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TMI Blog2023 (7) TMI 889X X X X Extracts X X X X X X X X Extracts X X X X ..... f lndia ('ICAI' hereafter) and were members of Engagement Team for the statutory audit of Coffee Day Global Limited ('CDGL' or 'the company' hereafter) for the Financial Year ('FY' hereafter) 2018-19. 2 This Order is divided into the following sections: A. Executive Summary B. Introduction & Background C. Major lapses in the Audit D. Other non-compliances with Laws and Standards E. Omission and Commission by the Audit Firm F. Points of Law raised by the Auditors. G. Articles of Charges of Professional Misconduct by the Auditors H. Additional Articles of Charges of Professional Misconduct by the Audit Firm I. Penalty & Sanctions A. EXECUTIVE SUMMARY 3 Pursuant to Securities and Exchange Board of India ('SEBI' hereafter) sharing in April 2022 its investigation regarding diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited ('CDEL' hereafter), a listed company, to Mysore Amalgamated Coffee Estate Limited ('MACEL' hereafter), an entity owned and controlled by the promoters of CDEL, NFRA initiated investigations into the professional conduct of the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs One Crore only upon M/s ASRMP & Co. In addition, this Firm is debarred for a period of two years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. b) Monetary penalty of Rs Ten Lakhs only upon CA A. S. Sundaresha. In addition, he is debarred for a period of five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. c) Monetary penalty of Rs Five Lakhs only upon CA Madhusudan U A. In addition, he is debarred for a period of five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. d) Monetary penalty of Rs Five Lakhs only upon CA Pranaav G. Ambekar. In addition, he is debarred for a period of five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CDEL and the sole buyer of coffee beans produced by MACEL. 10 As per the investigations made by the SEBI, the outstanding balance payable by MACEL to subsidiary companies of CDEL was Rs. 842 crores as on 31 March 2019, which had increased to Rs. 3,535 crores on 31 July 2019, detailed as under in Table-I. Table-I (Rs in crores) Sr No. Names of the Subsidiary Companies of No CDEL from which funds diverted to MACEL Outstanding balance as on March 31, 2019 July 31, 2019 1 Coffee Day Global Ltd (CDGL) 65 1,112 2 Tanglin Retail Reality Developments Pvt Ltd (TRRDPL) 789 1,050 3 Tanglin Developments Ltd (TDL) -12 620 4 Giri Vidhyuth (India) Ltd. (GVIL) - 370 5 Coffee Day Hotels and Resorts Pvt Ltd.(CDH&RPL) - 155 6 Coffee Day Trading Ltd (CDTL) 125 7 Coffee Day Econ Pvt Ltd (CDEPL) - 103 Total 842 3,535 11 As per the Financial Statements ('FS' hereafter) of MACEL, Rs 3,535 crore was further transferred from MACEL to the personal accounts of VGS, his relatives and entities controlled by him and/or his family members, whose outstanding balances payable to MACEL were Rs 3,238.95 crores as on 31.03.2019. On examination of FS of MACE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where the Statutory Auditors are concerned with that financial statement in a professional capacity. b) Failure to report a material misstatement known to them to appear in a financial statement with which the Statutory Auditors are concerned in a professional capacity. c) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties. d) Failure to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion, and e) Failure to invite attention to any material departure from the generally accepted procedures of audit applicable to the circumstances. 15 The Auditors sought an extension of time of 45 days for submitting response to SCN, which was allowed. The Firm vide letter dated 24.01.2023 submitted its reply to SCN. CA A. S. Sundaresha, CA Madhusudan U. A. and CA Pranaav G. Ambekar vide letters dated 30.01.2023 submitted that the reply of the firm may be considered as their reply and that they were not giving separate repl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are contained in their Requirements section and are represented by use of "shall". 19 The Auditors have also mentioned that complete investigation report of SEBI has not been provided to them. In this regard, the relevant extracts of the SEBI report that were relied upon in the SCN, have been provided to the Auditors and thus there is no merit in this objection. C. MAJOR LAPSES IN THE AUDIT C.1 Acceptance of audit engagement disregarding Independence requirements 20 The Auditors were charged with non-compliance with requirements relating to independence of auditor as per SQC 1, SA 200 and SA 2204 . CA A. S. Sundaresha's (signing partner) proprietorship firm had provided audit and non-audit services to 29 entities belonging to Coffee Day Group including its promoters. The audit firm of the signing partner's daughter (M/s Sundaresha & Associates) has provided audits as well as non-audit services to 27 entities of the Coffee Day Group. Further, her firm was actively participating in making audit presentation etc., on behalf of EP's firm and a partner of her firm represented as partner of EP's firm in the Audit Committee meeting of CDGL. All these audit firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation of Independence of the Firm's personnel. Similarly, the Engagement Partner was required to evaluate and prepare Client/Engagement Acceptance and Continuance Form. There is no evidence in Audit File that the Audit Firm and Engagement team had complied with these requirements on Independence as per SQC 1, SA 200 and SA 220. Reply of the Auditors 25 While denying the charge, the Auditors stated that independence confirmations were inadvertently not obtained from Madhusudan and Pranaav as they were paid assistants and the client acceptance/continuation form was inadvertently not kept. The Auditors have claimed to have complied with the Independence requirements by reducing self interest threat, familiarity threat and stated that their firm & partners do not have any financial interest in any of the CCD group companies, did not quote lower fees to obtain new engagements, did not have close business relationship with CCD group, nor have they stored any confidential information in their server to be used for any personal gain. Further, no partner or their family are Directors or Officers in CCD group companies, CCD group Directors and Officers did not have significant influe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial statements for FY 2018-19. Further, the presentation given on 24.05.2019 was prepared by CA Megha Sundaresha Andani, partner of M/s Sundaresha & Associates. (As per properties of PDF document containing presentation). 