Ineffective “control environment” at the top management of India’s third largest IT/BPO sector employer Cognizant Technologies Solutions led to improper payments worth approximately $5 million being made to gain permits and building licences for some of its 12 facilities in India, an internal investigation by the company has unearthed.
The New Jersey-based, firm made a filing with the US Securities and Exchange Commission (SEC) on September 30, saying it was conducting an “internal investigation” into the these payments, which “were made improperly and in possible violation” of the US Foreign Corrupt Practices Act (FCPA). On October 5, and October 27 “two purported securities class action complaints” were filed in the US District Court of New Jersey, naming the company and some of its officers alleging violations of the FCPA.
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On October 31, another lawsuit was filed in the Bergen County Superior Court — Law Division, naming the company and all of its directors along with certain of its current and former executive officers in the case.
“… based on the results of the internal investigation to date, we concluded that as of December 31, 2015, and in subsequent interim periods, we did not maintain an effective control environment. Specifically, we did not maintain an effective tone at the top as certain members of senior management may have participated in or failed to take action to prevent the making of potentially improper payments by either overriding or failing to enforce the controls established by the company relating to real estate and procurement principally in connection with permits for certain facilities in India,” Cognizant said on Monday.
Incidentally, the day Cognizant announced the improper payments issue, it also announced in the same SEC filing, the resignation of its President Gordon Coburn, who was held the post since February 2012. Even as the company did not confirm that Coburn’s resignation was related to the corruption case, it said the decision to quit was his own.
“Based on the results of the investigation to date, the members of senior management who may have participated in or failed to take action to prevent the making of the identified potentially improper payments are no longer with the company or in a senior management position,” the firm also said in its communication to the SEC on Monday, in which it has detailed its earnings for the quarter ended September.
For the third time in the current year, Cognizant has reduced its full year revenue growth estimates, particularly on account of its banking sector clients holding back their investments, added to UK customers making discretionary spending in light of the vote for Britain to exit the European Union.
The company marginally reduced the upper end of its annual revenue forecast, and now expects its topline for financial year ending December 2016 to be in the range of $13.47-$13.53 billion, instead of the earlier revenue guidance of $13.47-13.60 billion.
For the three-month period ended September, the company reported an increase in its revenues by 8.4 per cent to $3.45 billion, thus meeting its estimate of $3.43-3.47 billion topline for the said quarter.
However, Cognizant also said that as it was not able to predict the scope, duration or result of the ongoing internal investigation, the class action suits, as well as any other investigations by the SEC or the US Department of Justice, it was “presently unable to develop a reasonable estimate of a possible loss or range of losses” that were related to these cases.