The National Financial Reporting Authority (NFRA) has imposed a monetary penalty of ₹10 crores on BSR & Associates LLP, the statutory auditors of Coffee Day Enterprises Limited (CDEL) for FY 2018-19, due to severe lapses in their audit processes. The order stems from NFRA’s investigation, initiated following a SEBI report, revealing the diversion of ₹3,535 crores from CDEL’s subsidiaries to an entity controlled by CDEL’s promoters. The auditors, including the engagement partner (EP) CA Aravind Maiya and the engagement quality control reviewer (EQCR) CA Amit Somani, failed to conduct necessary audit procedures, particularly regarding significant loans and advances involving MACEL, a promoter-controlled entity. The audit firm’s negligence led to gross misrepresentation of CDEL’s financial statements, including understating loans by ₹1,706 crores. NFRA also identified lapses in audit documentation, with unauthorized modifications post audit sign-off. As a result, along with the monetary penalty, CA Aravind Maiya has been debarred from audit activities for ten years, and CA Amit Somani for five years, effective 30 days from the order date.
Government of India
National Financial Reporting Authority
7th — 8th Floor, Hindustan Times House,
Kasturba Gandhi Marg, New Delhi
Order no.- 020/2024 Dated: 19th August, 2024
In the matter of M/s BSR & Associates LLP, CA Aravind Maiya and CA Amit Somani, under section 132 (4) (c) of the Companies Act, 2013
1. This Order disposes of the Show Cause Notice (`SCN’ hereafter) no. NF- 23/14/2022 dated 17.01.2024 issued to M/s BSR & Associates LLP, Chartered Accountants, firm No: 116231W/W-100024, (`Firm’ hereafter), an audit firm registered with the Institute of Chartered Accountants of India (`ICAI’ hereafter), CA Aravind Maiya, ICAI Membership No-217433 (Engagement Partner or EP hereafter) and CA Amit Somani, ICAI Membership No- 060154, (Engagement Quality Control Reviewer or EQCR hereafter), who are members of ICAI and were EP and EQCR respectively for the statutory audit of Coffee Day Enterprises Limited for the Financial Year (`FY’ hereafter) 2018-19. (All are collectively called the Auditor/s or Principal Auditor/s).
2. This Order is divided into the following sections:
A. Executive Summary
B. Introduction & Background
C. Major lapses in the Audit of Consolidated Financial Statements (`CFS’ hereafter)
D. Major lapse in the Audit of Standalone Financial Statements (`SFS’ hereafter)
E. Violations of SQC 1 and SA 230 — Lapses in Audit Documentation
F. Omission and Commission by the Audit Firm
G. Finding on the Articles of Charges of Professional Misconduct by the Auditors
H. Penalty & Sanctions
A. EXECUTIVE SUMMARY
3. NFRA suo moto examined the professional conduct of the statutory auditors of Coffee Day Enterprises Limited under Section 132(4) of the Companies Act 2013 (`the Act’ hereafter), pursuant to the Securities and Exchange Board of India (`SEBI’ hereafter) investigation report regarding diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited (`CDEL’ hereafter), to Mysore Amalgamated Coffee Estate Limited (`MACEL’ hereafter), an entity owned and controlled by the promoters of CDEL. Coffee Day Enterprises Limited is listed on stock exchanges. A Show Cause Notice was issued to M/s BSR & Associates LLP, the auditor for the FY 2018-19; CA Aravind Maiya, the EP for the audit engagement and CA Amit Somani, the EQCR.
4. NFRA’s examination inter alia revealed that the CDEL’s Statutory Auditor for audit of Consolidated Financial Statements and Standalone Financial Statements for the FY 2018-19 failed to meet the relevant requirements of the Standards on Auditing (`SA’ hereafter), the Order in the matter of Coffee Day Enterprises Ltd (CDEL) for the FY 2018-19 Standards on Quality Control and provisions of the Act and also demonstrated serious lapses and absence of due diligence in following matters.