29 The above fact is corroborated by another fact that CA Pradeepa Chandra C. and CA Chaitanya G. Deshpande (both Partners of M/s Sundaresha & Associates) were involved in 47 out of 67 audit areas identified in the audit plan available in the Audit File. Out of these 4 7 audit areas, 44 were not reviewed by any partner of M/s ASRMP & Co. This shows that the audit of CDGL was performed jointly by partners of M/s ASRMP & Co. and M/s Sundaresha & Associates. But to hide this fact, both partners of M/s Sundaresha & Associates were named as external reviewers in the audit plan. These facts together with the fact that all three firms operate from the same office address, indicate their interrelationship and lack of independence. Detailed analysis of the role played by these two partners of M/s Sundaresha & Associates is given at para 136 to 138 of this Order. 30 It is important to understand the relationship of these audit firms with Coffee Day Group and its pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es a thorough examination of the auditee company's financial parameters, a background check of the promoters, ultimate beneficial owners, key managerial personnel, and ethical requirements, among other things. Evaluation of independence of auditor before acceptance of audit engagement is a mandatory requirement as per Standards on Auditing mentioned above. However, there is no record of this evaluation in the Audit File submitted by the Auditors. The reply of the Auditors reveals their ignorance of the basic requirement of ensuring independence as stated in the Standards on Auditing, which is unacceptable from the Auditors of public limited companies. The Auditors in this case failed to perform due professional care and did not perform sufficient appropriate procedures to evaluate their independence from Coffee Day Group and its promoters before acceptance of audit engagement of CDGL from FY 2018-19. The Auditors were reckless in accepting this audit engagement. 32 An Auditor's independence from the entity being audited, safeguards the auditor's ability to form an audit opinion without being affected by influences that might compromise that opinion. Independence enhanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sembled within 60 days of the signing of the audit report. The audit report was signed on 24.05.2019. Accordingly, the Audit File was required to be assembled by 23.07.2019. However, it is quite evident from the above that the same was not done. Further, when NFRA advised the Auditors on 22.06.2022, through email and speed post, to send the Audit File, the letter was returned by postal department with remarks 'no such firm on the address', and the Auditors did not respond to the email. Thereafter their email ID and postal address were obtained from ICAI, which intimated the same email ID and postal address except the change of floor number from 3rd floor to 1st floor. On being reminded vide letter dated 19.07.2022 to submit the Audit File, the Auditors responded on 21.07.2022 that they had shifted office from 3rd floor to pt floor in the same building and that the email dated 22.06.2022 had gone into the SPAM folder. Vide letter dated 21.07.2022 they provided some information and sought 30 days' time for submission of the Audit File after mentioning that since earlier letter was not served on them, they would be submitting the Audit File within 30 days of our letter dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile denying this charge, the Auditors have replied that maintenance of editable Excel file is not prohibited in SA 230 and modification of audit file is allowed as per para 16 of SA 230; that they have only formatted those files to make it pleasant to view and that the workings maintained in loose sheets were compiled in Excel format after receipt of NFRA notice; that some of the Excel files were merged and new Excel files were created for ease of review by NFRA. During this process the date modified could have been changed to the latest date. They further stated that the contents of Audit File have not been changed and that details of date of conducting the work by article assistants are available in time sheet maintained separately. In respect of creation of two files namely "Planning Compliance & Review Summary" and "Deferred Tax (Working)" after the date NFRA asked for Audit File, the Auditors have submitted that the information of some files were clubbed and moved to separate files for ease of review by NFRA. They further stated that a combined reading of audit plan, area wise audit procedure and time sheets will provide details of nature, timing and extent of audit procedure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners of M/s ASRMP & Co. and M/s Sundaresha & Associates. But to hide this fact, both were named as external reviewers in the audit plan available in the tampered Audit File. 42 On submission of additional working papers by the auditors and their claim that they had inadvertently missed out including them in the audit file, one has to look into SA 2305 which emphasizes the importance of timely preparation of audit documentation and its archival within a reasonable time after the issuance of the audit report. We highlight below some of the paras of the Standard:- a) Paragraph 7 of SA 230: The auditor shall prepare audit documentation on a timely basis. The explanatory material to the Standard at Para Al, inter alia, states that Documentation prepared after the audit work has been performed is likely to be less accurate than documentation prepared at the time such work is performed. b) Paragraph 8 of SA 230: The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: (a) The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable legal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt or the assembly of final Audit File by the Auditors are not accepted, as they would leave scope for large scale production of additional documents as an afterthought upon commencement of disciplinary proceedings. 