Why Shares of Cognizant Technology Solutions Corp. Slumped Today

By Markets Fool.com

Image source: Cognizant.

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What happened

Shares of Cognizant Technology Solutions Corp. (NASDAQ: CTSH) tumbled on Friday following the company's announcement that it is conducting an internal investigation in order to determine whether payments related to facilities in India were improper. Cognizant also disclosed that its president had resigned. At 11:45 a.m. EDT, the stock was down about 15%.

So what

Cognizant's investigation is in its early stages, and the company was unable to provide any guidance on how the probe could affect its operations, cash flows, or financial position. The audit committee, as well as outside counsel, are providing oversight, and Cognizant has voluntarily notified the United States Department of Justice and the Securities and Exchange Commission.

At issue are payments made related to a small number of company-owned facilities in India. Cognizant aims to determine whether these payments violate the U.S. Foreign Corrupt Practices Act. It gave no indication as to when the probe would be completed.

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In addition, Cognizant revealed that Gordon Coburn, its president, had resigned. Rajeev Mehta, current head of IT services, has been appointed to replace him.

Now what

At this point, it's difficult to tell whether this internal investigation will have a significant impact on the company. If the probe remains constrained to a small number of facilities or if it finds no evidence of wrongdoing, the decline in the stock price on Friday will prove to be an overreaction. But the resignation of the president on the same day suggests that the two pieces of news are related. Only time will tell what impact the probe will have on Cognizant's business.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cognizant Technology Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.