AI Drafter 
TaxTMI 
TaxTMI 
2024 (8) TMI 1111
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....lowing sections: A. Executive Summary B. Introduction & Background C. Major lapses in the Audit of Consolidated Financial Statements ('CFS' hereafter) D. Major lapse in the Audit of Standalone Financial Statements ('SFS' hereafter) E. Violations of SQC 1 and SA 230 - Lapses in Audit Documentation F. Omission and Commission by the Audit Firm G. Finding on the Articles of Charges of Professional Misconduct by the Auditors H. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. NFRA suo moto examined the professional conduct of the statutory auditors of Coffee Day Enterprises Limited under Section 132(4) of the Companies Act 2013 ('the Act' hereafter), pursuant to the Securities and Exchange Board of India ('SEBI' hereafter) investigation report regarding diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited ('CDEL' hereafter), to Mysore Amalgamated Coffee Estate Limited ('MACEL' hereafter), an entity owned and controlled by the promoters of CDEL. Coffee Day Enterprises Limited is listed on stock exchanges. A Sh....
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.... • CFS contained a number of false and erroneous account balances portraying lower amount of receivables; this was achieved through book entries of repayments of intra group loans through cheques received but not encashed as of balance sheet date. The Auditors did not exercise professional judgement & professional skepticism during the audit of loans of Rs 2,549 crores to promoter-controlled entity. These loans were fraudulently understated in the financial statements of CDEL by Rs 1,706 crores, which was orchestrated through passing book entries as repayment by cheques and evergreening via structured circulation of funds within CDEL group companies. The Auditors did not identify and report this huge misrepresentation of financial position. (Section C-I of this Order). • The Firm and the EP failed to exercise professional judgement & skepticism during the audit of the suspected fraudulent diversion of Rs 130.55 crores by CDEL's subsidiary to an individual (Section C- II of this Order). • The Firm, EP and the EQCR failed to evaluate fraud risk in recognition of interest income of Rs 75 crores on loans granted by Tanglin Developments Ltd (a subsidi....
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...., the professional or other misconduct, and impose a penalty for proven professional or other misconduct, of the individual Chartered Accountants or firms of Chartered Accountants. 7. The Statutory Auditors, whether individuals Chartered Accountants or firms of Chartered Accountants, are appointed by the members of companies as per the provision of section 139 of the Act. The Statutory Auditors, including the EP and the Engagement Team 'ET' hereafter) that conduct the Audit are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the Standards on Auditing 'SA' hereafter), including the Standards on Quality Control ('SQC' hereafter) and the Code of Ethics, the violation of which constitutes professional or other misconduct, and is punishable with penalty prescribed under section 132(4)(c) of the Act. 8. NFRA started its scrutiny, on receipt of information from SEBI in April 2022 about its investigation regarding the diversion of funds worth Rs 3,535 crores (as on 31-07-2019) from seven subsidiary companies of CDEL to MACEL, an entity owned and controlled by the promoters of CDEL. 9. Late V. G. Siddhartha ('VGS' h....
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....ving adequate bank balance or approved bank credit limit. These cheques were later shown as cleared in the next financial year, i.e., FY 2019-20 by evergreening loans/advances by CDEL's subsidiaries through orchestrated circulation of funds among related parties). 11. The linkage of the entities described in Table I is depicted in the Chart I below: Chart- I 12. On examination of the Consolidated Financial Statements of CDEL and MACEL, it transpired that except for CDGL, MACEL did not have any business transactions with 6 of the 7 subsidiary companies. MACEL was used as a conduit to transfer funds from CDEL's subsidiaries to the personal accounts of VGS, his relatives and entities controlled by him and/or his family members, as loans and advances that were never returned to CDEL/MACEL. 13. The modus operandi of the alleged diversion of funds discovered by the SEBI during its investigation was that "VGS used to ask (he Authorized Signatories to sign a bunch of cheques which were kept in his possession and used them as and when required'. Such pre signed blank cheques of bank accounts of various Coffee Day Group companies were used for the diversion of funds. ....
