(File photo)

BENGALURU: The calm was shortlived. It’s back to 2017 for Infosys . A letter accusing CEO Salil Parekh of dressing up the company’s financials to show better revenue and profit numbers sent the company’s share price plummeting by 14% in morning trade on the New York Stock Exchange (NYSE) on Monday.

The anonymous letter writers said they have complained to the company board and to the US Securities & Exchange Commission (SEC) and added that they have recordings and emails that substantiate their allegations.

A US-based brokerage house analyst, who did not want to be named, said if the SEC finds aggressive accounting practices, it will open up a Pandora's box. He said Satyam and EDS were two IT services companies that the SEC took action against previously for their accounting practices. Satyam and its auditor PwC were fined $17.5 million.

The latest episode at Infosys is in some ways a replay of 2017, when a series of anonymous mails accused then CEO Vishal Sikka of overpaying for two acquisitions – with the suggestion that he stood to personally benefit from it – and paying an overly generous severance amount to the CFO, allegedly to buy his silence on crucial matters. Investigations by renowned global bodies did not find any wrongdoing, but the environment forced Sikka and several board members to resign.

The latest letter, from a group that calls itself `ethical employees’, alleges irregularities in Infosys's large deals like Verizon, Intel, ABN Amro and a joint venture in Japan. It says revenue recognition in these deals were not as per accounting standards.

It says many of the large deals have nil margins, but the CEO directed the sales team to make “wrong assumptions to show margins.”

The letter also alleges that in the last quarter, the letter writers were asked not to fully recognise costs like visa costs in order to improve profits. “We have voice recordings of these conversations. When auditor opposed, the issue was postponed,” the letter says.

Infosys said the whistleblower complaints have been placed before its audit committee and will be dealt with in accordance with the company’s whistleblower policy. Judith Burns, SEC’s office of public affairs, declined to comment on the letter submitted by the whistleblowers.

Infosys has been under pressure to improve growth rates, without allowing margins to drop too much. It looked to be succeeding under Parekh, but the latest controversy will raise questions about that.

The letter comes within days of deputy CFO Jayesh Sanghrajka resigning after 14 years with the company. It is not clear if the allegations in the letter and the resignation are connected.

Harit Shah, research analyst at Reliance Securities, seems to think they are. In a note on Monday, he said: “Deputy CFO has also quit. This is an indirect admission that something is rotten. Stock will now languish 10-15% lower in the near term. It calls into severe question board-level processes at the IT major, which is even more disappointing given that when founder Nandan Nilekani was brought back on the board, his specific focus was to ensure high corporate governance standards post the Vishal Sikka fiasco.”

Nirmalya Kumar, Lee Kong Chian professor of marketing at Singapore Management University, indicated that it is difficult to predict how the board will respond to the allegations. If the top management itself is accused, then it becomes challenging, he said. He noted that there are often social ties between the board and management members that make the former less likely to question top management. And then there’s the issue of directors’ compensation being linked to profits/equity returns. “This makes the board potentially as compromised as the top management. The only protection is the integrity of, and the fear of deleterious reputation effects that the directors perceive,” he said.

Vijay Govindarajan, Coxe Distinguished Professor at Tuck at Dartmouth, said one likely outcome of the whistleblower complaint is that it will likely distract Infosys at an inopportune time, when the dust from the Vishal Sikka storm was just settling down. “The clients of Infosys are transforming from IT as an enabler (the old approach) to IT as a shaper of business strategy (the new reality). The Indian IT companies, including Infosys, must build new capabilities in cloud, big data analytics, and AI to help their clients with digital transformation. This is a time Infosys can least afford a distraction,” he said.

