SEC Investigation Of Alibaba Focuses On Questionable Accounting For 'Singles' Day" Sales

Questionable accounting practices have caused Chinese companies to be the most frequently de-listed (expelled) from global stock exchanges. This is not a trifling matter. Especially given the fact that Alibaba claimed $14.3 billion in sales for the day last year.

That said, the economic interrelationship between the US and China is so deeply infested with political considerations and concerns about their potential consequences that there is no such thing as 'purely business' matter between the two. JL


Charles Clover reports in the Financial Times:

The SEC’s investigation started “earlier this year” and is looking at how it accounts for its reporting of the transactions among its many businesses. The SEC has also asked about the massive, and unaudited, numbers Alibaba publishes on its sales on Singles Day, the November 11 shopping festival, the biggest in the global calendar.
Since Alibaba made history with the biggest ever $25bn listing on the New York Stock Exchange in 2014, the Chinese internet group’s fortunes in the US have seemed only to rise. Jack Ma, Alibaba’s founder, a former English teacher from Zhejiang province, now enjoys access at the highest levels in Washington, symbolised by his quiet meeting on May 17 with US President Barack Obama.
Just over a week after that White House tête-à-tête, however, the company revealed that a different set of US officials are taking a rather less friendly interest in its business.

Alibaba disclosed in its annual report that it is under investigation by the US Securities and Exchange Commission over possible violations of federal securities laws. Its share price dropped nearly 7 per cent that day.

In its filing, Alibaba said the SEC’s investigation started “earlier this year” and is looking at how it accounts for its Cainiao Network logistics business and its reporting of the transactions among its many businesses. The SEC has also asked about the massive, and unaudited, numbers Alibaba publishes on its sales on Singles Day, the November 11 shopping festival, the biggest in the global calendar.

While the markets initially dropped on news of the probe, they rebounded more than 2 per cent on Thursday. And some industry analysts were quite sanguine.“A financial non event”, read a research note by HSBC. Morgan Stanley analysts called the probe a “misunderstanding”.
Both banks said that while the SEC might force Alibaba to consolidate a logistics affiliate, Cainiao, into its financial statements, and restate its Singles Day sales total, neither of these actions would affect Alibaba’s overall finances significantly.

The latest investigation marks the second time in two years that the SEC has opened an probe of Alibaba. In 2015 following a damning report by a Chinese regulator, the US watchdog launched an investigation into whether the regulator’s earlier criticisms should have been disclosed by Alibaba. But after nine months of investigating, the SEC dropped the matter.

Paul Gillis, a professor of accounting at Peking University, said the biggest risk for Alibaba would be if the SEC decided to take issue with the way the tech group calculates gross merchandise value, or total sales across its China ecommerce platform. “I think this is serious investigation” he said.
The SEC has so far asked for information about “operational data” from Singles Day, which analysts have taken to mean GMV.
“GMV is the only operational data they release on Singles Day so they really are talking about GMV,” one analyst said.
Last year Alibaba said the company registered $14.3bn in total sales for the day. 

Unlike revenues and profits, GMV is not an audited number regulated by GAAP accounting rules, which leaves considerable leeway for companies to calculate it how they choose. Alibaba includes items that have not been paid for, along with fake sales known as “brushing” in China, which merchants use to inflate their sales totals and get more prominent placement.

Some of Alibaba’s competitors tabulate the number differently from Alibaba. Competitor JD.com, for example, will not count an unpaid transaction if it is more than Rmb2,000 ($305).

FT archive

China’s Singles Day sets spending record

November 2015: Alibaba sales pass $11bn in world’s biggest online shopping frenzy

Some analysts have long argued that some of Alibaba’s numbers strain credulity. In March the group claimed 12 month sales of Rmb3tn, more than the entire ecommerce market of the US in 2015. The company also reported it had 423m buyers. Taken together, the numbers suggest that each customer spent an average of Rmb7,092 in purchases during the year.

Anne Stevenson-Yang of J Capital Research says she believes Alibaba’s GMV may be overstated by up to 50 per cent because of the inclusion of faked orders, while others put it more conservatively at 20-30 per cent.
But there is a long distance between raising concerns about the way sales numbers are calculated and proving a deliberate violation of US securities law, analysts say.
“What the SEC would have to find is that somebody at Alibaba knew that the numbers they were reporting were bogus,” Mr Gillis said.
Alibaba’s disclosure also revealed that the SEC is looking at “our consolidation policies and practices . . . our policies and practices applicable to related party transactions in general”. It also specifically mentioned the Cainiao logistics business.
Alibaba’s already complex ownership structure has become even more Byzantine since its initial public offering, as it races into sectors such as film, health, finance and logistics since its record breaking initial public offering.
Analysts say investors have grown uncomfortable with the sprawling and opaque structure.
Shaun Rein, head of Shanghai-based China Market Research Group, says the hedge fund he advises has raised concerns about how Alibaba allocates costs among different entities and whether it affects its margins and share price. “That’s a concern that has been brought up to me many times,” he says.
Alibaba declined to comment, though it said in its annual report that it has increased its disclosure on Cainiao in response to the SEC investigation.

©Bloomberg

Alibaba founder Jack Ma now enjoys access at the highest levels in Washington

Mr Ma is not just the biggest shareholder in Alibaba. He is also one of the principal owners of Ant Financial, which controls Alibaba’s online payment platform Alipay and is contemplating a separate stock market listing.

Meanwhile Alibaba Pictures and Alibaba Health are listed on the Hong Kong stock exchange. Alibaba also has large stakes in several joint ventures such as a 50 per cent venture which does food delivery, and 47 per cent of Cainiao.
At the moment, Alibaba only includes 47 per cent of Cainiao’s operating loss, or Rmb295m, in its bottom line, reflecting that it does not have a majority stake.
If the logistics business were consolidated, 100 per cent of its financial operations would have to be included. An Alibaba spokesperson said that according to US securities law, it is not required to consolidate Cainiao as it does not have voting control of the company.
But Morgan Stanley noted that Cainiao’s revenues are a mere 3 per cent of Alibaba’s Rmb101bn last year. The analysts called the Wednesday sell-off a “buy on dip opportunity”.
Duncan Clark, head of Beijing-based consultancy BDA who has just written a book on Alibaba, said the SEC investigation may represent a “clash of cultures” between the bright line rules on Wall Street and sprawling “Zhejiang capitalism” of Mr Ma’s native region in southern China where relationships are hazier.
“It’s a phalanx model of capitalism,” says Mr Clark. “It’s about co-investment, interdependence, and interlocking relationships. Alibaba is on the front lines of this clash of cultures.”