Accounting and Audit News

published on 31 July 2023 | Reading time approx. 3 minutes

Introduction

Indian law compliances in last decade have seen paradigm shift from traditional to modern means all due to boost of IT. This can be demonstrated in the Companies Act as well, where the return filing, maintenance of books, audit, appeal, assessment etc. are now being compiled via electronic means. To have a control on such electronic based data & its related compliances, there are regular amendments, notification from the MCA.

In this article, we will cover the amendments in terms of maintenance of books & other records in electronic form.

1. Accounting data backup:

The Companies (Accounts) Fourth Amendment Rules, 2022 were introduced by the Ministry of Corporate Affairs (MCA) on 5 August 2022. These amendments focus on Rule 3 of the Accounts Rules, which governs the maintenance of books of accounts.

Under Section 128 of the Companies Act, 2013, every company is required to maintain books of accounts, relevant books and papers, and financial statements that provide an accurate representation of the company's affairs. Rule 3 of the Companies (Accounts) Rules, 2014 allows companies to keep their books of accounts and relevant books and papers in electronic form, subject to certain conditions. The recent amendments to Rule 3 bring about the following changes:

2. Accessibility of Electronic Books:

The amended Rule 3(1) emphasizes that books of accounts and relevant books and papers maintained in electronic form must be readily accessible within India at all times.

3. Backup Requirements:

Rule 3(5) now mandates companies to have a proper system in place for storing, retrieving, displaying, or printing electronic records as required by the Audit Committee or the Board of Directors. Furthermore, the amendment states that companies must maintain backups of their electronic books of accounts and relevant books and papers in an electronic mode on servers physically located in India on a daily basis (earlier periodic basis) even in cases where such backups are maintained at a place outside India.

4. Disclosure of Service Provider:

Rule 3(6) now requires companies to disclose to the Registrar of Companies (ROC) if they utilize a service provider for maintaining their books of accounts and other books and papers in electronic form. Additionally, if the service provider is located outside India, companies need to disclose the name and address of the person in control of the books of accounts and relevant documents in India.

Following to be disclosed annually at time of filing of financial statement in form AOC-4:

Name of the service provider
Internet Protocol address of the service provider
Location of the service provider (if applicable)
Address provided by the service provider in case of cloud storage of books of accounts
Details of the person in control of the books of accounts and relevant other books and papers in India when the service provider is located outside the country.

5. Audit Trail:

The Companies (Accounts) Second Amendment Rules, 2021 through MCA notification dated 24 March 2021, a new proviso has been added in Rules 3(1) of The Companies (Accounts) Rules, 2014, which states requirement of Audit trail. The Ministry of Company Affairs (MCA) vide its notification dated March 24 2021 and subsequent notification dated 1 April 2022, has made it mandatory for every company to fulfil the requirement of an audit trail feature in their accounting software from 1 April 2023.

Further from the financial year starting on or after the 1 April 2023, companies that utilize accounting software to maintain their books of account must exclusively use software that incorporates an audit trail feature. This feature should record the complete transaction history, maintain an edit log documenting every change made to the books of account, including the corresponding dates of the modifications, and ensure that the audit trail cannot be disabled.

Consequences of Non-Compliances

1. Management:

No such exclusive fines are levied for this non compliances however fine as per section 128(5), which shall not be less than fifty thousand rupees and may extend to five lakh rupees on the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with the duty of complying with the provisions of section 128 will be levied.

2. Auditor:

Based on evaluation of impact of non-compliance, the auditor may have observations or qualifications in the audit report.

Points yet to be clarified

Period over which backup shall be retained by the company? Section 128(5) states period of 8 years for books of account together with voucher. Thus, whether backup, edit logs, etc. of books of account and relevant paper and document will also be considered as books of accounts and be retained for period of 8 years, otherwise it shall be maintained for permanent.

Since accounting software is not defined in the act, clarity is needed in respect of this compliance as what is accounting software?

Is it the one that provide interface of general ledger or also another application or software that aid in transactional recording.

Summary

It is important to note that these changes introduce stricter compliance measures for companies maintaining electronic books of accounts, especially if they are stored outside India. Companies must ensure that their electronic records are accessible within India to facilitate verification by regulatory authorities. Companies using centralized servers located outside India may face increased compliance costs as they will need to maintain backups within the country. However, this can facilitate an effective control on electronic books of accounts and relevant data.