Alibaba is finding itself in hot water over an SEC inquiry regarding its accounting practices.
The investigation is focusing on how the eCommerce giant has dealt with companies in which Alibaba owns stock or has influence over their operation, The New York Times reported. It is also scrutinizing Alibaba's Singles' Day sales operation, a shopping event that is notable for its high sales volume and gave the company a Guinness World Record.
The investigation comes at a time when Alibaba is struggling to stabilize its fluctuating share value in a shaky Chinese economy, which has been marred by slow growth. In response to the weakening economy, Alibaba has reportedly spent billions of dollars in industries such as logistics and food delivery to find its place in China's growing mobile on-demand economy.
Alibaba says the investigation doesn't necessarily mean that it has violated a law and that it is cooperating with the SEC.
The SEC investigation is particularly looking into Alibaba's investment in its three-year-old logistics arm, Cainiao, which marked a change in the company's business approach. Cainiao, as NYT pointed out, was created to give strength to Alibaba's logistics operations, which were facing stiff competition from other players who had a strong hold over China's underdeveloped delivery channels.
Launched in 2013, Cainiao is co-owned by Alibaba and several logistics companies that are known to handle a majority of delivery operations for Alibaba's sales.
Alibaba, which owns a 47 percent stake in the company, does not consolidate its results in its own earnings report. Over the last two years, Alibaba has reportedly recorded a loss of about $60 million in connection to Cainiao. This is not settling well with the commission.
Recently, Pacific Square Research, a market analysis firm, released a 40-page report that pointed out how Alibaba did not give out sufficient information on a large number of its investments and used a network of investments to maintain hold over companies like Cainiao without accounting for their losses on its balance sheet.
The report goes on to point out how Alibaba chose not to disclose details on related-party transactions. For instance, Alibaba failed to disclose how much it spent advertising on social media platform Weibo, when Alibaba had just made a $1 billion investment in the company.
“We haven’t seen anything quite as difficult to untangle as this in our respective careers,” Herb Greenberg, a managing partner of Pacific Square, wrote in an email. “In our view, Alibaba is like a big ball of wet, knotted yarn.”