10-crore fine on auditor for not reporting Coffee Day lapses

Audit regulator National Financial Reporting Authority (NFRA) on Monday imposed a hefty penalty of ₹10 crore, one of the highest in the history of the regulator, on BSR & Associates LLP, an independent audit firm that has a contractual relationship with KPMG, for alleged lapses in the audit of Coffee Day Enterprises Ltd or CDEL, the company that runs coffee chain CCD. The audit watchdog also debarred two of BSR’s partners—one for 10 years and the other for five years.

Diversion of funds not reported

“The auditors did not report (allegedly) fraudulent diversion of funds despite having enough evidence that public money was moved to a promoters’ entity which had no business connection with the listed company,” the NFRA order said.

The audit firm said it was reviewing the regulatory order. “BSR & Associates is disappointed with this order for the CDEL audit for the year ended 31 March 2019. The firm is currently assessing the next steps and cannot comment further at this stage. BSR remains committed to the highest standards of professionalism, quality, and integrity,” the audit firm said in response to queries emailed by Mint.

Queries emailed to Coffee Day Enterprises on Monday evening seeking comments remained unanswered.

The regulator alleged that the auditors put on “their blinkers and when asked to explain, sought refuge in the provision of the standard on auditing 600, relying on the work of auditors of the subsidiaries, while CDEL investments in these subsidiaries constituted a staggering figure of ₹1,937 crores constituting 89% of the standalone balance sheet.”

The audit watchdog pointed out that exposure to promoter entities was a significant area of audit. “Providing of loans by the listed company to a related party in the garb of an advance for purchases, the amount itself being over five times the value of purchases was not questioned by the auditor for its business rationale,” the regulatory order said.

Penalty on partners

NFRA also imposed a penalty of ₹50 lakh on one of the partners and ₹25 lakh on the other for alleged substantial deficiencies in the audit, abdication of responsibility, and the issuance of a false and misleading audit report.

The regulator’s review of the audit stems from a Securities and Exchange Board of India investigation report on the alleged diversion of funds worth ₹3,535 crores from seven subsidiary companies of Coffee Day Enterprises to Mysore Amalgamated Coffee Estate Ltd, an entity owned and controlled by the promoters of CDEL, a listed company, NFRA said in the order.

There is a contractual arrangement between KPMG and BSR to share certain methodologies, tools, software, and training, but BSR is a very independent audit firm, Mint reported on 9 January 2023. NFRA is making efforts to improve the quality of statutory audits of companies through investigations, inspections, and quality review reports of the audits done. Since 2018, the audit watchdog has issued over 80 orders debarring erring auditors.

                                                 (By arrangement with livemint.com)