Auditor’s Observations on Common Non-Compliances in Electronically Maintained Books of Account

1. Introduction

In the course of audits of companies that maintain their books of account in electronic form, auditors frequently identify certain recurring areas of non-compliance with the requirements prescribed under the Companies Act, 2013 and the Companies (Accounts) Rules, 2014. These non-compliances generally relate to system configurations, data retention practices, audit trail maintenance and accessibility of electronic records in India. Some of the commonly observed non-compliances by the auditor in relation to maintenance of books of accounts in electronic form are discussed herewith:

2. Failure to Maintain Backup of Books of Account on Server Present in India

2.1 Facts

Nova India Private Limited, hereinafter referred to as “the company” is a wholly owned subsidiary of Nova Systems Inc., a tech solutions provider based in the United States. The Company maintains its books of account entirely in electronic form through an enterprise level accounting software that operates on cloud infrastructure managed by the parent company. Although, the company had its own servers installed at its facility in Bengaluru, the financial data was not being backed up or stored on these India based servers. Instead, the accounting system was configured to sync exclusively with the parent company’s servers located in the United States. As a result, no daily backup of the electronic books of account was maintained on any server physically located in India.

2.2 Relevant Provision

Rule 3(5) Companies (Accounts) Rules 2014

There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law.

Provided that the back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a daily basis.

2.3 Auditor’s Observation

As per Rule 3(5) of the Companies (Accounts) Rules, 2014, where a company maintains its books of account in electronic mode, it is required to maintain a daily backup of such electronic records on servers physically located in India, even if the primary books are maintained outside India.

During the audit, it was noted that the company maintains its books of account electronically on cloud servers managed by its parent company in the United States. Although servers are installed in India, no daily backup of the electronic books of account is being stored on these India based servers. Accordingly, the company has not complied with the requirement of maintaining a daily backup of electronic books of account on servers physically located in India, resulting in a non-compliance of statutory requirements.

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