NFRA imposed a penalty of Rs. 10 crores on CA firm in Cafe Coffee Day company Scam

NFRA imposed a penalty of Rs. 10 crores on CA firm in Cafe Coffee Day company Scam

In a recent judgment, NFRA has imposed a heavy exemplary penalty of Rs. 10 crores on CA firm and Rs. 50 lakhs on engagement partner and ban for 10 years for misconduct in Cafe Coffee Day company scam.

ABCAUS Case Law Citation:
4224 (2024) (08) abcaus.in NFRA

In the instant case, NFRA suo moto examined the professional conduct of the statutory auditors of Coffee Day Enterprises Limited (Operators of Cafe Coffee Day) under Section 132(4) of the Companies Act 2013 (the Act), pursuant to the Securities and Exchange Board of India (SEBI) investigation report regarding diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited (CDEL) to another entity owned and controlled by the promoters of CDEL.

NFRA found that the CDEL’s Statutory Auditor for audit of Consolidated Financial Statements And Standalone Financial Statements for the FY 2018-19 failed to meet the relevant requirements of the Standards on Auditing (‘SA’) Standards on Quality Control and provisions of the Act and also demonstrated serious lapses and absence of due diligence in following matters.

According to NFRA findings, the Auditors did not report 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 Auditors put on their blinkers and when asked to explain sought refuge in the provision of SA 600, relying on the work of Auditors of the subsidiaries, while CDELs investments in these subsidiaries constituted a staggering figure of Rs 1,937 crores constituting 89% of the standalone balance sheet. This was in addition to the fact that they themselves had listed the exposure to promoter entities as a significant and important area of Audit. Providing of loans by the listed company to arelated 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 Auditors’ reliance on management explanation and using the ruse of a good faith understanding of management explanation, resulted in their having totally flayed the professional skepticism required of a prudent Auditor.

According to NFRA due to the said fraudulent diversion of funds, the consolidated financial statements of CDEL were grossly misstated and, therefore, did not present a true and fair view of the company’s affairs. As a result, the unmodified audit report issued by the Audit Firm was false and misleading for the users of these financial statements.

The NFRA stated that given the fact that the Audit Firm is the appointed auditor under the Act and that the Engagement Partner (EP) remains mandatorily responsible for the individual audits subject to firm-level supervision, both the Audit Firm and the EP have joint and several responsibilities for the Audit. Section 132 (4) that provides for sanctions against both the chartered accountants and the firm of chartered accountants emanates from this basic premise.

The NFRA imposed a monetary penalty of Rs ten crores upon the audit firm, Rs. fifty lakhs upon the CA Aravind Maiya (the Engagement Partner) and Rs twenty five lakhs upon other CA. In addition, the Engagement Partner CA Aravind Maiya has been debarred for a period of ten years and CA Amit Somani has been debarred for a period of five years. 

Download Copy of NFRA Order Click Here >>

• AO can’t take two different stands on immunity u/s 270AA(2) for a same transaction
• ITAT held 2000 gram jewellery reasonable in view of customary practices & CBDT Instruction
• Documents obtained post search & information obtained from public domain not incriminating material
• No second reopening for unexplained credits in bank due to bank’s name change
• FDCM invites application for empanelment of practising CAs/ Chartered Accountant Firms