45 In the Matter of KPMG Assurance and Consulting Services LLP and Sagar Pravin Lakhani (Engagement Partner) relating to tampering of audit file, PCAOB7 (Public Company Accounting Oversight Board-Audit Regulator of United States of America), observed that "PCAOB standards require that [a]udit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement . . . [t]o determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of such review".... "PCAOB standards further require an auditor to archive a complete and final set of audit documentation as of a date not more than 45 days after the report release date (i.e., the documentation completion date). Any documentation added after the documentation completion date must indicate the date the information was added, the name of the person who prepared the additional documentation, and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al set of work papers for retention, or earlier, in these engagements. Additionally, some auditors on these engagements deleted and replaced sign-offs in order to ensure that reviewer sign-offs were dated after preparer sign-offs. Collectively, this conduct obscured the dates on which work had actually been completed and reviewed". For this misconduct, PCAOB had imposed a civil money penalty of $350,000 on the firm besides censuring the firm, requiring it to take corrective actions to establish, revise, or supplement, as necessary, its quality control policies and procedures, including monitoring procedures, to provide the Firm with reasonable assurance that personnel comply with PCAOB audit documentation requirements, including those concerning the dating of the completion of work performed and the dating of the review of work papers and also directed the firm to ensure that all Firm professionals involved in any "audit," have received four (4) hours of additional training concerning compliance with PCAOB audit documentation standards. 47 There have been many other instances of such wrong doings being penalized by the PCAOB, e.g., KPMG Singapore-Tan Joon Wei (2021), BDO-Mexico (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of coffee beans up to Rs 500 crores from MACEL, but CDGL had used this approval to give advance of Rs 3,840.51 crores against the reported purchase of Rs 70.90 crores only. MACEL subsequently repaid Rs 3,779.15 crores which indicates that the advance was not intended for purchase of coffee beans, but for diversion of funds. This huge advance was also an unusual transaction, being approx. 54 times of the value of reported purchase of coffee beans (Table 2). 53 Further, even the approval given by the Audit committee for Rs 500 crores advance to MACEL for purchase of coffee beans was unusual because the company's own reported purchase of coffee beans from MACEL was Rs 70.90 crores only. If the company was to purchase coffee of only Rs 70.90 crores and that too from a related party, the auditors should have used their professional skepticism and questioned why the audit committee gave approval of advance of almost 7 times of the purchase value. Table 2 Rs in crores Sr No Particulars 2018-19 2017-18 1 Purchase of clean and raw coffee 70.90 39.23 2 Advance paid to MACEL 394.21 365.01 3 Interest received on advance paid 5.10 0.37 4 Repayment of advance by MACEL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sstatements in its disclosure relating to RPTs. As per SA 315, the Auditors were required to perform risk assessment procedures and provide a basis for the identification and assessment of Risks of Material Misstatement (Ro MM) at the financial statements and assertion levels'. As per SA 330 the Auditors were required to respond to the identified RoMM. There is no evidence in the Audit File that such procedures were performed to identify & respond to RoMM due to fraudulent diversion of funds to MACEL. 57 SA 24014 provides that the objectives of auditor are to identify and assess the RoMM in the FS due to fraud, obtain audit evidence and respond to identified or suspected risk. It requires the auditor to maintain professional skepticism recognizing the possibility of existence of material misstatement due to fraud. It further requires auditor to evaluate the business rationale ( or lack thereof) of the significant transactions that are outside the normal course of business or otherwise appear unusual and evaluate whether such transactions may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of funds. There is no evidence in Audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closures given in the FS that all transactions and balances were priced on an "Arm's length basis". In this connection, Para 23 of Ind AS 24, Related Party Disclosures states "Disclosures that related party transactions were made on terms equivalent to those that prevail in arm 's length transactions are made only if such terms can be substantiated". There is no work paper in the Audit File that the Auditors performed any audit procedure to examine whether related party transactions and balances were at arm's length. Further, as per Ind AS 24, CDGL was required to disclose the terms & conditions of related party transactions, however CDGL did not give such disclosure in the FS. The Auditors did not report non-compliance with Ind AS 24 by CDGL. 61 Furthermore, the Auditors were also charged with their failure to perform appropriate audit procedures to verify whether CDGL had complied with Ind AS 32 & Ind AS 109 in relation to loans given to MACEL15 CDGL did not classify loans given to MACEL as financial assets in accordance with Ind AS 32. The loan given to MACEL was shown as 'Other Assets' under 'Current Assets' treating it as a supplier advance in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no misstatement in disclosure of related party transactions. Accordingly, the question of reporting fraud under section 143(12) of the Act & CARO does not arise. 