SEC to Investigate Alibaba Over Accounting Practices

The Chinese online retailer has declined by 6.8% after SEC probes its Singles Day' sales figure.

Alibaba Group Holding Limited was hit the most in 4 months after the Chinese E-commerce company stated the U.S Securities and Exchange Commission is investigating its accounting methods and determining whether they breach federal regulations. The regulator is having a look at the data reported regarding the online retailer’s Singles’ Day Promotion, the online retailer’s shopping day, and how the company consolidates results from associated organizations, including logistics division Cainiao Network, the organization stated in its yearly report.

The company stated its giving documents and collaborating with the inquiry, which is also conducting an examination of related-pay transactions. In U.S trading, the organization’s shares declined by 6.8%, the largest decline since January. It was reduced by less than 1% in 2016 through Tuesday. The share price of Alibaba decreased by 22% in 2015, hit by the economic slowdown in China, which it contributes for over 75% of the country’s online retail sales.

The investigation seems to be targeting at enhancing transparency for important parts of the business, stated Professor of accounting at Peking University’s Guanghua School of Management. The company refused to share views beyond the revelation in its yearly report. For a long time, the Hangzhou based organization’s “unusual” accounting methods have continued to be a concern amongst a number of investors, stated Morningstar’s analyst RJ Hottovy.

Alibaba is owner of 47% share in Cainao, which has a number of investors. These include Temasek Holdings Pte, Khazanah Nasional Bhd and GIC Pte. The organization is not a direct owner of physical infrastructure. These include trucks, delivery personnel or property. Instead it offers a centralized information technology to back courier service providers.

Due to its level of ownership, the web retailer just reports its loss percentage at Cainao. The American regulatory body might be inquiring whether Cainao must be completely, revealed Gills. Whereas that would mean that the company would need to include the entire losses from the organization, it would not be a huge deal, he stated.

The matter related to the company’s Singles’ Day sales record was associated to confusion regarding the organization’s gross merchandise volume( GMW) definition. GMW refers to cumulative transactions. The present metric does not remove fake orders, which could’ve exaggerated sales figures.

It is likely that 20% to 30% of transactions on the company’s marketplace could be done by merchants purchasing their products to improve their sales ranks, Helfstein stated. SEC inquiry disclosure was done less than 14 days after the organization lost its membership in International Anti-Counterfeiting Coalition. Some American retailers who lobby US officials are amongst the Coalition members. These members have testified before Congress that they view Jack Ma’s company as a large marketplace for counterfeits.

Gucci America, Tiffany and Micheal Kors quitted the group to protest after the company became a coalition member in April. The SEC inquiry raised the likelihood that the stellar results reported by Alibaba might have been too nice to be real, experts state.

The company has a huge foothold in the China. It has taken unorthodox measures, like selling its payment facility into an organization Jack controlled without informing Yahoo, a huge Alibaba investor.