4.1 In respect of Audit of CFS of CDEL, 1\4/s BSR & Associates LLP, the EP and EQCR as Principal Auditors did not perform appropriate additional audit procedures to obtain sufficient appropriate audit evidence to issue audit opinion on CFS. In view of the fact that a substantial portion of financial information of the CFS was audited by the Other Auditors, the Principal Auditors did not ensure compliance with the requirements of SA 600 in letter and spirit. The Principal Auditors did not properly evaluate whether their own participation was sufficient to be able to act as the Principal Auditor. Secondly, the additional procedures, wherever performed by the Principal Auditors, were also inadequate and deficient. Details are given hereunder.
- The Principal Auditor was grossly negligent in verifying the business rationale of unusually high amount of Rs 2,226 crores of the loans/advances given to MACEL, a promoter-controlled entity. The EP considered the exposure of CDEL group to MACEL as an important area for audit, but did not perform the required audit procedures, nor ensured appropriate audit procedures by the other auditors disregarding the provisions of para 10 of SA 600. (Section C- I of this Order).
- CFS had Rs 842.49 crores of outstanding amounts receivable from MACEL, a related party with very minimal business activities, but the Principal Auditors were grossly negligent in evaluating recoverability and the adequacy of the impairment allowance as per the applicable accounting standards; there was a pattern of diversion of funds of CDEL, the listed entity, to promoters or entities controlled by the promoters through a web of intra group circular transfer of funds where MACEL was used as a main conduit. (Section C- I of this Order).
- CFS contained a number of false and erroneous account balances portraying lower amount of receivables; this was achieved through book entries of repayments of intra group loans through cheques received but not encashed as of balance sheet date. The Auditors did not exercise professional judgement & professional skepticism during the audit of loans of Rs 2,549 crores to promoter-controlled entity. These loans were fraudulently understated in the financial statements of CDEL by Rs 1,706 crores, which was orchestrated through passing book entries as repayment by cheques and evergreening via structured circulation of funds within CDEL group companies. The Auditors did not identify and report this huge misrepresentation of financial position. (Section C- I of this Order).
- The Firm and the EP failed to exercise professional judgement & skepticism during the audit of the suspected fraudulent diversion of Rs 130.55 crores by CDEL’s subsidiary to an individual (Section C- II of this Order).
- The Firm, EP and the EQCR failed to evaluate fraud risk in recognition of interest income of Rs 75 crores on loans granted by Tanglin Developments Ltd (a subsidiary of CDEL) to MACEL which resulted in erroneous reporting of CDEL’s consolidated profit at Rs 27.93 crores instead of loss of Rs 47.07 crores. (Section C- III of this Order).
4.2 In respect of the audit of SFS, the Auditors failed to perform audit procedure to verify the end use of substantial amount of loan of Rs 1,055.73 crores given by CDEL to its subsidiaries and guarantee of Rs 1,015 crores given by CDEL on behalf of its subsidiary for taking loans from Banks/Financial institutions as required under the Companies (Auditors’ Report) Order 2016 read with section 185 of the Act. (Section D of this Order).
4.3 Lapses in audit documentation of SFS and CFS – The Audit Documentation application used by the Firm is not compliant with the requirements of SQC 1 and SA 230 as it allows unauthorised modification of audit work papers. The Auditors modified many audit work papers without recording the name and date of modifications after signing-off the audit work papers and also after issuing the audit report. (Section E of this Order).
5. Based on the proceedings under section 132 (4) of the Companies Act 2013 and after giving the Auditors an opportunity to present their case in person, we found the Audit Firm and its partners, who performed the audit as EP and EQCR, guilty of professional misconduct. Thus, this Order imposes a monetary penalty of Rs ten crores upon M/s BSR & Associates LLP; Rs fifty lakhs upon CA Aravind Maiya; and Rs twenty five lakhs upon CA Amit Somani. In addition, CA Aravind Maiya is debarred for a period of ten years and CA Amit Somani 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. This Order will be effective after 30 days from its issuance.
