NFRA slaps ₹10.75 crore fine, bans 3 entities in Coffee Day Enterprises funds diversion case

The case pertains to the diversion of ₹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 the market 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 show cause 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 ₹10 crore on the audit firm BSR & Associates LLP, ₹50 lakh on Aravind Maiya and ₹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 an unusually high amount of ₹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 ₹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 scepticism during the audit of the suspected fraudulent diversion of ₹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 ₹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 ₹27.93 crore instead of loss of ₹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 ₹1,055.73 crore given by CDEL to its subsidiaries and guarantee of ₹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).