Site Title

By Sidheswar Jena- PhD Scholar-Law

Introduction

On March 24, 2021, the Ministry of Corporate Affairs (MCA) issued Notification No. G.S.R. 205(E) introducing the Companies (Accounts) Amendment Rules, 2021. These rules made it compulsory for companies to maintain accounting software with an audit trail (edit log) feature. The intent was clear: stop backdated manipulation, ensure every change is logged with a timestamp, and make auditors accountable for reporting compliance.

After two years of deferment, the requirement finally came into force from April 1, 2023 for the financial year 2023–24. This was hailed as a milestone for corporate governance and financial transparency. But the real question remains: Has this mandate delivered any real benefits, or is it simply another costly compliance burden?

Under the amended rules, companies must ensure that:

• Their accounting software has a non-disableable audit trail/edit log.
• Every transaction and subsequent change is recorded with date and user details.
• Audit logs are preserved as per record-retention norms.
• Auditors, under Rule 11(g), report on whether:
  1. The company used audit-trail-enabled software.
  2. It remained operational throughout the year.
  3. It was tamper-proof.
  4. The records were properly preserved.

Promised Benefits of Audit Trails

• Transparency – A clear, verifiable record of all entries and changes.
• Forensic Use – Stronger tools for SFIO, SEBI, or tax authorities to trace misconduct.
• Deterrence – Making it harder for companies to manipulate books without leaving evidence.
• Investor Confidence – Reinforcing the trustworthiness of corporate disclosures.

The Reality After Mandate

1. Fictional Transactions Remain
   If the underlying data (invoice, receipt, adjustment) is false, the audit trail only preserves a well-documented fiction. Fraudulent inputs create fraudulent logs.
2. Compliance Costs Are Heavy
   • Technology upgrades: Companies upgraded to compliant ERPs.
   • Operational effort: Employees must maintain logs meticulously.
   • Audit fees: Auditors charge more for verifying audit trail compliance.
     For many SMEs, this feels like paying extra for more accounting work without obvious value.
3. No Documented Public Wins Yet
   Despite the mandate, no high-profile case has been publicly reported where audit trail evidence was decisive in uncovering fraud. Investigative agencies may already be leveraging logs, but the successes are not credited or highlighted in public domain.

Where Government Could Benefit

Even though results are not yet visible, audit trails can strengthen governance in key ways:

• Regulatory Oversight – MCA and SEBI can demand verifiable logs to check tampering.
• Tax Enforcement – Discrepancies between declared tax returns and company books could be traced back to edits.
• Forensic Investigations – Agencies like SFIO or ED could prove misconduct by showing who changed what, and when.
• Investor Protection – For listed firms, non-tamperable trails increase investor trust.
• Internal Governance – Companies can prevent small-scale frauds like duplicate invoicing or unauthorized payments.

The Illusion of Control

The biggest risk is that audit trails become a box-ticking exercise:

• If regulators check only for existence of logs, not substance.
• If auditors issue certificates without deeper verification.
• If management overrides systems or colludes internally.

In such cases, audit trails create an illusion of transparency—adding cost but not accountability.

My Take:

The audit trail mandate is an important step towards digital transparency. But as of now, it remains more of a burden than a boon for many companies. The government and regulators have not yet demonstrated measurable benefits, such as fraud prevention, improved enforcement, or cost savings to the public. For audit trails to achieve their potential, they must move beyond software compliance. Regulators must actively use them in enforcement, auditors must apply rigorous verification, and companies must embrace them as governance tools rather than obligations. Only then can the audit trail evolve from a costly ritual into a meaningful safeguard of accountability