The new Audit Trail Rule in Accounting Software will now be Implemented [CS Hera Siddiqui]

The Ministry of Corporate Affairs (MCA) issued a notification directing companies that use accounting software for maintaining their books of account is required to have an Audit Trail feature, creating an edit log of all transactional changes along with the date. 

According to the recent notification, the new audit trail rule in accounting software will now be implemented from 1st April, 2023. This was originally planned for 2021 and but later the effective date was moved to 1st April, 2022. Now, it is postponed to 1st April, 2023. 

To ensure that this is being implemented, companies need to ensure that their existing accounting software comprises an audit trail feature to remain compliant to the latest amendment. With this move, business entities would now be required to keep an edit log of all transactions and time stamps, with changes made in the books of account. They also need to enable their workforce to adhere to it. In case their existing software doesn’t come with this feature, they need to consider shifting to accounting software that provides the audit trail feature.?

To answer, the audit trail (edit log) rule is not applicable for all businesses. This rule applies only to those companies that fall under the purview of Ministry of Corporate Affairs (MCA). In short, if your company is governed by the regulations and guidelines of MCA, you need to ensure you follow the rule from 1st April, 2023. 

An audit trail, at its most basic, is a record of financial transactions. The audit trail is, however, not simply a record: it is listed in order, step-by-step, and serves as proof of a transaction’s history, right from recording to tracking all changes that may take place. They can be used to keep track of and verify various types of transactions.

Type of companies who should follow the rule

As per the Companies Act 2013, the new amendment released by the MCA will be applicable to the following companies, including the companies that are managed by State and Central Government, NGOs who are receiving funds from various stakeholders:?

  • All Public and Private Limited Companies 

  • One Person Companies (OPCs) 

  • Companies owned by Government of India 

  • State Government Companies 

  • Not-for-Profit Companies/Organization 

  • Nidhi Companies 

Businesses who are outside the purview of audit trail rule 

The following businesses don’t fall under the purview of the audit trail rule: 

  • Individuals 

  • Proprietorship concerns ? 

  • Partnership firms 

  • LLP-Limited Liability Partnership

Reasons and implications of the new audit trail rule? 

It is undeniable that having an end-to-end log of all financial events like purchases, sales, and expenses can be proven beneficial to back trace any anomalies in the system. The edit log would, further, enable businesses to analyse each activity, thereby helping in remaining compliant. 

The new rule has been introduced to bring transparency and restrict or reduce data manipulation of companies. This also implies that all accounting software is required to have the Audit Trail feature to ensure that their users are compliant with the new amendment and must comprise of the following enhancements:? 

  • Track and create an edit log of all transactional changes made in the books of account 

  • Capture all timeline details like date whenever any changes are done 

  • Accounting software must ensure that the edit log cannot be disabled 

Audit trail (edit log) features of Tally Prime Edit Log Release 2.1

The latest release 'Tally Prime Edit Log Release 2.1', is enhanced with the edit log feature that caters to the amendment released by the Ministry of Corporate Affairs (MCA). Following are the features of Tally Prime edit log release:

  • Track the edits for?masters?and?every transaction

  • Capture the?date details?and username when such changes (edits) are made

  • Difference report?to show the elements of the version that have been modified

  • Reports are enhanced to?filter?the edited transactions

  • Designed to ensure edit log feature will be enabled all the time to meet the MCA guidelines of ‘Edit trail cannot be disabled.’

How does audit trail work?

Audit trails must have a few key details to provide comprehensive information about a transaction. To get these details at an enterprise level, however, a certain audit trail framework must be set up. Every access made to the accounts and records of the company should be tracked. Every edit made to any information must be recorded with the name of the person who did it and the time it was done. If any information was deleted, that also should be recorded.

 Following are the key financial details to track as part of the audit trail:

  • Any changes involved in the transaction

  • The person who partook in the transaction

  • The time at which the transaction took place

  • The time at which the modification or edit took place

What is the purpose of an audit trail?

