NFRA’s Latest Ruling on M/s BSR & Associates LLP: Audit Misconduct in Cafe Coffee Day Enterprises Case
The NFRA latest rulings 2024 have set a benchmark for auditor accountability, as seen in the penalties imposed on BSR & Associates LLP for their misconduct in the Cafe Coffee Day audit. In a significant NFRA order, the National Financial Reporting Authority (NFRA) imposed severe penalties on M/s BSR & Associates LLP, its Engagement Partner (EP) CA Aravind Maiya, and Engagement Quality Control Reviewer (EQCR) CA Amit Somani for professional misconduct during the audit of Cafe Coffee Day Enterprises Ltd (CDEL) for FY 2018-19. The BSR & Associates LLP misconduct in auditing the financial statements of Cafe Coffee Day Enterprises led to the diversion of ₹3,535 crores to a promoter-controlled entity.
Read more on NFRA’s Latest Rulings 2024: NFRA issues order in the matter of MAN Industries (India) Limited against CA Nilesh Chheda
Key Findings of NFRA’s Investigation
The NFRA order of Cafe Coffee Day Audit highlights significant lapses in audit procedures, bringing to light one of the major audit failures in India. NFRA’s probe exposed multiple lapses by the auditors in meeting the required auditing standards in India during the audit of CDEL’s Consolidated Financial Statements (CFS) and Standalone Financial Statements (SFS). These shortcomings contributed to serious audit failures, undermining corporate governance at a listed company.
1. Inadequate Audit Procedures for Consolidated Financial Statements
M/s BSR & Associates LLP did not perform appropriate additional audit procedures, failing to obtain sufficient evidence to issue an opinion on CDEL’s consolidated financial statements. Despite identifying the exposure of CDEL group to MACEL as a significant audit risk, the auditors were negligent in assessing the recoverability of ₹842.49 crores in loans from MACEL and evaluating impairment provisions. This negligence extended to other issues:
- Gross Understatement of Loans: The auditors failed to detect the fraudulent understatement of loans amounting to ₹1,706 crores in CDEL’s financials. These loans were evergreened through circular fund transfers, and the auditors did not exercise adequate professional skepticism.
- Failure to Address Fraud Risks: The auditors did not recognize fraud risks in significant related-party transactions and failed to assess the legitimacy of CDEL subsidiaries loaning large sums to MACEL without business rationale.
2. Lapses in Standalone Financial Statements Audit
The auditors failed to verify the end use of ₹1,055.73 crores in loans extended to CDEL subsidiaries and ignored the guarantees amounting to ₹1,015 crores provided by CDEL. This shows a clear violation of auditing standards in India, where auditors are expected to conduct thorough checks on high-risk financial transactions.
3. Deficiencies in Audit Documentation
NFRA found significant lapses in the audit documentation used by M/s BSR & Associates LLP. The system allowed unauthorized modifications to audit work papers without proper record-keeping, which is a violation of both Standards on Quality Control (SQC 1) and Standards on Auditing (SA 230). Such lapses contributed to the overall failure of the audit process.
4. Professional Misconduct Charges
The auditors were charged with several counts of professional misconduct:
- Failure to Report Material Misstatements: The auditors did not report material misstatements despite being aware of the fraudulent diversion of funds to MACEL.
- Failure to Exercise Professional Skepticism: Despite identifying major audit risks, the auditors relied on management’s explanations without verifying their accuracy.
This case demonstrates the need for strict adherence to auditing standards in India, especially when dealing with high-risk transactions like those uncovered in Cafe Coffee Day’s audit.
NFRA Penalties and Sanctions for Auditor Misconduct
Following its investigation, NFRA imposed the following penalties:
- M/s BSR & Associates LLP: A monetary penalty of ₹10 crores.
- CA Aravind Maiya: A penalty of ₹50 lakhs and a 10-year ban from auditing.
- CA Amit Somani: A penalty of ₹25 lakhs and a 5-year ban from auditing.
This ruling is part of NFRA’s latest rulings in 2024 and highlights its commitment to enforcing accountability in the auditing profession. The penalties underscore the importance of adhering to auditing standards in India, especially in the audits of listed companies, where investor trust is crucial.
Conclusion
The NFRA order on Cafe Coffee Day Enterprises serves as a vital reminder of the critical role auditors play in safeguarding corporate governance. The professional misconduct of M/s BSR & Associates LLP, CA Aravind Maiya, and CA Amit Somani had far-reaching consequences for CDEL, its investors, and the broader financial market. With this ruling, NFRA sends a strong message about the need for professional skepticism, thorough due diligence, and adherence to auditing standards in India.
For more updates on NFRA’s latest rulings in 2024 and key developments in the auditing industry, stay tuned to our blog.
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