NFRA Penalises and Debars CA Lavitha Shetty for Professional Misconduct in Audit for FY 2019-20

The National Financial Reporting Authority (NFRA) recently conducted an investigation and issued an order confirming the professional misconduct of CA Lavitha Shetty, proprietor of Lavitha & Associates (ICAI Firm registration nuber 011882S), Chikkamagaluru, who is a member of the Institute of Chartered Accountants of India (ICAI) and the Engagement Partner (EP) for the statutory audit of Mysore Amalgamated Coffee Estates Limited (MACEL) for FY 2019-20.

The examination revealed serious failures by the EP to meet the criteria of the Standards on Auditing (SA), as well as several instances of professional incompetence. Previously, NFRA sanctioned and prohibited the same auditor for professional misconduct in MACEL’s audit for FY 2018-19 as well.

NFRA Investigation Initiated

After receiving information from the Securities and Exchange Board of India (SEBI) regarding the diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited (CDEL) to MACEL, an entity owned and controlled by CDEL’s promoters, NFRA launched an investigation into the role of the statutory auditor under section 132(4) of the Companies Act 2013 (the Act).

Key Findings of NFRA Investigation

1. Auditor’s Failure to comply with Standards on Auditing

NFRA investigations indicated that MACEL’s Auditor for FY 2019-20 failed to meet key Standards on Auditing (SA) standards in several significant aspects, exhibiting a substantial lack of competence. The EP failed to exercise professional judgement and skepticism during the audit in view of subsquent revelation of the non-disclosure of the following significant deficiencies in the financial statements:

i) Fraudulent borrowings of Rs 4,438.37 crore from Banks & Related Parties;

ii) Fraudulent diversion of Rs 4,176.67 crore to personal accounts of promoters, their relatives, entities controlled by them and other Related Parties;

iii) Related Party Transactions involving an accounting fraud;

iv) Inappropriate recognition of finance cost of Rs 40.47 crores;

v) Material misstatement of Rs 1,938.87 crores in the Cash Flow Statement; and

vi) Corporate guarantees issued by MACEL and creation of charges on its assets.

2. Absence of Internal Financial Control over Financial Reporting

The EP did not notify the absence of Internal Financial Control over Financial Reporting, despite the Director VG Siddhartha (VGS) using pre-signed blank cheques to divert monies to other group organisations. In addition, the EP breached various Auditing and Accounting Standards in this area.

3. EP’s Defense and NFRA’s Rebuttal

The EP claimed that she just became aware of the potential financial impropriety after learning of VGS’s death and the contents of the letter he left behind. However, NFRA argued that the Standards on Auditing do not relieve an auditor of the burden of disclosing other misstatements simply because a disclaimer on a specific aspect is provided.

NFRA imposes Penalties and Sanctions on CA Lavitha Shetty

Based on the inquiry and processes conducted under Section 132(4) of the Companies Act, NFRA found EP CA Lavitha Shetty guilty of professional misconduct and issued the following penalties and sanctions, which will take effect 30 days after the issuance of this Order:

i) A monetary penalty of Rs 10 lakhs; and

ii) Prohibition from being employed as an auditor or internal auditor, or from undertaking any audit of financial statements or internal audit of the functions and activities of any corporation or body corporate, for a period of ten years.

The first five years of the ten-year debarment shall run simultaneously with the period of debarment granted in a previous NFRA order dated 13/04/2023 addressing CA Lavitha Shetty’s audit for MACEL’s FY 2018-19 audit.

For Official Order Download PDF Given Below: