Since NQ Mobile (NYSE:NQ) is already over a month late filing their audited annual report on Form 20F, this article may turn out to be a moot point. In any case, here is my rationale for suspecting that maybe their Independent Auditor, PwC, may have already resigned, however the company has not disclosed this yet.
The first part of my thesis is very simple; I looked up an old favorite, China Sky One (OTCPK:CSKI) and noticed the announcement that their auditor, MSPC resigned was dated 4-03-12, however the resignation was effective 3-12-12. In other words, CSKI waited three weeks after their auditor resigned to announce this event. IE: a significant delay between resignation and announcement has happened in the past.
The second part of my thesis deals with the fact that NQ has not officially offered up any reason for needing additional time to file except, "because".
Unofficially, they have implied that PwC is holding up on signing off on the 20-F because they are waiting for a report from a special committee of the Board of Directors who were tasked with looking into the Muddy Waters allegations of fraud against NQ. Here is their official explanation of why they need additional time to file in their NT 20-F:
NQ Mobile Inc. (the "Company") has not completed its annual report on Form 20-F for the fiscal year ended December 31, 2013 (the "2013 Form 20-F"). The Company plans to file the 2013 Form 20-F on or before the extended deadline permitted under Rule 12b-25 under the Securities Exchange Act of 1934, as amended.
In other words their official reason for needing additional time to file their 20-F amounts to; "because". The unofficial reason for needing additional time to file the 20-F comes from their press release on 4-30-14, the last day to file their 20-F, and the date they filed for an extension. Here are a couple of pertinent paragraphs:
On October 25, 2013, the Company's board of directors formed an Independent Special Committee (the "Committee"), consisting of four independent directors of the Company, to conduct a review of fraud allegations made the previous day in a report issued by Muddy Waters. On November 1, 2013, the Company announced that the Committee had retained Shearman & Sterling LLP ("Shearman") to conduct an independent review, and that Shearman had retained Deloitte & Touche Financial Advisory Services Limited ("Deloitte") as forensic accountants to assist in its investigation.
The Investigation Team has thus far found no evidence that the Company engaged in the fraudulent conduct that was alleged by Muddy Waters. It has also discussed its work and the evidence it has obtained with the Company's independent auditor. The independent auditor is considering that information as part of its procedures in connection with its audit of the Company's financial statements, and may request that the Company provide additional information or that the Investigation Team undertake additional work.
There are two points of interest in the first paragraph; there is no mention that PwC is contracted to be part of this special investigation, and as I will expound on later I don't think they can be a part of it due to their mandate as "independent" auditor. The second point is that contrary to popular opinion among the defenders of the faith, D&T is not doing a "Forensic Audit", they are a sub-contractor to the law firm conducting the review. Point 2 is slightly off topic for this article though. While the second paragraph doesn't explicitly state that PwC is waiting on the special committee report before signing off on the 20-F, it certainly implies that's the case, and I know from the various message boards the defenders of the faith have bought this line of thinking. As I state above, in addition to there being no evidence that PwC was retained in any way to be a part of the special investigation, I don't see how they can have anything to do with it given their mandate to be "independent". Here's a quote from a Wikipedia entry on "Auditor Independence":
The purpose of an audit is to enhance the credibility of financial statements by providing written reasonable assurance from an independent source that they present a true and fair view in accordance with an accounting standard. This objective will not be met if users of the audit report believe that the auditor may have been influenced by other parties, more specifically company managers/directors or by conflicting interests (e.g. if the auditor owns shares in the company to be audited). In addition to technical competence, auditor independence is the most important factor in establishing the credibility of the audit opinion.
How can PwC have anything to do with a report from a committee of the BOD specifically looking into the veracity of NQ's financial filings when they are supposed to be working independently from the BOD? On 4-15-14, the day their extension to file their 20-F ran out, NQ provided this update:
The Company continues to work to file its annual report for the year ended December 31, 2013 as soon as possible. As previously disclosed by the Company in a press release dated April 30, 2014 and in its Form 12b-25 filed with the Securities and Exchange Commission, the Company is unable to file on time its annual report on Form 20-F because it needs additional time to complete it.
Since then they've put out press releases announcing two deals with no terms, updated guidance for their Q-1 and Q-2 2014 financials and announced a deal to sell a 5.88% stake in their FL Mobile unit contingent on an IPO within 12 months. However they only refer back to their 3-30-14 announcements for an update on the status of their 20-F filing. I know companies need extensions to file their reports once in a while, however they are always able to give you detailed rational explanations about what is causing the need for additional time. IE: "a big transaction took place at the end of the quarter and we need additional time to incorporate it into our filing" or "we found an error in past filings and we need time to fix it". You don't see "because" as the official reason for needing additional time to file.
NQ can't give a straight answer about why they need additional time to file, although they allude to the issue being a problem with PwC signing off. To me this smacks of PwC having issues with NQ's financials, and this far past the filing deadline I'm wondering if maybe PwC already resigned, however NQ has not disclosed it. I'm not an accountant, let alone an auditor, so I don't pretend to understand the legal requirements for NQ or PwC to report this event, so this is pure speculation on my part. Should this article make it to publication and somehow beat news one way or the other about the 20-F filing, I'm sure the defenders of the faith will be out in force crying foul that I dared speculate that PwC may have already resigned. I hope they report this to NQ and NQ responds. If they do respond, and it turns out that PwC has not resigned, I would ask that they also address the following issues:
- What in particular is holding up their 20-F filing, be specific and detailed.
- If they suggest it's due to coordination issues with the investigation please address whether PwC is retained to participate in the report and if so, in what capacity?
- If PwC is participating in the report, how can they do this given their mandate to work "independent" of the BOD?
- If PwC is waiting for the report to sign off on the 20-F, what legal justification do they have to do this given the report is voluntary and the 20-F is mandated by the SEC?
If it turns out that I guessed wrong about PwC already resigning so be it, but let's use the opportunity to get some straight answers about what is actually holding up the 20-F filing. While I don't expect we'll get an answer if PwC has issues with NQ's financials, we should be able to get clarification on a "coordination" issue with the special investigation, if they claim this is the problem.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.