NFRA imposes 1 Crore Penalty on Auditors of Cafe Coffee Day Subsidiary on Failure to Detects Fraudulent Diversion of Funds of Rs. 2,448.23 crores [Read Order]

The National Financial Reporting Authority (NFRA) imposed a monetary penalty of Rs. 1 crore on the auditors of Cafe Coffee Day subsidiary Tanglin Developments Ltd (TDL). The auditors include M/s Sundaresha & Associates, CA C. Ramesh and CA Chaitanya G. Deshpande. Pursuant to Securities and Exchange Board of India (SEBI) sharing in April 2022 its investigation regarding diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited (CDEL), a listed company, to Mysore Amalgamated Coffee Estate Limited (MACEL), an entity owned and controlled by the promoters of CDEL, NFRA initiated investigations into the professional conduct of the statutory auditors of Tanglin Developments Limited under Section 132( 4) of the Companies Act, 2013. Tanglin Developments Ltd is a subsidiary of CDEL. M/s Sundaresha & Associates was the statutory auditor ofTDL for Financial Year 2019-20. The Audit plan mentions that CA C. Ramesh was signing partner, who signed Financial Statements & Independent Auditor;s Report and CA Chaitanya G. Deshpande was Engagement Partner (EP). The NFRA's investigations inter alia revealed the Auditors failed to report suspected fraudulent diversion of Rs 2,448.23 crores to MACEL. The Auditors were also charged with failure to detect evergreening of loans through structured circular transactions of funds. Responding to the charge of diversion of funds of Rs 2073.23 crores, the Auditors have relied on the fact that the shareholders of TDL had accepted a proposal of the Board of TDL dated 21.01.2019 and given blanket approval during the company's AGM on 23.01.2019, by a special resolution permitting TDL to lend/invest up to Rs 10,000 crores to group companies and others. Analyzing the responses of the Auditors on the issue of diversion of funds, the NFRA found that the specific resolution referred to did give blanket approval of lending Rs 10000 crores. But every transaction thereafter under the aegis of this approval had to be backed by approval of the Board, which had not been done. Hence, shareholders' approval alone cannot cover up for all the subsequent transactions. Apart from non-reporting diversion of funds, the other issues found by the NFRA related to the auditors was: Continuation of Audit engagement disregarding Independence requirementsTampering of Audit File and related lapses - SA 230 'Audit Documentations'Lapse in audit of sale of 'Global Village Undertaking" at a net consideration of Rs 721 croresFailure to comply with SA 700 - "Forming an Opinion and Reporting on Financial Statements"Failure to report non compliances with section 134(1) of the companies Act Failure to comply with SA 315 - "Identifying and assessing the risk of material misstatement through understanding the entity and its environment", SA 330 - "Auditors response to a-;sessed risk" and SA 500 - "Audit Evidence".Failure to comply with SA 260 - "Communication with Those Charged With Governance" (TCWG) & SA 265 - "Commtmicating deficiencies in Internal Control to Those Charged With Governance and Management". The authority observed that “The Standards on Auditing do not free an Auditor from reporting all other misstatements once a Disclaimer on a particular aspect is given. The Auditors have failed in their statutory duty and have tried to hide behind Disclaimer of Opinion, which was incomplete as they did not cover all aspects of infraction of the Laws and the Standards. Despite being qualified professionals, the Auditors have not adhered to the Standards and have thus not discharged the statutory duty cast upon them.” According to the order of NFRA, M/s Sundaresha & Associates is debarred from for a period of four years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. Also, imposed a fine of Rs. 1 crore. With regards to CA C. Ramesh and CA Chaitanya G. Deshpande, the authority imposed a penalty of Rs. 5 lakhs and debarred him from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. The debarments ordered by the NFRA in this order concurs with the debarments ordered in past orders dated 26.04.2023 and 30.05.2023. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates

NFRA imposes 1 Crore Penalty on Auditors of Cafe Coffee Day Subsidiary on Failure to Detects Fraudulent Diversion of Funds of Rs. 2,448.23 crores [Read Order]

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