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....e 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. 17. The Auditors were initially allowed 30 days to submit a reply to SCN. On 02.02.2024 they sought an extension till 29^th March 2024, which was allowed. The Auditors submitted their replies on 29^th March 2024. On 05.04.2024 an opportunity of Personal Hearing (PH) was also provided to the Auditors and PH was fixed on 17.05.2024. On their request of postponement, the PH was rescheduled on 30.05.2024 for the EP; and on 31.05.2024 for the Firm and the EQCR. The EP attended PH on 30.05.2024*, and the Firm and the EQCR attended PH on 31.05.2024 along with their legal representatives Advocate Ajay Bahl and others of M/s AZB & Partners. They reiterated their written submissions during the PHs and sought 15 days to submit additional replies which was allowed. The Firm, the EP and the EQCR submitted additional replies on 14.06.2024. We have carefully considered the written replies and oral submissions made during the PHs. Accordingly, this Order is based on the examination of the facts of the matter, charg....
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....yment of loans/advances by subsidiaries subsequent to the Balance Sheet date and funds for repayments were arranged through circular rotation of funds within the group entities, which the Principal Auditors failed to note despite the Auditors themselves having identified outstanding balances with MACEL, (91.75% of whose shares are held by the father of VGS) as an area of significant related party transactions, but closing their analysis based on management explanations and without applying professional skepticism. Further, in the case of some of these loans by the subsidiaries a false and erroneous position of the outstanding balances was reflected in the balance sheet by passing mere book entries as repayment by the cheques though the cheques were not encashed at the reporting date. I. Lapses in the audit of fraudulent diversion of funds to MACEL, understatement of such diverted funds and evergreening of loans through circulation of funds 20. The Firm, the EP and the EQCR were charged with violation of section 143(2)^6, 143(9)^7, 143(2)^8 of the Act, the Companies (Auditor's Report) Order 2016 ('CARO' hereafter), SA 200^9, SA 240^10 , SA 315^11, SA 330^12 and SA ....
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.... rendering of services 64.82 3.46 Balance of Loan received (Liability) 11.68 0.00 51 D 11 Advance given for purchase of land to Smt. Vasanthi He de Mother of VGS 275.00 275.00 # This pertains to advance given by Coffee Day Global Ltd (CDGL) to MACEL. *This pertains to loans given by Tanglin Retail Reality Development Private Ltd (TRRDPL) to MACEL. • It can be observed from the above data that loans/advances of Rs 2,226 crores given to MACEL in 2018-19 were almost three times of the loans/advance given in the previous year i.e., 2017-18 (Rs 724 crores), and advance towards purchase of coffee beans (Rs 394 crores) was 5.62 times of its annual reported purchases (Rs 70 crores) from MACEL. Therefore, these transactions were unusual and lacked business rationale. • Further, CDEL borrowed Rs 2,960 crores from Standard Chartered Bank, through its step down subsidiary TRRDPL, which was a 100% subsidiary of Tanglin Developments Limited. 23. On being questioned about these advances to group entities, the EP has stated that they were the Auditors of CDEL and not for the subsidiaries, and they relied upon the a....
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.... light of this overarching requirement of the Act. The CFS of CDEL had substantial amount of Rs 842 crores as loans given by its subsidiaries to MACEL and borrowings from banks/NBFCs of Rs 7,060 crores. The Audit report on CFS says that the principal auditor did not audit the financial statements of forty subsidiaries whose financial statements reflect total assets of Rs. 12, 140 crores as at March 31, 2019, total revenues of Rs. 4,091 crores and net cash inflows amounting to Rs. 591 crores for the year ended on that date, as considered in the consolidated financial statements. Considering the total assets and revenue of CFS, significant account balances in the CFS were arising from the financial information of the components audited by the Other Auditors. This fact, coupled with Group Entity Structure having many subsidiaries, with large scale intra group lending activities is nothing but special circumstances to make it essential for the Principal Auditor to. visit the component and/or to examine the books of account and other records of the said components. Apart from these factors, the following evidence was also available to the Principal Auditors that indicates misappropriati....
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....tion of the Components audited by the Other Auditor. This para of SA 600 goes on to require the auditor to consider performing additional procedures as set out in this SA regarding the components audited by other auditor resulting in the principal auditor having significant participation in such audit. In view of the fact that the substantial percentage of total assets and total revenue were arising from the financial statements audited by the Other Auditors, the Risk of Material Misstatements ('RoMM' hereafter) arising from those financial statements were significantly material and, therefore, the Principal Auditor must have performed additional procedures to obtain sufficient appropriate audit evidence to enable him to issue the audit opinion on the CFS. 27. Had the above factors been taken into consideration, the EP could not have relied on the work of the component auditors without performing rigorous procedures to confirm the ultimate use of the funds of CDEL, the listed entity. Hence the reliance of the Auditors on SA 600 is misplaced and defies professional skepticism. 28. We now look at various other aspects of these loans. These are primarily the end use, ....