64 The Auditors have justified the pooling stating that MCAEL acts as coffee pooler to CDGL as a general trade practice adopted by CDGL over several years as a matter of convenience. The Auditors have attributed non-disclosure of purchase from MACEL worth Rs 1.13 crores to a clerical mistake. They have stated that the company had complied with Ind AS 24. They have further submitted that approval of audit committee was obtained for purchase from MACEL as ordinary course of business and therefore, no further approval was required for other related parties. 65 The Auditors further stated that during the year there was no new type of transaction with any related party and that they had tested that transactions with related parties had been carried out at 'Arm's length'; that there was no adverse indication, hence nothing was recorded in Audit File; that terms & conditions of RPTs are mentioned at note no. 38(E) of FS; that all RPTs were conducted in ordinary course of business; that audit procedure did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not hold as such an exemption to the provisions of section 188 of the Act, is available only if the transaction is on "Arm's length basis". The nature and facts of this advance and the absence of rationale & documentation clearly indicate that these transactions cannot be treated as arm's length. We therefore find that the Auditors failed to determine whether these significant Related Party Transactions of unusually high amount were authorized and approved by the Board of Directors in terms of section 188 of the Act. 68 From the above analysis, it is established that the Auditors failed to question and report the diversion of funds by CDGL by way of huge amount of advance to MACEL, a promoter owned and controlled entity, without any justification or operating necessity, without the Board approval and without any agreement. Such fraudulent diversion of funds, had serious repercussion on the financial health of the company in terms of liquidity, repayment of loans, payment to creditors and distribution of profits to the shareholders etc. the importance of the same can be understood from the fact that there is a separate Standard on Auditing (SA 240) prescribing the Auditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure for approval of related party transactions by the Audit Committee. Sub rule 4 of the said Rule inter alia provides that approval shall contain 'name of the related parties'. In this case, no approval was granted by the Audit Committee or the BOD of CDGL for entering into transactions with 40 other related parties. In respect of section 188 of the Act, though these transactions were in the ordinary course of business, it is observed from the Audit File that the Auditors did not perform any audit procedure to evaluate whether such transactions were entered into on "Arm's Length Basis" as required under section 188 of the Act. These prove blatant violation of section 177 & 188 of the Act. Failure of the Auditors to perform the audit procedures and question these transactions indicate their failure in discharging the statutory duty cast upon them under The Companies (Auditors Report) Order 2016. 71 The Auditors were appointed as the Statutory Auditor of CDGL from FY 2018-19, and this being the first year of audit, the Auditors were expected to perform detailed audit procedures to understand related party relationships, transactions and outstanding balances in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his misclassification and question the management. 75 As discussed in charge C-4, CDGL was involved in evergreening of loans and round tripping of funds with the ulterior motive of understating the loan to MACEL by Rs 222.50 crores. These loans were never repaid by the group companies, but financial statements were manipulated to conceal the real picture. The financial positions of MACEL showed that it had negligible business operations, had negative net worth, and was used as conduit by promoters to siphon off money from CDGL. These were sufficient evidence that MACEL lacked the financial strength to repay loans and accordingly recognition of impairment loss allowance and writing off of non-recoverable portion ofloans was required to be made but CDGL did not do so and the Auditors did not question the management and did not perform any audit procedures to obtain sufficient and appropriate audit evidence to determine whether CDGL's decision in this regard was in accordance with the provisions of Ind AS 109. 76 Therefore, we hold that the charge on this count stands proved and uphold that the Auditors have violated section 143(3)(e), 143(12) of the Act, CARO 2016 and SA 200, S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these fictitious accounting entries and thus were charged to have violated section 143(1) of the Act. 79 The cheques of Rs 222.50 crores received up to 31.03.2019 but not credited in bank accounts, constituted 27.75% of total borrowings of Rs 801.90 crores of CDGL. This was an indication of Risk of Material Misstatement (Ro MM) due to fraud. Auditors are required to perform appropriate audit procedures to investigate the RoMM as per SA 240, SA 315 and SA 330. In the instance case, there is no evidence in the Audit File that the Auditors performed such audit procedures to identify and respond to RoMM due to fraudulent reduction of Related Party outstanding balance in the form of supplier advances and bank borrowings & conversion of related party advances into bank balances. As such the Auditors were charged to have violated SA 200, SA 240, SA 315 and SA 330 Reply of the Auditors. 