BSR failed to do BRS

The recent order passed by the National Financial Reporting Authority (NFRA) against BSR & Associates LLP and its partners for their audit of Coffee Day Enterprises Ltd (CDEL) is a significant development in the ongoing scrutiny of corporate governance and audit practices in India. This order, which brings to light the gross negligence in auditing CDEL’s financial statements, underscores widespread issues within the auditing profession and raises critical questions about the effectiveness of current corporate governance frameworks. This article critically examines the NFRA’s findings and connects them with broader concerns about audit failures and the role of audit committees, as seen in the Coffee Day case and other similar corporate scandals.

NFRA's investigation into the audit of CDEL for the fiscal year 2018-19 revealed several critical lapses. Firstly, the auditors failed to verify the business rationale behind a ?2,226 crores loan to Mysore Amalgamated Coffee Estate Ltd (MACEL), a promoter-controlled entity, and neglected to perform required audit procedures. This lapse violated the provisions of SA 600 on using the work of other auditors, which was essential for the consolidated financial statements. The auditors’ failure to critically assess related party transactions, particularly the loan to MACEL, represents a stark violation of SA 550, which requires thorough examination due to their susceptibility to fraud. This negligence directly contributed to a misrepresentation of CDEL’s financial health.

Secondly, the auditors did not detect a fraudulent understatement of loans by ?1,706 crores, orchestrated through circular transfers within CDEL group companies. They also overlooked false entries regarding the repayment of loans through unencashed cheques. This failure highlights a severe breach of SA 230 on audit documentation and SA 240 on fraud. The auditors failed to exercise the professional skepticism necessary to identify and report these significant misrepresentations, thus failing in their duty to provide a true and fair view of the company’s financial position.

Lastly, the auditors did not exercise professional judgment or skepticism during the audit of a suspected fraudulent diversion of ?130.55 crores by a CDEL subsidiary. This further emphasizes their failure to comply with SA 315 on identifying and assessing the risks of material misstatement. The lack of rigorous audit procedures in such a high-risk area suggests a deeply flawed audit approach, potentially compromised by a too-cozy relationship with CDEL’s management.

The Coffee Day scandal is symptomatic of a broader malaise within the auditing profession, where audit failures have become alarmingly commonplace. This issue is reminiscent of other corporate frauds, such as the Satyam scandal, where auditors failed to detect fictitious assets and non-existent revenues, and DHFL, where auditors overlooked the creation of fake borrower accounts. In each case, the auditors’ failure to maintain professional skepticism and independence played a crucial role in the perpetuation of fraud. The NFRA order on Coffee Day is particularly troubling because it reveals how easily funds were diverted under the nose of auditors who were supposed to oversee and monitor such transactions. This raises the question: are audit failures now just another risk that lenders and investors must accept when dealing with businesses?

Beyond the failings of the auditors, the Coffee Day case also highlights deficiencies in corporate governance, particularly the role of the Audit Committee (AC). At the time of the fund diversion, the AC at Coffee Day included two independent directors and the promoter-CEO, Mr. V.G. Siddhartha. The presence of the promoter on the AC likely hindered any meaningful scrutiny of the questionable transactions. While the NFRA does not have direct jurisdiction over the AC, this case illustrates the urgent need for reform in how ACs operate. In many companies, the AC often functions as an extension of management rather than an independent body tasked with rigorous oversight. AC meetings are typically infrequent and dominated by routine presentations that avoid probing into sensitive issues, such as weak processes or vulnerable transactions. The broader issue here is the failure of independent directors to act as a check on management. In the case of Coffee Day, the AC’s failure to identify and question the diversion of funds is as condemnable as the auditors' failure. This points to a systemic problem where ACs are not equipped or perhaps not willing to challenge management effectively.

The NFRA’s order should serve as a wake-up call to both the auditing profession and corporate boards. While auditors need to recommit to maintaining the highest standards of integrity, objectivity, and professionalism, there is also a pressing need to reform the functioning of ACs. One potential reform could involve requiring ACs to issue reports on identified matters relating to the accuracy and integrity of financial statements, similar to the board’s report. This would increase the accountability of ACs and ensure that they take their oversight role more seriously. Additionally, there must be a cultural shift within companies where independent directors and ACs are empowered to challenge management decisions robustly. This is particularly important in listed companies, where the stakes are higher, and the potential for fraud or mismanagement is greater.

The NFRA’s order against BSR & Associates LLP in the Coffee Day Enterprises Ltd case is a stark reminder of the persistent issues within the auditing profession and corporate governance structures. The auditors’ failure to adhere to auditing standards and the AC’s inability to act independently both contributed to a significant misrepresentation of CDEL’s financial health. As the auditing profession faces increasing scrutiny, it is imperative that both auditors and corporate boards reassess their roles and responsibilities. Only through rigorous audit procedures, enhanced professional skepticism, and robust corporate governance can the integrity of financial reporting be restored, ensuring that such failures do not recur

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