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Is Cognizant Technology “Boiling The Ocean”?

Boiling the Ocean

This prior post highlighted the Foreign Corrupt Practices Act scrutiny of Cognizant Technology Solutions first disclosed in late September 2016. This post discussed how the company’s FCPA scrutiny presented an interesting, albeit early, FCPA case study as to the FCPA’s many “ripples.” (See here for the article “FCPA Ripples“).

The case study has become all the more interesting given that Cognizant recently disclosed: “in 2016, we incurred $27 million in costs related to the FCPA investigation and related lawsuits. We expect to continue to incur expenses related to these matters in 2017 and future periods.”

The question ought to be asked: is Cognizant “boiling the ocean”?

The phrase “boiling the ocean” was used by then Assistant Attorney General Leslie Caldwell in April 2015. As highlighted in this post, against the backdrop of ever-escalating FCPA investigative fees (an issue that has been highlighted on FCPA Professor for years), Caldwell stated:

“All too often, criticism is leveled against the Justice Department for purportedly causing companies to spend years, and many millions of dollars, investigating potential violations.  This is particularly true in the FCPA context where the need for international evidence can add to the expense and burden of an investigation.  Critics wrongly question the wisdom of disclosing misconduct and cooperating with the government in light of what they perceive to be the department’s requirement that companies then must conduct unnecessarily costly, time consuming and widespread investigations.

There is no question that some cooperating companies spend large sums of money investigating potential misconduct and correcting internal controls issues that allowed the misconduct to occur.  The decision to incur those costs, however, is one made by those companies, not a requirement of the department.  When a company chooses to cooperate with the government, the manner in which the company approaches its cooperation, and its own investigation of the conduct, can significantly affect the length of the investigation and the costs incurred by the company.

Although we expect internal investigations to be thorough, we do not expect companies to aimlessly boil the ocean.  Indeed, there have been some instances in which companies have, in our view, conducted overly broad and needlessly costly investigations, in some cases delaying our ability to resolve matters in a timely fashion.”

Assistant Attorney General Caldwell returned to this issue in a November 2016 FCPA speech (see here for the prior post and video clips) when she stated:

“I’ve seen over the years, alot of companies that did way too broad of investigation and in my experience that was not the result of what DOJ told them to do.”

During my nearly decade-long FCPA private practice career, I conducted several FCPA internal investigations around the world. Such investigations are not a cost-free exercise.

However, Cognizant’s disclosure that it “incurred $27 million in costs related to the FCPA investigation and related lawsuits” strikes me as unusual for an internal investigation that appears to have begun in the second half of 2016 and appears to be based on a single country (India).

In short, if I were a Cognizant board member (not to mention a Cognizant shareholder), I would have some serious concerns.

In any event, set forth below is additional information for Cognizant’s recent disclosure.

“As previously disclosed, the Company is conducting an internal investigation focused on whether certain payments relating to Company-owned facilities in India were made improperly and in possible violation of the U.S. Foreign Corrupt Practices Act, or FCPA, and other applicable laws. In September 2016, we voluntarily notified the Department of Justice, or DOJ, and the Securities and Exchange Commission, or SEC, and are cooperating fully with both agencies. The investigation is being conducted under the oversight of the Audit Committee, with the assistance of outside counsel. To date, the investigation has identified a total of approximately $6 million in payments made between 2010 and 2015 that may have been recorded improperly. In 2016, we recorded an out-of-period correction related to $4 million of such payments that were previously capitalized that should have been expensed. The recorded correction resulted in an increase of selling, general and administrative expenses of $4 million, a reduction in depreciation and amortization expense of $1 million, and a reduction in property and equipment, net of $3 million. These out-of-period corrections and the other $2 million in potentially improper payments were not material to any previously issued annual or interim financial statements and are not material to the financial results for the year ending December 31, 2016. Based on the results of the investigation to date, the members of senior management who may have participated in or been aware of the making of the identified potentially improper payments and 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.”

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