Reforms in Recording Trail of Financial Transactions

The term ‘accounting software’ is not defined under the Act. Even the Rules do not provide clarity on what constitutes ‘accounting software’. In general parlance, an accounting software may mean an application that records and processes accounting transactions, within various modules. The Rules do not provide clarity as to whether accounting software includes supporting systems/applications.

Ministry of Corporate Affairs (MCA), Government of India is seeking to bring reforms in the area of Maintenance of Audit Trail by businesses operating in India. MCA, vide amendment in Companies (Accounts) Rules, 2014 (‘Rules’) dated March 24, 2021, had introduced a requirement to use only such accounting software for maintaining the books of accounts in electronic mode which has a feature of recording audit trail of each transaction, creating an edit log of each change made in books of account along with the date of such changes and ensuring that such audit trail cannot be disabled. Companies are required to comply with these requirements with effect from April 1, 2023.

As per section 2(13) of the Companies Act, 2013 (‘Act’), the definition of ‘books of accounts’ includes records maintained in respect of (a) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place; (b) all sales and purchases of goods and services by the company; (c) the assets and liabilities of the company; and (d) the items of cost as may be prescribed under section 148 of the Act.

The term ‘accounting software’ is not defined under the Act. Even the Rules do not provide clarity on what constitutes ‘accounting software’. In general parlance, an accounting software may mean an application that records and processes accounting transactions, within various modules. The Rules do not provide clarity as to whether accounting software includes supporting systems/applications.

For maintenance of audit trail for database level changes, it may be noted that Rules do not define scope of the audit trail feature. Further, while it is expected that each accounting software has its own way of capturing audit trails, no uniform manner of recording audit trail has been mandated under law. Also, as the requirement of maintaining audit trails is applicable to all transactions recorded in the software, it appears that the audit trail feature is being envisaged at the application level.

In most of the commonly used accounting softwares, including Enterprise Resource Planning (ERP) software, the audit trail feature can be enabled or disabled at the discretion of the company. Original Software Vendors (OSV) for ERPs recommend settings for enabling audit trails only for tables having critical information. Complete audit trail is maintained in such ERPs for all changes carried out to the books of account (as well as other data) through the application interface. However, enabling audit trail for all the tables at the database level often results in sub-optimal performance of the system resulting in potential business disruption. Hence, audit trail is enabled for only for critical tables (which form part of the books of account) in the database while other tables are not enabled. This enables the ERP to optimise between availability of audit trail and efficient system performance.

The large scale companies due to their operations in multiple lines of business, global presence etc., use a primary accounting software for recording receipts, payment, purchases, sales, income, expenditures, asset & liabilities etc. and various other supporting applications/ softwares for processing and/ or storing huge volumes of financial and non-financial data for creation and maintenance of ‘books of account’ and cut across all business-wise masters related to customers, employees, vendors etc. The term ‘accounting software’ is not defined under the Act. Even the Rules did not provided clarity on what constitutes ‘accounting software’. In general parlance, an accounting software may mean an application that records and processes accounting transactions, within various modules. The Rules do not provide clarity as to whether accounting software includes sub-ledgers and supporting systems/applications. Therefore, as per the general understanding the applicability of audit trail was restricted only to primary accounting software used for maintaining the books of account. However, ICAI Guidance Note, as amended in February, 2024, has clarified that the audit trail is applicable not only on the primary accounting software(s) but also on all supporting systems and applications which are used for processing and/or storing financial data and provides inputs for recording accounting entries in main accounting software.

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