Alibaba, the Chinese e-commerce giant that's preparing what may be the biggest initial public offering in U.S. history, said Friday it has discovered suspicious accounting at its Hong Kong film company, raising questions about whether it has been conducting sufficient due diligence amid a spree of recent acquisitions.
Alibaba paid about $800 million two months ago to acquire Alibaba Pictures Group, formerly the ChinaVision Media Group, and the company said Friday it had discovered "possibly noncompliant accounting treatments” related to insufficient provision for impairment on assets, or write-downs, which weren't identified, the New York Times reported. As a result, Alibaba said it will miss an Aug. 31 deadline to release its first-half earnings numbers for 2014. The company's shares will also be suspended from trading until its audit committee completes a formal inquiry.
The disclosure of the accounting issues has raised questions about the thoroughness of Alibaba's due diligence process ahead of what analysts expect could raise up to $20 billion in a U.S. IPO as early as next month. “The big question is whether Alibaba did proper accounting due diligence,”Paul Gillis, a professor at Peking University’s Guanghua School of Management, who writes a blog about accounting issues in China, said, according to the Times.
“Alibaba has little expertise in many of the new businesses, which means that it has to rely on incumbent managers in business decisions,” Joseph Fan, a finance and accounting professor at the Chinese University of Hong Kong, said. "I suspect Alibaba, like most Chinese companies, does not have the ability to manage the increasing number of unfamiliar yet decentralized divisions and people.”
In an emailed statement to the Times, Alibaba said that it "fully supports the new management of Ali Pictures as they thoroughly review and rectify the possible financial noncompliance they have found with the former ChinaVision." Alibaba said that the accounting issues had been discovered by new management as part of “an initial review of the company’s financial and business affairs.”