Infosys Imbroglio: Image Body Blow
The alleged misrepresenting of revenue by top Infosys officials has dealt a body blow to the image of the company, which was seen as the exemplar of corporate governance. While the matter is being investigated both internally and by regulatory bodies, it brings to the fore several loopholes and gaps in auditing and regulatory practices that need to be addressed
Infosys shares witnessed a bloodbath on 22nd October 2019. On a single day’s trading, the value of the shares of Infosys fell by 14%, and investors lost about Rs 43,000 crores. The apparent reason for this fall was the anonymous complaint against the company filed by a group of employees describing themselves as the ‘ethical employees’. The complaint was filed before the Board of the company and also before the authorities in the US as the company is also listed on the New York Stock Exchange (NYSE).
The contents of the complaint that have come into the public domain relate to unethical practices and the issue of corporate governance. It has been alleged that CEO Salil Parekh and the CFO are the culprits. They have been accused of coercing the employees to book short term higher revenue where none existed. The allegation is that the employees were pressurised to not follow the set accounting standard while booking revenue coming from big contracts. It is further alleged that employees were pressurised to do risky things in the treasury area to book short term gain. The intention of the CEO and CFO as alleged, was to show higher income in the books, not the real income, and thus to mislead the shareholders and the regulatory authorities. There is also a personal complaint against Salil Parekh, that he undertook personal tours on a regular basis at the cost of the company. The complaint adds that the CEO and CFO are instrumental in not sharing relevant information with the auditor.
“CEO Salil Parekh and the CFO have been accused of coercing the employees to book short term higher revenue where none existed. The allegation is that the employees were pressurised to not follow the set accounting standard while booking revenue”
In the aftermath of the complaint, the chairman of Infosys, Nandan Nilekani, has authorised a short term enquiry which is to be conducted by the top corporate law firm, M/s Shardul Amarchand Mangaldas. Both the CEO and CFO will keep themselves away from such an enquiry. Meanwhile, regulatory authority SEBI has also initiated its own enquiry in its own regulatory framework. Class petitions on behalf of US investors have also been filed and law firms in the US have initiated the process. The regulatory authority in the US, the SEC (Securities Exchange Commission), is also seized of the matter and proceedings have started.
The truthfulness of the complaint will be known only after the results of the enquiries are known. But it cannot be denied that initial damage has been done. The face of the ‘poster boy’ of corporate governance and ethical practices stands tarnished, till the time the complaint is proved to be motivated or not true.
Infosys has been the country’s first true startup. It turned to become an Indian Multinational Corporation, which provides business consulting and outsourcing services. Today, it is the second largest IT company, after Tata Consultancy Services. As of March ending 2019, its market capitalisation was $46.52 billion with very high credit ratings.
Infosys was established by seven engineers in Pune with an initial capital of $280 in 1981. Later it shifted its headquarters to Bengaluru (and became a public limited company in 1992. Narayana Murthy was the founding chairman and CEO of Infosys from 1981 to 2002, then he was succeeded by other co founders like Nandan Nilekani and others. He returned as executive chairman for a short time in 2013 when the company needed him. Along with Narayana Murthy, Nandan Nilekani and other engineer co founders, Infosys attained the iconic stature for honest and transparent governance.
However, for almost a decade now, this iconic company has been plagued with some problem or the other at the top management level. The company brought a well known technocrat Vishal Sikka, to help the company at the CEO level, but he stepped down abruptly in August 2017 after having problems with the founder investors. Salil Parekh, another well known professional and an outsider like Vishal Sikka, took over as CEO and managing director in January 2018 and is continuing at present and he too has been confronted with allegations. This is unfortunate for both Infosys and the IT sector.
Some ‘side-effect’ problems are also now surfacing with Infosys, coupled with the present complaint. It has come to light that much before the complaint came into the public domain in October, there was a huge sell out of the shares of the company in September, when the market was going up after the government announcement of the reduction in corporate tax rates. The company had failed to forward the complaint to SEBI as per the rules, but it appears that some people who might be insiders of the company knew about the complaint. This insider information might have resulted in insider trading of the shares, which is illegal. SEBI has taken suo moto decision to investigate the suspected insider trading and identify the culprits. This is a serious issue and its seriousness can be viewed from the fact that the famous NRI, Rajat Gupta, was imprisoned in the US on the charge of insider trading.
“Much before the complaint came into the public domain in October, there was a huge sell out of the shares of the company in September, when the market was going up after the government announcement of reduction in corporate tax rates. The company had failed to forward the complaint to SEBI as per the rules, but it appears that some people who might be insiders of the company knew about the complaint. This insider information might have resulted in insider-trading of the shares”
Fuel to the fire
The contribution of the service sector to our GDP is about 54% and of which companies like TCS and Infosys are the main performers. We want our main performers running fast and without any blemish for better growth of the GDP. The Infosys problem has occurred when the economy has slowed down. This will add to the problems as foreign buyers of our IT services may rethink that our output figures can become suspect, like with the nature of the complaint against Infosys. Further, with enquires going on in the US by the SEC, foreign investors will think twice before entering our capital market or even go for FDI.
Earlier, the problem with IL&FS had seriously dented our financial system. Our bank NPAs, along with the IL&FS problem had affected our credit off take and thus became one of the important reasons for retarding our economy. We want to be a powerful country with a $5 trillion economy in the next five years. This will require our corporate sector and financial system to grow without any hiccups. Companies like Infosys or IL&FS should not suffer from internal problems or from any unethical doings of the management.
For this, two things are very important. First, highly professional and competent auditing. In the present case of Infosys, the allegation is that standard accounting was not followed while valuing the accrued revenue with some of the big international service contracts. A zealous auditor knows the accounting standards and queries could have been raised if anything amiss was observed. Even in the case of IL&FS, the auditor could have detected the mismanagement.
While on the issue of auditing, I believe that even the Institute of Chartered Accountants of India (ICAI) has been negligent. The newly appointed regulator for oversight of the work of auditors, NFRA (National Financial Reporting Authority), should go into swift motion and there should be deterrence for erroneous or negligent accounting. The second important thing is to give more teeth to corporate regulators like SEBI. The culprits at the top management should be held personally accountable if corporate governance is not transparent and honest.
The case of Infosys has revealed that a whistle blower has a big role to play. Unethical practices came to the forefront only because of a group of vigilant employees who played the role of whistle blowers. This requires that whistle blowers should be encouraged and safety should be provided to them. It is not possible for the government regulator in each case or even a competent auditor to detect a carefully hidden fraud unless a lead is provided. An informant or whistle blower is needed. We know the tragic case of Satyendra Dubey, the whistle blower who made public the frauds committed by the National Highway Authority of India, who was murdered. It becomes the duty of the government to protect whistle blowers who come forward to expose financial frauds. It is also important that while we want whistle blowers, there should not be bogus complaints and vested interests to harass the management or to sabotage the growth of a good company.