The Ministry of Company Affairs (MCA) has made it mandatory for every organization to have an audit trail feature in their accounting software from 1st April 2023.
As a result, the companies using accounting software are required to have audit trails facility to stay compliant with the provisions listed in the Companies (Accounts) Rules, 2014.
Technically this rule is applicable for Accounting Systems, however it is recommended that all Financial Systems (Like Fixed Assets Management system, Point of Sales, Payroll etc.) which post data to Accounting system shall also have Audit trail feature to have end to end Audit policy across systems.
If you are running payroll of a company, the new changes may also affect your organization. If there is no audit trail feature in your payroll system, it may result in a negative remark in annual Auditor report.
So, what does the new notification change? And how will it impact payroll software users? Is your software ready for the audit trail changes? Let us find out.
What is Audit Trail?
An Audit Trail or an ‘Audit Log’ is a linear record or set of records which provides a log of the sequence of proceedings that have affected the system at any time. It is required to log and keep the evidence of every operation, procedure or event that takes place in the system to ensure complete transparency to anyone undertaking the audit.
An audit trail can also be explained as a sequential set of records that provides a history of a transaction by which the accounting or other financial details can be traced to their source. Audit trails are used to verify and track many kinds of transactions, such as accounting, payroll, taxes, trades etc. Audit trails can document their reports in either paper or electronic records.
Benefits of Audit Trails
Audit trails are an essential tool used by the authorities to ensure organizations can be accountable for their actions and processes. Without audit trails to verify the financial information, it is difficult to verify the authenticity of a company’s financial reports.
Hence, it aids in staying compliant with the numerous local and national laws. Additionally, as the system keeps a track of the information, it becomes easier to spot any misplaced documents in the physical world.
Audit trails also empower companies to maintain an updated log and trail system, which helps cut down financial fraud and other misconduct. It also ensures that only the individuals with the right credentials can access the data and make the necessary changes, while maleficent actors are kept away from the system.
On the other hand, if there is any security breach, the audit trail system can keep a log of the activities that took place after the breach, helping in enhancing overall security.
To summarize, the following are the benefits of audit trails:
- Enhances user accountability
- Ensures compliance
- Recover lost documents
- Protects against fraud
- Improves security
- Organize critical documents
- Detect any irregularities
- Identify internal fraud agents
- Easily collect evidence
- Quickly detect data breaches
Maintaining an Audit Trail
Audit trails usually begin with a source document, which is the initial origin point of the financial transaction. It can be something as simple as an invoice, a receipt, or a purchase order. If you are maintaining a manual audit trail via a ledger, you need to attach copies of the documents along with it as proof of the transaction or activity.
Hence, modern organizations are using dedicated software to make things easier by tracking every change automatically and recording them. The recorded information log will remain secure and can be easily retrieved whenever required.
An ideal solution to tackling common audit trail challenges is to use a cloud accounting system, which provides secure data storage. Such software makes it easier to generate reports for audit trails.
For example, let us consider the case of an invoice, that requires details such as items, prices, etc. With the dedicated software, you can save the information in the database, and prefill the invoice you create later with this information.
In case you are not using a dedicated system, software equipped with an audit trail module can easily store logs of any transactions and capture any changes made to them since they were created, along with the user’s identity, date, and time.
Statutory Provisions changed The Companies Rules, 2014
The MCA notification dated 24th March 2021 stipulated a new proviso in Rules 3(1) of The Companies (Accounts) Rules, 2014, which states that.
“Provided that for the financial year commencing on or after the 1st day of April 2021, every company which uses accounting software for maintaining its books of account shall use only such accounting software which has a feature of recording an:
- Audit trail of each and every transaction
- Creating an edit log of each change made in books of account along with the date when such changes were made; and
- Ensuring that the audit trail cannot be disabled.”
Further changes were made by the MCA notification dated 1st April 2021, which substituted the date ‘1st day of April 2021’ with ‘1st day of April 2022’. Another change was made recently by the MCA notification dated 31st March 2023, which substituted the date ‘1st day of April 2022’ with ‘1st day of April 2023’.
With this notification, the MCA has made it mandatory from 1st April 2023 for any organization undertaking business in India to add the audit trail module in their accounting software.
The audit trail facility should also be a part of your payroll system. While there is no specific requirement from the authorities to audit payroll details specifically, not having an audit trail for your employee payroll could result in a negative remark in the scrutiny. It maybe even be considered an exception, if the audit trail feature was not operating during the reporting year, leading to a negative remark.
Changes in Auditor Report
The Companies (Audit and Auditors) Amendment Rules, 2021, effective from 1st April 2021 and the Companies (Audit and Auditors) Second Amendment Rules, 2021, effective from 01st April 2021, have the following clause inserted in Rule 11 of the Companies (Audit and Auditors) Rules, 2014 on which the auditor of the company will give their views and comments while generating the audit report:
“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 the 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.”
Benefits of Audit Trail in Payroll
There are numerous benefits of maintaining an audit trail in your payroll software, such as:
The payroll records will be stored with integrity since any tampering with them would be captured in the audit trails. Hence, any offender would be discouraged from tampering with it.
Another benefit of audit trails is that it captures any activity undertaken on the system along with the details of the person who made the changes. It also captures the time and date of the change and makes a permanent record of it, thereby discouraging any malpractice.
While audit trails do not result in accurate data directly, it helps in maintaining the integrity of the database, as well as avoiding any tampering due to accountability. It leads to an accurate database, where any irregularities can be easily identified and resolved.
Audit trails also enhance the security of the payroll database since the system tracks any changes made to it. It effectively deters miscreants, while also ensuring that any abnormalities are easily identifiable.
Due to the various benefits mentioned above, the company can stay compliant with local and national laws regarding the payroll of its employees. Hence, audit trails also result in compliant databases and processes.
The new changes made in The Companies (Accounts) Rules, 2014, on 31st March 2023 is a clear indicator from the authorities to ensure complete transparency in financial record-keeping.
Since company payroll is a critical part of the company finances, we request you kindly check whether your HRMS and payroll systems provide an audit trail feature. If the feature is absent, now would be the right time to invest in better HR and payroll software such as Pocket HRMS.