The Wall Street Journal reported that Alibaba Group Holding has discovered potential accounting irregularities at the film-production arm it recently bought, the latest red flag for investors as the e-commerce giant prepares for what could be the largest initial public offering in U.S. history.

Alibaba Pictures disclosed it would delay its financial results while it investigated what it called “possibly noncompliant” accounting practices. However, Alibaba Group said the investigation will not likely derail its IPO plans. However, the timing could not be much worse for a company trying to woo investors leading up to its initial public offering.

While it appears that the accounting issues occurred before Alibaba bought the film production company—then called ChinaVision Media Group Ltd.—for more than $800 million in June, it raises questions about whether Alibaba moved too quickly to secure the deal.

“This makes you wonder whether there was enough due diligence in Alibaba’s decision to buy ChinaVision,” said Tony Chu, analyst for an RS Investments fund that is considering whether to buy Alibaba’s shares.

Alibaba Group, in a statement, said that it “fully supports the new management of Alibaba Pictures as they thoroughly review and rectify the possible financial noncompliance they have found with the former ChinaVision.” Alibaba changed ChinaVision’s name to Alibaba Pictures Group after the acquisition. Goldman Sachs, which advised Alibaba on the ChinaVision deal, declined to comment. Deloitte Touche Tohmatsu, ChinaVision’s longtime auditor, said in a statement that “confidentiality duties prevent us from discussing matters related to our clients with third parties.”

The article goes on to say that, unless the accounting problems widen, they aren’t likely to affect investors’ appetite. The film business is small compared with the company’s mainstay e-commerce operations, so even if the investigation results in write-offs of assets or project delays at Alibaba Pictures, that won’t have a significant impact on Alibaba Group’s revenue or profit, according to Forrester Research’s Bryan Wang.

Whether or not the accounting problems point to larger issues remains to be seen.

 

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Wayne Thorp
ABOUT THE AUTHOR:

Wayne A. Thorp, CFA, is editor of Computerized Investing and a vice president and the senior financial analyst at The American Association of Individual Investors (AAII). He is also the program manager for AAII's Stock Investor Pro fundamental stock screening and research database program and is on the advisory boards of AAII's Stock Superstars Report and Dividend Investing newsletters. He holds the Chartered Financial Analyst (CFA) designation and is a 1997 honors graduate of DePaul University in Chicago. Wayne's interests include stock screening, technical analysis and charting, social media and tech gadgets. However, in the summer he'd prefer to be hip-deep in northern Michigan's Manistee River fly-fishing for rainbow trout.

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