Chinese video-streaming platform Iqiyi said Thursday that it is under investigation by US authorities over a short report released in April which accused the company of inflating 2019 revenue by up to 40%.
Why it matters: US regulators are more actively investigating allegations against Chinese companies for financial fraud after beverage chain Luckin Coffee admitted in April it had fabricated transactions in 2019 totaling around RMB 2.2 billion (around $317 million).
- The US is increasingly scrutinizing Chinese companies as lawmakers call for stricter audit requirements. US President Donald Trump has also recently threatened to delist from American stock exchanges Chinese companies that do not comply with US accounting standards.
Details: Baidu-backed Iqiyi said in a statement announcing its second-quarter earnings on Thursday that it is cooperating with the Securities and Exchange Commission (SEC) probe, which is seeking financial and operating records dating from January 2018.
- The top US financial market regulator is also seeking “documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020,” the company said.
- Iqiyi said it had hired advisers to conduct an internal review of the key allegations in the Wolfpack report “shortly” after it was released.
- Shares of the company tumbled as much as 19% on Thursday on the disclosure.
READ MORE: INSIGHTS | Short seller huffs and puffs, but it doesn’t blow Iqiyi down
Context: In April, Muddy Waters Research tweeted a link to a Wolfpack Research report, alleging that Iqiyi had inflated its 2019 revenue by 27% to 44% and overstated user numbers by 42% to 60%.
- At the time, Iqiyi said in a statement that the report “contains numerous errors, unsubstantiated statements and misleading conclusions and interpretations.”
- On May 20, CNBC reported that the US Senate unanimously passed legislation prohibiting foreign companies which do not adhere to the country’s regulatory and audit standards from listing on its exchanges or raising money from American investors.
- Earlier this month, the Trump administration issued its recommendations to ban Chinese companies from US stock exchanges if they don’t comply with American accounting standards, according to the Financial Times.