From 1^st April 2021, Companies using accounting software will have to compulsory maintain log of changes for each transaction

The Central Government in exercise of its powers provided under the Companies Act, had provided with the Companies (Accounts) Rules, 2014. The rules specified the following aspects:

• Manner of books of account to be kept in electronic mode
• Conditions regarding maintenance and inspection of certain financial information by directors
• Form of Statement containing salient features of financial statements of subsidiaries
• Manner of consolidation of accounts
• Transitional provisions with respect to Accounting Standards
• Matters to be included in Board’s report
• Disclosures about CSR Policy
• Statement containing salient features of financial statements
• Manner of circulation of financial statements in certain cases
• Filing of financial statements and fees to be paid thereon
• Companies required to appoint internal auditor

Rule 3 of the said rules pertained to Manner of books of account to be kept in electronic mode. According to Sub Rule 1, the books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India so as to be usable for subsequent reference. The Central Government has now added a new proviso to Rule 3(1).

According to the said proviso, for the financial year commencing on or after the 1st April, 2021, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.

Audit trails are the manual or electronic records that chronologically list down events or procedures to provide support documentation and history that is used to authenticate security and operational actions, or mitigate challenges.

This new proviso will prove to be extremely beneficial as audit trail provides a “baseline” for analysis or an audit when initiating an investigation. The purpose or importance of an audit trail takes many forms depending on the organization. A company may use the audit trail for reconciliation, historical reports, future budget planning, tax or other audit compliance, crime investigation, and/or risk management. This move will also aid curb back-dating of transactions and ensure that the corporate sector maintains books of accounts in true and correct manner.

Audit trails also help in increasing transparency. Transparency in transactions will create a surge in the tax revenue collection. This will boost the economy and significantly reduce the possibilities of the parallel black economy.

This reporting change will not only increase the IT testing of the accounting software, it will also enhance accountability among company personnel and enable audit of pervasive controls (for instance segregation of duty) using technology. Companies will have to immediately gear up their accounting software to enable audit trail / log of transactions, which cannot be disabled. While the audit reporting is generally for one year, the regulation refers to statutory requirements for record retention, which significantly enhances reporting responsibility.

The Central Government also inserted clause (xi) and (xii) in Rule 8(5) of the Companies (Accounts) Rules, 2014 stating that the report by Company’s Board of directors of the shall also contain:

• the details of application/proceeding pending under the Insolvency and Bankruptcy Code, 2016 and
• the details of difference between amount of the valuation done at the time of one-time settlement and the valuation done while taking loan from the Banks or Financial Institutions along with the reasons thereof.

Meanwhile, the MCA has amended its Companies (Audit and Auditors) rules 2014, to cast responsibility on the management to make representation that circuitous means have not been adopted for diversion of funds of the company. Managements have to give such a confirmation, and auditors have to comment in their report on their satisfaction of such representation.

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