In Short:
The National Financial Reporting Authority (NFRA) fined audit firm BSR & Associates ₹10 crore for failures in their audit of Coffee Day Enterprises Ltd. Two partners faced debarment for 10 and 5 years. The NFRA found BSR overlooked evidence of fraudulent fund diversion to unrelated entities. BSR is reviewing the order and remains committed to high standards in auditing.
New Delhi: In a significant move that has sent ripples through the auditing community, the National Financial Reporting Authority (NFRA) has slapped a colossal penalty of ₹10 crore on BSR & Associates LLP. This independent audit firm, which has ties with KPMG, has been penalized for alleged shortcomings in its audit of Coffee Day Enterprises Ltd (CDEL), the company behind the popular coffee chain CCD.
Debarred Partners
The audit watchdog didn’t stop at the penalty. They have also debarred two of BSR’s partners—one facing a ban for a decade and the other for five years.
The auditors allegedly failed to report a fraudulent diversion of funds, despite having clear evidence that public money was funneled into a promoter’s entity with no legitimate business connection to the listed company.
According to the NFRA order, “The auditors did not report (allegedly) fraudulent diversion of funds despite having adequate evidence that public money was moved to a promoters’ entity which had no business connection with the listed company.”
Reviewing Order
In response, BSR & Associates has expressed disappointment regarding the ruling on the CDEL audit for the financial year ending March 31, 2019. The firm is currently evaluating its next steps, stating, “BSR remains committed to the highest standards of professionalism, quality, and integrity.”
At the time of publication, attempts to reach out to Coffee Day Enterprises for comments went unanswered.
BSR & Associates expressed disappointment with this order for the CDEL audit for the year ended March 31, 2019. The firm is currently assessing next steps and cannot comment further at this stage.
The NFRA’s investigations revealed that the auditors effectively turned a blind eye to various issues. When pressed for explanations, they cited standard auditing provisions, relying on the work of subsidiary auditors, despite the fact that CDEL’s investments in these subsidiaries amounted to an astonishing ₹1,937 crores, which is a staggering 89% of its standalone balance sheet.
Significant Area of Audit
The NFRA highlighted that the exposure to promoter entities was a critical factor in the audit. They noted, “The provision of loans by the listed company to a related party under the guise of an advance for purchases, with the sum being over five times the value of the actual purchases, was never questioned by the auditor for its business rationale.”
Additionally, the regulator imposed penalties of ₹50 lakh and ₹25 lakh on the respective partners for significant audit deficiencies, neglect of responsibility, and issuing misleading audit reports.
This scrutiny stems from a report by the Securities and Exchange Board of India (Sebi), which investigated the alleged diversion of ₹3,535 crores from seven subsidiary companies of Coffee Day Enterprises to Mysore Amalgamated Coffee Estate Ltd, an entity controlled by CDEL’s promoters.
While there exists a contractual relationship between KPMG and BSR for sharing methodologies and training, BSR operates as an independent audit firm. The NFRA is committed to enhancing the quality of statutory company audits through investigations, inspections, and quality reviews. Since 2018, they have issued more than 80 orders to debar errant auditors.
