BackPricing pressure may persuade IT firms to manipulate large deals
Infosys CEO and CFO are accused of signing large deals with no profit margins to artificially boost revenue growthDuring the quarter ended 30 June, Infosys announced 13 large contracts worth $2.7 billion that included the deal with ABN AMRO
PremiumSoftware services contracts are sometimes designed in such a way that they are not profitable in the initial years but deliver profits later, experts said in response to allegations that Infosys’s top executives signed billion-dollar deals with no profit margin.
“Financial engineering is expected in case of large deals. So, one cannot judge the profitability of a deal at the onset," said Siddharth Pai, an IT consultant and venture capitalist, without referring specifically to Infosys.
An anonymous whistleblower complaint has accused Infosys chief executive Salil Parekh and chief financial officer Nilanjan Roy of signing large contracts with no profit margins to artificially boost revenue growth. The whistleblowers also claimed that the company’s top executives bypassed reviews and approvals for large deals, among other unethical practices.
While Pai declined to comment on whether Infosys’s top executives have made enough disclosures to the board, he said that not every deal needs to go to the board for approvals.
“Disclosures need to be made but the decision on a deal can be made by the chief financial officer or even the P&L (profit and loss) head of a certain business," Pai added.
IT companies in general are facing immense pricing pressure in their legacy business, said Sudin Apte, research director and chief executive of Offshore Insights, an IT research firm.
“I cannot comment on the truth of the claim, but it is certainly denting the image of Infosys," he added.
The whistleblower allegations also claimed that the complainants were pressured to not immediately recognize reversals of $50 million of upfront payment in the FDR (First Tier, Downstream and Related Entities) contract, as it would crimp quarterly profit and negatively affect the company’s stock price. However, a former board member of Infosys said on condition of anonymity that the allegations do not have much merit as it is impossible for a company like Infosys “to hide financial numbers of such magnitude".
The whistleblowers alleged that Parekh directed them to make wrong assumptions to show higher margins and CFO Roy prevented them from showing the real picture about the large deals in board presentations.
“Several billion-dollar deals of last few quarters have nil margin…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 read.
During the quarter ended 30 June, Infosys announced 13 large contracts worth $2.7 billion that included the deal with ABN AMRO.
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