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Two top execs quit Chinese portal Netease

Chinese Internet portal Netease.com on Monday announced the resignations of two key executives as it struggles with an internal investigation for financial inaccuracies reported last year.

Chinese Internet portal Netease.com on Monday announced the resignations of two key executives as it struggles with an internal investigation for financial inaccuracies reported last year.

Chief executive officer King Lai and chief operating officer Susan Chen quit Monday, chairman William Ding announced in a terse statement. Ding will become acting CEO and COO.

The departures come as the company broadens an internal audit related to misstatements in quarterly financial reports.

On May 8, Netease said it had discovered that one or more of its employees "may not have correctly reported the terms of several contracts between the company and third-party advertisers to Netease.com's internal finance department". Executives said last month that the potential error would only result in a revision to the first fiscal and calendar quarter of 2001.

But in a separate news release issued Monday, Netease said it may need to restate earnings for the entire 2000 fiscal and calendar year as well as the first fiscal and calendar quarter of this year. The company's auditing team, made up of board members, is specifically questioning contracts for approximately US$3 million of revenue, "which may have been attributed to incorrect periods during 2000".

Netease is one of the most popular Internet destinations in China, with at least 21.5 million people who have created more than 825,800 personal home pages. Netease controls 200 community forums and over 90,000 personal forums created by registered members.

It belongs to a growing cadre of businesses that have been forced to revise financials partly because of improper booking of revenue. In the United States, roughly two out of every 100 companies reporting in the third quarter of last year made accounting changes; four in 100 reporting in the fourth quarter needed to make changes.

For example, PurchasePro was recently forced to delay its fourth-quarter statement. The company apparently combined revenue from software sales--which can be recognized in advance of the actual sale to a consumer--with revenue from advertising, which is recognized over the life of the contract.

Netease is "disappointed by these most recent findings", Ding said. "However, the depth of the investigation ordered by our board and management has now proven its worth by uncovering possible additional incorrect attributions of revenue beyond those initially suspected. We believe that our thoroughness will benefit our shareholders and help restore confidence in our prospects and financial results."