Back in May I raised the question of whether PwC Hong Kong is the principal auditor of Alibaba given that most operations are on the mainland. The SEC has now released its correspondence with Alibaba and I found that they raised this issue with Alibaba. Here is the SEC’s question (italics) and Alibaba’s response (bold).
We note that your audit report is signed by PricewaterhouseCoopers - Hong Kong, although the majority of your operations appear to be in mainland China. We also note your risk factor disclosure that “[i]f the affiliate of [your] independent registered public accounting firm were denied, temporarily, the ability to practice before the SEC, [you] would need to consider with [your] Hong Kong based auditor the alternate support arrangements they would need in their audit of [your] operations in mainland China.” Please tell us how you concluded that it is appropriate to have an audit report issued by an auditor in Hong Kong, in light of the location of your corporate offices, your principal operations, and your principal assets. Please also tell us your understanding of the nature and extent of the work conducted by each firm, including the participation of your Hong Kong based audit firm with respect to the work of its affiliated firm in mainland China.
The Company advises the Staff that PricewaterhouseCoopers (“PwC HK”) has been the Company’s external auditor since the Company’s inception in 1999. PwC HK was also the reporting accountant of Alibaba.com Limited, a subsidiary of the Company which was listed on the Hong Kong Stock Exchange Limited from November 6, 2007 until June 20, 2012.
The Company further advises the Staff that the Company’s group reporting and accounting department is located in Hong Kong with a team of approximately 35 people and is overseen by the Company’s Chief Financial Officer and Vice President of Group Finance who are both based in Hong Kong. The Company’s group reporting and accounting department is responsible for consolidation, group financial reporting and technical accounting and provides support in connection with the Company’s merger and acquisition activities. The Company’s financial accounting system, which includes its accounting books and records, is accessible in both Hong Kong and Hangzhou. The Company’s group legal department, corporate finance department and investor relations department are also headed out of Hong Kong. There are a total of approximately 170 full-time employees who are based in Hong Kong.
The Company has been advised by PwC HK that the PwC HK audit engagement team is led by two core assurance partners, and supported by a quality review partner and a technical support partner who are all based in Hong Kong. In addition, the PwC HK team includes three assurance managers and a team of approximately 10 senior associates and associates who are also based in Hong Kong. Furthermore, the audit team is supported by tax specialists and valuation specialists from PwC HK. The audit work performed was primarily conducted in Hong Kong while from time to time, the core assurance partners, managers and other audit team members of PwC HK traveled to China to perform audit procedures and conduct meetings with the Company’s operation teams in Hangzhou.
As part of the audit, PwC HK utilized resources from PricewaterhouseCoopers Zhong Tian LLP (“PwC ZT”) which mainly performed the audit procedures on the Company’s information technology systems and the audit of the Company’s Internet infrastructure business in Beijing and provided junior staff resources to assist PwC HK in carrying out its audit procedures in Hangzhou. According to PwC HK, the audit hours spent by PwC HK in Hong Kong, the audit hours spent by PwC HK in China and the audit hours spent by PwC ZT in China accounted for approximately 70%, 10% and 20%, respectively, of the total hours spent with respect to each of the audits for the fiscal years ended March 31, 2012, 2013 and 2014. PwC HK is the principal auditor of the Company according to the SEC Financial Reporting Manual 4140.1 given that PwC HK has audited more than 50% of the revenues and assets of the Company for the fiscal years ended March 31, 2012, 2013 and 2014.
I was wrong. PwC HK does appear to be the principal auditor of Alibaba. I do hope the SEC asks the same question about all the other SEC accounts signed by Hong Kong member firms of the Big Four, including all the big SOEs that are listed in the US. That will be a tougher question to answer. I have observed that new IPOs are being signed by the Big Four on the mainland, but the firms are reluctant to change existing audits because that would require reporting the change.