The Registrar of Companies (RoC), Ahmedabad, has imposed a cumulative penalty of ₹3.5 lakh on a company and its promoter for failing to maintain an audit trail in its accounting software, as mandatorily required under the Companies Act framework.
The penalty comprises ₹3 lakh levied on the company and ₹50,000 on its Managing Director, following the detection of non-compliance during the financial year 2023–24. The order is being viewed as a landmark enforcement step, particularly for small and medium-sized companies that continue to rely on basic or legacy accounting software.
Mandatory Audit Trail Requirement
From FY 2023–24 onwards, the Ministry of Corporate Affairs (MCA) has mandated that all companies maintain their books of account using accounting software equipped with an audit trail, also known as an edit log. This feature is designed to record every transaction entered into the system, along with any subsequent modifications, capturing details such as the original entry, the changes made, and the final version.
In addition to maintaining such software, statutory auditors are required to verify and report whether the audit trail facility remained operational throughout the year and whether it was preserved in accordance with statutory record retention requirements.
Auditor’s Report Triggered Action
According to sources familiar with the matter, the company’s statutory auditor reported that the accounting software used during FY 2023–24 did not have an audit trail functionality. Acting on this disclosure, the RoC initiated adjudication proceedings under the Companies Act, ultimately resulting in the imposition of penalties.
Notably, the lapse came to light during internal due diligence carried out by the company itself. Following the discovery, the company and its Managing Director proactively filed a suo motu adjudication application before the RoC, acknowledging the default.
Rule 11(g): Often Overlooked, Now Enforced
Company Secretary Rajesh Tarpara, Central Council Member of the Institute of Company Secretaries of India (ICSI), pointed out that the requirement flows from Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014.
“The rule obligates auditors to specifically report whether the accounting software used by the company has an audit trail feature, whether it has been used consistently throughout the year for all transactions, and whether the audit logs have been properly preserved. Unfortunately, many companies remain unaware of this prerequisite, which leads to unintended violations and regulatory action,” he said.
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