Audit Trail :”An Essential Tool for Enhancing Data Security”
What should a Management do ?
Background: Companies (Audit & Auditors) Amendment Rules, 2021read with Section 143(3) of the Companies Act 2013 introduced the concept of an audit trail, which refers to the systematic record-keeping of all transactions and actions taken by a company and it is a record of all the steps taken by the company during the course of a particular event, transaction, or process. The records must include timestamps and other information that illustrate how the event or transaction was routed, processed, and tracked. Audit trails serve to protect both the company and its stakeholders from fraudulent and unethical activities, and provide a record of compliance with laws and regulations. However, the requirement for companies to use accounting software with an audit trail feature has been made applicable for the financial year starting from April 1, 2023 originally applicable for the financial year starting from April 1, 2021. This was initially deferred until April 1, 2022, and then further deferred until April 1, 2023 via MCA notification G.S.R. 248(E) dated April 1, 2021.
Rule 11(g) reads as:
“Whether the company, in respect of financial years commencing on or after the 1st April, 2022, has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the company as per the statutory requirements for record retention”
By maintaining a comprehensive audit trail, companies can:
- Ensure that all financial transactions are properly documented and accounted for
- Prevent fraudulent activity
- Identify errors and discrepancies
- Provide evidence in the event of legal or regulatory investigations the impact of the audit trail on companies is significant, as it helps promote good corporate governance practices and builds trust and confidence among stakeholders.
Management’s Role & Responsibility for an effective system:
Management plays a crucial role in establishing an effective audit trail system. They should define clear policies, document procedures, and enforce data security protocols. Authorization levels should be in place to control access, and all transactions should be logged and tracked. Regular review and evaluation of audit trail reports help identify errors, discrepancies, and suspicious activities.
Proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 (“the Account Rules”) states “that for the financial year commencing on or after the 1st day of April 2023, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording an audit trail of each and every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.”
Hence, the first step in establishing an effective audit trail system in an organisation is for management to define clear policies regarding the collection, storage, and analysis of data. They should document these policies and procedures and make them available to all employees. Management should also ensure that their data security protocols are up to date and enforced, and that the appropriate levels of authorization are in place prior to access is granted. Additionally, all transactions within the organisation should be logged and tracked, and reports made available to management to review and evaluate regularly. This type of record keeping provides an audit trail which facilitates internal investigations and the tracking of any suspicious activities. Therefore, the management must:
1. Establish systems to track audit trails. Implement automated audit trail software to monitor changes and approve all modifications.
2. Create processes to ensure all audit trails are auditable and secure.
3. Establish multi-step authentication to access sensitive data and secure backups.
4. Develop reporting requirements to effectively manage audit trails. Set up a system of daily and weekly reports that compile all changes made and any anomalies found.
5. Monitor audits and review findings to identify areas for improvement. Take a look at past audit trails and uses the information to spot trends and identify process improvements.
6. Implement security policies and procedures to protect audit trails. Establish rules regarding the use of encryption, authentication measures, and other security protocols to keep audit trails safe.
7. Design fault-tolerant systems to ensure data integrity. Build in failsafe mechanisms to detect and prevent data alteration or corruption.
8. Ensure that all data is properly encrypted and protected. Employ strong encryption algorithms to prevent data breaches.
9. Ensure all audit trails are backed up and preserved for future use. Store all audit trails on a secure server and backup storage
10. Educate users on the importance of audit trails. Provide comprehensive training on best practices and data security measures when it comes to managing audit trails.
Preservation of Audit Trails:
Compliance with Section 128(5) of the Companies Act, 2013 requires companies to retain audit trails for a minimum of eight years, starting from April 1, 2023. Proper storage and backup measures should be implemented to preserve audit trails securely.
Conclusion:
The new law aims to promote transparency and reduce data manipulation by companies, mandating the use of accounting software that has an audit trail feature to record all changes made in the books of account and time stamps, as well as create an end-to-end financial event log.
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