NFRA Imposes Rs10 Crore Penalty on KPMG Affiliate and Auditors for Coffee Day Enterprises Audit Lapses

Moneylife Digital Team 23 August 2024

Economy & Nation

The National Financial Reporting Authority (NFRA) has intensified its crackdown on auditing malpractices related to Coffee Day Enterprises Ltd (CDEL) and its subsidiaries. In its latest action, NFRA has imposed a record-breaking penalty of Rs10 crore on KPMG affiliate M/s BSR & Associates LLP for significant lapses in the 2018-19 audit of Coffee Day Enterprises. This follows an earlier penalty of Rs2.15 crore on the auditors of Coffee Day Global Ltd (CDGL), a subsidiary of CDEL. We have covered it earlier in detail here.

The regulatory body has taken severe action against individual auditors involved in both cases. In the most recent order, NFRA barred Aravind Maiya and Amit Somani from conducting audits for 10 and 5 years, respectively, alongside individual fines of Rs50 lakh and Rs25 lakh. Previously, NFRA had barred ASRMP & Co for four years, CA AS Sundaresha for 10 years, and Madhusudan UA for five years from auditing financial statements of any company.

These actions stem from investigations into the alleged misappropriation of Rs3,535 crore from seven CDEL subsidiaries to an entity owned by its promoters. NFRA's orders highlight "substantial deficiencies in audit" and the issuance of "false and misleading unmodified audit reports."

This decision follows an investigation by SEBI into the alleged misappropriation of Rs3,535 crore from Coffee Day Enterprises' subsidiaries to a promoter-owned entity. The NFRA's order highlights "substantial deficiencies in audit" and the issuance of a "false and misleading unmodified audit report."

The regulator criticised the auditors for failing to report the "fraudulent diversion of funds" despite having sufficient evidence. The orders also noted the auditors' overreliance on management explanations and their failure to question the business rationale behind certain transactions, such as loans disguised as purchase advances to related parties.

BSR & Associates resigned as Coffee Day Enterprises' statutory auditors in 2019-20, citing low fees. Interestingly, Aravind Maiya, the engagement partner, resigned from the firm shortly after signing the 2018-19 audit report and has since surrendered his practice certificate.

This verdict is part of NFRA's broader efforts to enhance the quality of statutory audits in India. Since its establishment in 2018, the watchdog has issued over 80 orders penalizing errant auditors across various corporate scandals. The regulator aims to reinforce the importance of high professional standards in auditing and the accurate representation of companies' financial positions to shareholders.

NFRA has also initiated annual inspections of major audit firms and is working to raise awareness among audit committees and corporate executives about their responsibilities in presenting accurate financial statements. These measures are designed to strengthen India's audit and accounting ecosystem, prevent corporate fraud, and protect shareholders' interests in the country's rapidly growing economy.

Comments

User

parimalshah1

2 years ago

Monetary fine is NOT adequate deterrent. A mandatory jail term of at least a few years will be a good deterrent. Penally amount will be recovered from future clients, so the culprits do not mind using the same trick again. In fact, they are incentivized to do it because they know that at the worst, few crores will need to be paid.