Auditors found guilty of misconduct in Tanglin Developments audit for FY 2018-19

The National Financial Reporting Authority (NFRA) found auditors guilty of professional misconduct for the statutory audit of Tanglin Developments Limited (TDL) for FY 2018-19. The auditors failed to meet auditing standards, lacked independence, tampered with audit files, did not assess risks adequately, failed to report fraudulent transactions, and did not ensure compliance with laws. NFRA imposed a monetary penalty and debarred the auditors from being appointed for a specified period. The auditors were fined and debarred from undertaking any audit work for a certain duration, with the sanctions becoming effective after 30 days.

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Issues Involved:
1. Professional Misconduct by Auditors
2. Independence Requirements
3. Tampering of Audit File
4. Risk Assessment Procedures
5. Fraudulent Loan Transactions
6. Interest Income Recognition
7. Diversion of Funds
8. Internal Financial Control
9. Compliance with Laws and Regulations

Summary:

1. Professional Misconduct by Auditors:
The National Financial Reporting Authority (NFRA) found the auditors, M/s Sundaresha & Associates and CA C. Ramesh, guilty of professional misconduct under Section 132(4) of the Companies Act 2013 for the statutory audit of Tanglin Developments Limited (TDL) for FY 2018-19. The auditors failed to meet the Standards on Auditing (SA) requirements, lacked competence, and demonstrated a serious lack of professional skepticism and judgment.

2. Independence Requirements:
The auditors failed to maintain independence from TDL by having audit and non-audit relationships with multiple Coffee Day Group entities and the promoters' family members. The auditors did not comply with the ethical requirements of SQC 1, SA 200, and SA 220, and failed to evaluate their independence before accepting the audit engagement.

3. Tampering of Audit File:
The auditors tampered with the Audit File to deceive NFRA by modifying and adding documents after NFRA requested the Audit File. This act violated SA 230 and displayed unprofessional behavior. The auditors' explanations were deemed evasive and unacceptable.

4. Risk Assessment Procedures:
The auditors did not perform adequate risk assessment procedures to identify and respond to the Risk of Material Misstatement (RoMM) due to fraud. They failed to understand TDL, did not prepare an audit plan, and did not perform risk assessment procedures as required by SA 300, SA 315, and SA 330.

5. Fraudulent Loan Transactions:
The auditors failed to report fraudulent loan transactions of Rs 2614.35 crores with MACEL, fraudulent understatement of loans of Rs 474 crores, and evergreening of loans through structured circulation of funds. They did not comply with SA 200, SA 240, SA 250, SA 315, SA 330, Section 143(1), 143(12) & 179(3) of the Act, and CARO.

6. Interest Income Recognition:
The auditors failed to exercise professional skepticism and judgment while auditing interest income of Rs 75.58 crores from MACEL, which was not recognized in MACEL's financial statements. This resulted in overstatement of revenue and profit, violating SA 200, SA 240, SA 315, SA 330, and Section 143(12) of the Act.

7. Diversion of Funds:
The auditors failed to report the fraudulent diversion of funds of Rs 507.05 crores to GVIL and Rs 1743.42 crores to TRRDPL. They did not perform adequate audit procedures and failed to report non-compliance with Ind AS 109, Section 143(3)(e), 143(12) of the Act, and CARO.

8. Internal Financial Control:
The auditors falsely reported that TDL had adequate Internal Financial Controls (IFC) despite the complete absence of the same. They did not perform any test of control with reference to the use of cheques leaves, management override of control, and authorization of transactions, violating Section 143(1)(i) of the Act.

9. Compliance with Laws and Regulations:
The auditors failed to ensure compliance with Section 134(1) of the Act, SA 260, SA 265, SA 500, SA 505, SA 550, and SA 700. They did not obtain sufficient appropriate audit evidence, failed to communicate with Those Charged With Governance (TCWG), and did not report material misstatements and non-compliances.

Penalty & Sanctions:
NFRA imposed a monetary penalty of Rs One crore on M/s Sundaresha & Associates and debarred them for two years from being appointed as auditors. CA C. Ramesh was fined Rs Five Lakhs and debarred for five years from undertaking any audit in respect of financial statements or internal audit of any company or body corporate. This order will become effective after 30 days from issuance.

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