The Companies Act, 2013 has introduced several provisions to enhance the corporate governance standards in India. One of the recent amendments to the Act is the mandatory requirement of audit trail in accounting software for all companies. This article will explain what is an audit trail, why it is important and how it will be implemented.

What is an audit trail?

An audit trail is a feature of accounting software that records each and every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made. It also ensures that the audit trail cannot be disabled or tampered with. This helps to ensure the accuracy, completeness and reliability of the financial statements and to prevent fraud or errors. An audit trail also helps the auditors to verify the transactions and trace them back to their source documents.

Why is an audit trail important?

An audit trail is important for several reasons:

•          It enhances the transparency and accountability of the financial reporting process by providing a clear and complete record of all transactions and changes made in the books of account.
•            It improves the quality and efficiency of the audit process by enabling the auditors to access and review the transactions and changes easily and quickly.
•           It strengthens the internal control system of the company by preventing unauthorized or fraudulent alterations or deletions in the books of account.
•            It facilitates the compliance with the statutory and regulatory requirements for record retention and disclosure by preserving the audit trail as per the prescribed norms.
•    It boosts the confidence and trust of the stakeholders, including shareholders, creditors, regulators and customers, by demonstrating the integrity and credibility of the financial statements.

The Ministry of Corporate Affairs (MCA) vide its notification No. GSR 206 (E) dated March 24, 2021 has issued the ‘ Companies (Audit and Auditors) Amendment Rules, 2021 ’ read with sub-section 3 of Section 143 of the Companies Act, 2013 introducing new Rule 11 (e), new Rule 11 (f) and new Rule 11 (g) and deleting Rule 11 (d). Rule 11 (g) says that- “Whether the company, in respect of financial years commencing on or after the 1st April, 2023, 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 throughout the year for all transactions recorded in the software and 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 retention".

This means that from April 1, 2023 onwards, all companies that use accounting software for maintaining their books of account must use only such software that has an audit trail feature and must operate it throughout the year for all transactions recorded in the software. They must also ensure that the audit trail feature is not disabled or tampered with and that the audit trail is preserved as per the statutory requirements for record retention.

The MCA has also extended the due date for filing form CSR-2 till May 31, 2022. Form CSR-2 is a new form introduced by MCA to report on corporate social responsibility activities undertaken by companies.

The implementation of audit trail will require companies to upgrade their existing accounting software or switch to new software that has an audit trail feature. They will also have to train their staff on how to use and maintain the audit trail feature. They will have to review their internal control policies and procedures to ensure compliance with the new rules. They will have to coordinate with their auditors to ensure smooth and effective audit process.

The implementation of audit trail will also bring several benefits to companies in terms of improved financial reporting quality, enhanced corporate governance standards, reduced audit risks and costs, increased stakeholder confidence and trust, and better compliance with statutory and regulatory requirements.

Audit trail under Companies Act is a game-changer for corporate governance in India. It will usher in a new era of transparency, accountability, integrity and credibility in financial reporting. It will also help in preventing frauds, errors and misstatements in financial statements. It will ultimately contribute to the growth and development of Indian economy.