Indian software services exporter Infosys said it received whistleblower complaints alleging "unethical practices" by its executives. Infosys issued a statement after an anonymous group sent letters to the board and the US Securities and Exchange Commission alleging that the company was taking "unethical" steps to boost short-term revenue and profit. CNBCTV18.com could not immediately independently review the letters. The matter has been referred to audit committee by Infosys.

Here is what we know of the complaint and what it could mean for the company:

What are the whistleblower complaints against Infosys about?

1. Large deal irregularities: The whistleblowers have alleged that large deal approvals have irregularities and chief executive officer Salil Parekh was bypassing reviews and approvals for large deals. "In large contracts like Verizon, Intel, JVs in Japan, ABN AMRO acquisition, revenue recognition matters are forced, which are not as per accounting standards," the letter alleged.

2. Accounting malpractices: The whistleblowers have alleged they were asked not to recognise costs like visa costs to improve profits. “This quarter there is lot of pressure to not recognise reversals of $50 million of upfront payment in FDR contract, which is against accounting practice,” they complained.

3. Corporate governance issues: The whistleblowers have said in board meetings, they were rold not to present data on large deals and important financial measures as “it will get board attention”. They said they wer also told not to make key disclosures and guve incomplete information to analysts and investors.

What are the potential implications of the complaints?

The allegations are very serious given that the complaints centre on breach of corporate governance standards and accounting malpractices.

But some allegations like large deals having nil margins could be a business decision and hence not lapses. Remember, decisions on margins on deals are often made over the course of a transaction.

On the issue of not recognising cost and reversal of upfront payments, or revenue recognition, this could either be aggressive accounting, a far cry from the earlier accounting policies that were typically conservative. But if there is proof of cooking up books, Infosys is in serious trouble.

Withholding information from auditors and board and allegations of sharing only positive and incomplete information is a serious corporate givernance issue.

Why is the street worried about the whistleblower complaint?

This letter was sent to board on September 20. So the big question is why was the board silent until now? They have had a month to go over the matter, but are yet to refute the claims.

The whistleblowers have brought the complaint to the attention of US regulators. They also claim to have evidence to prove their allegations.

Infosys traded at a premium due to its highest corporate governance standards. Any breach of trust will be taken badly.

If auditor indeed finds lapses, that could result in loss of trust with the management and a possible reshuffle at the top again.

Infosys' statement

The company has received anonymous whistleblower complaints alleging certain unethical practices. These have been placed before the audit committee as per the company’s practice and will be dealt with in accordance with the company’s whistleblower policy.

First Published:Oct 22, 2019 7:46 AM IST