Infosys ADR sinks 13% over whistleblower's window dressing allegations

Stock likely to come under more pressure today; audit committee examining anonymous claims

Information technology major Infosys saw its American Depositary Receipts (ADRs) on the NYSE sink by 12.91 per cent on Tuesday (as of 12.22 am), after the revelation that a group describing itself as ‘whistle-blower staffers’ had accused the management of hiding the true financial picture. 

The Indian stock exchanges were closed on Monday, due to state elections. Brokerages say they expect Tuesday to see similar selling pressure on the company’s shares. Infosys had faced allegations from whistle-blowers in 2016-17. The developments set in motion eventually led to the exit of then chief executive officer (CEO), Vishal Sikka. 

The latest charge is from an anonymous group, calling itself ‘Ethical Employees’. Their letter, dated September 20, was addressed to the board of directors and to the US markets regulator, the Securities and Exchange Commission (SEC). Infosys issued a statement that its audit committee was examining the allegations, in line with its policy on whistle-blowers.

The anonymous letter alleges the current management is taking ‘unethical’ steps to raise short-term revenue and profit. It says the Bengaluru-based firm’s CEO, Salil Parekh, had not taken the necessary approvals before entering into large deals. 

“Several billion-dollar deals of the last few quarters have nil margin,” goes the letter. “In large contracts like Verizon, Intel, joint ventures in Japan (and the) ABN AMRO acquisition, revenue recognition matters are forced.”

The group also alleges the current management had asked the complainants not to fully recognise visa costs in Q1 of this financial year, apart from deferring the recognition of $50 million worth of reversals in a contract.

“CEO and CFO are asking us to show more profits in treasury by taking up risks and make changes to policies. This will provide short-term profits,” the letter said. “They ask us not to make key disclosures in (Form) 20F (a format required by the SEC for specified information) and annual report, and to share only good and incomplete information with investors and analysts.” 

“We can’t jump to any conclusion based on the letter — it is lacking specifics and is too generic in nature,” said Amit Tandon, founder and managing director of IiAS, a corporate governance advisory entity.

Shriram Subramanian, founder of another corporate governance advisory, InGovern, says: “The charges require very urgent and immediate action by the audit committee, to give investors the correct picture. As the whistle-blowers claim to have evidence to prove their point, this is serious in nature.”

Auditors spoken to say Infosys’ approach to revenue recognition seemed to have remained consistent with the new regulations in this regard, which the company had clarified during an analyst call earlier this month.

“The way we look at revenue, these are based on activity and effort, whereas billing milestones are agreed with clients in advance, based on delivery dates, and that is the way billing actually happens,” had said Nilanjan Roy, chief financial officer (CFO) at Infosys. And, that there were no changes in the revenue recognition policy.

Finance experts said any change in IFRS 15 (the accounting standard dealing with revenue recognition) with material impact on the financials would have been disclosed by the company. For the just-ended quarter, Infosys’ auditor, Deloitte, gave an ‘unqualified’ opinion to the company’s financial statements. Brokerage firms feel Infosys’ shares, which enjoy strong investor support, could now see selling pressure in the near term.

“This (set of charges) equates to a corporate governance issue. Deputy CFO (Jayesh Sanghrajka) has also quit, which in itself is an indirect admission that something is rotten. The stock will now languish 10-15 per cent lower in the near term,” said Harit Shah, analyst at Reliance Securities.