80 While denying the charge, the Auditors have stated that they were not having access to books of accounts of MACEL; that CDGL has a regular practice of providing advance for coffee purchase and as a part of risk assessment procedure they ensured that the cheques were not stale cheques and were realise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lization of cheques in the bank statement of CDGL. CDGL received five cheques of total amount of Rs 25 crores on 30.03.2019 from MACEL, which were cleared on 02.04.2019 in circular manner. For example, MACEL paid Rs 6.70 crores to CDGL, which then paid Rs 6 crores to MACEL, which then paid Rs 5 crores to CDGL and so on ...... There was no economic substance in these transactions. 84 Similar evergreening through circulation of funds could be observed from bank statement of CDGL with Karnataka Bank as well and the Auditors have claimed that they have verified realization of cheques in the bank statement of CDGL. MACEL on 30.03.2019 issued six cheques of total amount of Rs 105.00 crores favoring CDGL. On 04.04.2019 the account was credited with Rs 22.70 crore from MACEL's own bank ale in Yes Bank. This was followed by a series of circular transactions, on the same day, between MACEL and CDGL, starting with MACEL paying Rs. 20 crores to CDGL, followed by CDGL paying the same amount to MACEL and so on, to enable clearance of six cheques amounting to Rs 105 crores issued to CDGL on 30.03.2019. Further, on 30.04.2019, MACEL got Rs 24 crores from CDGL, which was used on the same day f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 09.05.2019, CDGL again paid Rs. 135.50 crore in seven installments to MACEL, which in tum passed on the amount to Kumar Hegde, enabling him to repay the capital advance. Out of this, Kumar Hegde repaid Rs 55.50 crores directly to CDGL in three installments and CCCW repaid Rs 80 crores to CDGL in four installments. All these transactions were done on the same day. Thus, the CCCW repaid the advance received from the CDGL with the additional funds received from CDGL through a series of circular transactions but the end use of the money originally given as capital advance to Kumar Hegde in 2018-19 remains unknown. 88 The Audit File indicates that FS of CCCW and Standalone Financial Statements of CDGL were manipulated during the course of audit with the active involvement of the Auditors. The audit work sheet named 'Analysis', has two different figures of loan recoverable from CCCW at two different rows i.e., Rs 80.12 crores at row no-7 and Rs 130.67 crores at row no-32. There is a difference of Rs 50.55 crores between these two lines. The probable reason for the difference is evident from audit work sheet named 'Capital Advance Mar 19', which has list of advances g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o charged with their failure to perform appropriate audit procedures to verify whether CDGL has complied with Ind AS 109 in relation to loans given to CCCW. CDGL did not recognize impairment loss allowance & did not write off non-recoverable portion of loans given to CCCW (Rs 130.55 crores) as per Para 5.5.1 and para 5.4.4 of lnd AS 109, although CCCW did not have the financial strength to repay the loans. This resulted in CDGL violating Ind AS 109. The Auditors were required under section 143(3)(e) of the Act, to report whether, in their opinion, the financial statements comply with the accounting standards. They had reported that the Financial Statements complied with the Ind AS specified under section 133 of the Act. Thus, they were charged with violation of section 143(3)(e) of the Act. 92 Furthermore, the Auditors were also charged with failure to exercise due diligence while performing audit of Internal Financial Control over Financial Reporting. They did not perform adequate audit procedure in relation to fraudulent diversion of funds to related parties, evergreening of loans through round tripping of funds and non-recoverability of loans from related parties as discussed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S 109, the Auditors stated that the source of payment by Kumar Hegde to CCCW cannot be determined by them as statutory auditor of CDGL and that Kumar Hegde had already repaid it in the subsequent year before signing of audit report. Accordingly, at the time of finalization of audit, there was no indicator of impairment, and therefore question of impairment loss or write off does not arise. 97 The Auditors have denied the charge relating to Internal Financial Control. Citing para 5 Analysis of reply 98 We find that the special resolution passed by the shareholders of CDGL for investment up to Rs 4000 crores set the maximum limit up to which investment could have been made, whereas section 1 77 of the Act requires the Audit Committee to approve specific transactions mentioning party wise details. The Audit Committee of CDGL passed a resolution on 17.05.2018 granting omnibus approval for Related Party Transactions (RPT) with seven related parties. The loan of Rs 130.55 crores given to CCCW, though an RPT, is however not covered in the list approved by the Audit Committee and was therefore an unauthorized transaction. 99 On the plea of the auditor that the Capital advance was reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deficiencies in their Audit. 