Alibaba Facing SEC Investigation

Should The SEC Investigation Concern Alibaba's Investors?

Alibaba‘s stock price took a nearly 7% hit as the news regarding an SEC investigation on its accounting practices became public. The nvestigation is focused on the accounting for the results of logistics firm Cainiao Network (where Alibaba has 47% stake), as well as accounting practices applicable to related party transactions and operating data from its annual “Singles Day”. The company had reported about $ 14 billion as transactions on “Singles Day” where shoppers get special discounts. This investigation indicates that Alibaba needs to be more transparent about its accounting practices and given its acquisitive nature the company should be more proactive in reporting financials of companies where it owns substantial stake. While the impact of the specifics being currently investigated will not be significant, I believe Alibaba’s commitment towards transparent reporting practices is key for investor confidence.

Although the company appears to be moving in this direction, a lot more remains to be done. Alibaba accounted for its share of loss in Cainiao’s financials; however the financial summary of Cainiao Network is unaudited. Regulatory requirements might not warrant an audit for the company, but Alibaba can opt for voluntary audits of the accounts of all the companies where it holds significant stake to ensure transparency and accuracy in reporting. As the company diversifies its operations internationally and increases the number of acquisitions, accurate reporting of related entities will ensure that such investigations are not initiated in future and investor confidence is maintained.

In my opinion, the current SEC investigation should not impact Alibaba significantly; however the company needs to take adequate steps towards transparency in its accounting practices to retain the confidence of its investors.