Alibaba discloses SEC probe of its accounting practices

Federal regulators are investigating the accounting practices of Alibaba Group Holding Ltd., the e-commerce giant whose blockbuster U.S. stock-market debut helped win a wide following for Chinese tech firms.

The company disclosed Tuesday that the Securities and Exchange Commission asked Alibaba to provide details of its accounting for a delivery affiliate, its operating data for the largest online shopping day of the year, and “related party transactions in general.”

Alibaba shares fell nearly 7% to $75.59 at 4 p.m. in trading Wednesday in New York.

Alibaba and its executive chairman,Jack Ma,are prized as partners and investors around the world. The company’s affiliates are involved in mobile payments, financial services and television and film production. In the U.S., it holds stakes in car-sharing service Lyft Inc., e-commerce logistics provider ShopRunner Inc. and discount shopping website operator Jet.com Inc.

Alibaba has drawn the SEC’s attention in the past overalleged sales of fake goods on its Chinese website, and analysts have raised concerns about its use of financial measures that don’t comply with generally accepted accounting principles, or GAAP, and because it doesn’t consolidate results of some affiliates. Alibaba has said it cooperated with the past request, and has provided greater financial information in its latest annual report.

The U.S.-listed company said in a regulatory filing Tuesday that it is cooperating with the SEC on its inquiry. It also stressed the commission told it the request for information shouldn’t be taken as an indication of any violation of federal securities law.

The SEC doesn’t comment on individual investigations.

Investors have been concerned about the company’s growth prospects amid the economic slowdown in China. Its shares soared right after its $25 billion initial public offering in 2014. The shares jumped 38% in first day trading, but later fell below its $68 IPO price on concerns about its outlook.

Earlier this month, Chief Financial OfficerMaggie Wusaid the company would begin to provide greater transparency on its businesses by introducing annual revenue guidance and releasing new business cost structures and margins.

Still, Tuesday’s regulatory disclosure follows investor complaints about the prior lack of financial information on affiliate companies, including its Cainiao delivery and fulfillment provider. Alibaba doesn’t count losses at Cainiao as part of its own results, making it difficult for investors to determine how the company is performing, research firm Pacific Square Research said last October.

“We just don’t see how profitable or unprofitable that business is,” said short sellerJim Chanosof Kynikos Associates LP in a CNBC interview earlier this month, referring to Cainiao.

An Alibaba spokeswoman said the company offered detailed results of Cainiao in Tuesday’s regulatory filing. It showed a net loss from the affiliate of 90 million yuan ($13.7 million) and 295 million yuan in fiscal years 2015 and 2016, respectively.

The spokeswoman said these disclosures are “exactly the kind of robust and transparent information that will address the underlying issues in the SEC’s inquiry.”

The filing noted Alibaba accounted for approximately 60% of Cainiao’s revenue for 2015. In last year’s annual filing, Alibaba didn’t disclose costs paid to Cainiao.

Some analysts said Alibaba may balk at more detailed disclosures involving Cainiao, in which it has a 47% stake. For example, sharing details such as how many partners the company has, the volume shipped each quarter, and how much was paid to logistics partners for each parcel, could expose them to more questions.

Alibaba has said it takes an asset-light approach to logistics by using local delivery companies instead of directly owning trucks and employing delivery personnel. But that approach can make it difficult for specific information to be gathered, since each local delivery company operates as a franchise.

The SEC’s interest in China’s biggest online shopping day, called Singles’ Day, reflects a continuing focus over companies’ use of unorthodox accounting methods.

The Nov. 11 Chinese holiday is a major online commerce event akin to Cyber Monday in the U.S. Last year, Alibaba disclosed what it called gross merchandise volume of $14.4 billion on that day.

One of the SEC’s concerns about use of non-GAAP measures is that they may not be comparable among companies, saidPaul Gillis,a professor at Peking University’s Guanghua School of Management, in an email.

“A problem with GMV reporting is no two companies seem to define it the same way,” he said, referring to gross merchandise volume.

The SEC has stepped up efforts to target accounting fraud, creating an enforcement division unit focused on the area.

The agency has brought cases against companies alleging poor internal controls, even without alleging any underlying fraud. The number of accounting-related cases reached 134 in the year ended Sept. 30, compared with 98 the previous year and 68 the year before that.

(THE WALL STREET JOURNAL)