Deconstructing Infosys whistleblowers' charges. How serious are they?

Infosys which has been reeling under yet another whistleblower allegation is in complete turmoil with its stocks having tanked nearly 15% washing away ₹55,000 crores of shareholders’ wealth on the day the contents of the email written to the board and the US markets’ regulator SEC became public. But how valid are the allegations made in the email? Can they stand the scrutiny of the probe committee? Here are the possible explanations:

Charge: We want to bring to your notice the unethical practice of CEO in recent quarters. Same measures are taken up in the current quarter also to boost short-term revenues and profits.

Possible explanation: There has to be clinching evidence to show that the company management tried to manipulate figures to boost profits. It is a normal practice for IT companies to go back and forth with regard to certain disclosures about contracts. Sometimes there is a premature recognition of numbers.

Charge: In the last quarter, we were asked not to fully recognise costs like visa costs to improve profits. This quarter there is a lot of pressure to not recognise $50 million of an upfront payment of FDR contract, which is against accounting practise. As this will reduce profits for the quarter and negative for the stock price. Critical information is hidden from the auditors and the board.

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Possible explanation: What the whistleblowers are claiming is that certain payments were not shown in the books. These include visa cost and a payment of $50 million. The issue is how long can these be held back. One can withhold such information for a quarter or two but need to be shown in the books one time or the other. Such practices are common among IT services companies even though one can’t fudge figures for long. As Infosys has itself claimed in an investors’ call, there are differences in timing with regard to revenue recognition and actual billing milestones reached for clients. In the case of Infosys, fixed price projects have grown 4% to over 53% of revenues in FY 19 compared with FY17. If the number of fixed-price projects is more, the company can use its discretion to recognise revenues in one quarter or the next.

Charge: In large contracts like Verizon, Intel and JVs in Japan ABN Amro recognition, revenue recognition matters are forced which are not as per accounting standards. Large deals have irregularities. CEO is bypassing reviews and approvals and instructing sales not to send emails for approvals. He directs them to show wrong assumptions and shows margins. CFO is compliant and he prevents us from showing in presentations large deal issues.

Possible explanation: In a conference call with analysts earlier this month, issues were raised about unbilled revenues and whether there was a change in accounting policy. Unbilled revenues are those which are recognised before being billed to the client. Unbilled revenues for Infosys has gone up to 25% in the first six months for this fiscal compared with about 11% during the same period the previous year. This shows that the company y has been quite aggressive with regard to revenue recognition. Not unusual for an IT services company which has to keep investors happy quarter after quarter.

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Charge: CEO told us “no one in the board understands these things, they are happy as long as the share price is up. These two Madrasis (Sundaram and Prahalad) and Diva (Kiran Shaw) make silly points, you just nod and ignore them.

Possible explanation: When you make a charge like this, you know you are walking on thin ice. It reeks of personal vendetta and if one were to stretch this further, a game plan to “fix” the CEO.

Charge: Several billion dollars have nil margin. Please ask auditors to check deal proposals, margins, undisclosed upfront commitments made and revenue recognition. All information is not shared with auditors.

Possible explanation: There you go again. Infosys has quite a robust system of checks and balances. Those pieces of evidence and voice recordings filed before the whistleblower’s office of the US Labour Department should provide enough clues of how strong is the accusations.

Charge: CEO spends two and a half days in Ecity and rest in Mumbai. All his travel expenses are paid by the company, for these weekly personal trips. He is a Green Card holder and avoids deduction of taxes during his US travel which is non-compliance.

Possible explanation: Well, the previous CEO Vishal Sikka hardly paid a visit to the Infosys’ HQs in Bengaluru. Visting relatives, friends and family during a business visit are not unusual though it remains to be seen whether a CEO of such a large company who gets paid handsomely would ask his finance department to take care of his private visits.

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Charge: In the board meetings, we are told not to present data on large deals and important financial measures as it will get board attention. 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. They ask us not to make key disclosures in 20F and annual report and to share only good and incomplete information with investors and analysts. This is a regulatory issue.

Possible Explanation: Yes. This could stick. But again, you need irrefutable evidence to show that certain information was hidden from the shareholders and whether they were worth revealing in the first place.