NFRA Fines & Debars Audit Firm for not Reporting Auditee as Shell Company for Fund Diversion

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Case Details: Sundaresha & Associates, In re, – [2023] 151 taxmann.com 14 (NFRA)

Judiciary and Counsel Details

Dr Ajay Bhushan Prasad Pandey, Chairperson, Dr Praveen Kumar Tiwari & Smita Jhingran Member

Facts of the Case

In the instant case, the SEBI investigation revealed that the auditors of a company (i.e. GVIL) for FY 2019-20, failed to report the misstatement of Rs 325 crore in a statement of cash flow and the total misstatements in the financial statements of the company amounted to Rs 1,776.16 crore.

The case pertains to the diversion of funds worth Rs. 3,535 crore from seven subsidiary companies of Coffee Day Enterprises Limited (CDEL) to Mysore Amalgamated Coffee Estate Ltd. (MACEL), an entity owned and controlled by the promoters of CDEL. Giri Vidhyuth (India) Ltd. (GVIL) is one of the subsidiaries of CDEL.

It was found that the auditors failed to perform sufficient appropriate audit procedures while auditing related party balances, resulting in their failure to detect and report an understatement of related party loans by Rs 350 crore.

Further, the auditors failed to comprehend that the company was a shell company used by the promoters for financial manoeuvres.

NFRA Held

The NFRA noted that expressing a Disclaimer of opinion on a particular aspect does not relieve the auditor of his responsibility to report other material misstatements that would have required a modification of the audit opinion including the fact that the auditee was a shell company used by promoters for diversion of funds.

Further, it was also observed that the Standards on Auditing do not free an auditor from reporting all other misstatements once a disclaimer of opinion on a particular aspect is given.

Consequently, the NFRA imposed a monetary penalty of Rs. 1 Crore upon the Auditors. In addition, they were debarred for a period of two years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.

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