The Infosys Audit Committee that investigated a whistleblower complaint has found no evidence of financial impropriety or executive misconduct. The committee found that the allegations were substantially without merit, said a statement from the company.

The whistleblower group had alleged that the company’s CEO Salil Parekh and CFO Nilanjan Roy had indulged in ‘unethical’ practices to generate higher profits and revenues.

The audit committee conducted a thorough investigation with the assistance of independent legal counsel Shardul Amarchand Mangaldas & Co and PricewaterhouseCoopers Pvt Ltd (collectively “investigation team”). It concluded that no restatement of previously announced financial statements or other published financial information was warranted. The findings of the investigation were adopted by the company’s board of directors.

D Sundaram, the Chairperson of the Audit Committee, said: “The Audit Committee took the anonymous whistleblower complaints very seriously and commissioned a thorough investigation with the assistance of an independent legal counsel. The audit committee determined that there was no evidence of any financial impropriety or executive misconduct.”

Nandan Nilekani ‘pleased’

“I am pleased that after a rigorous investigation, the Audit Committee has found no wrongdoing by the company or its executives,” said Infosys Chairman Nandan Nilekani. “CEO Salil Parekh and CFO Nilanjan Roy are strong custodians of the company’s proud heritage. Salil has played a key role in reinvigorating the organisation and driving momentum and the board is confident that he will continue to execute on the company’s new strategic direction successfully.”

The investigation team conducted a detailed and extensive analysis which included:

a. One hundred and twenty-eight interviews with 77 persons including company personnel concerned with or mentioned in the allegations

b. Identifying 46 custodians for the collection of relevant documents and electronic data

c. Reviewing over 2,10,000 documents from electronic sources and imaged devices, with over 8 terabytes of electronic data being processed.

The investigation team’s review of the information pertaining to the allegations covered the period from January 1, 2018, to September 30, 2019. No limitations or restrictions were placed on its access to information, and the company, its directors and employees cooperated fully, said the Infosys statement.

Independent internal auditors

Additionally, Infosys consulted with its independent internal auditors EY on the matter of large deals and treasury-related processes. Their findings were also shared with the investigation team.

Infosys’ well-established whistleblower policy has been in place for over 15 years and ensures that the company both promotes the highest ethical standards and maintains a workplace that facilitates the reporting of potential violations of company policies and applicable laws, said the statement. The policy provides a mechanism for the Audit Committee to investigate complaints promptly and appropriately and assess whether disclosure is warranted, it added.

“While our business is focussed on delivering solutions for a changing world, for 38 years our culture and values have remained constant,” said Nilekani. “We’ve been guided by a strong value system and a sense of larger purpose. Our values have driven us to set high standards, behave ethically and with integrity, and to strive for excellence relentlessly. Infosys is a model of strong corporate governance, and the company’s handling of these allegations from start to finish has been consistent with these high standards of governance.”

Key findings on company matters:

On the basis of the interviews and forensics review, the investigation concluded:

a. The allegations regarding treasury policy are unsubstantiated. The company strictly complied with its treasury policy, without any interference or pressure from either the CEO or CFO.

b. The allegations regarding the visa costs are unsubstantiated. The costs incurred by the company towards visas are appropriately accounted for.

c. The allegations regarding large deal approvals are unsubstantiated. Large deals under the investigation team’s review were approved by the necessary stakeholders. In the case of one large deal, a post-facto approval was sought. The joint ventures were approved by the board and the Audit Committee. No evidence was found suggesting the CEO’s involvement in bypassing the deal approval process or issuing any instructions in this regard.

d. The allegations regarding revenue recognition of three large deals/joint ventures are unsubstantiated.

e. In the case of one large deal, the investigation team did not come across any evidence to suggest that the decision to follow a percentage of completion (PoC) cost method for the recognition of application maintenance revenue was forced. The company exercised its judgment in deciding to follow a PoC cost method. The selection of this method and the reasons behind it were neither discussed with the Audit Committee nor disclosed in the financial statements of the company.

Having reviewed the investigation findings, the statement said, the company noted that it has historically applied the straight line method (SLM) of revenue recognition for a substantial majority of its fixed-price maintenance contracts. In line with accounting standards and based on specific facts and circumstances of a contract, it had, in the past, applied the PoC cost or PoC efforts method for revenue recognition in some contracts, where this would rightly reflect the progress towards completion of the performance obligation in the contract.

Accounting policy

The company further said this method of accounting was in accordance with prescribed accounting standards and consistent with its accounting policy. Therefore, no specific disclosure was required to be made to the Audit Committee. Further, revenues from such maintenance contracts where this method had been applied were not material. So, a separate disclosure in the financial statements was not considered necessary.

