NFRA imposes INR 2.15 Crore fine on 2 Auditors and 1 Audit Firm for Coffee Day Global Audit Failure

The National Financial Reporting Authority (NFRA) has fined three entities, including two auditors, for their mistakes in auditing Coffee Day Global Ltd (CDGL) in FY 2019-20.

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

CDGL and MACEL are both subsidiaries of Coffee Day Enterprises Limited.

Entities that got charged with penalties and barred periods

ASRMP & Co., a firm, headquartered in Gurugram, India, faced a penalty of INR 2 crores from NFRA and has been banned from taking up audit assignments for 4 years, in relation to the CDGL case.

CA A. S. Sundaresha, Founder and Partner of Sundaresha & Associates, received a fine of INR 10 lakh and has been barred for 10 years. He was fined for his role as the statutory auditor of CDGL.

Surprisingly, in 2020 Sundaresha & Associates, the former auditor of Coffee Day Enterprises resigned citing “technical issues.”. Subsequently, Venkatesh & Company, a chartered accountant firm based in Chennai, was appointed as the new auditors for the company.

In a notification, Coffee Day Enterprises stated that the new auditors decided to resign due to a lack of a peer review certificate, which is necessary for issuing quarterly and annual audit reports.

CA Madhusudhan U A, a former Partner at ASRMP & Co., and a member of the engagement team (ET), was fined INR 5 lakh and barred for 5 years from being appointed as an auditor/internal auditor.

This marks the second penalty imposed by NFRA on the same audit firm and CAs since April 2023, in relation to the audit of CDGL.

Why NFRA fined the Auditors

NFRA’s investigation revealed that the auditors, ASRMP & Co, CA Sundaresha, and CA Madhusudan lacked professional judgment and skepticism during the audit of CDGL.

They failed to detect and report irregularities in the company’s financial statements, particularly related to its borrowings and investments.

• The audit uncovered fraudulent activities, including the diversion of funds to MACEL, amounting to INR 1,105.10 crore, and manipulation of loans through the circulation of funds among other subsidiary companies.
• Additionally, the auditors failed to collect sufficient evidence regarding delayed tax assets, leading to a misstatement of INR 244 crore.
• Moreover, they misreported INR 26.19 crore in the disclosure of related party transactions involving the purchase of coffee beans from MACEL.
• Overall, the total amount of misstatements in CDGL was Rs 1,615.04 crore, which the auditors did not identify or report in their independent auditor’s report.

NFRA stated that the auditors not only did not meet the necessary requirements of SAs and provisions of the Companies Act but also showed a significant lack of competence and diligence.

Wrapping up

The CDGL case emphasizes the significance of strong corporate governance. Companies must establish robust internal controls to prevent fraud and financial irregularities.

Unfortunately, we have been witnessing more and more audit failure cases over the past few years.

Why do you think auditors are not able to properly exercise due diligence in their work?