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....borrowed by TRRDPL from Standard Chartered Bank ('SCB' hereafter). TRRDPL is a 100% subsidiary of TDL which in turn is a 100% subsidiary of the auditee company, CDEL. The EP stated that he relied on management' s explanation regarding utilization of these funds. The facts of the matter are detailed below. CDEL and its promoters had 2,80,56,012 shares and 53,04,217 shares, respectively, of a listed company viz., Mindtree Ltd. All these shares were pledged against the group/promoter's borrowings. CDEL and its promoters agreed to sell these shares @ Rs 980 per share to a buyer The value of shares held by CDEL and promoters was to Rs 2,749.49 crores and Rs 519.81 crores respectively. In order to free these shares from the pledge, TRRDPL borrowed Rs 2,960 crores from SCB to repay to the lenders with whom such shares were pledged. As per the EP, out of this amount of Rs 2,960 crores, a sum of Rs 2,172 crores was lent to CDEL and Rs 789 crores was on-lent to MACEL. The EP's reply itself indicates a diversion of fund as Rs 789 crores was transferred to the promoters owned company MACEL against Rs 519.81 crores which was the actual value of shares held by the pr....
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....Sundaresha & Associates. The EP did not perform any procedures for compliance of paragraph 8 of SA 500 (Audit Evidence), that requires evaluation of the competence, capabilities and objectivity of the management expert. The EP did not provide a specific reply to this charge but mentioned that the ET assessed the recoverability risk associated with transactions entered into between CDEL's subsidiaries and MACEL; and component auditors did not raise any issue on this matter. This reply is not accepted as there is no evidence in the Audit File regarding Auditor's evaluation of the appropriateness of the methodology used for computation of the net worth of VGS by M/S Sundaresha & Associates; and evaluation of the competence, capabilities and objectivity of the management expert. 36. Table 2 shows an advance of Rs 394.21 crores given by CDGL (a subsidiary of CDEL) to MACEL whereas the actual supply of goods was only Rs 70.90 crores. On being questioned about the purpose of an advance of such a large amount to a related party, the EP replied that the said advance was given for purchase of coffee beans and there was nothing to demonstrate that transaction was unusual. We note t....
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....testing of the transactions and scrutiny of the work of the other auditors, and by performing additional procedures as required by SA 600. It is evident that such an examination was not done in this case as the Auditors failed to notice and report the web of circular transactions designed to siphon funds out of the listed company. Having knowledge of the business of the group and having identified these loans and advances as an area of risk, the EP was required to holistically assess the financial statements of the group and to sufficiently co-ordinate audit work with other auditors to ensure that the transactions and balances represent genuine business transactions in pursuance of the stated objectives of the entity. Routing funds under different pretexts, such as loans, advances for supply etc., to group entities without adequate justification and rationale should have made the Principal Auditors more vigilant and professionally skeptical. Para 19 of SA 600 requires that there should be sufficient liaison between principal auditor and other auditors including the issue of written communication to the other auditors. 38. The EQCR was also asked to show cause on the same issues ....
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....indly relied on management explanation. All recoveries within the group were actually through evergreening of loans as detailed in NFRA Orders no NF-23/14/2022 dated 13.04.2023, NF-23/14/2022 dated 12.04.2023, and NF-23/14/2022 dated 26.04.2023. in the cases of MACEL, CDGL and TDL. It is important to note that it has been recorded in the Audit File that bank statements of CDGL and TDL had been verified^22. Any verification of bank statements should have clearly evidenced the circular flow of funds and the evergreening arrangements within the group. This matter of evergreening is further discussed in paragraph no. 45 to 47 of this Order. 42. The CDEL did not disclose Related Party Transactions between - a) MACEL and CDGL of Rs 266.54 crores*, b) MACEL and CDH&RPL of Rs 150 crores*, c) MACEL and CDTL Rs 250.02 crores; d) MACEL and GVIL of Rs 200 crores. The Auditor did not report this misstatement in the CFS. The EP has admitted this mistake. Evidently, a diligent auditor would not miss out such high quantum RPTs, especially when exposure of the Auditee company to MACEL was marked as a significant area for Audit. 43. Further, there w....
