NQ Mobile (NYSE:NQ) filed its annual report on Form 20F on Monday, nearly 6 months late. NQ was the subject of a Muddy Waters report on October 24, 2013 that sent the stock price tumbling. A board initiated special investigation found no evidence of fraud, but reported that certain information had been erased from electronic devices. Auditor PwC demanded that it be allowed to expand the scope of its work, and NQ fired PwC and replaced them with Marcum, Bernstein and Pinchuk (MBP) a U.S. based auditor that specializes in smaller U.S. listed Chinese companies. MBP was ultimately able to complete the audit and issue the report.
PwC refused to consent to the use of its prior reports on 2011 and 2012, so MBP had to reaudit those years. Curiously, PwC did not withdraw its opinions on those years – it simply refused to consent to their use in the current filing.
One of the issues Muddy Waters raised in their initial report related to the classification of bank deposits as Level 2 assets in the financial statements. Muddy Waters suggested that meant the cash balances were highly likely to not be real. I disagreed with Carson Block on that matter, and got into a twitter fight with him and the lovable and reformed convicted felon Sam Antar of Crazy Eddie fame. In my view, Level 2 is just a description of how the asset is valued, and while practice varies, I believe that Level 2 is the right description for these assets. I was amused to see that all of the bank deposits are still classified as Level 2. I guess that is a fitting ending to my coverage of the NQ saga.