Posted May 29, 2016 7:15 pm by Comments

Alibaba Group Holding (NYSE:BABA) recently filed its annual report on Form 20F with the SEC which included the following disclosure of an SEC investigation into BABA’s accounting:

Pending SEC Inquiry

       Earlier this year, the 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.

As the China Accounting Blog explains in detail, there are three issues disclosed by BABA the SEC is looking into:

  1. The first relates to consolidation policies and practices (including accounting for Cainiao Network as an equity method investee).
  2. The second issue is related party transactions. BABA certainly has plenty of them and they have been a major concern for shareholders, especially since Alipay was taken out of the BABA structure.
  3. The third issue relates to the reporting of operating data from singles day (November 11, the biggest online commerce day of the year in China).

Again, the China Accounting Blog goes into considerable detail about each of these accounting issues, but still concludes by saying:

BABA says it cannot say how long the SEC investigation will take to be resolved. Such matters often drag on for a considerable period of time. I don’t see the issues discussed here to be a huge problem for BABA, even if resolved against BABA. However, without more details, there could be surprises.

It was also noted:

I think this is a more serious matter than a routine Division of Corporate Finance inquiry. The Form 20F has a section where the company reports any unresolved staff comments. BABA says there are none of these. That, together with BABA’s use of the term ‘investigation’, tells me that the process is likely being directed by the SEC’s Division of Enforcement. BABA correctly points out in its filing that the process should not be construed as an indication of a violation of securities laws.

Its also not the first time that Alibaba Group Holding has been investigated by the SEC as below the most recent disclosure is the following disclosure:

Concluded SEC Inquiry

       On January 30, 2015, following the release of the so-called SAIC “white paper,” the SEC initiated a non-public inquiry into whether any violations of the federal securities laws had occurred. The SEC advised us that the existence of the inquiry should not be construed as an indication by the SEC or its Staff that we or any of our officers or directors had violated any of the federal securities laws. As part of its inquiry, the SEC requested that we voluntarily provide certain information. The SEC’s initial information request covered background facts and other information related to our interaction with the SAIC, and related matters. In September 2015, the SEC notified us that it had concluded its inquiry and, based on the information it had received, it did not intend to recommend an enforcement action against us.

One does have to wonder though if any SEC investigation of Alibaba Group Holding could have something to do with the clout eBay Inc (NASDAQ:EBAY) or Amazon.com, Inc.(NASDAQ:AMZN) might have in Washington DC with the regulators and the current administration.

To read the whole blog post, BABA v the SEC, go to the China Accounting Blog. In addition, check out our China closed-end fund list and China ETF list pages.

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