Coffee Day zooms 4% after Rs 1-cr penalty on auditors in funds diversion case

Shares of Coffee Day Enterprises Limited (CDEL) rallied over 4 percent to Rs 43.5 in early trade on August 22 after the National Financial Reporting Authority (NFRA) levied a Rs 1.10-crore fine on auditors in a case about diversion of funds from a subsidiary of the company.

The NFRA slapped the penalty on three entities, including two individual auditors, for lapses in the auditing of Coffee Day subsidiary Tanglin Developments Ltd (TDL). The penalty includes a Rs 1 crore levy on audit firm Sundaresha & Associates, which has also been barred from serving as auditors or internal auditors of any company for four years.

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The issue relates to the diversion of funds worth Rs 3,535 crore from seven subsidiaries of CDEL to Mysore Amalgamated Coffee Estate Ltd (MACEL). MACEL is owned and controlled by the promoters of CDEL.

NFRA said its investigations revealed that the auditors failed to exercise professional judgement and scepticism during the audit of TDL, where borrowings of Rs 2,027.46 crore were used in the fraudulent diversion of funds to MACEL worth Rs 2,073.23 crore through its group entities without any business rationale or agreement and the money ultimately moved to promoter entity MACEL.

NFRA said the auditors also failed to maintain required standards during the “audit of fraudulent diversion of funds in the name of land advances”.

However, the audit firm has contested the show-cause notice issued by NFRA through legal channels. “The auditors have raised concerns about the legality of the show-cause notice and the investigative procedures conducted by NFRA. The auditors have initiated legal proceedings in various courts… As the matter is under legal consideration, this order does not address those concerns,” NFRA clarified regarding the issues raised in the auditor’s petitions before the courts.

NFRA also acknowledged that the audit firm had issued a ‘disclaimer of opinion’ in their audit report due to the significance of specific matters highlighted in the audit report, relating to financial statements and internal financial control over financial reporting.

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