India’s National Financial Reporting Authority Fines BSR & Associates INR 100 Million for Audit Lapses

Posted by Written by Archana Rao Reading Time: 5 minutes

India’s National Financial Reporting Authority (NFRA) has imposed an INR 100 million fine on BSR & Associates, an audit firm reportedly affiliated with KPMG, for alleged failures in auditing Coffee Day Enterprises Ltd. (CDEL), the company behind Café Coffee Day, an Indian multinational chain of coffee houses. This is one of the largest penalties ever imposed by the NFRA.

On August 19, 2024, the National Financial Reporting Authority (NFRA) issued an order saying it had imposed a penalty fine of INR 100 million (US$1.19 million) on KPMG affiliate BSR & Associates LLP and banned two of its auditors over professional misconduct during the audit of Coffee Day Enterprises for 2018-19.

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The two partners from BSR have been barred for 10 years and 5 years, respectively, due to their alleged negligence in reporting the diversion of company funds to a promoter’s entity unrelated to the business. 

This regulatory action by the body was taken after a Securities and Exchange Board of India (SEBI) investigation, which found that INR 35.35 billion (US$421.3 million) had been diverted from Coffee Day’s subsidiaries to a promoter-controlled entity.

NFRA launches investigation against BSR auditors

NFRA initiated an investigation under Section 132(4) of the Companies Act 2013, following a Securities and Exchange Board of India (SEBI) report that uncovered a diversion of INR 35.35 billion (US$421.3 million) from Coffee Day Enterprises’ subsidiaries to Mysore Amalgamated Coffee Estate Limited (MACEL), an entity controlled by Coffee Day’s promoters. M/s BSR & Associates LLP was the auditor for the 2018-19 financial year, with CA Aravind Maiya and CA Amit Somani involved.

Section 132(4) of the Companies Act, 2013, specifies: 

(4) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall—

(a) have the power to investigate, either suo motu or on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such manner as may be prescribed into the
matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949 (38 of 1949):

Provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation under this section;

(b) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:—

  1. discovery and production of books of account and other documents, at such place and at such time as may be specified by the National Financial Reporting Authority;
  2. summoning and enforcing the attendance of persons and examining them on oath;
  3. inspection of any books, registers and other documents of any person referred to in clause (b) at any place;
  4. issuing commissions for examination of witnesses or documents;

(c) where professional or other misconduct is proved, have the power to make order for—
(A) imposing penalty of—

  1. not less than INR 100,000 (US$1,192), but which may extend to five times of the fees received, in case of individuals; and
  2. not less than INR 1 million (US$11,920), but which may extend to ten times of the fees received, in case of firms;

(B) debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority.

NFRA’s examination findings

According to the circular order issued by the NFRA, the CDEL’s Statutory Auditor for the audit of Consolidated Financial Statements and Standalone Financial Statements for FY 2018-19 failed to meet the relevant requirements of the Standards on Auditing (‘SA’ hereafter), the Standards on Quality Control, and provisions of the Companies Act and also demonstrated serious lapses and an absence of due diligence.

Revised International Standard of Audit (ISA) 600

As per reports, the NFRA is set to hold a meeting with India’s key financial regulators, including the Reserve Bank of India, SEBI, and ICAI, at the end of August 2024 to adopt the revised International Standard of Audit (ISA) 600. This move aims to improve auditor oversight and address audit failures linked to reliance on subsidiary audit reports.

ISA 600 (International Standard on Auditing 600) is a standard issued by the International Auditing and Assurance Standards Board (IAASB) that provides guidance to auditors on how to audit group financial statements. Specifically, it addresses the responsibilities of the group auditor when using the work of component auditors, who audit parts of the group financial statements (such as subsidiaries or divisions).

The standards aim to prevent malfeasance, like in the Coffee Day Enterprises case, where auditors missed fund diversions due to over-reliance on subsidiary reports.

The NFRA claims that BSR & Associates ignored critical evidence and relied too heavily on the audits of CDEL’s subsidiaries, even though those subsidiaries accounted for a significant portion of the company’s finances. The auditors also allegedly failed to question loans given by CDEL to related parties disguised as advances, which were disproportionately high compared to the purchases made.

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They were particularly negligent in assessing the INR 22.26 billion (US$265.3 million) loans to MACEL, which was controlled by Coffee Day’s promoters. The apex regulatory body has also alleged that the auditors failed to perform essential audit procedures regarding these transactions and overlooked signs of fund diversion within the group, leading to fraudulent misreporting of Coffee Day’s financial position.

Further lapses included improper evaluation of the recoverability of funds and manipulation of financial records, leading to underreporting of liabilities by INR 17.06 billion (US$203.3 million). The auditors also failed to assess fraudulent transactions involving INR 1.30 billion (US$15.4 million) from Coffee Day’s subsidiary and incorrectly reported Coffee Day’s profits due to errors in recognizing interest income.

In addition to these findings, NFRA discovered serious deficiencies in audit documentation, with unauthorized changes being made to audit work papers even after reports were signed.

Penalty imposed against BSR & Associated and the auditors

As a result, NFRA found BSR & Associates LLP and the involved auditors guilty of professional misconduct, imposing fines on the firm, CA Aravind Maiya, and CA Amit Somani. At present, the penalty of INR 100 million (US$1.19 million) imposed by the NFRA is the largest against any audit firm in the country. Additionally, CA Aravind Maiya has been barred from auditing for 10 years, while CA Amit Somani has been banned for 5 years. The two auditors have also been fined INR 5 million (US$59,600) and INR 2.5 million (US$29,800), respectively, by the NFRA. This ruling will take effect 30 days from its issuance, i.e., August 19, 2024.

According to news reports, since 2018, the NFRA has issued over 80 orders penalizing auditors for auditing lapses and other misconducts.

Meanwhile, BSR & Associates maintains that, while it shares some resources with KPMG, it operates independently. Against the NFRA ruling, the audit firm responded to a media outlet by saying it is disappointed with the ruling and is evaluating its options. 

(US$1 = INR 83.87)

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