Facts of the Case

The matter arose from investigations conducted by the Securities and Exchange Board of India (SEBI) regarding diversion of funds amounting to approximately ₹3,535 Crores from various subsidiary companies of Coffee Day Enterprises Limited (CDEL) to Mysore Amalgamated Coffee Estates Limited (MACEL), an entity owned and controlled by the promoter group.

Tanglin Developments Limited (TDL), a subsidiary of CDEL, was found to have advanced substantial funds directly and indirectly to MACEL and other group entities. The investigation revealed that funds were routed through multiple subsidiaries without any genuine business rationale, agreements, or necessary corporate approvals.

The statutory auditors, M/s Sundaresha & Associates and the engagement partners responsible for the audit of TDL for FY 2019-20, issued a Disclaimer of Opinion citing inability to obtain sufficient audit evidence regarding recoverability of certain advances.

NFRA initiated proceedings under Section 132(4) of the Companies Act, 2013 after examining the audit file and other records and issued a Show Cause Notice alleging serious audit failures and professional misconduct.

 

Issues Involved

  1. Whether the auditors failed to detect and report fraudulent diversion of funds amounting to thousands of crores routed through TDL and related entities.
  2. Whether the auditors failed to exercise professional skepticism and professional judgment as required under the Standards on Auditing.
  3. Whether the auditors failed to identify and report evergreening of loans through structured circular movement of funds among group entities.
  4. Whether the auditors violated provisions relating to reporting of fraud under the Companies Act, 2013.
  5. Whether the auditors failed to evaluate and report deficiencies in Internal Financial Controls.
  6. Whether continuation of audit engagement despite independence concerns amounted to professional misconduct.
  7. Whether tampering with audit documentation and alteration of audit files constituted professional misconduct.

 

Petitioner’s / NFRA's Arguments

NFRA contended that:

  • TDL advanced approximately ₹2,073.23 Crores directly and indirectly to group entities which ultimately reached MACEL.
  • Funds were transferred without business rationale, supporting agreements, or proper approvals.
  • The auditors failed to identify and report fraudulent diversion of funds despite clear indicators.
  • Large-scale circular movement of funds among TDL, GVIL, TRRDPL, MACEL and other group entities constituted evergreening of loans.
  • Advances of ₹275 Crores and ₹100 Crores made as land advances to related persons displayed characteristics of diversion of funds and required deeper audit scrutiny.
  • The auditors failed to report fraud under Section 143(12) of the Companies Act, 2013.
  • Internal Financial Controls were effectively absent, yet the auditors failed to adequately report the deficiencies.
  • Audit documentation was subsequently altered and additional documents were introduced after commencement of regulatory proceedings, amounting to tampering of audit records.
  • The auditors failed to maintain independence and had conflicting audit and non-audit relationships with multiple Coffee Day Group entities and promoter-related persons.

 

Respondents’ Arguments

The auditors submitted that:

  • A Disclaimer of Opinion had already been issued in the audit report regarding recoverability of certain advances and therefore all material uncertainties were disclosed.
  • Information subsequently discovered through investigations was not available to them at the time of audit.
  • Shareholders had approved lending and investment transactions through resolutions authorizing advances to group companies.
  • Related party disclosures were duly made in the financial statements.
  • Transactions with subsidiaries were permissible under applicable provisions of the Companies Act.
  • Additional audit evidence and documents submitted during proceedings should be considered.
  • Standards on Auditing were merely guidance principles and the audit had been conducted in accordance with professional judgment.
  • There was no violation of anti-money laundering provisions as transactions occurred through banking channels.

 

Court / NFRA Findings

NFRA rejected the auditors’ explanations and held that:

1. Failure to Detect Fraudulent Diversion of Funds

The auditors failed to identify and report diversion of funds amounting to approximately ₹2,448.23 Crores routed through TDL and related entities.

2. Lack of Professional Skepticism

The auditors failed to exercise the degree of professional skepticism and professional judgment mandated under the Standards on Auditing.

3. Failure to Report Material Misstatements

Material and pervasive misstatements aggregating approximately ₹4,475.69 Crores were not identified and reported.

4. Evergreening of Loans Ignored

Bank records clearly demonstrated structured circular transactions and rotation of funds among group companies. Such transactions were indicative of evergreening and fraudulent movement of funds.

5. Failure to Report Fraud

The auditors failed to comply with Section 143(12) of the Companies Act despite clear indicators of fraud.

6. Defective Internal Financial Control Reporting

The auditors failed to adequately report that internal financial controls were substantially ineffective and absent.

7. Audit File Tampering

NFRA found that audit records had been altered and supplemented after initiation of investigation, amounting to serious misconduct.

8. Independence Violations

The auditors failed to adequately evaluate conflicts of interest and independence threats arising from extensive relationships with group entities.

Accordingly, NFRA held the audit firm and responsible engagement partners guilty of professional misconduct.

 

Court Order / Final Decision

NFRA imposed the following penalties and sanctions:

Against M/s Sundaresha & Associates

  • Monetary Penalty: ₹1 Crore.
  • Debarment: Four years from undertaking audits or internal audits of any company or body corporate.

Against CA C. Ramesh

  • Monetary Penalty: ₹5 Lakhs.
  • Debarment: Five years from undertaking audits or internal audits.

Against CA Chaitanya G. Deshpande

  • Monetary Penalty: ₹5 Lakhs.
  • Debarment: Five years from undertaking audits or internal audits.

Against CA Megha Sundaresha Andani

  • Proceedings dropped.

 

Important Clarifications

  1. A Disclaimer of Opinion does not absolve an auditor from reporting other material misstatements or frauds discovered during audit.
  2. Professional skepticism is a mandatory auditing requirement and not merely a discretionary practice.
  3. Circular movement of funds without business rationale constitutes a significant fraud risk requiring enhanced audit procedures.
  4. Auditors are obligated to report fraud under Section 143(12) when circumstances indicate fraudulent conduct.
  5. Audit documentation must remain complete and unaltered after completion of audit procedures.
  6. Independence requirements must be continuously evaluated throughout the audit engagement.

 

Sections / Provisions Involved

Companies Act, 2013

  • Section 132(4)
  • Section 139
  • Section 143(1)(b)
  • Section 143(3)(i)
  • Section 143(9)
  • Section 143(10)
  • Section 143(12)
  • Section 180
  • Section 185
  • Section 186

Standards on Auditing (SA)

  • SA 200 – Overall Objectives of the Independent Auditor
  • SA 230 – Audit Documentation
  • SA 240 – Auditor's Responsibilities Relating to Fraud
  • SA 250 – Consideration of Laws and Regulations
  • SA 315 – Identifying and Assessing Risks of Material Misstatement
  • SA 330 – Responses to Assessed Risks
  • SA 500 – Audit Evidence
  • SA 705 – Modifications to the Opinion in the Independent Auditor’s Report

Other Laws

  • Companies (Auditor's Report) Order, 2016 (CARO)
  • Prevention of Money Laundering Act, 2002 (PMLA)


Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/08/2023082120142346

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