Stay Safe. Stay Healthy.
31 March 2021
Amendment in Rule 3 of Companies (Accounts) Rule
 
Rule 3 of Companies (Accounts) Rule 2014 prescribes the manner of books of accounts to be kept in electronic mode. To this rule, MCA has recently added a proviso stating that accounting software used by the Companies should have a feature of recording audit trail of every transaction i.e, create and edit log of each change made in the books of accounts along with the date when such changes were made and ensuring that the audit trail cannot be disabled. The applicability of the proviso is effective from 1 April 2021.

The objective behind introducing the proviso is to maintain a check on the changes made in the preliminary set of transaction postings recorded in the books to obtain comfort on the presented set of financial information. This will trigger the need of controls and highlight the open ends of the processes related to maintain the books of accounts. Since this is applicable to all the concerns registered under Companies Act, 2013, this will bring in a much-needed change in the way books of accounts are being maintained. Irrespective of small, medium or large company; there will be a trail to original source for each and every transaction. This will ease up the auditing, as the trails will help the auditors to scope the investigation areas.

 
Implications of the amendment
 
While the high-end accounting solutions like SAP, Oracle, etc., already have such controls/audit trails in place, SMEs in India generally use low-cost solutions which may not have such functionality available. Owing to this, SMEs will be highly impacted by this change in regulation. India has nearly 42.5 million SMEs, being 95% of total industrial units in the country. Considering the business quantum, majority of the SMEs rely on Tally and like software for maintaining their books. This change will affect all such entities at large since audit trail is something which is least expected in their accounting systems.

Since this regulation is effective from 1 April 2021, it gives the impacted entities very little time to ensure that they are compliant with the change. In case they are not compliant by the said date, it may tantamount to non-compliance and company will have to face consequences for the same. These consequences consist of penalties for non-maintenance of books of accounts as per section 128 of Companies Act, 2013.

The Companies also need to keep a check on the cut off entries as they are often posted after the period has ended. If there is too much time lag, this can come under the scrutiny of auditors and may prove that the controls are not working effectively.

The Companies will also have to provide sufficient evidence to the auditors that their accounting system is compliant with the new requirement. MCA (Ministry of Corporate Affairs) has also made an amendment to the audit and auditor rules, whereby auditors now need to comment whether the Company’s accounting system has audit trail feature and cannot be disabled at any point in time. Hence, if companies are not compliant with the said regulations, they will be exposed to negative remarks by the auditors in the CARO reporting.

Mitigations
 
Given that proviso will be effective from 1 April 2021, Companies will have to either upgrade the current system or replace it with a compliant system. Implementing new or upgraded software can be tedious and challenging within the given timeframe. Companies should liaise with their software provider to ensure that the required patches or upgrades are implemented before the due date.

Implementation of new software can take a lot of time since all the ledgers, sub-ledgers, groupings, data from the previous periods will be required to be updated. If the companies opt for new software, transitioning processes will need proper attention to back up the past and current data. To speed up the process and avoid any complications to cope with new system, Companies may opt to take professional support over and above the support from their technology partner.

Once the system is implemented and the company is through the transitioning, maker-checker controls should be in place before entries are posted in the books of accounts. Emphasis should be given to the review of closure entries as the chunk of book adjustments lies there. Such review can help to minimize the changes captured in the audit trail and thereby leave a scope of correction in advance.

In case of the entries highlighted under audit trails, proper justifications should be ready beforehand for every line item. Periodic transactional review of the audit trail entries is recommended for the same. In addition to the review, management will have to take action and document if proper justifications are not derived. These reviews may suggest lack of checks/controls in the overall accounting process, and accordingly, management may need to set up additional controls or strengthen the existing controls.
Our Comments
 
The audit trail concept existed all the times, but it has been mandated now by the MCA. This regulation is ought to bring out the transparency and effectiveness of controls up to some extent. The current challenge is for SMEs and entities, who don't have such feature and the required budgets to invest in high-end systems, to comply with it in a small span of time. The notification is silent on the alternative until the companies find a solution to get the accounting system with said feature. For now, one is to imply that from 1 April audit trails should exist in the accounting system. Post companies deal with complying with the proviso, rigorous monitoring of the books of accounts is expected since the audit trails will need proper justification while facing any authorities. Overall, the notification brings along diverse offerings to the table. It will become much easier for companies to face most of the assessments or scrutiny considering audit trail exists and the feature cannot be disabled at any point in time.
Nexdigm (SKP)
Urmi Axis | 7th Floor | Famous Studio Lane |
Mahalaxmi | Mumbai | 400 011 | India
+91 22 6730 9000 | ThinkNext@nexdigm.com | www.nexdigm.com
USA | Canada | India | UAE | Japan | Hong Kong
DISCLAIMER
This alert contains general information which is provided on an “as is” basis without warranties of any kind, express or implied and is not intended to address any particular situation. The information contained herein may not be comprehensive and should not be construed as specific advice or opinion. This alert should not be substituted for any professional advice or service, and it should not be acted or relied upon or used as a basis for any decision or action that may affect you or your business. It is also expressly clarified that this alert is not intended to be a form of solicitation or invitation or advertisement to create any adviser-client relationship.

Whilst every effort has been made to ensure the accuracy of the information contained in this alert, the same cannot be guaranteed. We accept no liability or responsibility to any person for any loss or damage incurred by relying on the information contained in this alert.

© 2021 Nexdigm Private Limited. All rights reserved.

  Unsubscribe  |  View in browser