Coffee Day Global Limited (CDGL) – NFRA Orders & Auditing Standards

This article discusses the recent orders issued by the National Financial Reporting Authority (NFRA) against the auditors of Coffee Day Global Limited (CDGL) for the financial year 2019-20. The penalties were imposed based on findings of misconduct and non-compliance with auditing standards and the Companies Act, 2013. The article explores the implications of these orders for the auditors and the company.

Coffee Day Enterprises Limited (CDEL) is a listed company that operates in various sectors, including coffee retailing, logistics, financial services, hospitality and technology parks. It is the parent company of Coffee Day Global Limited (CDGL), which runs the popular Cafe Coffee Day chain of outlets in India and abroad. CDGL is also the holding company of several other subsidiaries, such as Mysore Amalgamated Coffee Estate Limited (MACEL), which owns coffee plantations and estates.

In July 2019, the founder and former chairman of CDEL, V.G. Siddhartha, committed suicide after leaving a note that alleged harassment by tax authorities and pressure from lenders. His death triggered a series of investigations by various regulators and agencies into the financial affairs of CDEL and its group companies. One of the major findings was that there was a diversion of funds worth Rs 3,535 crore from seven subsidiary companies of CDEL to MACEL, which was not disclosed in the consolidated financial statements of CDEL for the financial year 2018-19.

The National Financial Reporting Authority (NFRA) is an independent statutory body established under the Companies Act, 2013, to oversee the quality of audit and accounting standards in India. It has the power to investigate and penalize auditors for professional misconduct or negligence. In April 2020, NFRA initiated an investigation into the professional conduct of the statutory auditors of CDGL for the financial year 2018-19.

In July 2023, NFRA issued another order against ASRMP & Co and its partners, imposing a penalty of Rs 2 crore on the audit firm and Rs 10 lakh on A.S. Sundaresha. It also barred them from undertaking any audit for a period of four years and ten years, respectively. NFRA found that ASRMP & Co was appointed as the statutory auditor of CDGL for the financial year 2019-20 without obtaining prior approval from NFRA, as required by law. It also found that ASRMP & Co failed to comply with the auditing standards and the provisions of the Companies Act, 2013, in relation to the audit of CDGL. It also found that ASRMP & Co failed to exercise professional skepticism and due diligence in verifying the existence and valuation of deferred tax assets and related party transactions involving CDGL and MACEL.

NFRA also imposed a penalty of Rs 5 lakh on Madhusudan U A, who was a partner of ASRMP & Co during the audit of CDGL for the financial year 2019-20. It also barred him from undertaking any audit for a period of five years. NFRA found that Madhusudan U A failed to comply with the auditing standards and the provisions of the Companies Act, 2013, in relation to the audit of CDGL. It also found that Madhusudan U A failed to exercise professional skepticism and due diligence in verifying the existence and valuation of deferred tax assets and related party transactions involving CDGL and MACEL.

NFRA noted that the total material misstatements in the financial statements of CDGL for the financial year 2019-20 amounted to Rs 1,615.04 crore, which were not identified or reported by ASRMP & Co or Madhusudan U A in their independent auditor’s report. NFRA also noted that there was a complete absence of internal financial control over financial reporting in CDGL, which was not reported by ASRMP & Co or Madhusudan U A.

NFRA stated that its orders were based on a detailed examination of the audit working papers, documents, evidence and submissions made by the auditors during the investigation process. NFRA also stated that its orders were aimed at protecting public interest and enhancing public confidence in the quality of audit and financial reporting in India.

What is RBI instruction on changing interest on NPA accounts?

Non-performing assets (NPAs) are loans that have become overdue or defaulted by the borrowers. NPAs pose a risk to the financial stability of banks and affect their profitability and capital adequacy. Therefore, the Reserve Bank of India (RBI) has issued prudential norms on income recognition, asset classification and provisioning pertaining to advances (IRACP) to ensure that banks follow sound practices in managing their credit portfolios.

One of the aspects of IRACP norms is the treatment of interest income on NPAs. According to the RBI, banks should stop recognizing interest income on an account as soon as it becomes NPA. Moreover, banks should reverse the interest already charged and not collected by debiting the profit and loss account. This means that banks cannot accrue interest income on NPAs unless they actually receive it from the borrowers.

However, some banks may try to upgrade an NPA account to a standard account by receiving only interest payments from the borrowers, without recovering the principal amount or clearing the arrears of interest. This practice may not reflect the true quality of the loan portfolio and may lead to ever greening of bad loans.

