Who exactly is checking the numbers at Alibaba?
Professor's blog raises good point in wondering if Hong Kong auditors really did firm's books
Paul Gillis, a professor at Peking University who writes the China Accounting Blog, made an excellent point over the weekend about Alibaba Group that is worth repeating.
His suspicions are well-placed. In a statement with the Securities and Exchange Commission for its planned initial public offering, Alibaba said that substantially all of its employees were based on the mainland. About 94 per cent of its floor space worldwide is at the headquarters for its principal operating businesses in Hangzhou.
"While there may be a Hong Kong partner assigned to the account, I will bet dollars to doughnuts that a large portion of the hours on the audit were done by mainland staff," Gillis wrote. "This raises the question of whether the audit should have been signed by PwC's mainland member firm instead of the Hong Kong member firm." Gillis compared the issue to a Chinese firm sewing "Made in Italy" labels on shirts made in Wenzhou.
Why does this matter to investors? As Gillis wrote: "I have read bloggers who are arguing that investors should trust the Alibaba accounts because the Hong Kong member firm of PwC, and not the mainland member firm, audited them."
To his point, it was only a few years ago that mainland auditing firms suffered severe reputational hits after a wave of Chinese companies with North American listings turned out to be frauds.
What's more, Pricewaterhouse of Hong Kong isn't the same as the mainland Pricewaterhouse. The big accounting firms don't have parent-subsidiary structures like most corporations do. They operate more like giant membership clubs.