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....able-3 Bank Statement of CDEL with Karnataka Bank (Rs in crores Date Name of Company Withdrawal Deposits 24.12.2018 TDL 50 TDL 50 27.12.2018 TDL 50 TDL 5 TDL 50 TDL 5 08.022019 TDL 50 11.02.2019 TDL 50 13.02.2019 TDL 50 TDL 50 It can be observed from Table no. 3 that on 24.12.2018, Rs 50 crores received from TDL was returned to TDL; on 27.12.2018 Rs 50 crores & Rs 5 crores received from TDL were returned to TDL; Rs 50 crores received from TDL on 08.02.2019 was returned on 11.02.2019 to TDL; on 13.02.2019 Rs 50 crores received from TDL was returned to TDL. In respect of evergreening of loans as was apparent in CDGL, TDL and TRRDPL, the EP replied that he was not aware of alleged evergreening of loans by these companies; the Firm was not the auditor of these companies and that the auditors of these companies did not highlight any such issues. This reply is not accepted as the ET has verified ....
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....er similar examples also. 48. The above mentioned evergreening of loans through structured circulation of funds between CDGL and MACEL had been done to understate the amounts of advance given by CDGL to MACEL by Rs 222.50 crores as on 31.03.2019. These cheques, issued in March 2019 by MACEL to CDGL, remained uncleared and were unreconciled items of Bank Reconciliation Statements of CDGL on 31.03.2019. CDGL again provided funds to MACEL for clearance of these cheques in FY 2019-20. The Auditors failed to detect the fraud committed through evergreening during their verification of the subsequent clearance of cheques in CDGL's bank statements. Accordingly, the auditors also failed to raise alarms about the possibility of the similar frauds in other subsidiaries of CDEL. Further, it is relevant to mention that as per CFS of CDEL, there was unusually high amount of cash and cash equivalent account balance (Rs 1453.79 crores), which was almost 20% of the total borrowing of Rs 7,060.35 crores. This represents mostly the amount of uncashed cheques used in evergreening and was additional red flag to verify bank reconciliation statements of subsidiaries, which was not done properly. T....
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....circular movement of funds which is apparent and evident from the bank statements available with the Auditors, the immediate reliance on management explanation regarding these transactions, the recoverability analysis based on the net worth of the chairman of the group,- all of these point to the failure on the part of the Auditors of CDEL, to exercise professional skepticism and judgement and perform appropriate audit procedure to detect and report fraudulent diversion of funds. The facts enumerated clearly show that the Independent Auditor's Report falsely reported that financial statements of CDEL gave a true and fair view. It is clear that they knew that funds were being diverted to MACEL, an entity owned by promoters of CDEL and the fraud being committed in the company. It is also evident from above analysis that despite being aware that an offence of fraud had been committed in the company, they failed to report the same to the Central Government under Section 143 (12) of the Act. On the contrary, they reported ^25 that no material fraud by or on the company had been noticed or reported during the course of audit. Thus, the EP and the Firm violated section 143 (12) of the....
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....er than this capital advance, its balance sheet size would be Rs 1.81 crores. It becomes clear that CCCW was a partnership firm with a small capital. Money from a subsidiary of a listed company was routed through this partnership firm to an individual. But the Auditors state that the money was advanced to MACEL. Thus, the Auditors conclusion was incorrect and false, as money was not given to MACEL but paid to 'Kumar Hegde H C'. As such it is misleading on the part of the Auditor to say that the money was advanced to MACEL. • The Auditor did not check the bank statement of CDGL to verify the management's explanation that Rs 130.55 crores was recovered by CDGL from CCC W. Being principal auditor of the holding company, the Auditor had a right of access to these bank statements of CDGL as per permitted under section 143(1) of the Act. However, he did not do so. We have obtained and reviewed that bank statement of CDGL which shows that CDGL provided additional funds to MACEL, which were rotated seven times among CDGL, MACEL, CCC W and Kumar Hegde to show repayment of this amount. The Bank statement of CDGL and MACEL shows that on 09.05.2019, CDGL paid Rs 20 cro....
