NFRA imposes Rs.10 crores Monetary Penalty on BSR & Associates; debars Two Auditors

The National Financial Reporting Authority (NFRA) has imposed a Rs 10 crore monetary penalty on KPMG affiliate M/s BSR & Associates LLP, the highest ever imposed by the regulator, and barred two of its auditors for alleged glaring professional lapses in Coffee Day Enterprises’ 2018-19 audit.

NFRA suo moto examined the professional conduct of the statutory auditors of Coffee Day Enterprises Limited under Section 132(4) of the Companies Act 2013 (‘the Act’ hereafter), pursuant to the Securities and Exchange Board of India (“SEBI’ hereafter) investigation report regarding diversion of funds worth Rs.3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited (“CDEL’ hereafter), to Mysore Amalgamated Coffee Estate Limited ((MACEL’ hereafter), an entity owned and controlled by the promoters of CDEL. Coffee Day Enterprises Limited is listed on stock exchanges. A Show Cause Notice was issued to M/s BSR & Associates LLP, the auditor for the FY 2018-19; CA Aravind Maiya, the EP for the audit engagement and CA Amit Somani, the EQCR.

NFRA’s examination inter alia revealed that the CDEL’s Statutory Auditor for audit of Consolidated Financial Statements and Standalone Financial Statements for the FY 2018-19 failed to meet the relevant requirements of the Standards on Auditing (‘SA’ hereafter), the Standards on Quality Control and provisions of the Act and also demonstrated serious lapses and absence of due diligence in following matters.

In respect of the Audit of CFS of CDEL, M/s BSR & Associates LLP, the EP and EQCR as Principal Auditors did not perform appropriate additional audit procedures to obtain sufficient appropriate audit evidence to issue an audit opinion on CFS. In view of the fact that a substantial portion of the financial information of the CFS was audited by the Other Auditors, the Principal Auditors did not ensure compliance with the requirements of SA 600 in letter and spirit. The Principal Auditors did not properly evaluate whether their own participation was sufficient to be able to act as the Principal Auditor. Secondly, the additional procedures, wherever performed by the Principal Auditors, were also inadequate and deficient. Details are given hereunder.

• The Principal Auditor was grossly negligent in verifying the business rationale of the unusually high amount of Rs 2,226 crores of the loans/advances given to MACEL, a promoter-controlled entity. The EP considered the exposure of the CDEL group to MACEL as an important area for audit but did not perform the required audit procedures, nor ensure appropriate audit procedures by the other auditors disregarding the provisions of para 10 of SA 600. (Section C- I of this Order).
• CFS had Rs 842.49 crores of outstanding amounts receivable from MACEL, a related party with very minimal business activities, but the Principal Auditors were grossly negligent in evaluating recoverability and the adequacy of the impairment allowance as per the applicable accounting standards; there was a pattern of diversion of funds of CDEL, the listed entity, to promoters or entities controlled by the promoters through a web of intragroup circular transfer of funds where MACEL was used as a main conduit. (Section C- I of this Order).
• CFS contained a number of false and erroneous account balances portraying lower amounts of receivables; this was achieved through book entries of repayments of intragroup loans through cheques received but not encashed as of balance sheet date. The Auditors did not exercise professional judgment and professional skepticism during the audit of loans of Rs.2,549 crores to a promoter-controlled entity. These loans were fraudulently understated in the financial statements of CDEL by Rs.1,706 crores, which was orchestrated through passing book entries as repayment by cheques and evergreening via structured circulation of funds within CDEL group companies. The Auditors did not identify and report this huge misrepresentation of financial position. (Section C- I of this Order).
• The Firm and the EP failed to exercise professional judgement and skepticism during the audit of the suspected fraudulent diversion of Rs.130.55 crores by CDEL’s subsidiary to an individual (Section C- II of this Order).
• The Firm, EP and the EQCR failed to evaluate fraud risk in recognition of interest income of Rs .75 crores on loans granted by Tanglin Developments Ltd (a subsidiary of CDEL) to MACEL which resulted in erroneous reporting of CDEL’s consolidated profit at Rs.27.93 crores instead of loss of Rs 47.07 crores. (Section C- III of this Order).

In respect of the audit of SFS, the Auditors failed to perform the audit procedure to verify the end use of the substantial amount of loan of Rs 1,055.73 crores given by CDEL to its subsidiaries and guarantee of Rs.1,015 crores given by CDEL on behalf of its subsidiary for taking loans from Banks/Financial institutions as required under the Companies (Auditors’ Report) Order 2016 read with section 185 of the Act. (Section D of this Order).

Lapses in audit documentation of SFS and CFS – The Audit Documentation application used by the Firm is not compliant with the requirements of SQC 1 and SA 230 as it allows unauthorised modification of audit work papers. The Auditors modified many audit work papers without recording the name and date of modifications after signing-off the audit work papers and also after issuing the audit report. (Section E of this Order).

Based on the proceedings under section 132 (4) of the Companies Act 2013 and after giving the Auditors an opportunity to present their case in person, we found the Audit Firm and its partners, who performed the audit as EP and EQCR, guilty of professional misconduct. Thus, this Order imposes a monetary penalty of Rs.10 crores upon M/s BSR & Associates LLP; Rs.55 lakhs upon CA Aravind Maiya; and Rs.25 lakhs upon CA Amit Somani. In addition, CA Aravind Maiya is debarred for a period of ten years and CA Amit Somani 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. This Order will be effective after 30 days from its issuance.

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