Penalty of Rs.2.3 Crore levied on Chartered Accountant [Read NFRA Order]

The National Financial Reporting Authority (NFRA) has imposed a penalty of Rs.2.3 Crore on a Chartered Accountant for Professional misconduct under section 132(4).

NFRA’s investigations inter alia revealed that the CDGL’s Auditors for the FY 2019-20 had failed to meet the relevant requirements of the Standards on Auditing (‘SA’ hereafter) and provisions of the Companies Act 2013 and also demonstrated a serious lack of competence and due diligence on the part of the Auditors. They failed to evaluate their potential conflict of interest and maintain their independence from CDGL by having audit and non-audit relationships with a large number of Coffee Day Group companies and the promoters’ family members and thus violated the Code of Ethics issued by ICAI as the professional fees received from Coffee Day Group Entities/Promoters was more than 40% of their total fees. They also attempted to mislead NFRA by adding and altering documents in their audit file which amounted to tampering with the Audit File.

The Auditors failed to exercise professional judgement & skepticism during audit of CDGL where there was (a) Fraudulent diversion of funds to MACEL worth Rs 1105.10 crores; (b) Evergreening of loans through structured circulation of funds among group companies; (c) Fraudulent repayment of loan of Rs 130.55 crores by ‘Kumar Hegde’ to M/s Classic Coffee Curing Works (CCCW) and in turn repayment of loan by CCCW to CDGL-by Roundtripping of CDGL’s own funds to MACEL, from MACEL to Kumar Hegde, from Kumar Hegde to CCCW, and finally fund came back from CCCW to CDGL; (d) Sale of Fresh & Ground (‘F&G’ hereafter) business involving diversion of Rs 103.20 crores (received from Japanese Investor) to MACEL and Misstatement of sale price by Rs 185.57 crores; and (e) Provisions made for doubtful advance of Rs 24.52 crores. Despite the fraud being revealed after the suicide of the group chairman, Shri VG Siddhartha, and the reports of investigations by Mr. Ashok Kumar Malhotra, retired DIG of CBI, the Auditors displayed no professional skepticism or due diligence.

The Auditors also failed to obtain sufficient appropriate audit evidence during audit of (a) Deferred Tax Assets involving misstatement of Rs 244 crores; and (b) Misstatement of Rs 26.19 crores in related party disclosure relating to purchase of coffee beans from MACEL. Thus, total material and pervasive misstatements amounted to Rs 1615.04 crores, which the Auditors did not identify and report in their Independent Auditor’s Report. The Auditors failed to report that Internal Financial Control over Financial Reporting was completely absent in CDGL.

Based on investigation and proceedings under section 132 (4) of the Companies Act 2013 and after giving the Auditors opportunity to present their case, NFRA found the Audit Firm and audit team members, guilty of professional misconduct and imposes through this Order the following monetary penalties and sanctions with effect from a period of 30 days from issuance of this Order:

a) Monetary penalty of Rs Two Crores only upon M/s ASRMP & Co. In addition, this Finn is debarred for a period of four 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. The first two years out of the four years debarment ordered, would run concurrently with the period of debarment ordered vide NFRA order dated 12.04.2023 in the case of Coffee Day Global Limited for FY 2018-19.

b) Monetary penalty of Rs Ten Lakhs only upon CA A. S. Sundaresha. In addition, he is debarred for a period of ten years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal au4it of the functions and activities of any company or body corporate. The first five years out of the ten years debarment ordered, would run concurrently with the period of debarment ordered vide NFRA order dated 12.04.2023 in the case of Coffee Day Global Limited for FY 2018-19.

c) Monetary penalty of Rs Five Lakhs only upon CA Madhusudan U A. In addition, he 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.

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