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Alibaba Facing SEC Investigation Over Accounting Practices

Alibaba Group Holding Ltd. fell the most in four months after the e-commerce giant said it’s being investigated by the U.S. Securities and Exchange Commission over its accounting practices and whether they violate federal laws.

The regulator is looking at data reported from the company’s Singles’ Day promotion, Alibaba’s biggest shopping day, and how Alibaba consolidates results from affiliated companies, including logistics partner Cainiao Network, the Hangzhou, China-based company said in its annual report. Alibaba said it’s providing documents and cooperating with the probe, which is also examining related-party transactions.

Alibaba fell 6.8 percent to $75.59 in U.S. trading, the biggest drop since January. It was down less than 1 percent this year through Tuesday. The stock fell 22 percent last year, hurt by a slowdown in China’s economy, where it accounts for more than three-quarters of the nation’s online retail sales. The probe appears to be aimed at improving transparency for key parts of the business, said Paul Gillis, an accounting professor at Peking University’s Guanghua School of Management.

“We don’t have enough details to know how serious this is at this point,” said Gillis.

Accounting Concerns
Alibaba declined to comment beyond the disclosure in the annual report.

“The S.E.C. advised us that the initiation of a request for information should not be construed as an indication by the SEC or its staff that any violation of the federal securities laws has occurred,” Alibaba said. “This matter is ongoing, and, as with any regulatory proceeding, we cannot predict when it will be concluded.”

Alibaba’s “unusual” accounting practices have long been a concern among some investors, said RJ Hottovy, an analyst at Morningstar Inc.

“It’s always been an overhang on the stock but this certainly more or less confirms it,” Hottovy said. Even so, Alibaba has well-known auditors, who have vetted its numbers, he said.

Cainiao Question
Alibaba owns a 47 percent stake in Cainiao, which counts Temasek Holdings Pte, GIC Pte and Khazanah Nasional Bhd as investors. The company doesn’t directly own physical infrastructure including property, trucks or delivery personnel. Instead it provides a centralized information system to support courier companies.

Because of its ownership level, Alibaba reports only its percentage of the losses at Cainiao. The U.S. regulator may be asking whether Cainiao should be consolidated completely, according to Gillis. While that would mean that Alibaba would have to include 100 percent of the losses from the business, it wouldn’t be a big deal, he said.

“That wouldn’t have a huge affect on the financial statements,” Gillis said.

The issue related to Alibaba’s Singles’ Day sales figures were related to confusion over the company’s definition of gross merchandise volume, which refers to total transactions. The current metric doesn’t remove orders that were fake, which could have inflated sales figures, Jason Helfstein, a New York-based analyst at Oppenheimer & Co Inc. wrote in a report.

It’s possible that 20 percent to 30 percent of transactions on Alibaba’s retail platform could be from sellers buying their own products to inflate their sales rankings, Helfstein said.

“Given BABA’s track record of improving financial clarity and cracking down on fake products, we think the company is trying to become more transparent,” Helfstein said.

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