Audit Lapses: NFRA imposes Penalty of Rs.1.10 Cr on Chartered Accountants

The National Financial Reporting Authority(NFRA) in the matter of M/s Sundaresha & Associates has imposed Penalty of Rs.1.10 Cr on Chartered Accountants and CA Firm for Audit Lapses.

Pursuant to Securities and Exchange Board of India (“SEBI’ hereafter) sharing in April 2022, its investigation regarding diversion of funds worth Rs.3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited (‘CDEL’ hereafter), a listed company, to Mysore Amalgamated Coffee Estate Limited (‘MACEL’ hereafter), an entity owned and controlled by the promoters of CDEL, NFRA initiated investigations under section 13,2(4) of the Act. GVTL is one of the subsidiaries of the Coffee Day Enterprises Limited.

This Order has detailed all the lapses in Audit and the non-compliances with the Standards on Auditing made by the Auditors. The constant refrain of the Auditors throughout their reply has been that they had given the Disclaimer of Opinion indicating non recoverability of advances made to MACEL and Razia Sultana. The death of VGS happened in July 2019 and the Auditors had sufficient time to evaluate all the areas spelt out in this Order where the Standards have not been adhered to. The Auditors had access to the investigation report of Mr. Ashok Kumar Malhotra, which contained complete details of diversion of funds and its modus operandi, including signing of blank cheques. Despite this, they did not report fraudulent diversion of funds, just to preserve their professional relationship with the promoters of the auditee company. The Standards on Auditing do not free an Auditor from reporting all other misstatements once a Disclaimer on a particular aspect is given. The Auditors have failed in their statutory duty and have tried to hide behind one Disclaimer of opinion, which was incomplete as they did not cover all aspects of infraction of the Laws and the Standards. All of this weighs heavily on our mind while determining the quantum of penalty.

NFRA’s investigations inter alia revealed that the Auditors of GVIL for FY 2019-20 failed to meet the relevant requirements of the Standards on Auditing (‘SA’ hereafter) and the provisions of the Companies Act 2013 and demonstrated a serious lack of competence. They failed to evaluate their potential conflict of interest and failed to maintain their independence from GVIL by having audit and non-audit relationships with a large number of Coffee Day Group companies and the family members of the promoters. They blatantly violated the Code of Ethics issued by ICAI, as the percentage of professional fees received from Coffee Day Group (including Promoters) was more than 40% of their total professional fees. The Auditors failed to comprehend that GVIL was a shell company used by promoters for financial maneuvers. The Auditors did not exercise professional judgement & skepticism during audit of (a) Rs 581.16 crores borrowed from subsidiary companies of CDEL; (b) loan of Rs 370 crores fraudulently given to promoter’s company MACEL; (c) loan of Rs 105 crores fraudulently given to a related party named SICAL Logistics Ltd; (d) land advance of Rs 45 crores fraudulently given to Mrs. Razia Sultana, which was subsequently provided for and written off; (e) bank transactions-failing to detect evergreening of loan through structured circulation of funds; and (f) the going concern risk in GVIL, thus violating SA 570. All these loans and advances were given without any business rationale, without any authorisation and without any written agreements with counter parties. The Auditors failed to perform sufficient appropriate audit procedures while doing audit of related party balances, thus failing to detect & report understatement of related party loans by Rs.350 crores.

They failed to report the misstatement of Rs.325 crores in Statement of Cash Flow. The total misstatements in the Financial Statements of GVIL were of Rs 1776.16 crores. The Auditors failed to report absence of Internal Financial Controls in respect of fraudulent diversion of funds, pre-signing of blank cheques and evergreening of loans. They also violated a number of Standards on Auditing and provisions of the Companies Act 2013.

Based on investigation and proceedings under section 132 (4) of the Companies Act 2013 and after giving them opportunity to present their case, NFRA found the Audit Firm and its Engagement Partners, guilty of professional misconduct and imposes through this Order the following monetary penalties and sanctions that will take effect after 30 days from the date of this Order:

a) Imposition of a monetary penalty of Rupees One crore only upon M/s Sundaresha & Associates. In addition, M/s Sundaresha & Associates is debarred for a period of Two years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. This debarment period will start after completion of two years debarment period imposed in case of Tanglin Development Limited for FY 2018-19 vide NFRA order dated 26.04.2023.

b) Imposition of a monetary penalty of Rupees Five Lakhs only upon CA C. Ramesh. In addition, CA C. Ramesh is debarred for a period of Five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.

c) Imposition of a monetary penalty of Rupees Five Lakhs upon CA Chaitanya G. Deshpande. In addition, CA Chaitanya G. Deshpande is debarred for a period of Five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.

For Official Order Download PDF Given Below: