The US-based Cognizant, whose four out of five of whose employees are based in India, is facing a lawsuit that questions its controls over its financial reporting, which could open a Pandora's box involving its auditors.
Rosen, a New York-based law firm, filed a case in US courts against Cognizant representing unnamed shareholders of the company. Cognizant declined to comment on the lawsuit.
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The suit will add pressure on the Cognizant management to complete investigations into bribery allegations and prepare for the legal challenge. The bribery probe last week coincided with Cognizant announcing the sudden departure of its president, Gordon Coburn, without citing a reason.
Coburn has worked in Cognizant since the company's inception as a joint venture with Dun & Bradstreet and was its chief financial officer till 2012 before he was elevated as president. Rajeev Mehta, Cognizant’s IT services head, has been named the new president.
"If Cognizant gets into prolonged litigation, you don't know where this will head," said an executive with an IT firm that has dealt with legal cases. Because there are alleged financial misdemeanours, even the auditors could be questioned.
The same executive said companies typically sought out-of-court settlements in such cases. Cognizant must regularly update the US Securities and Exchanges Commission on the status of its probe.
Cognizant Chief Executive Francisco D'Souza is struggling to revive business after the company lowered its annual revenue forecast in August for the second time in the year. The growth forecast of 8.5-9.5 per cent, the lowest in a decade, was due to project cancellations and cutbacks by banking and healthcare clients.
Cognizant, among the first companies to identify clients were increasing their spending on digital services, has not been able to leverage the shift.
"The problem for Cognizant and the rest of the Indian business is that for the top 20 in aggregate traditional business represents 79% of the total business and 21% is the new business. What this means for Cognizant is that although they lead the Indian firms in moving to the new business such as Digital the sizes of their traditional business is holding them back.," says Peter Bendor-Samuel, founder and chief executive officer at Everest Group, the global technology researcher. "Put another way they simply can’t grow the new business fast enough to offset the decline in growth in the traditional segment."