Starting this FY, companies must maintain audit trail
New Delhi, April 24. 2023
Businesses must maintain an unbroken record of all edits in their books of accounts and not disable the audit trail feature in their accounting software starting this financial year, marking a significant change in accounting regulations.
The ministry of corporate affairs has decided not to defer the requirement, first announced in 2021, for businesses any further, a person familiar with the government’s decision said.
“Companies were given two years to prepare and comply with this rule. Now the government is not extending it any further," said the person, who spoke anonymously.
Companies (Accounts) Amendment Rules, 2021, which was modified twice later to give extra time for businesses to comply, stipulates that companies record an audit trail of all transactions in the accounting software used and capture the edit log of all changes along with the date of the change.
The chronological history of changes to the entries is meant to help verify the integrity of the financial information stored in the documents. Books of accounts include records of all cash and other financial transactions, records of sales and purchases, inventory, fixed assets, liabilities and tax-related records. An email sent to the ministry of corporate affairs on Thursday seeking comments for the story remained unanswered at the time of publishing.
The audit trail requirement from this fiscal is expected to significantly enhance the authorities’ ability to take a closer look at changes to the records that materially impact financial statements, while allowing businesses to make genuine corrections where needed. In addition, the provision brings more openness in how companies maintain their books at their registered offices.
Experts said that an audit trail would allow the management, auditors and regulators to check the flow of transactions and improve the accuracy and reliability of financial reporting.
“The basic purpose is to see if the books of accounts have been manipulated," said Ved Jain, a former president of the Institute of Chartered Accountants of India (ICAI).
“It will give an idea of when a transaction was entered and if it was changed as an afterthought. In the normal course, an edit may not attract extra questions, but in the case of a company where a red flag is raised, then the regulators may like to verify the audit trail. In such cases, an audit trail can help to detect the motive of the change." This is expected to be a shot in the arm for the Registrars of Companies, Income Tax officials and other authorities in investigations.
The government has been ramping up requirements for financial transparency and improving company governance by maintaining books of accounts and disclosures in financial statements. In line with this, the government recently introduced the Accounting Standards Amendment Rules, 2023, which mandates companies to disclose material accounting policies that could influence investors, shareholders, and lenders.
Separately, the government is also working on measures to address concerns around auditors’ independence and enhance corporate governance. For example, the corporate affairs ministry is considering amending the Companies Act to clarify services that auditors can’t offer their audit clients. The National Financial Reporting Authority is also developing a new requirement for auditors to publish an annual transparency report on their operations, quality control systems, ownership and management systems, and network relationship with other consulting firms to eliminate concerns around independence.
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