Whistleblower letter alleges accounting irregularities in Infosys

An alleged group of employees at Infosys who recognise themselves as 'Ethical employees' have levelled allegations for the first time against current CEO Salil Parekh and CFO Nilanjan Roy of 'wilful misstatement' and 'accounting irregularities' to make the company's performance look good. They also claim to have the required evidence to prove their claim which they intend to submit during the course of investigation. Infosys in its statement to Business Today said "The 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".

The main allegations and what Infosys says is as follows:

COMPANY NOT RECOGNISING VISA COSTS FULLY TO IMPROVE PROFITS:

The letter to the board of directors and the Securities Exchange Commission allege that entire visa costs were not fully recognised to improve margins. The issue was allegedly also red flagged by auditors.

In the first quarter of FY20 when the company's operating margins stood at 20.5 per cent, replying to a question by Jared Levine of Cowen on the investors call, CFO Nilanjan Roy breaking down the margin impact said there was a special Q1 impact, of 80 basis points on the higher visa cost but, however, said the company had fewer visas compared to last year. In Q2 the CFO again mentioned the company's onsite mix was coming down with more work getting off shored to India. The company discontinued the practice of stating the absolute numbers of H1B or L1 visas. In its 20F filing to SEC, the company had stated "As of March 31, 2017, the majority of our professionals in the United States held either H-1B visas (14,859 persons), which allow the employee to remain in the United States for up to six years during the term of the work permit and work as long as he or she remains an employee of the sponsoring firm, or L-1 visas (1,549 persons), which allow the employee to stay in the United States only temporarily".

IRREGULARITIES IN LARGE DEAL APPROVALS:

The letter also alleges the CEO bypassed reviews and approvals for large deals with not enough disclosures to board members. It also says several large deals have nil margin impact.

The company in the first quarter of FY20 announced large deals with total contract value of $2.7 billion. The 13 large deals with a TCV of $2.7bn included the Stater deal with ABN AMRO. Three deals each in financial services and retail verticals, two deal each in communication and energy utilities resources & Services and Manufacturing verticals, while one deal was in Life Sciences. The share of new deals in the overall TCV was about 55 percent while the rest were renewals which work out to nearly $1.15 billion. In the recently announced Q2 numbers as well the large deals TCV was $2.85bn. Pravin Rao the COO of the company in the investor calls said "The rebid is close to 90 per cent. So the net new deals will be about 10 per cent this quarter". BOBCAPS in its results review dated 12 October said the downside risk for the stock to be the below-expected operating margins for new engagements and renewals.

UPFRONT PAYMENT FOR DEALS COSTS, CHARGES NOT RECOGNISED:

The letter alleges that the company has not recognised nearly $50 million of reversal of upfront payments in First Tier, Downstream and Related Entities (FDR) contracts which could drag down profits and some deals. Some deals referred to in the letter include Infosys Consulting Pte Ltd, a wholly-owned subsidiary of Infosys Limited, had acquired 81 per cent voting interest in HIPUS Co Ltd, Japan, a wholly owned subsidiary of Hitachi Ltd, Japan on April 1, 2019 for approximately $30 million. On May 23, 2019, Infosys Consulting Pte Ltd acquired 75 per cent voting interest in Stater N.V along with its eight subsidiaries from ABN AMRO for approximately $171 million.

However according to Shriram Subramanian Founder and MD, Ingovern Research Services, a proxy advisory firm, the more pressing issue that the letter has brought to the forefront is auditors being prevented to do their job. "The audit committee and board need to take it up seriously and give a correct picture to investors" said Shriram. According to the latest annual report the company's three-member audit committee is headed by independent director D Sundaram with Dr Punita Kumar Sinha and Roopa Kudva being the other member while the board of Infosys is headed by non-executive chairman Nandan Nilekani.

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