MCA – Mandates companies to use accounting software with “audit trail” which cannot be disabled

Ministry of Corporate Affairs (MCA) amended the Companies (Accounts) Rules, 2014, and provides that for the financial year commencing on or after the April 1, 2021, every company which uses accounting software for maintaining its books of accounts, 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 the software shall ensure that the audit trail cannot be disabled.

The amendment has been made by inserting a proviso to Rule 3(1) of the said Rules. Rule 3 of the Companies (Accounts) Rules, 2014 prescribes the manner of maintaining books of accounts in electronic mode.

The above rules are applicable to Companies (both Public and Private Companies) only.

At present, there is no mandatory requirement of keeping audit trail by other than companies like, LLPs, Firms, Individuals etc.. However, it is advised to implement the ‘audit trail’ by other than companies also as it will provide more transparency and improve compliance.

The widely used Tally software has the feature of ‘audit trail’ and edit log. Presently this feature is optional and can be disabled by the user. Now, the amendment mandates Tally software and other similar accounting software’s to ensure that the above feature cannot be disabled.

Audit trail aims to track and discourage changes in accounting entries. ‘Human errors’ like passing sales entries erroneously will also get recorded in the audit trail. Hence it is advised to ensure that, the entries are passed ‘error free’ to avoid any unnecessary difficulties in explaining the reasons for amendments made in the books.

The necessary amendment has also been made in the Companies (Audit and Auditors) Amendments Rules, 2021 where in the duty is casted on Auditors to report in their Audit report; “ whether the Company has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated through the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the Company as per the statutory requirements for record attention.