Alibaba’s accounting methods under scrutiny by the SEC

Although Cainiao’s business is capitally intensive and appears to be controlled by Alibaba it is unclear how much of this capital will be spent by Alibaba as opposed to its delivery partners.

U.S regulators have started probing into the accounting practices of Alibaba Group Holding Ltd in order to determine whether the Chinese e-commerce giant has violated federal laws, sending its shares into a spiraling crash.

The Chinese e-commerce has said that the SEC had launched the investigation earlier this year. Its relation with affiliated companies and its growth rates have dodged the company for years.

The investigation could also have a bearing on the fact that the Chinese company sells fake products on its website. The latest investigation could go to spur the need for more transparency in Alibaba’s operations. Furthermore, it could also impact its acquisition spree and create uncertainty over its earnings.

Although the SEC has said that its investigation into Alibaba’s workings should not be read as through the company had violated federal securities laws, the fact that it sells fakes, and the perception that it needs more internal transparency has led to the crumbling of its share price. Alibaba has clarified that it is cooperating with the authorities.

In its investigation into the company, the SEC has focused on the accounting practices followed by Cainiao Network, Alibaba’s logistics firm which has a 47% stake in the company. In particular, accounting practices related to third party transactions are in focus, especially its reported turnover on “Singles’ Day”.

Many merchants in China have questioned its results of the November 11 event wherein Alibaba had reported its turnover to exceed the combined sales of Black Friday and Cyber Monday, the hugely popular shopping events in the United States.

In 2015, Alibaba reported net transactions worth $14 billion on Singles’ Day.

Cainiao came into being in 2013 and was created jointly by Alibaba, Fosun Group, Yintai Holdings, Forchn Holdings and five other major delivery companies. Its corporate results have in the past, have not been consolidated in Alibaba’s financial statements, thus raising questions among analysts and investors.

However, Alibaba has said its latest annual report discloses Cainiao’s revenues, net loss, assets and liabilities. This is the first time it has done so. According to Robert Christie, these figures are “exactly the kind of robust and transparent information that will address the underlying issues in SEC’s inquiry”.

Christie went on to add, there are no other undisclosed SEC inquiries.

According to Jim Chanos, a noted short-seller at Kynikos Associates, Alibaba “appears to control Cainiao via 48 percent stake and consolidates the results via equity method. Cainiao’s business is capitally intensive. It is unclear how much of this capital will be spent by Alibaba versus the delivery partners.”

Chanos has called Alibaba’s delivery and warehouse infrastructure “a risk”.

In the last one year, Alibaba’s share prices have fallen by 12.3%. On Wednesday it fell further by 6.8% to $75.59.

Categories: HR & Organization, Regulations & Legal, Strategy


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