Who is auditing Alibaba? - Paul Gillis

+Paul Gillis 

PWC is auditing Alibaba, but - writes accounting professor Paul Gillis at his weblog - it is very unclear whether the Hong Kong or the mainland offfice of PWC is doing the legwork. Officially it is the Hong Kong office, but Gillis has its doubts, and that might matter to the investors.

Paul Gillis:

Alibaba is audited by the Hong Kong member firm of PwC, or at least that is what the audit opinion says. I am a bit skeptical about that claim. While there may be a Hong Kong partner assigned to the account, I will bet dollars to donuts that a large portion of the hours on the audit were done by mainland staff. 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.

Who signs the audit report matters to investors. 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. The mainland firm is currently appealing a judge’s order to suspend them from practice before the SEC – a ban that does not apply to Hong Kong. I have previously written about the practice of signing China reports in Hong Kong and said it is the same consumer fraud as a Chinese shirt maker sewing ‘Made in Italy’ labels on shirts made in Wenzhou.

Of course, PwC in Hong Kong could be auditing Alibaba using only its own staff. That seems unlikely to me based on Alibaba’s disclosures. Alibaba says that:  “Substantially all of our employees are based in China” and 94% of facilities are located at Alibaba’s headquarters in Hangzhou. To audit Alibaba, PwC needed to spend a lot of time on the ground in Hangzhou. Now, they could have flown in staff from Hong Kong to do it, but why would they do that when there is a PwC office in Hangzhou and PwC’s biggest China office down the road in Shanghai? That said, since firms often measure partner performance based on use of staff from their own group, I have seen entire engagements done with fly-in teams despite having a local office next door that could do the work much cheaper.

More at the China Accounting Blog.

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