NFRA slaps Rs 10.75-cr fine, bans 3 entities in Coffee Day Enterprises funds diversion case

The National Financial Reporting Authority (NFRA) has slapped penalties to the tune of Rs 10.75 crore on three entities, including BSR & Associates LLP, besides barring them for varying periods for lapses in the audit of Coffee Day Enterprises for the 2018-19.

The case pertains to the diversion of Rs 3,535 crore from seven subsidiary companies of Coffee Day Enterprises Ltd (CDEL), to Mysore Amalgamated Coffee Estate Ltd (MACEL).

MACEL, a subsidiary of the listed entity Coffee Day Enterprises Ltd (CDEL).

After markets watchdog Sebi shared its investigation report regarding the diversion of funds, NFRA suo moto examined the professional conduct of the statutory auditors of CDEL.

Thereafter, a showcause notice was issued to BSR & Associates LLP (auditor), Aravind Maiya (Engagement Partner or EP) and Amit Somani (Engagement Quality Control Reviewer or EQCR) for 2018-19.

In its order passed on Monday, the audit regulator imposed a penalty of Rs 10 crore on the audit firm BSR & Associates LLP, Rs 50 lakh on Aravind Maiya and Rs 25 lakh on Amit Somani.

Further, Maiya and Somani have been debarred for 10 and five years from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.

In its probe, NFRA found that the auditors were grossly negligent in verifying the business rationale of unusually high amount of Rs 2,226 crore of the loans/advances given to MACEL.

NFRA's examination revealed that the CDEL's statutory auditor for audit of CFS and SFS for 2018-19, failed to meet the relevant requirements of the SAs, the standards on quality control and provisions of the Act and also demonstrated serious lapses and absence of due-diligence.

The consolidated financial statements had Rs 842.49 crore of outstanding amounts receivable from MACEL, a related party with very minimal business activities, but the auditors were grossly negligent in evaluating recoverability and the adequacy of the impairment allowance as per the applicable accounting standards, according to the order.

Further, there was a pattern of diversion of funds of CDEL 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.

BSR & Associates LLP and Aravind Maiya (engagement partner) failed to exercise professional judgement and skepticism during the audit of the suspected fraudulent diversion of Rs 130.55 crore by CDEL's subsidiary to an individual, NFRA said.

Also, BSR & Associates LLP, Maiya and Somani failed to evaluate fraud risk in recognition of interest income of Rs 75 crore on loans granted by Tanglin Developments Ltd (a subsidiary of CDEL) to MACEL, resulting in erroneous reporting of CDEL's consolidated profit at Rs 27.93 crore instead of loss of Rs 47.07 crore, the regulator said in its 35-page order.

In respect of the audit of standalone financial statements, the auditors also failed to perform audit procedure to verify the end use of substantial amount of loan of Rs 1,055.73 crore given by CDEL to its subsidiaries and guarantee of Rs 1,015 crore given by CDEL on behalf of its subsidiary for taking loans from banks/financial institutions as required under the Companies (Auditors' Report).