Alibaba faces probe over accounting practices

E-commerce giant Alibaba, which lists shares on the New York Stock Exchange, said the investigation by the Securities and Exchange Commission was not an indication it had violated any law.
E-commerce giant Alibaba, which lists shares on the New York Stock Exchange, said the investigation by the Securities and Exchange Commission was not an indication it had violated any law.PHOTO: REUTERS

Investigation focuses on how it accounts for affiliated companies

HONG KONG • Alibaba Group, the e-commerce giant, said it was under investigation by United States securities regulators over its accounting practices, in a potential setback for a company long seen as a symbol of China's growing technological might.

Cainiao Smart Logistics Network, which is 47 per cent owned by Alibaba, is not consolidated into the e-commerce giant's accounts, and now the Securities and Exchange Commission (SEC) is asking why.

The investigation - disclosed in a stock filing - appears to focus on how Alibaba deals with a web of companies in which it owns stakes or has some say in the operations.

The company said the SEC was investigating how Alibaba accounts for affiliated companies, including a logistics venture, and how it treats related-party transactions.

Alibaba said it was voluntarily cooperating with the commission, and the investigation was not an indication it had violated any law. Still, the disclosure risks tarnishing a rare Chinese company that has won global fame for its business acumen.

Little-known Cainiao is at the heart of Alibaba's push into rural areas in China and overseas markets as it develops giant hubs around the country's biggest cities, including one near Beijing as big as 37 football fields.

Little-known Cainiao is at the heart of Alibaba's push into rural areas in China and overseas markets as it develops giant hubs around the country's biggest cities, including one near Beijing as big as 37 football fields.

Created in 2013, Cainiao does not own the trucks and vans that ship Alibaba packages. Instead, it provides a centralised information system to marshal trucking, shipping and delivery firms to get products from seller to buyer.

In some ways, Cainiao is Alibaba's answer to Amazon.com's investment in logistics and warehouses.

The SEC probe appears to be aimed at improving transparency and getting Alibaba to include all the earnings and losses from affiliates, said accounting professor Paul Gillis from Peking University's Guanghua School of Management.

"One thing that would do is improve disclosures," he said, adding that the company's filing revealing the probe is doing just that. "This is not an unusual kind of probe."

Cainiao's growth is being funded by more than just Alibaba, which created the business with department-store chain Intime Retail Group and industrial conglomerate Fosun International.

The trio led an initial investment of 100 billion yuan (S$21 billion) in the company. Subsequent investors include Temasek Holdings, GIC and Khazanah Nasional, which backed a funding round earlier this year.

The Alibaba spokesman said the company had provided disclosures about Cainiao's financials in its most recent annual report. That "is exactly the kind of robust and transparent information that will address the underlying issues in the SEC's inquiry", she added.

Alibaba recorded losses of about US$60 million (S$83 million) over the past two years in connection with Cainiao, according to the filing. The Pacific Square report also described instances that it said showed Alibaba did not disclose related-party transactions

It is unclear whether the investigation will have an impact on Alibaba. Asked for comment, an Alibaba spokesman reiterated the company's statement to the commission.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on May 27, 2016, with the headline 'Alibaba faces probe over accounting practices'. Print Edition | Subscribe