- REUTERS/Ruben Sprich
The SEC is investigating the world’s largest e-commerce firm, Alibaba, over its accounting practices.
The investigation was disclosed in Alibaba’s annual report on Monday, and the company said it was complying with federal regulators.
Here’s the key part of the annual report (emphasis ours):
Earlier this year, the U.S. Securities and Exchange Commission, or SEC, informed us that it was initiating an investigation into whether there have been any violations of the federal securities laws. The SEC has requested that we voluntarily provide it with documents and information relating to, among other things: our consolidation policies and practices (including our accounting for Cainiao Network as an equity method investee), our policies and practices applicable to related party transactions in general, and our reporting of operating data from Singles Day.
We are voluntarily disclosing this SEC request for information and cooperating with the SEC and, through our legal counsel, have been providing the SEC with requested documents and information. The SEC 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. This matter is ongoing, and, as with any regulatory proceeding, we cannot predict when it will be concluded.
Alibaba, which was founded by Chinese billionaire Jack Ma, went public on the New York Stock exchange in 2014 in the biggest-ever initial public offering. The stock fell about 3% on the news of the investigation.
A few people on Wall Street have been talking about Alibaba’s accounting issues for some time now. Most recently, short seller Jim Chanos, the founder of Kynikos Associates, told a crowd of money managers in Las Vegas that Alibaba’s accounting was “some of the most questionable accounting” he had ever seen.
“What the company is really earning, we don’t know,” he said earlier this month at the SkyBridge Alternatives conference.
He started pitching the idea as a short as early as November.
Back in September, Jon Laing of Barron’s published a massive, 3,000-word story about the decline of Alibaba’s business.
Business Insider’s Bob Bryan broke it down at the time, saying the story made three basic claims:
“Dream” stock: Alibaba is overvalued at its 25x price-to-earnings multiple. It should be valued closer to eBay’s 15x forward price-to-earnings since the businesses have similar operations. “Puzzling” user numbers: Alibaba’s user numbers seem too high. The government says there were 361 million online shoppers in all of China during 2014, while Alibaba claims to have 367 million active users buying just from its site. The article questioned the accuracy of Alibaba’s number. “Hard-to-square” user spending: The amount Alibaba says users spend on its site is too high. Barron’s said US consumers spend $1,655 per shopper online, while Alibaba claims that its customers spend $1,215 a year on its site alone. Given the higher relative income of the US population, those numbers are too close. Initially, Laing wrote that Alibaba claimed its average shopper spent 26% more than the average US online shopper. That error was later corrected by Barron’s.