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NFRA Cracks Down on Auditors with Fines and Bans -Rs 1 crore on CA Firm and 5 lakhs each on partners

In the recent case of M/s Sundaresha & Associates and CA C. Ramesh and CA Chaitanya G. Deshpande (Order No. NF-23/14/2022/05, NFRA M/s Sundaresha & Associates and CA C. Ramesh and CA Chaitanya G. Deshpande, (30.05.23), the National Financial Reporting Authority (“NFRA”) has taken stern action against M/s Sundaresha & Associates(“Auditor”), a prominent Chartered Accountancy (CA) firm, and its partners CA C. Ramesh and CA Chaitanya G. Deshpande. The NFRA's investigation revealed instances of professional misconduct and violations of auditing standards and provisions of the Companies Act, 2013. As a result, the NFRA has imposed significant penalties and debarred auditors from certain roles within the financial ecosystem. This article provides a comprehensive analysis of the case, highlighting the key facts, the NFRA's findings, and the implications for the auditing profession.


Brief Facts:

NFRA conducted an investigation under section 132(4) (‘u/s’) of the Companies Act, 2013 (“The Act”) on M/s Sundaresha & Associates based on the information received from the Securities Exchange Board of India (“SEBI”) in April (vide a letter Dt. 01.04.2022 & 29.04.2022) regarding the diversion of funds worth Rs. 3,535 Cr. from seven subsidiary companies of Coffee Day Enterprises Limited (“CDEL”), a listed company to Mysore Amalgamated Coffee Estate Limited (“MACEL”), which is owned and controlled by the promoters of CDEL.


M/s. Sundaresha & Associates u/s. 139 of The Act was the statutory auditor of six companies of CDEL including Giri Vidhyuth (India) Ltd. (“GVIL”), which is one of its subsidiary companies (F.Y. 2019-20). As per the audit procedure, CA. C Ramesh was the signing partner, who signed the Financial Statements (“FS”), and Independent Auditor’s Report and CA Chaitanya G. Deshpande was the Engagement Partner (“EP”).


NFRA, under Rule 3 of (NFRA, Rules 2018) and u/s. 132 (4) of The Act, called upon the audit file and conducted an investigation upon auditors of GVIL, which had an outstanding loan of not less than Rs. 500 crores (‘Cr.’) as on 31.03.19 the end of the preceding financial year.

As per NFRA’s investigation, the auditors failed to meet the requirements of Standards on Auditing (“SA”) and comply with the provisions of The Act. This apparent lack of competence is evident in the auditor's failure to follow the required compliance while being the statutory auditors of Coffee Day Group companies. The auditors also blatantly violated the code of ethics by ICAL (Institute of Chartered Accountants of India), by charging more than 40% of professional fees from CDEL.


The auditors were aware of the transactions that took place and had access to the details of the transactions that were conducted to mislead the funds. The CDEL (owned by Late V. G. Siddhartha, who was the former chairman and managing director) diverted the funds to MACEL (91.75% of shares owned by the Late S.V. Gangaiah Hegde father of V. G. Siddhartha).


The auditors had knowledge of the modus operandi used for the diversion of funds. VGS used to ask authorized signatories to sign blank cheques of coffee day group companies which were diverted through GVIL, a subsidiary of TDL which was a subsidiary of the parent company i.e., CDEL. the funds of CDEL were transferred to GVIL which were diverted to MACEL. According to MACEL’s FS, funds worth Rs. 3535 Cr. were received from CDEL, which were further transferred to VGS’s personal account.


The Auditors failed to understand that GVIL was a shell company used by the promoters of CDEL for financial misconduct. GVIL was formed with the intention of entering the power sector, model obtained some approvals for setting up a power plant, but later dropped the project. Through its FS, it was found that it was not engaged in the business of power generation, nor did it have any revenue or expenditure related to power generation. It also did not own any physical assets. These details suggest that GVIL was a shell company being used as a conduit for financial manoeuvres and to divert funds from the listed company to entities controlled by the promoter of listed the entity.


As per NFRA findings, the auditors did not exercise professional judgement and scepticism during the audit of the transactions of GVIL, the transactions of GVIL were as follows:

  • Rs. 581.16 Cr. borrowed from subsidiary companies of CDEL.A loan of Rs. 370 Cr. was fraudulently given to MACEL (a promoter company).

  • A loan of 105 Cr. was fraudulently given to a related party named SICAL Logistics Ltd.

  • Land advances of Rs. 45 Cr. were fraudulently given to Ms. Razia Sultana, which were subsequently written off.

The auditors were unable to determine the recoverability and requirements for the loans and advances, as a loan of Rs. 370 Cr. was given to MACEL, Rs. 105 Cr. to SICAL Logistics Ltd. and Rs. 45 Cr. to Ms Razia Sultana, without charging any interest or obtaining any security.


The auditors were unable to determine the recoverability and requirements for the loans and advances, as a loan of Rs. 370 Cr. was given to MACEL, Rs. 105 Cr. to SICAL Logistics Ltd. and Rs. 45 Cr. to Ms Razia Sultana, without charging any interest or obtaining any security.


The auditors failed to ascertain the evergreening of loan transactions and the circulation of funds that took place without any business rationale or written agreements. The auditors also failed to perform the audit efficiently and in accordance with auditing standards.


The auditors failed to report the fabricated FS of GVIL which were of Rs. 1776.16 Cr. and failed to bring into attention the absence of internal financial controls with respect to the fraudulent diversion of funds which took place and thus, violated the standards of auditing and the provisions of the act.


Hence, based on the above facts, NFRA conducted an investigation u/s. 132(4) of The Act.


Held:

NFRA passed an order u/s. 132 (4)(c) of The Act against the auditors based on the investigation conducted and held the auditors liable for professional misconduct and for contravening section 143(3)(i), 143(12) of The Act, SA 200, SA 240. SA 250. SA 315. SA 330 and SA 550


NFRA imposed the following penalties:

  1. M/s Sundaresha & Associates was penalized with a fine of 1 Cr. and debarred from being appointed as an auditor or undertaking internal audit for any company or body corporate for a period of 2 years. This debarring period will commence after the completion of an earlier debarment of 2 years, which was imposed in the previous order dated 26.04.23.

  2. CA C. Ramesh and CA Chaitanya G. Deshpande were debarred for a period of 2 years from being appointed as auditors or undertaking internal audits of any company or body corporate.

  3. A penalty of Rs. 5 lakhs was imposed individually on CA C. Ramesh and CA Chaitanya G. Deshpande.

Analysis:

The NFRA's action against M/s Sundaresha & Associates is based on the following findings:

  • The auditors failed to detect material misstatements in the financial statements of the company.

  • The auditors did not exercise professional judgment in their work.

  • The auditors did not comply with auditing standards.

This case study highlights the consequences of professional misconduct and the need for auditors to demonstrate diligence and sound judgment in their work. Auditors must recognize that their roles and responsibilities are subjected to meticulous scrutiny by governing bodies. Their commitment to following auditing standards and exercising professional judgment is pivotal in maintaining the credibility of financial reporting, fostering trust in the market, and safeguarding the interests of stakeholders.


Authored by Purvi Garg, Associate at Metalegal Advocates. The views are personal and do not constitute legal opinion.



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