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....erest income of Rs 75 crores, thus violating SA 240, and SA 315. TDL is a subsidiary of the auditee company CDEL. During the year TDL recognized an interest income of Rs 75 crore from MACEL without any underlying agreement for the same. On the other hand, MACEL did not account for this corresponding interest expenditure. 58. The Auditors selected the Interest income of TDL for risk assessment^27. However, the Audit File does not evidence procedures to assess the risk. After earmarking this item for risk assessment, the Standards- specifically, paragraph 26 of SA 240, requires the Auditors to presume the risk of fraud in revenue recognition and as per SA 315, they were required to perform risk assessment procedures. 59. The EP's response again is that the Firm was not the auditor of MACEL and thus was not aware that MACEL had not recognized interest expense; that the interest income in question was recognized in the profit & loss account and cash flow statement of TDL; that the work paper referred by NFRA has only listed various streams of revenues but does not mean that the ET presumed fraud risk in each of those listed income stream. 60. This reply is not acceptable a....
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....ies of such subsidiaries. Details are given hereafter: • Section 185 of the Companies Act provides that loans, guarantees and securities can be provided to related parties if a special resolution is passed by the company in general meeting and the loans are utilised by the borrowing company_ for its principal business activities. • As per Related Party Disclosures in note no. 33 of its SFS, CDEL had given the following amount of loans/guarantee (Table 5) to its wholly owned subsidiaries. Table - 5 Rs in crores Name of subsidiary to whom CDEL provided loans/ guarantee Amount of loans given Amount of guarantees provided Tanglin Developments Ltd (TDL) 734.46 1,015.00 Coffee Day Kabini Resorts Private Limited (CDKRPL) 1 10,67 0.00 Coffee Day Hotels and Resorts Private Limited (CDH&RPL) 210.60 0.00 Total 1,055.73 1,015.00 62. The Firm, the EP, and the EQCR were also charged with failure to exercise professional skepticism to evaluate fraud risk in respect of loan of Rs 734.46 crores given by CDEL to TDL during the year as per Note 33 of SFS as mentioned above. It may be noted that TDL had given a total amount o....
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....the Audit File does not evidence his review of this matter. 65. The Auditors had reported in the Audit Report (CARO) that the Company had complied with the provisions of Section 185 of the Act with respect to loans advanced and investments made and securities and guarantees given. Whereas in the Audit File^29, the EP and EQCR recorded that the loans taken by the WOSs (Wholly Owned Subsidiaries) were tar general corporate purposes; and the Company was exempt from the provisions of Section 185. Therefore, it is clear that: - • The Auditors did not verify whether CDEL had passed a special resolution in the general meeting before giving loans/advances as stated above. • The Auditors did not verify whether subsidiary companies had used proceeds of loans for their principal business activities. • The Audit File does not evidence audit procedures performed in respect of the guarantee provided to TDL and loan given to CDKRPL. 66. The EP in his reply stated that it was his good faith understanding (based on management explanation and representation letter) that each of these loans/guarantees were for respective business activities of TDL, CDKRPL ....
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....t evaluation by the auditor; ^I Again, the EP stated that the purpose of the loan was for general corporate purpose, which is not accepted as the EP did not verify the end use of the loan proceeds. d) Loan of Rs 1/0.67 crores given to CDKRPL: The EP stated that against a loan of Rs 1 10*.67 crores, CDKRPL had acquired land of Rs 10 crores and returned the balance amount during same year. The giving of a loan to a related party has certain requirements under the law. The fact that a major amount is repaid does not absolve the auditor from doing the necessary audit procedures required under the law. The asset purchased is less than of the loan amount and the end use of loan proceeds was not verified. As such the reply of the Auditor is not accepted. 67. The EQCR had also been charged with the above violations as his review suffered from the same infirmities as those that the EP was charged with. The replies of the EQCR are summarised below- (a) He stated that generally compliance matters do not require a significant judgement of the ET. This reply is not accepted as compliance matters also requires significant judgement as happened in this case and discussed in p....
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....n by the engagement team and other authorized parties as necessary to properly discharge their responsibilities. As per paragraph 8 of SA 230 the Auditors were required to 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 and regulatory requirements; (b) The results of the audit procedures performed, and the audit evidence obtained; and (c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions. As per paragraph 9 of SA 230, they were required to document in the Audit File, infer alia, the record of name of person & date of performing audit procedures, name of person performing review and date & extent of review. Paragraph 13 of SA 230 requires that if, in exceptional circumstances, the auditor performs new or additional audit procedures or draws new conclusions after the date of the auditor's report, the auditor shall document: (a) The circumstances encountered; ....
