Mandatory to use accounting software with audit trail: MCA

The Ministry of Corporate Affairs issued an amendment to the Companies (Accounts) Rules on 24th March 2021. One of the amendments will mark a historic shift in technology for accounting and bookkeeping by all companies from 1st April 2021. The notification impacts various businesses, including MSMEs, auditors and accounting software providers, from FY 2021-22.

In Rule 3(1) of the Company (Accounts) Amendment Rules, 2021, a new proviso is inserted. As per the new proviso, companies that use accounting software for maintaining ledgers and books of accounts must take a note. Henceforth, it must use such accounting software that records an audit trail for every transaction effected. 

Such companies must have edit logs in place in the accounting software. This log must record each change made to the accounts and the date of such change. The accounting software must be reconfigured such that the audit trails cannot be disabled. 

Similarly, a corresponding amendment is made to Company Auditing rules through the Companies (Audit and Auditors) Amendment Rules, 2021. According to the amendment, the auditor must also check whether the company is subject to audit maintaining the audit trail or editing log for its accounting software throughout the entire financial year. It should not have been tampered with, while the audit trail must be backed up and retrievable as per the Company law.

These represent the government’s admirable desire to enhance accountability and enforcement. The aim appears to be to identify (wherever the claim is made) corporate management’s misuse of electronic accounting records to defraud stakeholders (shareholders, lenders, tax authorities) and, in the process, defeat the object and intent of the law.

The audit trail refers to the record of all activities related to a specific transaction. The audit trail is very relevant and acceptable on a conceptual and regulatory level. Several accounting software providers raised a few concerns surrounding this notification. 

First of all, the notification has come out around the end of the financial year with just a week left for the date of implementation. It will induce panic among businesses, especially the MSME segment and may involve an unexpected increase in compliance costs. Furthermore, the software providers need to make the necessary changes to their system in a rushed manner.

Secondly, there are several instances of erroneous recording of values and entries in the accounting records by operating teams without the intention to defraud. The original and the revised entries both get recorded in the audit trail creating unnecessary hassles for the relevant business and the auditors.

Thirdly, the rule intends to apply to companies of all sizes. This rule will inconvenience the MSME segment giving them less time to shift to the relevant accounting software that has the feature. Many tax experts opinionated that although this rule brings transparency, it should have been implemented for only large companies initially. 

For any clarifications/feedback on the topic, please contact the writer at annapoorna.m@cleartax.in