J U D G M E N T

Per: Justice Rakesh Kumar Jain:

This appeal is directed against the order dated 12.04.2023 passed by the National Financial Reporting Authority (in short ‘NFRA’) by which the Appellant who is a CA, having ICAI Membership No. 240379, member of the Engagement Team for the statutory audit of Coffee Day Global Limited (in short ‘Company’) for the Financial Year 2018-19 has been held guilty of professional mis-conduct under Section 132(4) of the Companies Act, 2013 (in short ‘Act’) r/w Section 22 and clauses 5,6,7,8 & 9 of Part 1 of the second schedule of the Institute of Chartered Accountants of India Act (in short ‘CA Act’) and has been saddled with the penalty of Rs. 5 Lac and further debarred for a period of five 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 the Company or body corporate.

2. In brief, NFRA initiated investigations into the professional conduct of the statutory auditors under Section 132(4) of the Act, after receiving the report of investigation by the Securities and Exchange Board of India (‘SEBI’), shared in April, 2022 regarding diversion of funds worth Rs. 3,535 Crores from seven subsidiary companies of Coffee Day Enterprises Limited (‘CDEL’), a listed company, to Mysore Amalgamated Coffee Estate Limited (‘MACEL’), an entity owned and controlled by the promoters of CDEL.

3. The Statutory Auditors, individuals and firm of Chartered Accountants, are appointed by the members of companies as per provisions of Section 139 of the Act. The Statutory Auditors, including the Engagement Partners (EP) and the Engagement Team which conduct the audit are bound by the duties and responsibilities prescribed in the Act, Rules, the Standards on Auditing (‘SA’) including the Standards on Quality Control (‘SQC’) and the Code of Ethics, the violation of which constitutes professional or other mis-conduct and is punishable with penalty prescribed under Section 132(4) (c) of the Act.

4. The NFRA is a Statutory Authority set up under Section 132 of the Act to monitor implementation and enforce compliance of the auditing and accounting standards and to watch the quality of service of the professional and ensure compliance with such standards.

5. The Investigation of NFRA, inter alia, revealed that the Company Auditors for the financial year 2018-19 failed to meet the relevant requirements of the standards on auditing (SA) and provisions of the Act and also demonstrated a serious lack of competence, failed to evaluate their potential conflict of interest and failed to maintain their independence from the Company by having audit and non-audit relationships with a large number of Coffee Day Group Companies and the promoters’ family members, made an attempt to deceive NFRA by adding more documents to as well as altering the documents in their audit file which amounted to tempering with the audit file, failed to exercise professional judgment & skepticism during audit of the transactions of Rs. 6,958.91 Cr. entered fraudulently with MACEL which were also not disclosed in the related party disclosers in their entirety, failed to report understatement of loan by Rs. 222.50 Cr. fraudulently given to MACEL and ever greening of loans through structured circulation of funds among group companies, failed to report fraudulent diversion of Rs. 130.55 Cr. to a related party M/s Classic Coffee Curing Works, performed audit in a perfunctory manner resulting in non- reporting of misstatement of Rs. 132.37 Cr. in the consolidated financial statements, failed to perform appropriate audit procedure to indentify misstatement of Rs. 69.77 Cr. in related party disclosure relating to purchase of coffee beans from MACEL and thus total material and pervasive misstatements amounted to Rs. 7514.10 Cr. and in spite of that falsely reported that the financial statements of Company for the financial year 2018-19 gave a tr