To prevent this, the RBI has issued a clarification on November 12, 2021, directing banks that loan accounts classified as NPAs should be upgraded as ‘standard’ asset only if **the entire arrears of interest and principal are paid by the borrower**. The RBI has also specified that from March 31, 2022, in case of interest payments in respect of term loans, an account will be classified as NPA if **the interest applied at specified rests remains overdue for over 90 days**.

The RBI has further clarified that in case of working capital facilities, where interest is applied at monthly rests or more frequent rests, an account will be classified as NPA if **the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days or more**. In such cases, banks should not apply interest at monthly rests or more frequent rests unless there is a specific clause in the loan agreement permitting such application.

The RBI has also harmonized the IRACP norms across all lending institutions, including non-banking financial companies (NBFCs), co-operative banks and all-India financial institutions. The RBI has advised all lending institutions to ensure compliance with these norms and also specify the exact due dates for repayment of loans in the loan agreements.

The RBI’s clarification on IRACP norms is aimed at improving the transparency and discipline in the recognition and resolution of stressed assets. It will also help in aligning the Indian accounting standards with the international best practices.

NFRA order in Coffee Day Global case: What does it mean for the auditors and the company?

The National Financial Reporting Authority (NFRA) is a statutory body that regulates the quality of audit and accounting standards in India. It has the power to investigate and penalize auditors of certain companies for any misconduct or negligence in their audit work.

Recently, NFRA issued an order against the auditors of Coffee Day Global Ltd (CDGL), a subsidiary of the listed entity Coffee Day Enterprises Ltd (CDEL), for the financial year 2019-20. The order was based on the findings of an investigation conducted by NFRA after receiving a report from SEBI, the market regulator, in April 2022.

The report revealed that there was a diversion of funds worth Rs 3,535 crore from seven subsidiary companies of CDEL to Mysore Amalgamated Coffee Estate Ltd (MACEL), another subsidiary of CDEL. The funds were used to repay loans taken by MACEL from various lenders. The diversion was not disclosed by CDEL or CDGL in their financial statements or auditor’s reports.

NFRA found that the auditors of CDGL, namely ASRMP & Co, A S Sundaresha and Madhusudan U A, failed to exercise professional judgement and skepticism during the audit of CDGL. They also failed to obtain sufficient appropriate audit evidence to verify the transactions between CDGL and MACEL, the deferred tax assets of CDGL and the related party disclosures.

As a result, NFRA imposed penalties of Rs 2.15 crore on the three entities and barred them from undertaking any audit work for varying periods ranging from four years to ten years. NFRA also stated that the auditors committed professional misconduct and violated various provisions of the Companies Act, 2013 and the NFRA Rules, 2018.

The order has serious implications for the auditors and the company involved. The auditors may face legal action from their clients, regulators or other stakeholders for their lapses and misstatements. They may also lose their reputation and credibility in the market. The company may face regulatory scrutiny, litigation or claims from its investors, creditors or other parties for its non-disclosure and misrepresentation of material facts. It may also suffer a loss of trust and goodwill among its customers and suppliers.

The Reserve Bank of India (RBI) has recently issued a circular that prohibits banks from charging interest on non-performing assets (NPAs) or bad loans. This means that banks cannot accrue interest on loans that have been classified as NPAs, and have to reverse any interest already charged on such loans. The RBI has justified this move as a prudential measure to ensure that banks reflect the true value of their assets and liabilities, and do not inflate their income by charging interest on loans that are unlikely to be recovered.

However, this circular has raised some objections from the National Financial Reporting Authority (NFRA), which is the independent regulator of auditing and accounting standards in India. The NFRA has argued that the RBI’s circular violates the Indian Accounting Standards (Ind AS), which are based on the International Financial Reporting Standards (IFRS). According to the NFRA, the Ind AS require banks to recognize interest income on an accrual basis, regardless of whether the loan is performing or not. The NFRA has also claimed that the RBI’s circular undermines the role and authority of the NFRA, which is mandated by law to oversee the implementation and enforcement of the Ind AS.

The conflict between the RBI and the NFRA over the treatment of interest on NPAs has created a dilemma for banks, auditors and investors. On one hand, banks have to comply with the RBI’s circular, which is binding on them as a regulatory directive. On the other hand, banks have to follow the Ind AS, which are mandatory for financial reporting and disclosure purposes. If banks do not charge interest on NPAs, they may face legal action from the NFRA for violating the Ind AS. If banks do charge interest on NPAs, they may face penal action from the RBI for defying its circular.