Accounting of the obligation with respect to a service credit (and the related provision) was not in accordance with applicable revenue recognition principles. The review of the investigation team found that across the three quarters ended September 30, 2019, the reversal/non-accounting of the provisions would help in dealing with the softness of the vertical/ deal quarterly revenues, margin pressures and internal revenue estimates in these quarters.

Having reviewed this investigation finding, the company determined that the reversal/non-accounting of provisions were insignificant. They were neither qualitatively nor quantitatively material to the reported revenues or operating margin guidance for the three quarters ended September 30, 2019, said the Infosys statement. The cumulative effect of this would have impacted revenue and operating margins for both FY19 and for the half year ended September 30, 2019, by 0.02-0.03 per cent.

The company further noted that it would have achieved its declared revenue and operating margin guidance for the relevant period and, consequently, the reversal would not have had any impact on these parameters.

‘Unsubstantiated’ findings:

a. The allegation regarding non-recognition of reversal of upfront payment of $50 million for a specific client contract being against accounting practice is unsubstantiated.

b. The allegations regarding exits in the finance team are unsubstantiated.

c. The allegations regarding non-disclosure of key information in the Annual Report and Form 20F and sharing of incomplete information with analysts and investors are unsubstantiated.

d. The allegations that the CEO and CFO prevented employees from presenting large deals-related data, or issues with the board or statutory auditors are unsubstantiated.

On personal matters concerning CEO:

On the basis of the interviews and forensics review, the investigation concluded that all the allegations regarding the personal matters of the CEO were without merit.

a. The CEO has relocated to, and operates from, the Bengaluru office of Infosys. He travels extensively both within India and abroad for work. Specifically, on all trips made by the CEO to Mumbai, he attended or operated from the company’s Mumbai office, met with investors, clients and board members or visited development centres.

b. All compliances and payments towards taxes in the US were made by the CEO in accordance with the applicable laws and company policies.

c. The CEO’s bonus was computed by the finance and HR teams in accordance with the applicable company policies and his employment contract. Further, his bonus was paid after obtaining the approval of the Nomination and Remuneration Committee (NRC).

a. The CEO and the CFO are eligible to be paid a bonus annually per their employment agreements while the rest of the leadership is paid half yearly. As a result, a comparison of the dates of payment of the bonus for the CEO with the rest of the leadership is not appropriate.

b. A revision of the vesting period of the annual performance equity grant from three years to one year was made upon the recommendation of the NRC and subsequent approval of the shareholders of the company. As previously disclosed by the company, in the notice to shareholders dated May 18, 2019, for the 38th AGM, approval of the shareholders was not required for the change in the vesting period. However, the company sought the approval as a measure of good corporate governance.

d. The CEO attended a majority of the committee and board meetings during the period of review. Page 110 of the annual report for the year ended March 31, 2019, sets forth the number of meetings attended.

e. The CEO’s children attended two tennis events when he was part of the company delegation. These two additional tickets were paid for by the CEO personally. No clients were denied seats at the event due to their presence.

f. Based on the review by the investigation team including public domain search and market intelligence, no evidence was found of personal investments by the CEO in small companies in Mumbai.

g. There is no evidence to suggest that the CEO proposed funding to any foreign universities or used the company’s connections for securing his child’s admission. The Academic Relations team had planned to schedule meetings for the CEO, which were cancelled on the CEO’s request.

h. The investigation team found no evidence that the CEO made inappropriate personal comments with respect to other board members.

Quarterly, 9-month results

The Company has announced its quarterly results for the quarter and nine months ended December 31, 2019. The statutory auditors have issued an unmodified opinion on the financial statements for the periods. The audit opinion is available on the company website.

On October 24, 2019, the US Securities and Exchange Commission (SEC) had initiated an investigation into the whistleblower complaints. Infosys also received letters from Indian regulatory authorities seeking information on the issue. The company continues to cooperate with the SEC and Indian regulatory authorities, said the statement.

It may be recalled that a stockholder class action lawsuit was filed in the US District Court for the Eastern District of New York against the company and some of its current and former officers. The complaint alleged claims for violations of US federal securities laws, and sought unspecified compensatory damages and other relief on behalf of a purported class of purchasers of the company’s securities from July 7, 2018, through October 20, 2019. The company intends to vigorously defend the litigation, said Infosys in its statement.

The investigation into the whistleblower complaints comprised a team of over 15 attorneys, led by Pallavi S Shroff, Managing Partner of Shardul Amarchand Mangaldas, along with partners Sandip Beri, Ajit Warrier, Anuj Berry and Smarika Singh.

PricewaterhouseCoopers supported the probe in computer forensics and accounting analysis.

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