XYZ Ltd., uses an Accounting Software for recording its financial transactions. The statutory auditor of the company while auditing finds the…

The second proviso to Section 128 (1) of the Companies Act, 2013 allows company to keep books of account or other relevant papers in electronic mode as per manner specified in Rule 3 of the Companies (Accounts) Rules, 2014. Rule 3 (1) states the books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India, at all times, so as to be usable for subsequent reference. (i) Audit Trail and Edit Log [Proviso to Rule 3 (1) ] In order to ensure audit trial, in case of company which uses accounting software for maintaining its books of account, the proviso to Rule 3 (1) of the Companies (Accounts) Rules, 2014 requires that: (1) For the financial year commencing on or after the 1st day of April, 2023, (2) Every such company (which uses accounting software) shall use only such accounting software, (3) Which has a feature of recording audit trail of each and every transaction, (4) Creating an edit log of each change made in books of account along with the date when such changes were made and (5) Ensuring that the audit trail cannot be disabled. Further, Sub-rule 5 requires there shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law. Advice to the Company: XYZ Ltd. has not complied with the Audit Trail and Edit Log requirements of the Companies Act, 2013 since the journal entries were altered without creating edit logs and audit trail feature was also partially disabled. Therefore, XYZ Ltd. should ensure compliance with the above provisions by enabling edit log features for all entries linked to its creation and alteration, and enabling the audit trail feature for all modules. (ii) The back-up of books of accounts Proviso to sub-rule 5 of Rule 3 requires 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. Hence, the issue raised by the statutory auditor of XYZ Ltd. with respect to mandatory requirement of maintaining the audit trail and edit log requirement, and with respect to maintenance of the backup of books of accounts is correct.