The main reason for documenting everything that a company or its employees do is to have a record that can be revisited if the need arises. In case of any discrepancy, you have a pathway that can lead to the erring or fraudulent transaction which is causing the discrepancy. The trail is basically a way to ensure that there are no gaps in data that may lead to a blind spot, making it impossible to determine the cause of the error. It also enables the company to locate external breaches and interference. It is also a mandatory requirement for notified companies to stay compliant.

What are the benefits of an audit trail?

  • Accountability 

There are several internal and external benefits of having a strong audit trail. It makes sure that everyone who is involved in transacting business has the details of their actions are being recorded. This draws a clear path to hold a user who may have undertaken a fraudulent or erroneous transaction.

  • Intrusion detection

If someone is not authorized to perform a certain activity, that will also be recorded. It will help in detecting that an unwanted entity has access to information they should not and help bolster security.

  • Foolproof

There is also the advantage of proving that the company books are clean and in a healthy state which gives a big boost in the valuation of the company as well as generating funds through loans or by raising capital.

  • Staying compliant

There is the obvious advantage of staying compliant with the laws of the land as well as internal policies.

Things that companies should prepare for audit trail rule

With the audit trial rule, you might have several questions about how to prepare your business to be compliant with the new rule. To answer that, here are some of the key aspects that you need to keep in mind as a company to prepare for the upcoming audit trail rule: 

  • Evaluate if your accounting software caters to MCA guidelines: As a business, it is essential to understand the fundamentals of the MCA guideline to ensure that your accounting software comes with the audit trail (edit log) feature. To remain compliant with the new audit trail rule, every company that uses accounting software must have the audit trail feature to capture the trail of each and every transaction.
  • Educate your team on the new rule: To ensure that your business easily transitions to the new rule, your staff needs to be empowered. Conducting webinars on the importance of the new amendment and ensuring that your staff adapts to the new way of working will be the key to remaining compliant.
  • Automatic recording of transactions: It is mandatory for companies to investigate the current procedure of recording transactions- whether it is being recorded automatically and cannot be disabled under any circumstances. In case there's any deviation from the same, they need to bring relevant changes to remain compliant with the audit trail rule.  
  • Compliant software to manage business efficiently: For a smooth business transition, make sure that you have compliant accounting software that helps you meet the new audit trail (edit log) guidelines, thereby ensuring seamless business operations.  

Audit trail (edit log) features to look for in accounting software

As the deployment of the new feature approaches soon, businesses would have to understand some key features that their accounting software should have to remain compliant with the new audit trail feature. In light of the same, here are some of the key features that your accounting software should have:
  • Date stamp

One of the critical features to remain compliant with the audit trail (edit log) feature is having the time and date log within the accounting software. According to the latest amendment, the accounting software should keep records of all the edits being made in the books of accounts and shouldn't be disabled.

  • Scope

While the scope of keeping a tab of all the activities done within a transaction is ensuring business transparency, another crucial feature of the accounting software should be able to track and log all changes conducted – right from creation, alteration, to deletion of data within each transaction.

  • Edit log feature shouldn't be disabled

To remain compliant with the new rule, it is critical to ensure that the audit trail feature should be enabled all time.

  • Technical Log vs. audit log

Don't confuse audit log with software logging. While opting for accounting software, it is critical to note that accounting software should have a separate log. Thus being aware of the changes is crucial in selecting the right accounting software for your business.

  • User details

Having insights into user details of each change within an edit log is critical to keep business processes transparent. Thus, ensure that your accounting software can capture user information right from creation to alteration to deletion of data within each financial transaction. 

  • Versions difference

Another key factor that you should consider while choosing the right accounting software is that it should provide you with user versions. This would help you get a clear picture of all the changes made. Additionally, it should also provide you with version differences that would aid in understanding various elements like modifications or any changes that were made.                

  • Sequential order

The purpose of the audit trail rule is to increase business efficiency. That's why opting for accounting software that provides detailed insight into chronological history by date and time is crucial to increase business efficiency.   

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