National Financial Reporting Authority: The National Financial Reporting Authority (‘NFRA’) has imposed monetary penalty of Rs. 1.10 Crore on 1 Auditor Firm and 2 Chartered Accountants (Auditors) and debarred the auditors of Coffee Day Enterprises Limited from being appointed as Auditors for professional misconduct.
The Securities and Exchange Board of India (‘SEBI’) shared its investigation regarding diversion of funds worth Rs. 3,535 crores from 7 subsidiary companies of Coffee Day Enterprises Limited (‘CDEL’) to Mysore Amalgamated Coffee Estate Limited (‘MACEL’) (entity owned and controlled by promoters of CDEL).
The modus operandi of the alleged diversion of funds discovered by the SEBI during its investigation was that Late, Mr. V.G. Siddhartha (‘VGS’), Chairman and Managing Director of CDEL, used to ask the Authorized Signatories to sign a bunch of cheques which were kept in his possession and used them as required and these pre-signed cheques were used for diversion of funds.
Giri Vidhyuth (India) Limited (‘GVIL’) as wholly owned subsidiary company of Tanglin Development Limited (‘TDL’) and was one of the companies used for such diversion of funds with M/s Sundaresha & Associates as their Statutory Auditor.
NFRA, on examining the Audit File of GVIL, issued a show cause notice asking them why the penal provisions under Section 132(4)(c) of the Companies Act, 2013 should not be invoked for professional misconduct.
Failure to disclose a material fact known to the Auditors which was not disclosed in a financial statement, but the disclosure of which is necessary in making such financial statement where the statutory auditors are concerned with that financial statement in a professional capacity.
Failure to report a material misstatement known to the Auditors to appear in a financial statement with which the statutory auditors are concerned in a professional capacity.
Failure to exercise due diligence and being grossly negligent in the conduct of professional capacity.
Failure to obtain sufficient information which is necessary for expression of an opinion, or its exceptions are sufficiently material to negate the expression of opinion.
Failure to invite attention of any material departure from the generally accepted procedure of audit applicable to the circumstances.
Submissions by the Auditors:
The Creditors of GVIL are largely group companies therefore no public is involved.
The diversion of funds can emerge only from an investigation of all group companies and are not capable of being detected within the scope of work of a Statutory Auditor GVIL and TDL.
Auditors relied on their Disclaimer and stated that they had disclaimed the Financial Statement as a whole. Therefore, it is important to examine whether an Auditor, who had issued a Disclaimer of Opinion for one matter, is responsible for other unreported material misstatements in financial statements or not?
They also submitted that they have inadvertently missed certain evidence which was not available in the Audit File submitted to NFRA and submitted some additional documents for consideration.
Major Lapses in the Audit:
The Auditors were in non-compliance with requirements relating to independence of the Auditor.
Violation of Code of Ethics, as the professional fees received by the Auditors from CDEL including its promoters, exceeded the maximum threshold of 40% of the total professional fees.
Failure on the part of Auditors as they were unable to understand the nature of GVIL including its operations, ownership and governance structures, types of investments GVIL was making, and it was financed.
NFRA, after analyzing, said that sums of Rs. 370 crores, Rs. 105 crores and Rs. 45 crores were fraudulently diverted to MACEL, SICAL and to Razia Sultan respectively. NFRA also noticed that there was evergreening of loans through structured circulation of funds.
Therefore, NFRA found that the Auditors failed to report the fraud to the Central Government and in the Independent Auditor’s Report resulting in violation of Section 143(12) of Prevention of Money Laundering Act 2002 (‘PMLA’).
Failure to evaluate management’s assessment of the entity’s ability to continue as going concern.
Failure to report material misstatements of Rs. 325 crores in Statement of Cash Flows.
Omission and Commission by the Audit Firm only:
Lapse in constitution of Engagement Team (‘ET’) and assigning responsibilities among the ET members- The firm engaged 2 Engagement Partner (‘EP’) due to which no single ET member took the ultimate responsibility of the audit engagement which adversely effected the performance of audit engagement.
NFRA held that the Auditors have committed Professional Misconduct and all the charges stand proved.
Penalty and Sanction on:
M/s Sundaresha & Associates (Firm) – Rs. 1 Crore
Debarred for 2 years from being appointed as auditor.
The 2 Chartered Accountants- Rs. 5 Lakhs each
Debarred for 5 years from being appointed as auditor.
[Sudaresha & Associates, CA C. Ramesh, and CA Chaitanya G. Deshpande under Section 132 (4) of the Companies Act 2013, Order No: NF-23/14/2022/05, order dated 30-5-2023]
Advocates who appeared in this case :
Chairperson: Dr. Ajay Bhushan Prasad Pandey;
Full-Time Members: Dr. Praveen Kumar Tiwari;