The RBI and the NFRA need to resolve this issue as soon as possible, as it has implications for the financial stability and transparency of the banking sector. The RBI and the NFRA should engage in a constructive dialogue and find a common ground that respects both the prudential and accounting aspects of interest on NPAs. The RBI and the NFRA should also consider the interests of other stakeholders, such as auditors, investors and depositors, who rely on accurate and consistent information from banks. The RBI and the NFRA should work together to harmonize their regulations and standards, and avoid creating confusion and uncertainty in the market.

The issue of provisioning of interest on non-performing assets (NPAs) has been a contentious one between the Reserve Bank of India (RBI) and the National Financial Reporting Authority (NFRA). The RBI has argued that banks should not provide for interest on NPAs, as it would overstate their profits and capital adequacy. The NFRA, on the other hand, has maintained that banks should follow the accounting standards and provide for interest on NPAs, as it would reflect the true and fair view of their financial position.

This issue has implications for the chartered accountants (CAs) who audit the banks and certify their financial statements. If the CAs follow the RBI’s directive and do not provide for interest on NPAs, they may be violating the accounting standards and the auditing standards. If they follow the NFRA’s mandate and provide for interest on NPAs, they may be going against the regulator’s instructions and exposing themselves to legal action.

How can CAs be held accountable in such a situation? This is a question that needs to be resolved urgently, as it affects the credibility and independence of the audit profession. The CAs have to balance their professional obligations with their regulatory compliance, and ensure that they do not compromise on the quality and integrity of their audit work. They also have to communicate clearly and transparently with the stakeholders, such as the shareholders, creditors, depositors, and regulators, about the basis and rationale of their audit opinions.

The issue of provisioning of interest on NPAs is not just a technical matter, but a matter of public interest and trust. The CAs have a vital role to play in ensuring that the banks’ financial statements reflect the true and fair view of their affairs, and that the public confidence in the banking system is not eroded. The CAs have to act in the best interest of the society, and uphold the values and ethics of their profession. They have to be accountable not only to their clients, but also to the public at large.

The chartered accountants (CAs) who audit the banks and certify their financial statements face a dilemma. They have to follow the accounting standards and the auditing standards, as mandated by the National Financial Reporting Authority (NFRA). But they also have to comply with the Reserve Bank of India (RBI)’s directive, which contradicts the accounting standards. The RBI does not want the banks to provide for interest on non-performing assets (NPAs), as it would reduce their profits and capital adequacy. The NFRA, however, insists that the banks should provide for interest on NPAs, as it would show the true and fair view of their financial position.

How can CAs balance their obligations in such a situation? This is a question that requires urgent attention, as it affects the quality and credibility of the audit profession. The CAs have to consider their professional responsibilities, as well as their regulatory compliance. They have to ensure that they do not compromise on the integrity and independence of their audit work. They also have to communicate effectively and transparently with the stakeholders, such as the shareholders, creditors, depositors, and regulators, about the basis and rationale of their audit opinions.

How can CAs communicate effectively in such a situation? This is a question that needs to be addressed promptly, as it affects the quality and credibility of the audit profession. The CAs have to consider their professional responsibilities, as well as their regulatory compliance. They have to ensure that they do not compromise on the integrity and independence of their audit work. They also have to communicate effectively and transparently with the stakeholders, such as the shareholders, creditors, depositors, and regulators, about the basis and rationale of their audit opinions.

One way to communicate effectively is to use clear and concise language, and avoid jargon and technical terms. Another way is to use appropriate formats and channels, such as reports, presentations, emails, or meetings. A third way is to use evidence and examples, and cite sources and references. A fourth way is to address the expectations and concerns of the stakeholders, and provide recommendations and solutions. A fifth way is to invite feedback and questions, and respond to them promptly and politely.

How can CAs provide recommendations and solutions in such a situation? This is a question that requires careful analysis and judgment, as it involves ethical and legal aspects. The CAs have to evaluate the pros and cons of each option, and consider the implications for their clients and the public. Some possible recommendations and solutions are:

– To follow the RBI’s directive and do not provide for interest on NPAs, but disclose this fact in the notes to the financial statements, and explain the impact on the profits and capital adequacy.

– To follow the NFRA’s mandate and provide for interest on NPAs, but seek legal protection from the RBI’s action, and inform the stakeholders about the potential risks.

– To seek a clarification or a resolution from the RBI and the NFRA, and request them to align their views on the issue of provisioning of interest on NPAs.

– To withdraw from the audit engagement, if there is no agreement or consensus between the RBI and the NFRA, or if there is a threat to their independence or reputation.

