The National Financial Reporting Authority (NFRA) has imposed penalties and a ban on five entities, four of which are auditors, for lapses in the auditing of Coffee Day Global Ltd and Mysore Amalgamated Coffee Estate Ltd during the 2018-19 fiscal year. The penalties total INR 1.25 crore. It’s worth noting that both CDGL and MACEL are subsidiaries of Coffee Day Enterprises Ltd (CDEL), a listed entity.
CDEL was owned and controlled by the late V G Siddhartha and his family members.
This case is related to the diversion of funds amounting to INR 3,535 crore from seven subsidiary companies of CDEL to MACEL.
In April 2022, following the investigation report shared by the markets regulator SEBI, NFRA initiated an examination into the professional conduct of the statutory auditors of CDGL. In a separate instance, NFRA has imposed a five-year ban and a fine of INR 5 lakh on Lavitha Shetty, who served as the statutory auditor for MACEL in the 2018-19 period. Regarding CDGL, the audit regulator has imposed a fine of INR 1 crore on audit firm ASRMP & Co, INR 10 lakh on A S Sundaresha, and INR 5 lakh each on Madhusudan U A and Pranaa.
ASRMP & Co has been prohibited from undertaking auditing work for two years, and the four individuals have each been banned for five years.
As per the order, all of them have been prohibited from conducting any audit related to the financial statements or internal audit of any company or body corporate during the duration of the ban.
According to two separate orders from NFRA, the material and pervasive misstatements in the financial statements of CDGL and MACEL amounted to INR 7,514.10 crore and INR 11,393.69 crore, respectively.
According to the order issued against CDGL, the company’s auditors did not exercise professional judgment and skepticism while auditing the transactions of INR 6,958.91 crore that were fraudulently entered into with MACEL. Moreover, these transactions were not fully disclosed in the related party disclosures.
The regulator has determined that the auditors neglected to scrutinize and report the diversion of funds by CDGL, which involved providing a large sum of money to MACEL without any justification or operational requirement. Additionally, this was done without the approval of the board and without any agreement in place, as per the regulator.
NFRA has also stated that the auditors attempted to deceive it by adding additional documents and modifying existing ones in their audit file, which constituted tampering with the audit file.
The auditors provided false information in their reports on the financial statements of CDGL and MACEL for the fiscal year 2018-19, and did not present an accurate and impartial view of the financial status of both companies.
As per another order, Lavitha Shetty neglected to apply professional skepticism while auditing the related party balances involving an accounting fraud of INR 2,363.34 crore. This resulted in an understatement of the related party loan balances by INR 1,713.74 crore in the financial statements of MACEL.
In addition, she also neglected to assess the recoverability of loans amounting to INR 3,235.16 crore that were provided to late V G Siddhartha, who was the Chairman and MD of CDEL at that time, his wife Malavika Hegde, and entities controlled by them.
The order also states that Lavitha Shetty did not conduct adequate and suitable audit procedures while reviewing the cash flow statement, which had a material misstatement of INR 909.99 crore.
NFRA has stated that the auditors did not exercise due diligence while performing their duties by not disclosing material transactions and misstatements in the financial statements of CDGL and MACEL.
NFRA added that the auditors’ conduct was grossly negligent in the performance of their professional duties, and as a result, they should be penalized.