HYDERABAD/BENGALURU: Trouble struck Infosys once again with whistle-blowers alleging wilful misstatements, material accounting deviations at the company such as revenue recognition, irregularities in large deals involving Verizon, ABN, Intel, and Japan JV during the past two quarters. Anonymous individuals, calling themselves ethical employees, waged a battle against Infy’s alleged unethical practices by stealth, dispatching an email and two separate letters (one to the board on September 20, an email to the US Securities and Exchange Commission on September 27, followed by a letter on October 3). The complaint accessed by TNIE claims to have provided voice recordings and password-protected emails as evidence.
While suspicions of skulduggery aren’t proven yet, investors are calling the company to account with Infy’s Nasdaq-listed American Depository Receipts suffering their biggest intra-day fall in six years crashing as much as 15% in early trade on Monday. Domestic traders, too, expect bedlam on the BSE and NSE on Tuesday.
“Very serious news indeed. This equates to a corporate governance issue. Deputy CFO has also quit. This in itself is an indirect admission something is rotten. Stock will now languish 10-15% lower in the near term,” said Harit Shah, Research Analyst, Reliance Securities.
While Infy referred the complaint to its audit committee, the move brought back memories of recent corporate governance issues and how it courts controversies from time to time. If in 2017, whistle-blower allegations drummed Infy’s then CEO Vishal Sikka out of office, in 2013, it agreed to pay $34 million in settlement over allegations of misusing US H1-B visas. Such instances diluted the strongman image of Infosys, and though the company fought back, its credibility could take a knock for the worse this time, analysts say.
The letter accuses CEO Salil Parekh and CFO Nilanjan Roy of indulging in unethical practices to boost short-term revenue and profits, besides grossly undermining the company’s board. “CEO told us, ‘no one in the Board understands these things, they are happy as long as share price is up’,” it noted, adding that critical information was also hidden from the auditors as well as the board.
“Last quarter, we were asked not to fully recognise things like visa costs to improve profits. When auditor opposed, the issue was postponed. This quarter, there is pressure not to recognise reversals of $50 million upfront payment in FDR (first tier, downstream and related entities) contracts, which is against accounting practice,” the letter notedThe complaint also alleges Parekh prevented employees from highlighting issues during board meets and bypassed approvals.
“He directs them to make wrong assumptions to show margins. CFO is compliant and he prevents us from showing in board presentations large deal issues (sic),” the letter, accessed by wire agencies, noted.
“CEO and CFO are asking us to show more profits in treasury by taking up risks and make a change to policies. This will provide short-term profits,” it added.
‘Victim of personal grudge’
Parekh’s close aides claim he is being targeted for the churn in the top team after he became CEO. Seven executives heading finance, consulting, healthcare and manufacturing and divisions left after he took over