An anonymous whistleblower letter has alleged that Infosys Ltd. Chief Executive Officer Salil Parekh dressed up the company's books—accusations that could plunge the software services provider into its second leadership-related crisis in a little over two years.
The letter from a group of “Ethical Employees” accused Parekh of unethical practices in “recent quarters” to boost short-term revenue and profits, according to a copy published by Deccan Herald newspaper on its website. Employees were asked not to fully recognise costs like those for visas of employees to improve profits, according to the letter dated Sept. 20 addressed to the company's board and the U.S. Securities and Exchange Commission.
The whistleblower complaints are being dealt with in an objective manner, says Infosys Chairman Nandan Nilekani.
Read: https://t.co/gvuz2QImwy pic.twitter.com/TBTHSPTENvAn Infosys spokesperson confirmed having received the letter and its contents to BloombergQuint. In a separate response to emailed queries, the company said “whistleblower complaint has been placed before the audit committee as per the company's practice and will be dealt with in accordance with the company's whistleblowers policy”.
Emailed queries to Parekh and Chief Financial Officer Nilanjan Roy, also named in the letter, didn't elicit a response.
The allegations come two years after Vishal Sikka quit as CEO following a founder-led boardroom coup. He, too, faced whistleblower allegations and corporate governance concerns stemming from his salary and acquisitions and how much Infosys paid for them. Parekh's appointment had ended the uncertainty, and he led a revival by focusing on large deals and digital services.
The whistleblowers allegations, however, call some of that record into question. The letter alleged:
- Putting pressure on whistleblowers not to recognise reversals of $50 million of upfront payment in the quarter ended September.
- Revenue recognition in large contracts involving Verizon Communications Inc., Intel Corp., the company's joint venture in Japan as well as acquisition of Stater NV, a subsidiary of ABN AMRO Bank NV, were “forced” and not as per accounting standards.
- Approvals for large deals have irregularities and the chief executive is bypassing reviews and approvals by instructing sales teams not to send mails for the same.
- Parekh and Chief Financial Officer Nilanjan Roy had asked the whistleblowers to show “more profits in treasury operations” by raising risks and changing policies.
The whistleblowers claim they have emails and voice recordings of the conversations on the matters discussed.
While on certain matters, the auditors refused to sign off because of which certain “issues” were postponed, matters relating to large deal information were asked to be withheld from the auditors. The whistleblowers said they were asked not to make specific disclosures in the company's annual report and share only “good and incomplete information” with investors and analysts.
Deloitte Haskins & Sells LLP is the company's statutory auditors, while EY LLP is its internal auditor. Its board audit committee is led by D. Sundaram as chairperson, and comprises financial expert Punita Kumar-Sinha and Roopa Kudva.
Kiran Mazumdar-Shaw, founder of Biocon Ltd. and an independent director on Infosys board who was part of the panel that selected Parekh, told BloombergQuint, “We will follow due process which will be according to the company's whistleblower policy.”
Reacting to the news reports on Monday morning, a trading holiday in India, American Depository Receipts of Infosys slumped over 13 percent that evening when U.S. markets opened.
Brokerage Reactions
We expect a negative reaction on the stock due to the whistle blower letter, said a note from Equirus Capital. “We however feel the recent correction provides a good opportunity to invest into the stock.”
Equirus pointed out that greater unbilled revenue was due to estimates on milestones, a case of aggressive account not necessarily fraud. It also explained away the whistleblower allegations on margin-dilutive deals as customer acquisition cost.
A note from Credit Suisse expressed more caution. “Whether proven or not, these allegations can lead to a lot of potential uncertainty for Infosys,” the report said.
The nature of allegations and the fact that it comes from its own employees makes this a serious matter, in our view. If proven, this can lead to the CEO and CFO being fired with potential SEC investigations against them. Even if these are not proven, this can kick-start a period of potential uncertainty amidst management ranks and clients. It will not be unreasonable to assume that such issues eat significantly into mgmt. bandwidth which may have a bearing on growth and execution for a company of Infosys' scale.Credit Suisse ReportInvestors should watch critically for the outcome of the investigations, said a Macquarie report. “Any significant change in sales strategy, top management could increase uncertainty around growth,” it added.
While Morgan Stanley said this controversy could de-rate the company stock's multiples until clarity emerges. The Infosys stock corrected to 11.6x PE in July 2013 when Narayana Murthy led restructuring and derated from 20x to 13x in 2017 surrounding the Panaya acquisition, the note pointed out.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
