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When the Alibaba Group Holding Corp. revealed its financial results for the second quarter of 2014, excitement about the upcoming Initial Public Offering (IPO) for Alibaba only intensified. With a 46% increase in revenue over the last year and earnings three times higher than the amount reported in the previous year, the prospects for the Alibaba IPO were much more than favourable.
However, in the article “Opinion: In Alibaba’s IPO, where did the skepticism go?” Mark Hulbert states that there are legitimate concerns regarding the reliance that can be placed on the financial results reported by Alibaba or any other Chinese company. How can you trust any Chinese company’s financial statements amid the numerous recent reports of accounting scandals involving the Chinese companies such as Tianhe Chemicals, AgFeed, Ultrasonic AG, and Sino-Forest. All of these companies, have been accused of either reporting fake revenue, profits or asset bases. John Wasik with Forbes agrees that “Chinese corporations are not audited the same way as American companies” and as a result the full picture of Alibaba’s financial position may not have been reported. It does seem clear that the risk of financial statement fraud is greater for Chinese companies who are operating in a less regulated business environment. Potential Alibaba investors and others who rely on their financial statements would be wise to exercise caution.
- http://www.marketwatch.com/story/in-alibabas-ipo-where-did-the-skepticism-go-2014-09-19
- http://www.forbes.com/sites/johnwasik/2014/09/17/alibabas-underbelly/