Sketchy financials send Supermicro auditors running for the hills

If SMCI is the AI Enron, Ernst & Young wants nothing to do with them

Supermicro shares took a nose dive on Wednesday, sliding more than 30 percent after the accounting firm hired to review its reporting practices resigned after determining they were just a bit too sketchy to warrant the risk.

"We are resigning due to information that has recently come to our attention which has led us to no longer be able to rely on management's and audit committee's representations," Ernst & Young wrote in a resignation letter, which also raised alarm bells regarding Supermicro CEO Charles Liang's influence over the board.

The concerns, disclosed in a recent SEC filing, only serve to stoke the fires of controversy surrounding Supermicro, which, after more than two months, still hasn't filed its 10-K annual report and faces the possibility of being de-listed from the Nasdaq as a result.

The San Jose, California-based server maker currently faces a whistleblower lawsuit alleging it misreported revenues by prematurely booking sales and billing customers on incomplete orders. In the wake of the lawsuit, activist short-seller Hindenburg Research claimed to have obtained additional evidence of accounting manipulation and unscrupulous behavior.

The allegations are serious enough that Supermicro has reportedly fallen under the US Justice Department's scrutiny. Last month, the Wall Street Journal reported that DoJ investigators had begun gathering evidence to support a case against the firm.

EY's resignation apparently came months after it raised concerns with management regarding the "governance, transparency, and completeness of" Supermicro's financial reporting, and warned that the release of 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 seems EY was not too pleased with the special committee's findings which apparently raised yet more red flags. "After receiving additional information through the Review process, EY informed the special committee that the additional information EY received raised questions, including about whether the Company demonstrates a commitment to integrity and ethical values," the SEC filing reads.

For its part, Supermicro argues it disagreed with EY's reasons for resigning, emphasizing that the special committee tasked with reviewing the concerns had not yet completed their report. "Nevertheless, the company has taken the concerns expressed by EY seriously, and will carefully consider the findings of the special committee and any remedial or other actions recommended by the special committee following the conclusion of the review."

Supermicro says it's working to identify a new accounting firm to replace EY. However, the damage may have already been done with EY getting out before it ends up like Arthur Andersen following the Enron collapse.

Whether or not Supermicro will be able to get its books sorted before it is ejected from the Nasdaq remains to be seen. The firm doesn't exactly have a great track record when it comes to financial reporting. Back in 2020, the SEC charged the system builder with "widespread accounting violations," which it paid $17.5 million to settle the case without admitting wrongdoing. ®