iQIYI announced in second-quarter results published Thursday that it’s under investigation by the Securities and Exchange Commission over allegations the China-based video-streaming company overstated its revenues and subscriber numbers.
According to iQIYI, the SEC’s Division of Enforcement is “seeking the production of certain financial and operating records” from Jan. 1, 2018, “as well as documents related to certain acquisitions and investments” that were identified in a report by short-seller firm Wolfpack Research (with assistance from Muddy Waters) on April 6.
In the report, Wolfpack Research claims iQIYI was “committing fraud well before its IPO in 2018 and has continued to do so ever since. Like so many other China-based companies who IPO with inflated numbers, IQ is unable to legitimately grow their business enough to true up their financial statements.”
Wolfpack Research estimates iQIYI inflated its 2019 revenue by approximately RMB 8 billion (U.S. $1.15 billion) to RMB 13 billion (U.S. $1.87 billion), or up to 44 percent. It does this by overstating its user numbers by approximately 42 percent to 60 percent and then inflates its expenses, “the prices it pays for content, other assets, and acquisitions in order to burn off fake cash to hide the fraud from its auditor and investors,” the report states.
The SEC is now investigating. In its regulatory filing, iQIYI said it is “cooperating with the SEC. We cannot predict the timing, outcome, or consequences of the SEC investigation.”
iQIYI has previously denied the allegations. “The company believes that the report contains numerous errors, unsubstantiated statements, and misleading conclusions and interpretations regarding information relating to the company,” the company stated back in April. However, shortly after the publication of the Wolfpack Report, iQIYI said it “engaged professional advisers to conduct an internal review into certain of the key allegations” and “to report their findings to the company’s audit committee.”
“These professional advisers have been examining the company’s books and records and undertaking testing procedures that, in their judgment, are necessary and appropriate to evaluating the key allegations in the Wolfpack Report, including accounting policy analysis, data analytics on whether the company manufactured orders and inflated revenues and/or expenses,” iQIYI said. The company added the internal review is ongoing and that it “cannot predict the timing for completion, outcome, or consequences” at this time.
The iQIYI accounting saga has been closely tied to that of fellow Chinese business Luckin Coffee, which is similarly being investigated by the SEC, as well as Chinese regulators, following allegations that it’s a “fundamentally broken business” that fabricated most of its 2019 sales. In May, Luckin Coffee fired its Co-Founder and CEO Jenny Zhiya Qian and Chief Operating Officer Jian Liu after more evidence came to light regarding the fabricated transactions.