Baidu Stock Slides as iQIYI Video Unit Discloses SEC Investigation

Online video streaming business of Baidu Inc., also known as “China’s Alphabet,” disclosed an investigation by the Securities and Exchange Commission (SEC) related to the company’s 2013 filing of financial results. The investigation was revealed in the company’s SEC filings in March, with Baidu estimating the cost of the investigation at $26 million and implying that it could delay the release of its financial results for the fourth quarter of 2018.

The disclosure of the investigation came following the news that Baidu had lowered its video streaming revenue guidance. Baidu’s iQIYI, which operates in China, now expects advertising revenue for the fourth quarter of 2018 to be between $729 million and $735 million, from $840 million to $870 million. The internet giant has been struggling with its business and data integration with its parent company, as well as in terms of adapting to Chinese regulations. After the first quarter of 2018, China imposed new regulations on the online video industry and forced platforms to share more revenue with content creators and television networks.

“The company previously disclosed a review of certain accounting procedures related to the 2013 filing of the company’s Annual Report on Form 20-F,” Baidu said in its SEC filing. “The SEC has requested information related to this matter and, to the extent that information related to this matter is provided by the SEC, the company may be required to restate certain of its financial statements for periods prior to the filing of the 2013 Annual Report on Form 20-F.”

The investigation is related to the company’s performance audit for the year ended December 31, 2013. Baidu said the SEC is investigating the company’s financial reporting under requirements of Regulation S-X and the Audit Disclosure and the Company, which were written into the US Securities and Exchange Act of 1934.

The investigation, which has been ongoing since September 2018, will be conducted by PricewaterhouseCoopers LLP in conjunction with a third-party consulting firm and Ernst & Young LLP. Financial statements will be updated in order to include the anticipated effects of any future restatements on the company’s consolidated financial statements for the years ended December 31, 2014 through the year ended December 31, 2016, as well as on the consolidated financial statements of iQIYI from the year ended December 31, 2017 through the year ended December 31, 2018.

Shares of Baidu stock have dropped more than 6 percent as investors fear a delay in the company’s financial results release, according to Reuters. While many blamed Baidu’s weak guidance on the backlash from stricter regulations, Morgan Stanley analyst Tian Hou told Reuters that Baidu’s difficulty adapting to Chinese regulators’ requirements might have also contributed to the weak outlook.

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