Audit Trail-Enabled Accounting Software in India - Legal Imperatives and Compliance

As per the Companies (Accounts) Amendment Rules, 2021, The Ministry of Corporate Affairs (MCA has Issued a notice stating that companies utilizing software select systems must include a function to log an audit trail for each transaction.

The revised audit trail regulation in accounting software became effective as of last year. Initially set for implementation in 2021, the actual date for the applicability of the effective audit trail was later revised to April 1, 2023.

The new regulation aims to guarantee that businesses are transparent about their practices and refrain from distorting information. This implies that each accounting software needs to include an Audit Trail function.

Audit Trail

An audit trail is a comprehensive, sequential log of modifications, specifics, and additional financial information regarding transactions in an accounting system. In straightforward terms, it offers a comprehensive record of a transaction along with simple tracking and traceability to its source.

Hence, it offers proof of conformity to the industry standards which includes data privacy laws, financial regulations, and healthcare compliance. Mentioned here are key elements for audit trail functionalities-

• Time stamps: A time stamp is included to check timings of every logged event.
• User identification: It recognizes the user related to each event and makes sure only the appointed person can change the data.. Including approvals and authorizations provided.
• Event descriptions: It provides thorough accounts of the occurrences during events.
• System information: It provides details about the event’s technical aspects, including its location, origin, and type of activity, and are also included.

 

Purpose of an Audit Trail

A standard audit trail includes key details to examine previous events and recognizing the individuals engaged. It acts as evidence that supports management assertions and declarations.

Audit trails may have multiple domains like financial data, IT workflows, HR documentation, or operational practices. The major objectives of an audit trail are:

• User response: Audit Trails ensure that individuals take responsibility for their behavior in a system. It monitors user activity to identify modified data or view any sensitive information.
• Regulatory Standards: It is important for the industries to maintain comprehensive record keeping practices due to the force of numerous regulatory standards. Audit Trails allows businesses to adhere to these regulations, which reduces the risk of a penalty for disobedience.
• Security Protocols: Companies can easily retaliate and recognize threats related to security by checking user behavior. They also check system occurrences. It detects unauthorized access and supports quick action to solve data security threats.
• Identifying and resolving issues: Audit trails are valuable resources to see problems and mistakes from the grassroot level within a system. It examines the system logs for reconstructing all the incidents and accurately detects the source of problems to implement preventive measures to solve issues.

 

Need and Applicability

Businesses need to maintain a detailed and complete audit trail to identify the inconsistencies and pinpoint the loopholes when they occur.

Moreover, it is important to mention that the pertinence of an audit trail is not mandatory for every business. It is primarily intended for all Companies registered under the Companies Act 2013, such as:

• Public and private limited companies
• One Person Companies (OPCs)
• Companies owned by the Government of India
• State government companies.
• Not-for-profit companies/organizations
• Nidhi companies, and
• Foreign companies

 

Audit Trail Checklist

The Companies Act 2013 requires that all companies must maintain accurate records of their transactions. These documents will help them to  establish a transparent audit trail for every transaction. It includes -

• Transaction details: Date, sum, and type of every transaction.
• Changes in accounting records: It shows the date and description of every change.
• Authorization information: It contains the Names of people approving transactions and modifications.
• Details of approvals and rejections: Identities of individuals endorsing or denying transactions and alterations.
• Access to records: Information regarding access to records, such as the date, time, and identities of individuals reviewing the accounts books.
• Backup and recovery efforts: Information on all activities associated with the financial records.

 

Non-Compliance

These requirements, if not followed properly, may result in a penalty between ?25,000 to ?5 lakh, based on the nature of the violation. Moreover, the business will face legal repercussions for deceptive practices.

 

Time Period Rela Audit Trail

Section 128(5) of the Companies Act, 2013 mandates that a company's accounts must be preserved for a minimum of eight financial years prior to a financial year or for all earlier years combined if the company is less than eight years old. Additionally, all vouchers related to any entry in those accounting records must be maintained in sequence. Consequently, the organization must also keep an audit trail for at least eight years.

 

Strategies for Preserving an Audit Trail

• Frequent data backups: Consistently back up data to avoid losses during system malfunctions or data corruption events. It keeps backups safe for simple recovery whenever needed. Keep backup safe to enable simple recovery when necessary.
• User verification: It uses strong user verification techniques to identify the person making modifications. It follows role-based access control and data encryption for editing processes.
• Routine audits: The routine audits ensure correct financial documents by examining irregularities or indications of manipulations. The audits are performed by independent parties, including both internal and external auditors.
• Automated recording: The automated recording systems and software applications create and maintain audit trail documentation and ensure uniform recording of all activities to minimize human mistakes.

 

Significance of Audit Trails in Accounting Software

The Audit Trail function of accounting software is essential to maintain the correctness and trustworthiness of financial information. Here are some useful insights on the importance of Audit Trails: Compliance: With the advent of Goods and Service Tax (GST) in India, businesses need to maintain valid financial records for tax- related transactions. The Audit Trail feature of the accounting software helps businesses to follow regulatory standards. It also ensures precisely documented and traceable financial transactions.

• Transparency: The audit trail feature of the software maintains transparency in financial transactions and helps businesses to know their financial state. It assists companies to detect mistakes or inconsistencies in financial records and resolve them in advance to avoid considerable financial losses.
• Fraud Defense: The Audit Trail function spots fraudulent activities A function for audit trails assists companies in detecting swindling activities by pinpointing unlawful alterations to financial information. This feature protects businesses from financial losses, legal issues, and loss of credibility.
• Decision-making: Accounting software featuring an audit trail provides businesses with accurate and reliable financial data to utilize for decision-making. It allows businesses to discover patterns and trends in financial data and utilize that knowledge to make informed choices.