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Fund Diversion: NFRA Bars Auditors Of Coffee Day For Professional Misconduct

The auditors of Coffee Day Enterprises should have conducted their work with professional skepticism, the NFRA said.

<div class="paragraphs"><p>Outside view of a Cafe Coffee Day, the line of coffee houses operated by Coffee Day Enterprises. (Source: Company website)</p></div>
Outside view of a Cafe Coffee Day, the line of coffee houses operated by Coffee Day Enterprises. (Source: Company website)

The National Financial Reporting Authority penalised and barred auditors of Coffee Day Enterprises Ltd. on Wednesday, for audit lapses in fiscal 2019.

The audit firm, ASRMP and Co., has been barred from being an auditor or internal auditor of any entity for two years and has also been fined Rs 1 crore. The order also penalised the signing partner and two engaging partners with a fine of Rs 10 lakh and Rs 5 lakh, respectively. They are also barred from being engaged as auditors for a period of five years.

According to NFRA, the auditors failed to exercise professional judgement and skepticism in the audit of transactions of over Rs 6,000 crore, entered into by Coffee Day Group Companies with Mysore Amalgamated Coffee Estate Ltd., a company owned and controlled by Coffee Day Enterprises.

The transactions should have been declared as related party transactions, which the company failed to do and the auditors failed to point out, the order said.

It is established that the auditors failed to question and report the diversion of funds by CDGL, by way of a huge amount of advance to MACEL, a promoter-owned and controlled entity, without any justification or operating necessity, without the board's approval and without any agreement.
NFRA Order

The company also failed to report a Rs 200 crore advance to Mysore Amalgamated and an additional Rs 130 crore transaction to yet another related party—Classic Coffee Curing Works.

These lapses cumulatively amount to a misstatement of nearly Rs 7,500 crore, according to the authority.

The NFRA had initiated an investigation into the conduct of Coffee Day Group's auditors, after the Securities and Exchange Board of India discovered a diversion of nearly Rs 3,500 crore from the company's funds to Mysore Amalgamated.

It noted that the auditors failed to provide sufficient responses to these lapses. The authority also found evidence of a personal relationship between the auditors of the company and its promoters, which according to them, could have affected the independence of the auditor. Evidence of tampering was also found in some of the audit files.

In response to this, the auditors questioned the authority of the NFRA to initiate such an investigation and said that it was without any conclusive evidence. They also stood by the appropriateness of their report and submitted that all professional standards had been met with. The authority rejected these contentions and held that the audit was short of satisfactory.

BQ Prime couldn't immediately reach the firm for a comment.

According to NFRA, by failing to disclose material transactions and misstatements in the financial statements of the company, the auditor has failed to exercise due diligence during his duties. He has also been grossly negligent in the conduct of his professional duties and therefore, needs to be penalised, the order concluded.