Why Qihoo 360 Crashed, Then Recovered

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chinese Internet security software maker Qihoo 360 (NAS: QIHU) promptly crashed this morning by 16% before recovering partially after a Forbes article questioned the financials of the company.

So what: The Forbes article said that Qihoo may have questionable accounting practices that have led to some unanswered questions surrounding the change of its business model over the past year. Forbes contributor Richard Pearson says there is "maybe" a fraud case at the company, and that auditor Deloitte may have trouble signing off with a stamp of approval.

Now what: Investors in Chinese companies justifiably have itchy trigger fingers when it comes to selling, considering the numerous accounting frauds and controversies that have plagued the sector in recent memory. Just putting the word "fraud" in a sentence with "[insert name of Chinese company here]" is enough to send investors packing for the door. Qihoo is trying to get in front of this one and has issued a formal press release "strongly [rejecting] the allegations raised in [the] Forbes article today." If management wanted to really put its money where its mouth is, it could even personally buy shares like Focus Media (NAS: FMCN) CEO Jason Jiang did when his company faced similar allegations.

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At the time this article was published Fool contributor Evan Niu holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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