102 The Auditors have not explained why the FSs of CCCW were not signed by any CCCW officer or even an officer of CDGL, which was the major partner of CCCW. Regarding the absence of the signing partner's ICAI membership number and the auditor firm's ICAI firm registration number on the FS and audit report of CCCW, the Auditors have contended that mentioning these details was not mandatory prior to July 2019. We note that such information was required to be mentioned in the Audit Report as per the requirement of SA 700, Forming an opinion and reporting on financial statements, during the relevant time period. Further, the availability of two sets of unsigned financial statements, as well as the absence of the signing partner's ICAI membership number and the Audit Firm's ICAI firm registration number, casts serious doubt on the authenticity of these FSs. Accordingly, we conclude that the Auditors were grossly negligent in conducting audit of Consolidated Financial Statements. 103 As already discussed, CDGL was involved in evergreening of loans and round tripping of funds with the ulterior motive of converting the loan of Rs 130.55 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions. However, based on the above analysis, we find that controls were totally absent in CDGL in release of supplier advances & loans, and banking transactions and there was total management override of controls in these areas. Any significant deficiencies or material weaknesses in internal controls must be revealed by the Auditors, but we find that instead of reporting their absence, the Auditors falsely reported that CDGL had adequate Internal Financial Controls with reference to financial statements and that these were operating effectively. The reply of the Auditors that they have provided disclaimer of opinion in this matter is factually incorrect as they had given an unmodified opinion, and this averment is tantamount to misrepresentation of fact in an adjudication proceeding under Section 132 ( 4) of the Act. 107 From the above analysis, we therefore hold that the Auditors have failed to perform the required statutory duties in accordance with the provisions of SA 200, SA 240, SA 315, SA 330 and Section 143(1)(b), 143(3)(e), 143(3)(i), 143(12) and failed to report violation of section 177 of the Act by CDGL. C.6 Lapses in audit relating to capital advance given to Da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions; that even though the transaction is beyond the limit approved by the Audit Committee, the same was carried out in the ordinary course of business and purchases were within the approved limit; and that since the advance to DFFCPL was covered by the general limit of Rs 4,000 crore approved by the company by special resolution, there is no non-compliance of section 177 of the Act. 112 The Auditors have further submitted that the amount of Rs.50.55 crores was paid to DFFCPL on behalf of CCCW. This amount was inadvertently accounted as capital advance to DFFCPL instead of advance to CCCW, and that the same was rectified later on. The transaction was in the ordinary course of business and in their opinion, there is no material misstatement in the said transactions. Analysis of reply 113 The exemption under section 188 of the Act is applicable if transactions with related parties are entered on 'Arm's Length Basis'. Arm's length is an expression which is commonly used to refer to transactions in which two or more unrelated and unaffiliated parties agree to do business. In this case, the advance given to DFFCPL was without any agreement and Order in the matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrol to Those Charged With Governance and Management. e) Failure to comply with SA 300, Planning an audit of Financial Statements. Reply of the Auditors 116 The Auditors have denied their wrongdoings and professional misconduct in all the charges mentioned in the previous paragraph. 117 With respect to compliance with section 134( 1) of the Act, the Auditors stated that they had obtained constructive evidence, in the form of receipt of signed copies of the financial statements, before they signed on the same and issued audit report thereon. Further considering the 'Doctrine of Indoor Management', they had ensured the compliance with section 134(1) of the Act. They further stated that the company has complied with section 134(1) of the Act and the Auditor is not required to make any report on this issue. 118 With respect to compliance with SA 700, the Auditors have reiterated their submissions given in support of each charge and claimed that they had obtained reasonable assurance that the Financial Statements as a whole were free from material misstatements, whether due to fraud or error; and that they had provided appropriate opinion in the audit report in complianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile making audit conclusions, the Auditors violated SA 700 and failed to draw attention to the presence of material misstatements of Rs 7514.10 crores in the Financial Statements of CDGL. Thus, the charge that the Auditors violated SA 700 is proved. 124 Regarding SA 250, it was seen that CDGL had given loans of Rs 35840.51 crores to a promoter owned entity viz MACEL, in the garb of Supplier Advance for coffee beans, despite the fact that the actual purchase of coffee beans from MACEL was Rs 1.13 crores only. Therefore, release of such an exorbitant amount to MACEL cannot be considered to be in the ordinary course of business. The outstanding amount receivable from MAC EL on 31.03.2019 was Rs 287 .32 crores. This was adequate proof of diversion of funds to promoter owned entity MACEL. Further, the loan of Rs 130.55 crores given to CCCW has ultimately gone to Kumar Hegde and never come back to CDGL, and its final use remained unknown. Its repayment was shown in records of CDGL by circulation of CDGL's own funds in a fraudulent manner which resulted in conversion of loan given to CCCW into loan given to MACEL. This is clear proof of diversion of funds