The new rules also require auditors to play a stronger role in assessing how companies maintain their books of accounts. It also makes it mandatory for companies to use accounting software that preserves the audit trail of all transactions.
Starting 1 April, companies will have to comply with stricter accounting rules relating to a range of subjects, including off-the-book deals and assets held by promoters and related parties, according to the corporate affairs ministry.
The new rules also require auditors to play a stronger role in assessing how companies maintain their books of accounts. It also makes it mandatory for companies to use accounting software that preserves the audit trail of all transactions.
Experts said the move is set to raise transparency standards, but it may increase the compliance cost for small businesses.
The Companies (Accounts) Amendment Rules notified on Wednesday stipulates that companies record an audit trail of all transactions. It mandates that the accounting software create an edit log of all changes made in the books of account.
Kapil Rana, founder and chairman of HostBooks Ltd, claimed that among accounting software for small and medium businesses, only HostBooks has the audit-trail feature. There are a few other enterprise-level applications in which these facilities can be in-built on request, he said.
“We believe in transparent business, and this is a welcome move as it will help them avoid unforeseen tax and financial complexities," Rana said in response to a question on whether the new requirement would favour select software makers in the market. His firm offers this facility to its customers without any additional cost.
According to Naveen Wadhwa, deputy general manager of Taxmann, a publisher of law books, recording the history of amendments in any transaction with dates would help the statutory auditor trace fictitious transactions. “As a result, the true and fair picture will be presented by the firm. This, however, would increase the compliance cost for companies," said Wadhwa.
Archit Gupta, founder and chief executive of ClearTax, said making audit trail an essential feature of the business accounting system is the Centre’s ultimate digital push to businesses. “With the launch of GST e-invoicing for businesses and this new rule about accounting software having an audit trail, the government has shown it is serious about minimising fraud. This will also mitigate the risks arising from unverifiable transactions and help the government protect its own revenues." ClearTax offers an application for businesses to digitize their invoicing, maintain sales and purchase books electronically.
An email sent to the spokesperson for the ministry enquiring if the development will be onerous to small businesses remained unanswered at the time of publishing. An email sent to Zoho Corp. Pvt. Ltd, a software provider, seeking comments remained unanswered.
More transparency in off-the-book arrangements that companies enter into with entities that appear unrelated but may be connected is aimed at preventing accounting fraud.
The auditor now has to comment on whether the management has assured that no undisclosed funds or loans have been given to anyone or invested in any entity, including non-resident entities, with the written or unwritten understanding that the latter will lend to or invest in any entity on behalf of the company.
The requirement is brought to effect by the Companies (Audit and Auditors) Amendment Rules, 2021 notified late Wednesday.
Auditors also have to comment on whether the management has assured that no undisclosed funds have been received by the company from anyone including foreign entities with the written or unwritten understanding that it will be lent to or invested in any entity on behalf of the latter. This disclosure requirement also covers any guarantee given or received by the company. The idea is to throw light on whether funds have been used to the advantage of the ‘ultimate beneficiary’ of the firm clandestinely.
Through two other separate notifications, the ministry sought to step up disclosures in financial statements and board reports of companies and through the software used in maintaining the books of account.
According to the amended instructions, firms have to give detailed year-wise break up of delays in payments to micro, small and medium enterprises and others, title deeds of immovable property that are held in the name of major shareholders, directors or their relatives and reasons for these not being held in the name of the company.
Tejas Goenka, managing director, Tally Solutions, said small businesses will find the new software requirement onerous. “The concept of ‘edit logs’ for non-material changes likes notes, comments, corrections of spelling errors, corrections of human errors—and then ‘explaining and justifying’ every such change will be both stressful, high-cost, and fraught with harassment and legal proceedings," said Goenka. “In general, all transactions are actually automatically cross-verifiable since they occur with other entities. So trying to create a history serves no meaningful or useful purpose," said Goenka. He added that the company was seeking clarity on what the requirement was from software makers before making any claim about meeting it.
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