In India, Audit Trail Software: Mandatory Compliance the Ministry of Company Affairs (MCA) is policing and supervising limited liability partnerships and corporate entities. An entity’s bookkeeping is crucial, and any manipulation of it can result in fraud and significant losses.

Companies are currently able to enter any transaction at any moment and make various changes to it without leaving a trace of their actions. Many times, businesses complete their accounting after the year is over, during the compilation of the financial statement, or they make changes to transactions as needed unless they are documented elsewhere.

MCA has made it necessary for all businesses to have an audit trail option in their accounting software in order to increase the transparency and quality of reporting. Originally, it was suggested that this requirement be put into force on April 1, 2021. However, MCA first postponed the implementation until April 1, 2022, and then again until April 1, 2023, taking into account the representations received. As of April 1, 2023, all businesses must incorporate an audit trail capability into their accounting software.

This article provides a thorough examination of the audit trail tool’s operation, ramifications, potential implementation difficulties, and other related topics.

The Companies Act of 2013 was amended to include provisions for audit trails.

Rule 3 of the Companies (Accounts) Rules, 2014 was modified by the Companies (Accounts) Amendment Rules, 2021, which added the following clause:

As long as the accounting software has the ability to record an audit trail of every transaction, create an edit log of every change made to the books of account along with the date that the change was made, and ensure that the audit trail cannot be disabled, then any company that uses accounting software to maintain its books of account for the fiscal year starting on or after April 1, 2021, may use it.

• The date of implementation was eventually moved up to April 1, 2022, and then April 1, 2023.

• As a result, Rule 3 required the business to install an audit trail function in its accounting software.

• The Companies (Audit and Auditors) Rules, 2014 underwent a similar revision in addition to Rule 3 of the Companies (Accounts) Rules. In Sub-rule 11, the new clause (g) that follows was added:

For years of operation beginning on or after April 1, 2023, has the company maintained its books of accounts using accounting software that has an audit trail (edit log) feature? Has the software been used for all transactions recorded in the accounting software throughout the year? Has the audit trail feature not been tampered with? Has the company maintained the audit trail in accordance with the legal requirements for record retention?

What is an Edit Log (Audit Trail)?

• An audit trail, also known as an audit log, is a chronological record, set of records, destination, and/or source of records that are essential to security and that offer documentary proof of the order in which various activities have impacted a particular operations of the entity.

• One feature that assists businesses in keeping track of all the modifications made to their financial data is the Audit Trail (Edit Log) feature. It is a system that helps businesses detect any potentially fraudulent or unauthorized activity by tracking and monitoring changes to financial transactions.

• To keep track of all operations in books of accounts, including the creation, modification, and deletion of all transactions recorded in accounting software, a new audit trail (edit log) function is needed.

• This feature is necessary for all masters, including groups, ledgers, and stock items, as well as for accounting transactions and the editing of details in corporate masters.
• As a result, the company and auditor can quickly determine the following through the modification log:

• When and by whom was the transaction created?

• whether or not there were any other changes made, and if so, by whom

• What adjustments are made to the accounting transaction?

Obstacles in the Audit Trail’s Implementation

Switching between different accounting software: The organization must migrate data onto another accounting program, which can be a difficult and expensive process if the current accounting software does not include audit trail features.

Determining roles and responsibilities is necessary: Currently, transactions are entered through a general profile, and firms typically do not construct unique profiles of users to clarify their rights and duties. To determine who has logged or altered the transactions, companies must now specify the roles and responsibilities of users.

Application to Data from Past Years: Software that includes data from prior years must also incorporate the audit trail capability. As a result, this feature will be automatically applied for previous years, particularly for the unfinalized FY 2022–2023. Therefore, for FY 2022–2023—where finalization entries must be entered after April 1, 2023—the edit log functionality will be automatically enabled.

Increased Storage Costs: The system now requires additional storage space because the program records every transaction and alteration. Bulk data can also speed up software processing while slowing down transaction processing.

Raise the Cost of Compliance: Small businesses typically opt to retain a summary of their accounting in Excel or another tool rather than keeping complete books of accounts in any accounting software because doing so incurs costs for both the software and the accounting staff. Nevertheless, businesses with fewer or no transactions must now keep their books of accounts in real-time using software that has an audit trail option for the entire year. The price of compliance will go up as a result.

Advantages of the Audit Trail

Fraud Prevention and Identification: Fraud is anything that is planned out in detail and is concealed at all costs. There’s a chance that the accounting department or the corporation will enter the transaction and then remove it to conceal it. Nonetheless, the Audit Trail function makes it simple to identify any malicious activity.

Responsibility: Having an audit trail in place aids managers in upholding personal responsibility. It encourages users to accept personal accountability for their acts, which are documented in an audit trail, and it promotes appropriate user behavior. This guards against unauthorized database changes and underutilised data on the system.

Greater Precision: Frequently, transactions are entered without a thorough examination in the hopes that they will be modified later. Companies will need to record transactions more accurately and instantly, though, as the audit trail will now record all adjustments.

 

Final Thoughts

The government’s implementation of the audit trail is a noteworthy measure aimed at improving openness in accounting activities. But this particular modification has been put with few challenges to the small business as it has resulted into additional compliances and cost. Given the implications, MCA must address a number of concerns, including

the reporting requirement with respect to the audit trail.