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....ion of the engagement team member & date of modifying the AWPs is not mentioned in modified AWPs. This is in violation of SA 230, as quoted above. 72. The Firm and the EP did not dispute the fact of modifications in AWPs, but denied the charge. The Firm stated that a statutory audit is an iterative and live process, involving among other things, an ongoing flow of draft/final information to and from the audit client, onsite and offsite discussion]reviews between the EP and the ET and addressing of comments by the ET. To facilitate this process, the electronic audit workflow application used in this audit allowed the ET to exercise a degree of discretion and judgement in terms of timing and extent of review and work paper finalization and filing, subject to the principles that (a) sufficient appropriate audit evidence is obtained before the audit sign-off date, and (b) the EP takes full responsibility for that occurring. The Firm replied that it has established policies and procedures designed to maintain the confidentiality, safe custody, integrity, accessibility and retrievability of engagement documentation as required under paragraph 77 and 79 of SQC l . 73. We have con....
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....contended that the requirement of recording when and by whom changes to audit file were made is provided in paragraph 13 of SA 230 which applies to matters arising after the date of audit report i.e. (i) the auditor performs new audit procedures; or (ii) the auditor performs additional audit procedures; or (c) the auditor draws new conclusions, in each case, after the date of the auditor's report. According to the EP, in the instant case, there were no exceptional circumstances and no modifications were made to record new audit procedures, additional audit procedures or new conclusions in the Pre-Archival Period. He contended that alleged modifications done in the audit file were either done during audit period (in which there were no restriction); or during pre-archival period during which modifications permitted by paragraph A22 of SA 230 were done. 76. It is noted that only administrative changes are permitted by paragraph A22 of SA 230 such as deleting or discarding superseded documents; sorting, collating and cross-referencing working papers; signing off on completion checklists relating to the file assembly process; and documenting audit evidence that the auditor has o....
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.... of fraud risk during audit which was signed off by preparer and reviewers between 24.04.2019 to 23.05.2019 but the document property shows creation date as 03.06.2019. 78. The EP could not demonstrate what kind of sorting/collating/cross-referencing activities were done and why these documents were saved with a different name after I I to 19 days from the date of reviewers' sign off; and after date of audit report. Such practice of saving AWPs with different names leaves scope for signing off an incomplete AWP and also replacing an AWP with new one even after signing off date, and thus shows weakness in the Firm's procedures and practices. 79. The above proves the Firm's and the EP's violation of paragraphs 77 & 79 of SQC; and paragraphs 8, 9 & 13 of SA 230. F. OMISSIONS AND COMMISSIONS BY THE AUDIT FIRM 80. M/S BSR & Associates LLP was appointed as statutory auditor of CDEL vide letter dated 01.10.2018. The powers and duties of the statutory auditors have been prescribed in Section 143 of the Act. The duties include making audit report to the members of the company after taking into account the provisions of the Act, the accounting and auditing standards (subs....
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....riptive and require that an engagement partner exercises professional judgment and discretion in the execution of any audit. The Firm also provided a broad overview of the tools and safeguards made available by the Firm to the audit team; and stated that an appropriate degree of diligence, professional judgement, and skepticism was also expected from the EP. Where applicable, areas involving significant judgements were also to be discussed with and considered by the EQCR. The Firm further stated that its processes for EP and EQCR assignment, ensured that an appropriately experienced Engagement Partner and EQCR were allocated. 82. We do not agree with any of the contentions of the Firm in this regard. M/S BSR & Associates LLP is the legal entity appointed under Section 139 of the Act as the auditor of CDEL. Hence the report issued by the legal entity, signed by EP on behalf of the legal entity, remains the primary responsibility of the legal entity issuing the report under the Act. We have proved in the previous sections of this Order that the audit report issued by the Firm ws BSR & Associates LLP lacked adequate basis. Hence, apart from the individuals assigned by the ....
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....ed accountants and the firm of chartered accountants emanates from this basic premise. It is evident from the above discussion that there is not adequate evidence of effective supervision and oversight of this audit by M/S BSR & Associates LLP. Had the Audit Firm discharged its supervisory responsibilities timely and effectively such major lapses in the audit as discussed in the foregoing paragraphs could have been avoided. Further, in this case, the Firm's policies and procedures with respect to audit documentation have also been found to be non-compliant with SQC I and SA 230. (section E of this Order). 87. Due to these fraudulent transactions 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. Had the Auditors properly discussed the audit procedures with the component auditors in response to the identified risks, advised them accordingly, and exercised due professional skepticism throughout the audit, (as required by SA 200), they could hav....
