The resignation of the auditing firm BSR and Associates, a unit of KPMG in India, from Cafe Coffee Day Enterprises Limited (CDEL) citing “commercial considerations" and a lack of proper information to do the audit could indicate financial irregularities in the company.
When contacted by THE WEEK, S.V. Ranganath—the current chairman of CDEL—declined to comment on the issue citing that he was extremely tied up.
Experts say that the whole audit exercise may further suffer as there could be huge discrepancies in the overall accounting structure in the organisation. It has been reported that the company has replaced BSR with Sundaresha & Associates.
“The resignation of the auditing firm indicates that there may be financial integrity issues in the organisation and also its holding companies. A lot of things may not have been declared in a proper way across the organisation. That proves that correct revenue numbers may not have been declared by the organisation in the past too. Many at times it may be possible that there may have been over-reporting of revenues by the organisation. The fact that the auditor is refusing to go ahead with the auditing indicates financial irregularities...Probably the audit firm did not get the expected response from the company,” B.S. Murthy the CEO of Leadership Capital Consulting told THE WEEK.
Murthy added that from the beginning, the model that Cafe Coffee Day (CCD) followed involved a huge cash component just like any restaurant model.
“This cash has to be accounted for in large numbers and there could be discrepancies if not reported properly,” added Murthy.
Due to increasing scrutiny by regulators, audit firms have become very careful of late and are letting go of accounts that they feel are risky and which could lead to trouble later.
At the same time, corporates and companies have many motives in concealing information or providing false information to the auditors in order to increase share price, attract investors, obtain finances and avoid taxes. There have also been cases of mismanagement by audit firms that may include not reporting the correct profit, not disclosing impairment issues or defaults and not reporting internal controls in the past.
“There have been reports that the overall restaurant [and] cafe business has been down—that is an industry phenomenon. It is not related to concealing information. The overall cafe business is down due to the COVID-19 pandemic. As far as the CCD brand is concerned it will not have much of an impact. A customer will not be bothered about the kind of finances a firm has and would only be interested in consuming coffee or eatables in an outlet,” remarked Murthy.
Brand expert Harish Bijoor also strongly stands firm by the brand.
“I do believe CCD is a power brand. What it is going through now is a re-organisation. It has in it the potential to be a strong brand in the Indian context. It is going through an "amrit manthan" of its own. It will emerge stronger through it. CCD is a made-in-India offering. This is a power brand waiting to mature,” said Bijoor.
Reports point out that CCD had a decline in average sales per day (ASPD) per cafe of Rs 15,445 during the April-June quarter and had closed down around 280 outlets in the June quarter due to profitability issues and future increase in expenses. The company had also earlier repaid Rs 1,644 crore to its 13 lenders after selling its technology business park and had announced the sale of its Global Village Tech Park in Bengaluru to global investment firm Blackstone and realty firm Salarpuria Sattva for Rs 2,700 crore. CDEL had also sold its stake in IT company Mindtree to L&T Infotech.