How can CAs seek legal protection from the RBI’s action? This is a question that depends on the legal framework and jurisdiction of each case. The CAs have to consult with their legal advisors and professional bodies, and explore the available options. Some possible options are:

– To file a writ petition in the High Court or Supreme Court, challenging the validity or constitutionality of the RBI’s directive.

– To file a suit in the civil court, seeking an injunction or a declaration that they are not bound by the RBI’s directive.

– To file a complaint in the consumer forum or ombudsman, alleging unfair trade practice or deficiency in service by the RBI.

– To file an appeal or a review petition in the RBI itself, seeking a reconsideration or a modification of its directive.

# What is the legal framework for CAs in India?

This is a question that requires an overview of the laws and regulations that govern the profession of CAs in India. The legal framework for CAs in India consists of:

– The Chartered Accountants Act, 1949: This is an act of Parliament that regulates the profession of chartered accountancy in India. It establishes the Institute of Chartered Accountants of India (ICAI) as a statutory body that oversees the education, training, examination, registration, discipline, ethics, standards, quality review, continuing professional development (CPD), peer review, membership, recognition, representation, rights, privileges, obligations, functions, powers etc. of CAs in India.

– The Companies Act 2013: This is an act of Parliament that regulates companies in India. It prescribes various provisions related to audit committees; auditor appointment; auditor qualifications; auditor duties; auditor remuneration; auditor rotation; auditor independence; auditor reporting; auditor liability; auditor penalties etc. for CAs who audit companies in India.

– The Income Tax Act 1961: This is an act of Parliament that regulates income tax in India. It prescribes various provisions related to tax audit; tax deduction at source (TDS); tax collection at source (TCS); advance tax; self-assessment tax; return filing; assessment; appeals; penalties etc. for CAs who deal with income tax matters in India.

– The Goods and Services Tax (GST) Act 2017: This is an act of Parliament that regulates goods and services tax in India. It prescribes various provisions related to GST registration; GST returns; GST payments; GST refunds; GST audits; GST assessments; GST appeals; GST offences; GST penalties etc. for CAs who deal with GST matters in India.

– The Information Technology (IT) Act 2000: This is an act of Parliament that regulates information technology in India. It prescribes various provisions related to electronic records; electronic signatures; digital certificates; cyber security; cybercrimes; cyber contraventions; cyber adjudication; cyber appeals etc. for CAs who deal with IT matters in India.

– The Money Laundering Act 2002: This is an act of Parliament that regulates money laundering in India. It prescribes various provisions related to money laundering offences; money laundering investigations; money laundering prosecutions; money laundering punishments; money laundering reporting etc. for CAs who deal with money laundering matters in India.

# Summary

This article has discussed the issue of provisioning of interest on NPAs, which is a contentious one between the RBI and the NFRA, and its implications for the CAs who audit the banks and certify their financial statements. It has also suggested some ways for the CAs to communicate effectively, provide recommendations and solutions, seek legal protection, and understand the legal framework for their profession in India. The article has highlighted the importance of the CAs’ role in ensuring that the banks’ financial statements reflect the true and fair view of their affairs, and that the public confidence in the banking system is not eroded. The article has also emphasized the need for the CAs to act in the best interest of the society, and uphold the values and ethics of their profession. They have to be accountable not only to their clients, but also to the public at large.

Points to note in NFRA Order pertaining to auditors of Coffee Day Global Ltd:

• We quote Para 75 in the NFRA Order ref no. NF-23/14/2022 dated 12-04-2023
• “As discussed in charge C-4, CDGL was involved in ever greening of loans and round tripping of funds with the ulterior motive of understating the loan to MACEL by Rs. 222.50 crores. These loans were never repaid by the group companies, but financial statements were manipulated to conceal the real picture. The financial positions of MACEL showed that it had negligible business operations, had negative net worth, and was used as conduit by promoters to siphon off money from CDGL. These were sufficient evidence that MACEL lacked the financial strength to repay loans and accordingly recognition of impairment loss allowance and writing off of non-recoverable portion of loans was required to be made but CDGL did not do so and the Auditors did not question the management and did not perform any audit procedures to obtain sufficient and appropriate audit evidence to determine whether CDGL’s decision in this regard was in accordance with the provisions of Ind AS 109. Therefore, we hold that the charge on this count stands proved and uphold that the Auditors have violated section 143(3)(e), 143(12) of the Act, CARO 2016 and SA 200, SA 240, SA 315, SA 330 and SA 550.”
• This point refers to non-provision of impairment losses and not writing off of an advance to a Related Party which has turned into NPA. The advance referred to was to MACEL a Related Party which lacked the financial strength to repay loans. The total advances to MACEL were Rs. 3,535 crores as on 31 July 2019. The auditee company Coffee Day Global Limited did not make any impairment losses nor did it write off those advances with respect to which the Auditors did not question the management and did not perform any audit procedures to obtain sufficient and appropriate audit evidence to determine whether CDGL’s decision in this regard was in accordance with the provisions of Ind AS 109.
• Thus treating of an NPA as Standard and not providing for impairment losses and not writing off an NPA advance is pointed out as a clear violation of section 143(3)(e), 143(12) of the Act, CARO 2016 and SA 200, SA 240, SA 315, SA 330 and SA 550 by the auditing firm.
• The question of not charging interest on the above NPA accounts was not raised in this order that relates to the auditors of Coffee Day Global.

