deferred to the financial year commencing on or after April 1, 2022 and thereafter to April 1, 2023.
The relaxations by way of deferment of the Accounts rules twice by the MCA ought to be leveraged by the companies to assess whether the accounting software has the requisite functional parameters and attributes which would be considered as being compliant with the Accounts Rules and where necessary, engage with their service providers to ensure compliance.
In today’s environment, accounting software used for maintaining books of accounts is hosted and maintained in India or outside India, on-premises or on the cloud, or through subscribed Software as a Service (SaaS) application. Also, there are multiple other software or infrastructure elements involved in processing end-to-end transactions like Enterprise Resource Planning (ERP), Web Portals, Applications, use of End User Applications like Excel, Email Systems, Mobile Applications, Ticketing Applications, Consolidation Solutions, and others.
Considering the requirements detailed above and the said complexities involved, it