Cognizant reveals corruption probe in US, replaces president

Cognizant appointed India-born Rajeev Mehta as the new president of the company after the current president Gordon Coburn resigned


Cognizant’s offices in Chennai. The development adds further pressure on the outsourcing firm, which expects to grow this year at the slowest pace since 1996. Photo: Mint
Cognizant’s offices in Chennai. The development adds further pressure on the outsourcing firm, which expects to grow this year at the slowest pace since 1996. Photo: Mint

Bengaluru: Cognizant Technology Solutions Corp. on Friday said it was cooperating with US authorities in an investigation related to the Foreign Corrupt Practices Act, and carrying out its own probe to determine whether some payments made in India breached the law.

The Nasdaq-listed company, which has most of its 244,300 employees based in India, also announced the resignation of its president Gordon Coburn, whom it replaced with India-born Rajeev Mehta.

The development, which sent Cognizant shares tumbling, piles further pressure on the outsourcing company, which expects to grow this year at the slowest pace since 1996, when Cognizant started serving outside clients after being separated from Dun and Bradstreet.

“The company is conducting an internal investigation into whether certain payments relating to facilities in India were made improperly and in possible violation of the US Foreign Corrupt Practices Act and other applicable laws,” said a Cognizant statement issued to the US stock exchange.

“The investigation is being conducted under the oversight of the Audit Committee, with the assistance of outside counsel, and is currently focused on a small number of company-owned facilities,” it added.

Six of the 11 members of Cognizant’s board are part of the audit committee.

A spokesman for Cognizant declined to say if Coburn’s decision to resign was related to the investigation.

“It was Gordon’s decision to resign,” the spokesman said.

Cognizant’s shares fell as much as 15% to $46.71 in early trading on the Nasdaq, their lowest in about two years.

“The company has voluntarily notified the United States Department of Justice (the “DOJ”) and United States Securities and Exchange Commission (the “SEC”) and is cooperating fully with both agencies. The internal investigation is in its early stages, and the company is not able to predict what, if any, action may be taken by the DOJ, SEC or any governmental authority in connection with the investigation or the effect of the matter on the Company’s results of operations, cash flows or financial position,” said the Teaneck, New Jersey-based company.

The Foreign Corrupt Practices Act makes it unlawful for US firms to make payments to foreign government officials to assist in “obtaining or retaining business”.

The spokesman for Cognizant said: “We uncovered this situation through our own compliance processes, voluntarily reported it to the government, and are fully cooperating with them.”

Nonetheless, this development marks a blot for chief executive officer Francisco D’Souza, who has steered the company well since taking the helm in 2007. Under D’Souza’s leadership, Cognizant has grown from $2.13 billion to end last year with $12.42 billion in revenue.

In August, Cognizant, which follows a January-December fiscal year, for the second time this year, cut its full-year revenue growth forecast sharply to 8.5-9.5%, half the pace at which revenue expanded last year.

“On the negative side, as we previously mentioned, we think the change suggests downside to either Sept/Dec Q consensus estimates,” Keith Bachman, analyst with BMO Capital Markets, wrote in a note on Friday after Cognizant named Mehta as the new president.

“On the positive side, we think change of management is needed at CTSH (Cognizant). Over the next three years, we believe that growth rates will be more in the 5-10% annually. However, since current management is accustomed to rapid growth, we believe management will push to accelerate growth, potentially at the expense of margins, rather than accept current market conditions. Rather than hire from within, we believe that CTSH should look for new external leadership, including at the board level.”

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