NFRA Order No: 023/2023 dated 27-07-2023 against the auditors of an Ahmedabad based clothing company M/s Anshu’s Clothing Ltd

• The question of not charging interest on the borrowings by the auditee company from Bank of Baroda that have turned NPA was raised in the order that relates to the auditors of M/s Anshu’s Clothing Ltd vide NFRA Order No: 023/2023 dated 27-07-2023 In the matter of CA Sachin Kansai, under Section 132(4) of the Companies Act, 2013
• Specific sub paragraphs from Paragraph 22 of the order are reproduced below:
• “There was no evidence of a firm commitment from Bank of Baroda on waiver of interest at the time of the audit of FY 2015-16. The settlement with Bank of Baroda came into effect on 03.04.2018, i.e. 19 months after the signing of the balance sheet by the EP on 03.09.2016. The EP is using subsequent developments that took place over one and a half years that followed, to justify his actions at the time of statutory audit.
• The accrual concept in accounting requires a company to record revenue and expenses in the period they are earned or incurred, regardless of when the related cash transactions occur4. Liabilities, including contractual obligations, are recognized in the financial statements when they are incurred, even if payment is not due until a later period. This means that contractual obligations that arc incapable of being fulfilled are still recognized as liabilities by a company, even if they are not acknowledged any longer by the management.
• By not providing for the interest accrued, the company has materially misstated the financial statements. The EP failed to report this material misstatement.
• Based on the above, the charges relating to failure to report non-provision of Interest Costs pertaining to Borrowings from bank and NBFCs stand proven. The omission being material in nature, the EP should have taken them into consideration before issuing his opinion in accordance with SA 7056, which he failed to do.
• Thus the NFRA orders on Coffee Day Global as well as M/s Anshu’s Clothing relate to failure on the part of the auditors to strictly comply with the Standards on Auditing and the provisions of the Companies Act 2013.
• The grey area as to whether interest on borrowings from banks in respect of which the auditee has stopped making any repayments and which have been categorized by the lending bank, Bank of Baroda as Non- Performing Assets, has to be provided in the books of the borrowing entity in accordance with the accrual concept of accounting so that the financial statements reflect a true and fair view of the increased losses of the entity or whether it is not required to provide such interest since the lending bank has categorized the loan into NPA and as per RBI instructions the bank will not be obliged to accrue income in the form of interest on NPA accounts, requires Regulatory clarification.
• The reason being that the balances on account of the loan between the bank’s books and the entity’s books will not match due to the interest portion.
• My article on focuses only on this grey area. This addendum is issued to clarify that the reference to Non-Provision of interest on loans that have turned NPA relates to the Ahmedabad Clothing Company and not Coffee Day Global.
• The point used in my articulation in the article is focusing on this greyness of positions taken by accounting standards and RBI instructions and hence relevant for academic discussion.

Conclusion: The NFRA’s orders in the Coffee Day Global case have far-reaching implications for auditors and companies alike. It emphasizes the need for auditors to uphold professional standards, exercise due diligence, and report material facts accurately. For companies, it reinforces the importance of transparency and compliance with financial reporting regulations. By taking such actions, NFRA aims to protect public interest and enhance confidence in the quality of audit and financial reporting in India.

The orders issued by NFRA can be accessed from its website at

https://nfra.gov.in/document-category/orders/

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[1] Coffee Day Global case: NFRA slaps Rs 2.15 cr fine, imposes ban on 2 auditors, 1 audit firm : Auditors of Coffee Day Global Limited Penalized with Rs. 2.15 Crore Penalty

[2] Order in the matter of Coffee Day Global Limited against M/s ASRMP & Co., CA A. S. Sundaresha, CA Madhusudan U A, and CA Pranav G. Ambekar, under Section 132 (4) of the Companies Act 2013, NFRA, April 13, 2023. NFRA imposes penalty of Rs 1 crore on Auditors