Qihoo: The Next Accounting Victim? 奇虎360：下一个会计丑闻受害者？

By newsdoug on April 5, 2012

Forbes takes on Qihoo Just when the confidence crisis that has hit US-listed Chinese stocks for nearly a year looked like it was waning, a new accounting scandal could now be brewing, this time involving security software maker Qihoo 360 (NYSE: QIHU). Readers of this space will recall that Qihoo came under attack last year by a small brokerage named Citron, which questioned the company’s user figures and said Qihoo’s stock was probably worth around $5 per share rather than the $20 range where it was trading at that time. (previous post) Now Forbes magazine has come out with a much broader report questioning many of Qihoo’s operational figures, including its advertising revenues. (Chinese article) Qihoo responded by issuing a statement “strongly rejecting” the allegations, and also threatening legal action. (Qihoo statement) As a veteran reporter, I know it’s one thing when a small brokerage questions a company’s data, as many observers will suspect that brokerage is making such allegations to make some quick profits by short selling the company’s stock. But it’s quite another thing when a big publication like Forbes makes similar or even bigger allegations, as such publications understand the risks of printing material that might be considered defamatory and are much more careful about what they publish. Such publications also strictly forbid their reporters to trade in the stocks that they write about. In this case, I’ve had a look at the Forbes article and it does indeed appear that the author, Richard Pearson, has done quite a bit of research, including trying to contact the people who sell ads that are a main revenue source for Qihoo. Nothing in his research allows him to directly accuse Qihoo of falsifying data, but many of his arguments do seem convincing about why he believes the company may be engaged in questionable accounting. I’m quite confident that Deloitte, which is Qihoo’s accountant, will feel compelled to investigate some or all of the issues pointed out in the Forbes article, and wouldn’t be surprised at all to see it resign the Qihoo account if it doesn’t like what it finds. What surprises me quite a bit is how resilient Qihoo’s stock has been despite all this controversy. Its shares were trading around $20 when the initial Citron report came out last year and went down a bit afterwards. But they have rebounded sharply since then and were even above $25 before this latest Forbes story came out. And yet despite the strong arguments in the Forbes report, Qihoo shares have only fallen a relatively modest 11 percent since the article came out, indicating investors aren’t completely convinced that there are any problems. I previously said “let the buyer beware” when Qihoo made its initial public offering last year, as the company had a history of lawsuits being filed against it as a result of some of its dubious business practices. (previous post) I would take this opportunity to reiterate that message, and would be willing to bet this latest controversy involving Qihoo is far from over.

Bottom line: An attack on Qihoo 360 by Forbes magazine marks the beginning of a new controversy for the company, in the latest of a string of accounting scandals for US-listed Chinese firms.

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