MCA: Submission requesting for clarity in provisions requiring companies to adopt accounting software having audit trail feature

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MCA: Submission requesting for clarity in provisions requiring companies to adopt accounting software having audit trail feature

Tejasvi

@tejasvi

March 9, 2023

Public Policy

833

As per Rule 3(1) Companies (Accounts) Rules 2014 as amended by Companies (Accounts) Amendment Rules 2021 (Amended Rules), a company using accounting software for maintaining its books of account is required to use such accounting software which has a feature to record audit trail of every transaction, create edit log of each change made in books of account along with the date when the change was made and ensure that the audit trail cannot be disabled. Companies are required to comply with these requirements from April 1, 2023.

Based on inputs from the Industry, we have made a submission to Ministry of Corporate Affairs (MCA) requesting for clarity on the following aspects:

Definition of accounting software and whether accounting software include supporting systems/applications

The term ‘accounting software’ is not defined under the Companies Act, 2013 (Act). Even the Amended Rules do not provide clarity on what constitutes ‘accounting software’. In general parlance, an accounting software would mean an application that records and processes accounting transactions, within various modules. The Amended Rules do not provide clarity as to whether accounting software includes sub-ledgers and supporting systems/applications.

We believe that only the General Ledger, that generates and stores financial transactions, is covered under this amendment. However, an alternate interpretation could be that all supporting systems/applications through which numbers flow into the General Ledger for generation of financial statements, would constitute ‘accounting software’. This interpretation could result in complexity in implementing an appropriate solution for organisations using large number of systems to process data that ultimately resides in the General Ledger. Hence, it would be important to get some clarity on this aspect.

Whether a change management process/log be considered adequate for compliance with these provisions?

It is important to clarify that if the industry has implemented adequate controls around change management (say Internal Controls over Financial Reporting under the Act), would this be considered adequate for compliance with the Amended Rules. This will enable the industry to demonstrate the changes made using change management controls.

Details required as part of the audit trail and edit logs

The term “Audit trail” is not defined under the Act. Even the Amended Rules do not provide any guidance on this aspect. In general parlance, audit trail includes all information necessary to trace a transaction to its source document such as invoice no., invoice date, date of recording, description, who posted the transaction, etc. Clarity on this aspect would provide certainty to the industry.

The Amended Rules requires a company to maintain “edit log of each change made in books of account along with the date when such changes were made”. We understand that edit log should be able to generate the data regarding any change made to details of original transaction (amount, description, record date, invoice no.), and should be recorded along with the date of such change. Clarity on whether the intention of Amended Rules is to capture edit log containing only details of changes to transactions posted will be helpful.

Requirements in case transaction level data is posted in supporting system/application and consolidated entry is interfaced to the General Ledger

Clarity is required in cases where the transaction level data resides in a separate system. In such cases, does the audit trail have to be available in the separate system and hence that system will be considered to be maintaining books of account or does the interfacing with the General Ledger mean that the transaction now resides in the General Ledger, and hence other systems would not need to be included under the requirements.

Consideration of human error:

We understand that the intent of the government to introduce the amended rules is to track, penalise, and discourage fraudulent changes in accounting entries. However, it is important to note that the amended rules do not give any consideration to ‘human error’ involved. For instance, while making a sales entry of INR 1990, if the user erroneously enters INR 1099, they will need to change the same. An audit trail of such trivial nature will have unintended consequences and may lead to highly unproductive outcomes.

In this regard, we have requested MCA to provide clarity on the above aspects This will enable Industry to make the required changes in their accounting software, in order to be complaint with these provisions.

To ensure certainty on compliance obligations, we request MCA to set up a process of certification or approval of the software so that the industry can be certain on the compliance parameters. Once MCA has provided guidance on the above points and enabled a process of
certification/ approval, a reasonable time may be given to incorporate these in the ERP/ accounting software.

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Tejasvi

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