The National Financial Reporting Authority (NFRA) has taken significant action against the statutory auditor and two chartered accountants involved in the audit of Coffee Day Enterprises Limited (CDEL) for the financial year 2019-20. This move comes in light of serious professional misconduct, with the NFRA imposing a penalty of ₹2 crore on the statutory auditor and ₹15 lakh on each of the two chartered accountants.
Findings of Professional Misconduct
The NFRA’s order highlights that the auditors, despite having access to all necessary records and books of account for CDEL and its subsidiaries, failed to execute appropriate audit procedures to mitigate the risk of material misstatements and fraud. The authority’s investigation revealed that the auditors deliberately avoided their statutory duty to report the fraud, thereby compromising the public interest.
The scrutiny by NFRA was initiated after an investigation report concerning the diversion of ₹3,535 crore from seven CDEL subsidiary companies to Mysore Amalgamated Coffee Estate Limited (MACEL) was presented to them by the Securities and Exchange Board of India (SEBI). This diversion raised red flags about the integrity of the financial reporting and the audits conducted.
The Role of Mysore Amalgamated Coffee Estate Limited
The investigation unearthed that MACEL, the promoter entity, acted as a conduit for transferring funds from CDEL subsidiaries to the personal accounts of V. G. Siddhartha, the then chairman of CDEL, along with his relatives and controlled entities. The alarming details of this financial misconduct came to light following the untimely demise of Siddhartha in FY19-20, leading to the exposure of the funds’ diversion.
Previous Penalties and Continued Scrutiny
This is not the first time that penalties have been levied against auditors connected to CDEL. Earlier in August, the NFRA had already imposed a ₹10 crore penalty on the audit firm BSR & Associates LLP and barred two chartered accountants, with penalties totaling ₹75 lakh, for their lapses in auditing CDEL, which operates the popular Cafe Coffee Day chain.
Failures in Audit Engagement
In its latest ruling, NFRA criticized Venkatesh & Co. for commencing the audit engagement as statutory auditor for FY2019-20 without completing mandatory procedures and starting audit activities before obtaining a no-objection certificate from the previous auditor, BSR & Associates. This negligence reflects a serious breach of professional standards.
Consequences for Chartered Accountants
As a part of the recent order, the NFRA has debarred the two chartered accountants involved for ten years and five years, respectively, from being appointed as auditors or internal auditors. They are also prohibited from undertaking any audits concerning financial statements or internal audits of any company or body corporate during this period.
Conclusion
The stringent penalties imposed by the NFRA underscore the importance of ethical practices and accountability in the auditing profession. The Coffee Day Enterprises case serves as a stark reminder of the critical role auditors play in maintaining the integrity of financial reporting and protecting public interest. As the regulatory bodies intensify their scrutiny, it becomes imperative for auditors to adhere to the highest standards of professionalism and vigilance in their duties.