DealBook: Alibaba Discovers Suspicious Accounting at Film Unit

HONG KONG — Alibaba, the Chinese e-commerce giant, said on Friday that it had discovered suspicious accounting at a Hong Kong film company that it paid about $800 million just two months ago to control.

The disclosure may raise concerns that Alibaba, which is preparing what may be the biggest initial public offering in American history, could be biting off more than it can chew in a recent spree of acquisitions.

The film company, Alibaba Pictures Group, formerly ChinaVision Media Group, said on Friday that it had discovered "possible noncompliant accounting treatments" involving insufficient provision for impairments on assets, or write-downs, which were not identified. The company added that it would miss an Aug. 31 deadline to release its earnings for the first six months of the year and that its shares would be suspended from trading until its audit committee could complete a formal inquiry.

The accounting issues at Alibaba Pictures may lead to questions about whether Alibaba, which analysts expect could raise as much as $20 billion in a New York I.P.O. as early as next month, has been carrying out sufficient due diligence as it vets potential takeover targets. For example, a deal in June to pay nearly $200 million for a 50 percent stake in Guangzhou Evergrande F.C., a Chinese soccer team, was wrapped up in a matter of days after Alibaba's executive chairman, Jack Ma, agreed to the investment while having drinks with Evergrande's owner, a billionaire real estate developer.

Alibaba agreed in March to purchase a 60 percent stake in ChinaVision, which produces and distributes films and television programs in China, for 6.24 billion Hong Kong dollars, or $804 million at the time. The deal was completed in June. Alibaba renamed the company Alibaba Pictures and installed its own slate of directors. Last month, Alibaba Pictures issued a profit warning, saying that because of a drop in revenue, it expected to book a substantial loss in the first six months of this year, compared with a profit of $18 million in the same period in 2013. The film unit also announced plans to work with the respected Hong Kong director Wong Kar-wai on future productions.

Alibaba on Friday issued a vote of confidence in its new film unit, describing it as the "flagship company" in its growing entertainment business.

Alibaba "fully supports the new management of Ali Pictures as they thoroughly review and rectify the possible financial noncompliance they have found with the former ChinaVision," a spokeswoman for the e-commerce company said in an emailed statement. "The new management team has a firm commitment to transparency, good corporate governance and investor protection, and the actions they have taken are consistent with this commitment."

Alibaba Pictures said the potential accounting issues had been discovered by its new management as part of "an initial review of the company's financial and business affairs."

"The board's audit committee has therefore begun a further inquiry into the matters concerned, in accordance with an action plan approved by the board to determine the cause, impact and extent of the relevant issues," the film unit said. "It is currently uncertain how long the further inquiry will take."

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