Fresh allegations against Infosys from a group of employees who call themselves “Ethical Employees’’ will certainly hurt the company but what is more significant about these charges is that this group’s claim that they have enough documentary evidence to nail any denial from the company.

Fudging numbers

One can immediately draw parallels to the scandal involving Satyam Computers with regard to certain allegations, especially those concerning manipulating figures to artificially boost profits and revenues but then, Infosys has built for itself a solid reputation for corporate governance.

 

The allegations must have been completely unexpected considering Infosys had posted a good set of numbers during the second quarter of the fiscal - much better than its nearest competitor, TCS. The Tata-owned company’s second-quarter earnings were lower than expected while Infosys’ profits met analyst estimates and were ahead in terms of sequential growth and margin.

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Harit Shah, a research analyst, Reliance Securities, said that while one awaits developments on the board investigation, it is likely that some investors will vote with their feet and sell at least some of their holdings. The market is very unforgiving of companies that have corporate governance issues and while it would not be fair to directly jump to conclusions, this issue appears quite ugly, he said. Another analyst said that prima facie, the allegations do not appear to be very strong and Infosys should take note of this.

The allegations can be classified into three buckets. Firstly, allegations about how certain measures were taken up in the current quarter to boost short-term revenue and profits. Secondly, how certain figures and facts were kept hidden from the board as well as the auditors. Thirdly, the role played by the CFO to allow the CEO to indulge in “unethical practices,” and how large deals approvals are full of irregularities.

The claims made by the whistleblower group will stand up to scrutiny only if there is clinching evidence. But what remains to be seen is how fast Infosys moves to constitute an independent probe and if the allegations are true, sets an example to win back investors’ confidence.

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