Facts of the Case

Coffee Day Enterprises Limited (CDEL), a listed company, came under scrutiny after investigations revealed diversion of substantial funds from its subsidiary companies to Mysore Amalgamated Coffee Estate Limited (MACEL), an entity owned and controlled by the promoter group.

Following the death of Shri V.G. Siddhartha in July 2019, the Board of Directors appointed an independent investigation led by a retired Deputy Inspector General of the Central Bureau of Investigation along with a legal firm. The investigation identified significant financial irregularities including:

  • Diversion of funds from subsidiaries of CDEL to MACEL.
  • Advances and loans extended without commercial justification.
  • Evergreening of loans through structured circulation of funds.
  • Use of pre-signed blank cheques.
  • Understatement of outstanding balances.
  • Questionable land advances resulting in substantial provisions.

SEBI subsequently shared its investigation findings with NFRA. NFRA initiated suo motu proceedings against the statutory auditors of CDEL for FY 2019-20.

The audit engagement was conducted by:

  • M/s Venkatesh & Co. (Audit Firm)
  • CA Dasaraty V. (Engagement Partner)
  • CA Desikan G. (Engagement Quality Control Reviewer)

NFRA found that despite having access to investigation reports containing multiple fraud indicators, the auditors failed to adequately assess, investigate, or report the fraud.

 

Issues Involved

  1. Whether the auditors failed to exercise professional skepticism and due diligence regarding diversion of funds amounting to approximately ₹3,512 crore.
  2. Whether the auditors failed to identify and report fraud involving transactions between CDEL subsidiaries and MACEL.
  3. Whether the auditors failed to examine records of subsidiaries despite statutory authority and clear red flags.
  4. Whether the auditors failed to comply with Section 143(12) of the Companies Act, 2013 by not reporting fraud to the Central Government.
  5. Whether the auditors failed to verify compliance with Section 185 of the Companies Act, 2013.
  6. Whether the Engagement Quality Control Reviewer failed to perform an effective quality review.
  7. Whether the auditors were guilty of professional misconduct under the Companies Act, 2013.

 

Petitioner’s / NFRA’s Arguments

NFRA contended that:

  • The auditors had access to an investigation report that clearly highlighted diversion of funds, evergreening of loans, and other fraudulent practices.
  • Huge amounts were advanced to MACEL without commercial rationale.
  • The auditors ignored numerous fraud indicators and failed to perform necessary audit procedures.
  • The auditors did not use their statutory right under Section 143(1) to inspect records of subsidiaries.
  • They failed to assess fraud risk despite significant related-party transactions.
  • They failed to report fraud under Section 143(12).
  • They incorrectly relied upon disclaimer of opinion instead of conducting further audit procedures.
  • They failed to communicate significant fraud risks to those charged with governance in a timely manner.
  • The Engagement Quality Control Reviewer failed to objectively review the engagement and significant audit judgments.

 

Respondents’ Arguments

The audit firm and concerned Chartered Accountants argued that:

  • They were auditors only of CDEL and not of its subsidiaries.
  • No fraud had occurred in CDEL itself; alleged diversion took place within subsidiaries.
  • The investigation report did not establish fraud in CDEL.
  • Appropriate professional judgment was exercised by issuing a disclaimer of opinion.
  • Component auditors had already reported qualifications relating to subsidiaries.
  • They had communicated concerns to management and governance authorities.
  • They were not obligated to investigate matters beyond the scope of their audit engagement.
  • Transactions and balances with MACEL were disclosed in the financial statements.

 

Court / Authority Findings

NFRA rejected the defenses raised by the auditors and held that:

1. Failure to Assess Fraud Risk

The auditors ignored clear red flags indicating diversion of funds and fraudulent conduct despite having access to detailed investigation findings.

2. Failure to Exercise Professional Skepticism

The auditors failed to evaluate the business rationale behind massive loans and advances made to MACEL.

3. Failure to Examine Subsidiary Records

The auditors possessed statutory authority under Section 143(1) to inspect records of subsidiaries but chose not to exercise that right.

4. Failure to Report Fraud

The auditors failed to report fraud to the Central Government as mandated under Section 143(12).

5. Failure Regarding Evergreening of Loans

Evidence demonstrated structured circulation of funds among group companies designed to conceal actual exposure and understate liabilities.

6. Improper Audit Reporting

The auditors issued contradictory audit reports and failed to comply with requirements governing disclaimer opinions.

7. Failure of Engagement Quality Control Review

The EQCR did not perform an adequate review of significant judgments and conclusions.

NFRA concluded that the auditors deliberately failed to discharge their statutory responsibilities and were guilty of professional misconduct.

 

Important Clarifications

Disclaimer of Opinion Does Not Remove Duty to Report Fraud

NFRA clarified that issuing a disclaimer of opinion does not relieve auditors of their obligation to investigate fraud indicators or report fraud under Section 143(12).

Holding Company Auditor’s Responsibility

A principal auditor cannot avoid responsibility merely because transactions occurred through subsidiaries where significant red flags exist.

Professional Skepticism is Mandatory

Where transactions lack commercial substance, auditors must conduct deeper examination and assess fraud risks.

Right of Access to Subsidiary Records

Auditors of a holding company possess statutory access rights to subsidiary records and may be expected to exercise those rights where circumstances warrant further investigation.

 

Final Order

NFRA held M/s Venkatesh & Co., CA Dasaraty V., and CA Desikan G. guilty of professional misconduct.

Monetary Penalties

  • M/s Venkatesh & Co. – ₹2 Crore
  • CA Dasaraty V. – ₹10 Lakh
  • CA Desikan G. – ₹5 Lakh

Debarment

  • CA Dasaraty V. – Debarred for 10 Years
  • CA Desikan G. – Debarred for 5 Years

The debarment applies to appointment as auditor, internal auditor, or undertaking audit assignments relating to financial statements or internal audits of companies and body corporates.

 

Relevant Provisions Involved

  • Section 132(4)(c), Companies Act, 2013
  • Section 143(1), Companies Act, 2013
  • Section 143(9), Companies Act, 2013
  • Section 143(12), Companies Act, 2013
  • Section 185, Companies Act, 2013
  • Companies (Auditor's Report) Order, 2016 (CARO)
  • Standard on Auditing (SA) 200
  • Standard on Auditing (SA) 240
  • Standard on Auditing (SA) 260
  • Standard on Auditing (SA) 315
  • Standard on Auditing (SA) 330
  • Standard on Auditing (SA) 550
  • Standard on Auditing (SA) 600
  • Standard on Auditing (SA) 705

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2024/10/20241010657531408.pdf

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