New Companies Act Requirement: Your accounting software needs to have these features

The MCA has provided that from April 01, 2022, the accounting software used by a company should have the feature of recording the Audit Trail for all accounting entries and an Edit Log for every change made to the accounting entries including the dates on which the entries were modified. Further, the accounting software should have a facility to ensure that the capture of Edit Log cannot be disabled.

What does this change mean for businesses?

• Accounting of transactions needs to be done on an ongoing and regular basis. The approach of year-end accounting is being discouraged

• There should be a hard-close for the books of account on a monthly basis. The Edit Log shall reveal any back-dated entries made

• Accounting should be first-time-right. Changes/modifications to accounting entries could require a sound explanation for the reasons necessitating the change

• The Tax Authorities and Auditors could examine the Edit Log to ascertain the reliability and appropriateness of the accounting function of the company

• This change applies only to companies. Non-corporate entities (e.g. LLP, Trusts, etc.) are not covered under this change

Our comments

The above change introduced by MCA shall usher in greater accounting hygiene. It is also aligned to the changes being made in other regulations (e.g. GST) where compliances need to be made on a monthly basis. However, this change could require updates to the accounting software used by companies, particularly Small and Medium-Sized Companies. Given that the change is effective from April 01, 2022, the time available with businesses and technology developers to implement this change is highly inadequate. It is expected that either the timeline for implementation could be extended or the change could be introduced in a phase-wise manner where the change shall apply to large companies to start with. Larger companies that use ERP packages for accounting purposes may not be affected by this change since the ERP software generally provides the Audit Trail by default.

Be that as it may, this change highlights the policy direction of the MCA to ensure that

year-end accounting or ‘tentative’ accounting practices are discouraged.