to Kumar Hegde. Diversion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered the replies, we drop these charges. E. OMISSION AND COMMISSION BY THE AUDIT FIRM In addition to being jointly responsible for the lapses in audit performed by the EP and other members of the engagement team, the Audit Firm was charged with omissions and commissions solely attributed to it. These are discussed below. Lapses in constitution of Engagement Team (ET) and assigning responsibility among ET members (Additional Lapse on the part of the Audit Firm only) 128 The Audit Firm was charged with lapses in constitution of ET and lapses in assigning responsibility of this audit engagement among ET members. As per audit plan, the ET was constituted as follows: Table-4 Sr No Name Role assigned 1 CA Sundaresha A S Signing Partner 2 CA Pradeepa Chandra C External Reviewer 3 CA Chaitanya G External Reviewer 4 CA Madhusudan Engagement Partner 5 CA Pranaav Ambekar Engagement Partner 6 X Article Assistant 7 Y Article Assistant 129 As per audit plan, there were two external reviewers in the team. As per definition of 'Engagement Team' ('ET' hereafter) given at para 7(d) read with definition of 'Personnel' at para 7(1) of SA 220, ET ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udit engagement in a very casual manner without clearly defining the responsibilities among engagement team members thereby laying a weak foundation of audit engagement. Reply of the Auditors 133 While denying the charge, the Audit Firm has submitted that the word signing partner is used in their office to identify the person going to sign the Financial Statements after reviewing the work done by engagement team. Therefore, the term 'signing partner' was used without reference to any SA. They have further clarified that CA Sundaresha A S, was partner in charge of engagement team and CA Madhusudan and CA Pranaav Ambekar were partners who executed day to day audit procedures and discussed the findings with CA A. S. Sundaresha. The Audit Firm stated that the word senior partner is used to specify the more experienced partner and others are referred as junior partners. The words article assistant and audit assistant are used interchangeably. These terms are generally used in their profession. 134 While citing para 3 of SQC 1, the Audit Firm replied that there is no bar on deputing more than one engagement partner to a particular engagement; that bigger companies have joint A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in para 6(c) & (d) of SQC 1 and para 7(b) & (c) of SA 220. It is neither the claim of the Auditors that CA Pradeepa Chandra C. and CA Chaitanya G. Deshpande had been engaged as EQCRs, nor is it evident from the Audit File that they performed the tasks of EQCRs. ( c) An Auditor may consult external persons on difficult or contentious matters. In this case no such consultation was made with these so-called external reviewers. 137 Both these external reviewers i.e., CA Pradeepa Chandra C. and CA Chaitanya G. Deshpande (both Partners of M/s Sundaresha & Associates) were involved in 4 7 audit areas out of 67 audit areas identified in the audit plan available in the Audit File. Out of these 4 7 audit areas, 44 audit areas were not reviewed by any partner of M/s ASRMP & Co. This shows that they were not only supervising day to day audit work being performed by the article assistants but were practically doing a major part of the audit. This shows that the audit of CDGL was performed not merely by M/s ASRMP & Co. but by M/s Sundaresha & Associates also. But to hide this fact, both partners of M/s Sundaresha & Associates were named as external reviewers in the audit plan. Thus, the Audit F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(9) of the Act}. f) In compliance with section 143(12) of the Act, the Audit Firm replied that there is no fraud identified by them, hence there is no reporting requirement to the Central Government. g) The Firm has a Quality Control Manual in place and the same has been adhered to while conducting the audit of CDGL. h) Based on the facts and circumstances they had complied with the applicable Standards on Auditing, SQC 1 and ethical requirements. Accordingly, there was no act of omission and commission on their part, which will have impact on their audit opinion. 141 Statutory Audits are performed by Engagement Team on behalf of the Audit Firm appointed as statutory auditor under section 139 of the Act. The audit reports are signed on behalf of the Audit Firm and, therefore, the Audit Firm remains responsible for all the acts of omissions and commissions by the Engagement Team as well as for violation of duties and responsibilities specifically required of the Audit Firm. Mis ASRMP & Co. was appointed as the Statutory Auditor of CDGL for FY 2018-19. We have already considered in the earlier paragraphs, the point wise replies of the Audit Firm and determined that the Aud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussion, it is proved that the Auditors had issued unmodified opinion on the Financial Statements without any basis. The poor quality of Audit, tampering of Audit File, the cover up in terms of submission of additional documents that did not exist in Audit File, incomplete documentation and attempt to mislead through false and evasive replies further compound the professional misconduct on the part of the Auditors. Based on the foregoing discussion and analysis, we conclude that the Auditors have committed Professional Misconduct as defined under Section 132 (4) of the Companies Act 2013 in terms of section 22 of the Chartered Accountants Act 1949 (CA Act) as amended from time to time, and as detailed below: i. The Auditors committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he ''fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such of 46 financial statement where he is concerned with that financial statement in a professional capacity". This charge is pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Auditors failed to conduct the audit in accordance with the SAs as explained in the Section C and D above. H. ADDITIONAL ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT BY THE AUDIT FIRM 146 In addition to above, the Audit Firm has committed Professional Misconduct as defined Section 132 (4) of the Act by failing to exercise due diligence and being grossly negligent in the conduct of professional duties in respect of matters explained at Section - E above as the Audit Firm failed to exercise due diligence and was grossly negligent in the conduct of professional duties, thus, violated SQC 1. 