New accounting rules will curb fraud, backdating of entries: Experts

In a notification issued last week, the ministry of corporate affairs made it mandatory for any company that is using a software programme to maintain its books of account to use such software programme, which creates an audit trail of each and every change made in any accounting entry, reports ETV Bharat's Deputy News Editor Krishnanand Tripathi.

New Delhi:The new accounting rules that will come into effect from Thursday will curb frauds by backdating of accounting entries, said two chartered accountants, adding that it will discourage fly-by-night operators as any tinkering with accounting records will provide irrefutable evidence to investigators.

In a notification issued last week, the ministry of corporate affairs made it mandatory for any company that is using a software programme to maintain its books of account to use such software programme, which creates an audit trail of each and every change made in any accounting entry.

New rules effective from April 1

The new rules that will come into effect this week require the companies to use such accounting software in which this feature of the audit trail cannot be disabled in any case.

“From the coming financial year, every company maintaining its Electronic books of account, shall use only such accounting software which has a feature of recording audit trail at the transaction level, creating an edit log of each change made,” said Rajat Mohan, a practising chartered accountant and partner in Delhi based AMRG Associates.

“It is now the responsibility of companies to ensure that the audit trail is practically invincible, and the same cannot be disabled,” Rajat Mohan told ETV Bharat.

Cos must create audit trail: MCA

In a gazette notification issued on Wednesday, the government made changes in the Companies (Accounts) Rules of 2014 to insert the necessary provision by inserting a provision in sub-rule (1) of rule 3.

The notification said the software programme must create 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.

“The amendment may entail a major overhaul for the Companies who are not having the accounting software which is fully compliant with the proposed changes,” said Pritam Mahure, a Pune based Chartered Accountant and tax expert.

Mahure says after the amendment, it will be difficult for fly-by-night operators to amend the accounting records.

“If someone tinkers with the accounting records then the trail of the changes made will be available,” Mahure told ETV Bharat.

New rules will curb tax fraud

The new rules are aimed at curbing the GST related frauds where fake GST dealers resorted to large scale misuse of fake GST invoices for fraudulently availing the input tax credit (ITC) available to GST registered businesses which was designed to avoid cascading of taxes.

Last November, the GST law committee recommended a twin-pronged approach to curb GST related frauds by making GST registration difficult and suggested the use of Aadhaar based authentication to prevent the entry of fraudsters into the GST regime.

The GST law panel also recommended faster suspension of fake GST dealers to weed out bogus firms and fraudsters from the GST regime.

The new accounting rules enforced by the ministry of corporate affairs will make it even more difficult to commit fraud as backdating of entries will be nearly impossible.

New rules to help investigators

Tax and accounting experts say that the new rules will not only discourage backdating of entries but will also provide an audit trail to investigators in case of fraud.

Rajat Mohan says the change will disincentivize the backdating of entries in books of accounts and ensure that the corporate sector maintains books of accounts in the true and correct manner.

While Pritam Mahure says the audit trail can be of substantial use to investigators in case of financial frauds.

Mahure, also clarifies that it will be the responsibility of auditors to mention in their report whether the software programme used by the company audited by them uses compliant software or not.

“As regards auditors, as it is an amendment from April 1, 2021, going forward, they will need to comment whether the accounting software is in compliance with the amendment or not,” he told ETV Bharat.