Alibaba Unit’s Accounting Flaw Seen Drawing SEC Scrutiny
Alibaba Group Holding Ltd. (BABA)’s planned initial public offering may face added scrutiny from U.S. regulators after accounting irregularities at its film unit, although the share sale is unlikely to be delayed.
Alibaba Pictures Group Ltd. (1060) uncovered possible accounting flaws and won’t be able to publish its mid-year results on time, it said yesterday. The Hong Kong-listed media company appointed a new chief executive officer this month, after Alibaba acquired 60 percent of it for about $800 million.
With the Chinese company in the final stages of preparing for a U.S. IPO in September, the U.S. Securities and Exchange Commission’s primary focus will be on ensuring that Alibaba is properly disclosing irregularities. The SEC doesn’t want to get in the way of offerings, and works with companies to keep them on track, said David Martin, a former head of the regulator’s corporation finance division -- which oversees filings including prospectuses.
“When you file your registration statement, you hope that you sort of remain in a steady state until the process is finished, but it almost never happens,” said Martin, who is now a partner at the Covington & Burling LLP law firm in Washington. “You’re going to have stuff come up.”
Firms going through the U.S. IPO process often amend their registration documents with the SEC when they encounter business changes, and Alibaba has already filed several amendment forms since its initial filing in May. A company going through the process is aiming to answer all SEC questions on its prospectus before it goes on a so-called roadshow to meet with potential investors.
John Nester, an SEC spokesman, declined to comment on Alibaba’s situation. In an e-mailed statement, Alibaba expressed its support for the new management of Alibaba Pictures “as they thoroughly review and rectify the possible financial noncompliance they have found.”
A spokesman for the company declined to comment beyond the statement. Sara Rich, a spokeswoman for the New York Stock Exchange, where Alibaba has chosen to list its shares, also declined to comment.
Alibaba has already pushed back the timing of the IPO as it continued talks with the SEC about its prospectus. After earlier planning for an Aug. 8 debut, the company is now aiming for a trading date of Sept. 16, people with knowledge of the matter said this week.
The postponement wasn’t because of the issue at Alibaba Pictures, and the company doesn’t expect this to delay it from the September target, one person said yesterday, asking not to be identified discussing private information.
“This would be a red flag,” said Peter Romeo, a partner in Washington at Hogan Lovells U.S. LLP who is also a former chief counsel of the SEC division of corporation finance. “The staff wouldn’t let the company proceed if they wanted to go active with their IPO today. The burden would be on the company to demonstrate that it is not material.”
Alibaba, which has been on an acquisition spree of late, has cautioned that integration of its new purchases could cause problems. It has struck about $4.6 billion of deals this year, data compiled by Bloomberg show.
“We do not have substantial experience in integrating major acquisitions,” it said in the most recent IPO filing. “Any of these difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses.”
It’s too soon to know if the Alibaba Pictures’ revelation will impact the timing of the offering, said Jason Flemmons, a managing director at FTI Consulting Inc. and the former deputy chief accountant of the Division of Enforcement for the SEC. Factors the SEC will consider include whether the errors were intentional and if they reflect the personal integrity of executives, he said.
“I would be surprised if the IPO would go forward until such time as the company provides a more robust update on the nature of the issues; that’s what I’ve seen in my experience.”
In Alibaba’s favor is the fact that it didn’t own its stake in the company, formerly known as ChinaVision Media Group Ltd., until June, and that the business has replaced other senior executives recently.
Alibaba Pictures in June said it appointed Shao Xiaofeng, Alibaba Group’s chief risk officer, and Alibaba Group Vice President Liu Chunning to its board. The company named Zhang Qiang, a former vice president of state-owned China Film Co., as its new chief executive officer on Aug. 5.
“The new management team has a firm commitment to transparency, good corporate governance, and investor protection, and the actions they have taken are consistent with this commitment,” Alibaba said in its e-mailed statement.
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