- In the middle of an audit, NQ Mobile just swapped out its audit chair on its board of directors - red flag #1.
- PwC is apparently seeking more information than NQ Mobile has given it for its audit - red flag #2.
- NQ Mobile appears to be "considering" the request - but, if it doesn't abide, this could lead to a road where the auditor may have to resign - red flag #3.
- Avoid NQ Mobile at all costs here.
My goodness, how quickly things change. It was only yesterday that NQ Mobile (NYSE:NQ) had spiked on rumors of news coming out of China that the 20-F was going to be filed soon. QTR has been advising people to avoid NQ for the better part of the last couple months, as major questions have remained about the company's ability to file its audited annual report for the year 2013.
I'm not going to try and be balanced in today's piece on NQ - the news I read this morning turns me into a bone fide NQ bear. Hell, I even tried to short it this morning at $5.55, but couldn't find shares to borrow in pre-market trading. So, my disclosure should now read "I would be short if I could have found shares to borrow."
Upon glancing at pre-market trading in NQ Mobile this morning, I noticed that the stock was off more than 20%. I knew instantly that there had to be news out about the audit, and there was. In a press release issued this morning, NQ announced that it would be appointing new board members - specifically ones for the audit committee, and one as chair of the audit committee. It also announced that PwC has requested more information from the company and - get this - the company is considering whether or not to approve PwC's request. These two things are not something you'd usually expect to see in the middle of a Big 4 audit on last year's financials.
Especially when your company is being harangued with fraud accusations.
The PR read:
Two new independent Directors, Messrs. Max Yao and Justin Chen, have been appointed to the Board and the Audit Committee, effective July 6, 2014. Mr. Max Yao will also serve as Chair of the Audit Committee of the Board. Ms. Ying Han, the current Chair of the Audit Committee has informed the Board that she would be stepping down from the Board due to personal reasons not related to her role at the Company effective on July 6, 2014. There are no disagreements between Ms. Han in her capacity as Chair of the Audit Committee and the Company.
Forget the fact that altering the board during the middle of an audit is weird enough, but changing the audit committee screams to me that former members of the audit committee may or may not have been getting along with the auditors real well - or perhaps, they refused to pony up information that the auditors were looking for.
Then, the biggest thing, tucked away at the bottom of the press release:
In addition, following the June 4, 2014 release of the summary findings of the independent investigation conducted by the independent Special Committee of the Board, the Company's independent auditors, PricewaterhouseCoopers Zhong Tian LLP (OTC:PWESF), communicated to the Company that it would need to perform additional procedures and expand the scope of its 2013 audit work. The Company's Board and Audit Committee are considering PwC's request. The Company will provide a further update when available.
What this means is that PwC is asking for stuff - stuff that the old audit chair obviously either didn't have access to or didn't want to come up with. The fact that NQ is simply "considering" their request, instead of just doing it says a million things to me:
- It says that NQ may or may not have something to hide.
- It says the audit is a long way off.
- It says the relationship between NQ and PwC is in jeopardy; and so is the audit.
This is the first step to an auditor not being able to complete an audit - you heard it here first.
The red flags continue to pile up here. The stock is currently trading $5.40 x $5.45 in pre-market trading, but QTR expects this morning's news to drive the price down significantly further - if not on today's shortened day, in the coming weeks.
The scope of this news is massive - this is all the circumstantial evidence one needs to know for sure that things haven't been going well behind the scenes at NQ - as the company marches towards 70 days from when it said it was going to filing its annual report late.
This news has yet to sink in this early in the morning, and the stock likely has space downward to move, QTR thinks.
Avoid NQ Mobile at all costs here.