147 Therefore, we conclude that all the charges of professional misconduct in the SCN (Except charges relating to noncompliance with SA 210, SA 510 & SA 720, which have been dropped) stand proved based on the evidence in the Audit File, the Audit Report dated 24.05.2019 issued by the EP on behalf of the Firm, the submissions made by the Auditors and the Financial Statements of CDGL for the FY 2018-19. 148 It will be useful to look at how Audit regulators in other countries have dealt with similar violations that we have observed in this case particularly with regard to diversion of fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection with Issuer A 's identification, accounting, and disclosure of related party relationships and transactions ... .... Specifically, as part of her risk assessment procedures, she was required to obtain an understanding of the design and implementation of Issuer A 's internal control over financial reporting ("JCFR '') in connection with related parties, to evaluate the design of those controls that were relevant to the audit, and to determine whether those controls had been implemented. Gore failed to perform any of these procedures during the 2016 Audit"". This case resulted in debarment and imposition of monitory penalty on the auditors. 151 In a matter relating to impairment allowance for loans in the case of Grant Thornton LLP, PCAOB20 had observed "Grant Thornton, among other things, failed to exercise due professional care, including appropriate professional skepticism, and failed to obtain sufficient appropriate audit evidence concerning the reported value of Bancorp's net loans, the effectiveness of Bancorp's controls relating to its allowance for loan ... ... ... a known significant risk and significant accounting estimate. As a result o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & barred partner from being an associated person of a registered public accounting firm, and imposed a civil money penalty on the audit firm and the partner. I. PENALTY & SANCTION 154 Section 132( 4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed is evident from the fact that a minimum punishment is laid down by the law. 155 Independent Auditors of Public Limited Companies22 serve a critical public function of enabling the users of Audited Financial Statements to take informed economic decisions. Quality audits bolster stakeholder' s confidence in the credibility of financial reporting. 156 But stakeholder's confidence is not automatic. Trust must be earned, and it must be preserved. Auditors' Integrity and Diligence are of utmost importance to preserve the trust of users in Auditing Profession, which plays an important role in the economic development of India. 157 In the instant case, the Auditors, chose to preserve their professional relationship with the promoters of the auditee company, instead of discharging their statutory duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nished by Mis Sundaresha & Associates vide letter dated 10 .09.2022 and Mis ASRMP & Co. vide letter dated 29.09.2022, the statutory audit fees of CDGL for 2018-19 was Rs_, besides Mis Sundaresh & Co. received Rs_as tax audit fees from CDGL. Further, Mis ASRMP & Co., Mis Sundaresha & Associates and Mis Sundaresh & Co. received total professional fees of Rs- from Coffee Day Group entities and promoters in respect of services rendered for FY 2018-19. Total professional fees received by these three related audit firms during FY 2018-19 was Rs-. CA A. S. Sundaresha has 81 % share, CA Madhusudan U. A. has 6% share and CA Pranaav G. Ambekar has 6 % share in the profit of Mis ASRMP & Co. 162 Considering the proved professional misconduct and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order: a) Imposition of a monetary penalty of Rs One Crore only upon Mis ASRMP & Co. In addition, Mis ASRMP & Co. is debarred for a period of two years from being appointed as an auditor or internal auditor or from undertaking any audit in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 06.12.2022. 8 PCAOB Release No. 105-2021-014 dated 29.09.2021 9 Audit file is defined in para 6(b) of SA 230 'Audit Documentation' as "one or more folders or storage media, in physical or electronic form, containing the records that comprise the audit documentation for a specific engagement". 10 As per para 15 of SA 200, Auditor is required to plan and perform Audit with Professional Skepticism. 11 Para 5 of SA 315, Identifying and Assessing the Risk of Material Misstatement through understanding the Entity and its Environment. Para 5 of SA 330, The Auditor's Response to Assessed Risks 12 Audit report dated 24.05.2019 under the Companies (Auditor's Report) Order, 2016 ('CARO' hereafter). 13 SA 550, Related Parties. It deals with auditor's responsibilities regarding related party relationships, transactions, and balances. 14 SA 240, The Auditor's responsibilities relating to Fraud in an Audit of Financial Statements. 15 Ind AS 32, Financial Instruments: Presentation, Ind AS 109, Financial Instruments 16 Unique Document Identification Number. 17 Agreement is available in the Audit File 18 PCAOB Release No. 105-2020-012 and PCAOB Relea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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