Shares of Chinese mobile security-software maker, NQ Mobile (NQ) plunged as the company dismissed the services of Pricewaterhouse Coopers Zhong Tian LLP (PwC) as its independent auditor. Instead, NQ Mobile appointed Marcum Bernstein Pinchul LLP (MBP) as the new auditor for fiscal 2013 and subsequent periods.
NQ Mobile shares fell as much as 21.0% to hit a 52-week low of $3.45 on July 18, 2014. However, the stock rebounded 15.2% to close the day at $5.01.
PwC’s dismissal came after NQ Mobile management decided that it will be difficult for the company to comply with the auditor’s request of expanding its scope in the operations going forward.
Expanding PwC’s scope in operations would have resulted in delaying filing of its 2013 Annual Report, as the auditor had asked for certain third-party related information, which would have been difficult for the company to obtain. However, NQ Mobile insisted that there was no disagreement with PwC on any matter of accounting principles or otherwise.
We believe that the dismissal of PwC at such a crucial time may adversely impact investor confidence, which will remain an overhang on the stock. In such a scenario, speeding up of Annual Report filing will be a major positive that will revive trust among investors.
Of late, the company has been facing headwinds related to its corporate governance practices. NQ Mobile recently responded to a Muddy Waters’ research report dated Jul 7, 2014, which accused the company of being a “massive fraud” with at least 72.0% of its 2012 China security revenue fictitiously coming from a shell company called Yidatong, which was actually owned by NQ itself.
Moreover, NQ Mobile was also accused of concealing important information from public including the stepping down of the head of the company’s audit committee, Ying Han.
NQ Mobile responded to these accusations by conducting an independent investigation. This investigation was conducted by a Special Committee comprising four of its independent directors along with two renowned firms, Shearman & Sterling LLP and Deloitte & Touche Financial Advisory Services Limited. The aim of the investigation was to determine whether NQ Mobile had resorted to any unfair means or not.
The results of the investigation were revealed to the public soon after it was over. Per the investigation, NQ Mobile had submitted all material information within the stipulated timeframe as well as in full compliance with all Securities and Exchange Commission (SEC) regulations.
Hence, the Committee concluded that no fraudulent practice had been adopted by NQ Mobile. However, in this case PwC refrained from commenting.
NQ Mobile reported mixed fourth-quarter results. Better-than-expected user growth in FL Mobile’s gaming platform and new game launches remain the growth catalysts. The company’s associations with Sprint and Samsung are positives.
However, the company’s margins were adversely impacted by higher expenses and higher contribution of lower-margin businesses. Moreover, competition from Autodesk Inc. (ADSK), Cadence Design (CDNS) and Citrix Systems Inc. (CTXS) remains a major headwind going forward.
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