‘Audit trail’, ‘Edit log’ Mandatory for All Companies (including Section 8 companies)

With effect from 1^st April 2023 all companies big or small, including not-for-profit companies licensed under Section 8 of the Indian Companies Act 2023 must ensure that the software which they use has a built-in mechanism to record audit trail of every transaction, creating an edit log of each change made in the electronically maintained books of account along with the date when such changes are made and ensure that the audit trail cannot be disable.

While this requirement is mandatory for not-for-profit companies licensed under section 8 of the Indian Companies Act 2013 (or section 25 of the Indian Companies Act 1956), it is not mandatory yet for public charitable trusts or for societies registered under the Act of 1860. It is not mandatory for Limited liability Partnership (LLP) Firms either.

Do you have Tally Prime or Tally ERP9?

‘Audit trail’, ‘Edit log’ is a feature already installed in Tally Prime but not in Tally ERP9. If you have Tally Prime, please enable the ‘audit trail, edit log feature. Others may speak to their Tally service provider if new or additional software is required.

Effect on accounting system?

Once the ‘audit trail’, ‘edit log’ feature is installed or enabled all backdated entries will get recorded, including any alteration made to any entry in the Books of Account. For example, if the accountant passes an entry in the month of October 2023 pertains to the month of May 2023, then a record will be maintained in the accounting system regarding the month the entry was passed (i.e., October 2023) and the actual period that it pertains to (i.e., May 2023). This is akin to a self-installed monitoring system within the company’s accounting system in order to enhance transparency and accountability.

The law

Companies (Accounts) Rules 2014 requires that with effect from 1^st April 2023 every company which uses accounting software for maintaining books of accounts shall use such accounting software which has:

1. the feature of recording audit trail of each, and every transaction;
2. creating an edit log of each change made in books of accounts along with date when such change was made and
3. ensure that the audit trail cannot be disabled.

Companies (Accounts) Rules, 2014 also require that:

1. the books of accounts shall remain accessible in India at all times;
2. that the back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a daily basis.

Companies (Audit and Auditors) Rules

Companies (Audit and Auditors) Rules, 2014 was amended on 24^th March 2021 whereby an additional reporting point must be incorporated in the Auditors report, i.e., “Whether the company has used such accounting software for maintaining its books of accounts 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  the audit trail feature has not been tampered with and  the audit trail has been preserved by the company as per statutory record for record retention.” This additional clause was initially made applicable from 1^st April 2021, then postponed to 1^st April 2022. However, it is now finally applicable from 1^st April 2023.

This clause puts an additional responsibility on statutory auditors of all companies to ensure that the company records entries in their electronic books of accounts (from 1^st April 2023) in such a way that details of transactions along with who recorded the entry and when (date and time) is implemented and preserved. If the transactions undergo modification or deletion, such details along with date and time of such action needs to be preserved chronologically.

Exercise cation and due diligence

Going forward, accountants should record every entry in the electronic books of account very carefully and accurately. Any subsequent modification/deletion will leave an audit trail scar for the accountant to answer.