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....nd firm-level quality matrices. Engagement level metrics provide information about a particular engagement of the firm, and firm-level metrics address an audit firm's overall strategy in complementing the engagement-level matrices. The study covers all major jurisdictions, including India, in the world and top tier Audit Firms. The study reveals that many metrics can be applied at both the engagement and firm level and some metrics may only be reported at either the engagement level or the firm level. (Refer to Page 5 of the report). The report lists key Audit Quality Indicators reported by 9 leading audit firms (refer to page 14 of the report). This Audit Quality Indicators make it clear that in, actual practice across the world, the Audit Firm has an equally important role as that of EP to ensure overall quality in any audit undertaken by the Firm. Similar misconducts have been viewed seriously at international level as mentioned below: 90. The PCAOB^35 in matters of diversion of funds to related parties on the pretext of purchase of material, observed that "The transactions-between one of the Issuer 's wholly-owned Chinese subsidiaries ("Subsidiary") and a Chinese ....
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....ate audit evidence; and did not prepare audit documentation that was sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of the audit procedures performed in relation to the BT Italy Adjustments generally. 93. FRC in the matter of KPMG Audit Plc and Mr Turner^39 imposed total financial sanction of GBP2,450,000 on KPMG Audit Plc and GBP70,000 on Me Turner for deficiencies in audit of Caril lion like they failed to exercise an adequate degree of professional skepticism, failed to consider and respond to the risk of fraud, failed to obtain sufficient appropriate audit evidence regarding the accounting treatment adopted for receiving a further sum as a contribution to 'exit fees' payable to the former outsourcing provider, from a new service provider. 94. FRC in the matter of KPMG LLP and ADRIAN WICOX^40 imposed financial sanction of GBP1,462,500 and GBP48,750 on the firm and the Partner respectively for deficiencies in audit of M&C Saatchi plc. like failure to audit with sufficient professional skepticism the release of WIP credits (a type of client payment on account), which increased rev....
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....r its failure to establish, implement and communicate appropriate quality control policies and procedures to provide the firm with reasonable assurance that the work performed by engagement personnel complied with applicable professional standards, regulatory requirements, and the firm's standards of quality. G. FINDINGS ON ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT BY THE AUDITORS 99. As discussed, the Finn, the EP and the EQCR have made a series of serious departures from the Standards and the Law, in conduct of the audit of CDEL for FY 2018-19. Based on the above discussion, it is proved that they had failed to report fraudulent diversion of funds to related parties and failed to exercise due diligence in performance of audit. Based on the foregoing discussion and analysis, we conclude that they 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' hereafter) as amended from time to time, and as detailed below: a) The Firm and the EP committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the CA Act....
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....nd non-compliances made by the Company in the financial statements, as explained in the Section - C, D, E and F above. e) The Firm and the EP committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the CA Act, which states that a chartered accountant in practice is guilty of professional misconduct when he "fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances". This charge is proved since the Firm and the EP failed to conduct the audit in accordance with the SAS and related Quality Control Standards and Code of Ethics as explained in Section - C, D, E and F above. H. PENALTY & SANCTIONS 100. 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. 101. The foregoing discussion in this Order is replete with the instances of the lapses in Audit, the infraction of the law and non-adherence to the standards of Audit, Quality Control Stan....
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....ing ten years as may be determined by the National Financial Reporting Authority. 104. As per information furnished by M/S BSR & Associates LLP vide letter dated 28.03.2023 and email dated 25.05.2024, the statutory audit fees of CDEL for 2018-19 was Rs lakhs and total professional fees of the Audit Firm during FY 2018-19 was Rs . Crores. It is also noted that the Firm is part of KPMG international network. CA Aravind Maiya and CA Amit Somani earned a total professional fee of Rs lakhs and lakhs respectively during FY 2018-19. 105. 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 imposition of monetary penalty of Rs ten crores upon M/S BSR & Associates LLP; Rs fifty lakhs upon CA Aravind Maiya; and Rs twenty five lakhs upon CA Amit Somani. In addition, CA Aravind Maiya is debarred for a period of ten years and CA Amit Somani 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....