Supermicro's battle over sketchy financial reports • The Register

Shares of Supermicro took a nosedive on Wednesday, plunging more than 30 percent after the accounting firm hired to review its reporting practices resigned after finding they were a bit too sketchy to address the risk justify.

“We are resigning due to information that has recently become known to us that has resulted in us no longer being able to rely on the representations made by management and the audit committee,” Ernst & Young wrote in a resignation letter, also regarding the CEO of Supermicro, Charles Liang's influence on the board raised alarm bells.

The concerns, disclosed in a recent SEC filing, only serve to fuel controversy surrounding Supermicro, which after more than two months still has not filed an annual 10-K report and may be delisted from the Nasdaq as Result.

The San Jose, California-based server maker is currently facing a whistleblower lawsuit accusing it of misreporting sales by booking sales early and charging customers for incomplete orders. Following the lawsuit, activist short seller Hindenburg Research claimed to have received additional evidence of accounting manipulation and unscrupulous behavior.

The allegations are so serious that Supermicro has reportedly become the focus of the US Department of Justice. Last month, the Wall Street Journal reported that U.S. Justice Department investigators had begun gathering evidence to support a case against the company.

EY's resignation apparently came months after the company raised concerns with management about the “governance, transparency and completeness” of Supermicro's financial reporting and warned that the server maker's annual report was at significant risk.

In response, Supermicro's board appointed an independent special committee and hired Cooley and forensic accounting firm Secretariat Advisors to review its internal controls and governance procedures.

It appears that EY was not too happy with the special committee's findings, which appeared to raise even more red flags. “After obtaining additional information through the review process, EY informed the Special Committee that the additional information received by EY raised questions, including whether the company demonstrates a commitment to integrity and ethical values,” it said the SEC filing.

For its part, Supermicro argues that it does not agree with EY's reasons for resignation and emphasizes that the special committee tasked with examining the concerns has not yet completed its report. “Nevertheless, the firm has taken seriously the concerns raised by EY and will carefully consider the Special Committee’s findings and any remedial actions or other measures recommended by the Special Committee following the completion of the review.”

Supermicro says it is working to find a new accounting firm to replace EY. However, the damage may have already been done when EY exited before it ended up like Arthur Andersen after the collapse of Enron.

It remains to be seen whether Supermicro will be able to sort out its books before the company is delisted from Nasdaq. The company doesn't exactly have a great track record when it comes to financial reporting. Back in 2020, the SEC filed charges against the system developer for “widespread accounting violations” and paid $17.5 million to settle the case without admitting any wrongdoing. ®