Facts of the Case

Coffee Day Global Limited (CDGL), a subsidiary of Coffee Day Enterprises Limited (CDEL), was subjected to scrutiny following investigations revealing diversion of funds amounting to approximately ₹3,535 crores from various subsidiaries of CDEL to Mysore Amalgamated Coffee Estates Limited (MACEL), a promoter-controlled entity.

The statutory audit of CDGL for FY 2019-20 was conducted by M/s ASRMP & Co. with CA A.S. Sundaresha acting as Engagement Partner and CA Madhusudan U.A. serving as Engagement Team member.

NFRA examined the audit file, audit procedures, audit evidence and auditor conduct after receiving information from SEBI and investigating reports relating to diversion of funds, related party transactions, recovery of advances, round-tripping of funds, and other material matters.

NFRA found significant deficiencies in audit execution, lack of professional skepticism, failure to maintain independence, tampering of audit files, inadequate documentation, and failure to report fraud and material misstatements in the financial statements of CDGL.

Issues Involved

  1. Whether the auditors maintained independence as required under SQC 1 and the Code of Ethics.
  2. Whether the auditors exercised professional skepticism and professional judgment while auditing transactions involving MACEL.
  3. Whether the auditors complied with Standards on Auditing relating to fraud risk assessment, related party transactions, audit evidence and documentation.
  4. Whether the auditors failed to detect or report diversion of funds and circular movement of funds.
  5. Whether the auditors improperly relied on management representations without obtaining sufficient audit evidence.
  6. Whether the audit file was tampered with after issuance of the audit report.
  7. Whether the auditors failed to report fraud under Section 143(12) of the Companies Act, 2013.
  8. Whether such failures constituted professional misconduct under the Chartered Accountants Act, 1949.

 

Petitioner’s / NFRA’s Arguments

NFRA alleged that:

  • The auditors continued the audit engagement despite serious independence threats arising from close professional and financial relationships among related audit firms.
  • The audit team failed to evaluate substantial advances made to MACEL despite MACEL's weak financial position and inability to repay.
  • Audit documentation was incomplete, altered and tampered with after issuance of the audit report.
  • The auditors failed to obtain sufficient appropriate audit evidence concerning:
    • Recovery of advances from MACEL.
    • Related party transactions.
    • Deferred tax assets.
    • Doubtful debts and advances.
    • Sale of coffee business and diversion of funds.
  • The auditors failed to identify indicators of fraud and diversion of funds despite significant evidence available from financial records.
  • The auditors failed to perform adequate procedures under SA 240 relating to fraud.
  • The auditors ignored suspicious circular transactions and round-tripping of funds.
  • The auditors failed to communicate material matters to those charged with governance.
  • The auditors failed to report suspected fraud under Section 143(12) of the Companies Act.
  • The auditors violated multiple Standards on Auditing and Quality Control requirements.

 

Respondents’ Arguments

The auditors contended that:

  • They had issued a Disclaimer of Opinion due to uncertainty regarding recoverability of advances to MACEL.
  • Adequate audit procedures had been performed based on information available at the time of audit.
  • Transactions with MACEL were part of normal business operations and were properly disclosed in financial statements.
  • No fraud was identified during the audit and therefore reporting under Section 143(12) was not required.
  • The audit file modifications made after issuance of the audit report were merely formatting changes and did not alter audit conclusions.
  • Independence requirements had been complied with and safeguards had been applied to address any threats.
  • Reliance on management representations and financial disclosures was reasonable under the circumstances.

 

Court Order / Findings

NFRA rejected the auditors’ explanations and held that:

Independence Violations Established

The auditors failed to comply with independence requirements under SQC 1, SA 220 and the Code of Ethics due to close relationships among associated audit firms and personnel.

Failure to Exercise Professional Skepticism

The auditors ignored significant warning signs regarding:

  • Diversion of funds.
  • Financial distress of MACEL.
  • Related party transactions.
  • Recovery of advances.

Fraud Risk Assessment Deficient

The auditors failed to perform adequate procedures required under SA 240 and failed to identify or appropriately respond to fraud indicators.

Audit Documentation Defective

NFRA found:

  • Audit files were not assembled within prescribed timelines.
  • Documents were modified after issuance of the audit report.
  • Significant audit records lacked proper support and documentation.
  • Evidence of audit file tampering existed.

Failure to Obtain Sufficient Audit Evidence

The auditors violated SA 500 and related standards by failing to obtain adequate evidence concerning:

  • Advances to MACEL.
  • Deferred tax assets.
  • Doubtful debts.
  • Related party disclosures.
  • Circular transactions.

Failure to Report Fraud

The auditors failed to discharge their statutory duty under Section 143(12) despite indicators of fraud and diversion of funds.

Professional Misconduct Proved

NFRA concluded that the auditors committed professional misconduct under multiple provisions of the Chartered Accountants Act, 1949.

 

Important Clarifications by NFRA

Disclaimer of Opinion Does Not Eliminate Auditor Responsibility

NFRA clarified that issuing a Disclaimer of Opinion does not relieve auditors from:

  • Performing required audit procedures.
  • Evaluating fraud indicators.
  • Obtaining sufficient audit evidence.
  • Reporting fraud where required.

Independence Must Exist Throughout Engagement

Merely reducing participation of certain individuals does not eliminate independence threats where close relationships continue to exist.

Audit File Tampering Is a Serious Regulatory Violation

NFRA emphasized that audit documentation is a critical component of audit quality and post-report modifications can amount to professional misconduct.

Reporting Duty Under Section 143(12)

Auditors must report suspected fraud where circumstances indicate possible fraud, even if management explanations are available.

Sections Involved

Companies Act, 2013

  • Section 132(4)
  • Section 132(4)(c)
  • Section 143(12)
  • Section 143(3)
  • Section 143(1)
  • Section 143(2)

Chartered Accountants Act, 1949

  • Second Schedule, Part I
    • Clause 5
    • Clause 6
    • Clause 7
    • Clause 8
    • Clause 9

Standards on Auditing (SA)

  • SA 200
  • SA 230
  • SA 240
  • SA 250
  • SA 315
  • SA 330
  • SA 500
  • SA 550
  • SA 260
  • SA 265
  • SA 300

Standard on Quality Control

  • SQC 1

Code of Ethics

  • Independence Requirements
  • Professional Skepticism
  • Professional Judgment

 

Final Order

NFRA imposed the following sanctions:

Against M/s ASRMP & Co.

  • Monetary Penalty: ₹2,00,00,000
  • Debarment: Four years from undertaking audit or internal audit assignments.

Against CA A.S. Sundaresha

  • Monetary Penalty: ₹10,00,000
  • Debarment: Five years from undertaking audit or internal audit assignments.

Against CA Madhusudan U.A.

  • Monetary Penalty: ₹5,00,000
  • Debarment: Five years from undertaking audit or internal audit assignments.

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/07/2023072818.pdf

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