By Bill Alpert
As Super Micro Computer's stock fell by a third Wednesday, after its auditor's acrimonious resignation, the computer maker's investor relations contact came unplugged.
Some $9 billion in market cap was fizzling, but questions emailed to the IR address got the response: "Your message couldn't be delivered."
That morning, Supermicro disclosed that its auditor Ernst & Young had resigned a full week earlier. E&Y questioned the company's "integrity and ethical values," according to the Wednesday 8-K filing. The accounting firm was unwilling to be associated with financial statements prepared by management.
"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 the Audit Committee's representations," E&Y's resignation letter said.
"Supermicro disagrees with E&Y's decision to resign, and we are working diligently to select new auditors," the company told Barron's in an email. Supermicro said it doesn't expect that a resolution of the issues raised by E&Y will result in a restatement of previously reported results.
Those results don't include Supermicro's results for its June 2024 fiscal year. Ernst & Young had been hired last year to audit the 2024 fiscal year report, but with E&Y's resignation, that 10-K report won't arrive soon. Supermicro has scheduled a business update call on Nov. 5.
Companies have had to disclose a change in auditors since the 1970s, and they have had to disclose accounting issues since the 1980s. Businesses will switch accountants to save money, so changing auditors isn't unusual. But a resignation and disagreement like E&Y's is uncommon.
In July, E&Y resigned as auditor of the solar panel maker SunPower. In 2015, PricewaterhouseCoopers quit as auditor of chip maker Marvell Technology, decrying lax accounting controls. When fraud toppled Sino Forest in 2012, E&Y resigned as auditor of the Canada-based harvester of Chinese timber.
SunPower sought bankruptcy protection and its shares were delisted from Nasdaq in August. Marvell acknowledged that sales had been prematurely reported, and its CEO resigned. Sino Forest was liquidated in bankruptcy, and Canadian authorities found that its top executives had committed securities fraud.
Of some 5,700 changes in auditors at U.S. firms from 2004 to 2020, about 1,200 were resignations, according to a recent study by the accounting researchers Brian Bratten, Samer Khalil, and Wenyin Li.
Even when an auditor's resignation doesn't result in an earnings restatement, there may have been disagreement over estimates of future results, said Bratten, an accounting professor at the University of Kentucky. Poor estimates can cause problems later, he told Barron's.
And disclosure of a resignation, like E&Y at Supermicro, can roil a stock. The number of securities filings that mentioned auditor resignations swelled amid the 2007 financial crisis, according to data from AlphaSense.
Supermicro was a darling of this year's frenzy for artificial intelligence stocks. Microsoft, Meta Platforms, Alphabet and Amazon spent tens of billions apiece on artificial intelligence data centers, where computers are filled with Nvidia accelerator chips. Super Micro was the best-known supplier of those computers.
Before a 10-for-1 stock split in October, Supermicro's stock shot from $280 to $1,200 and raced neck-and-neck with shares of Nvidia for the affection of Wall Street. Even after Wednesday's jolt, Supermicro stock is up 20% on the year.
There were warnings.
In 2020, Supermicro and its chief executive Charles Liang settled -- without admitting fault -- an investigation by the U.S. Securities and Exchange Commission that alleged the company had improperly accounted for about $200 million in expenses and sales.
"We fell short of our standards, and we have implemented numerous remedial actions and internal control enhancements to prevent such errors from recurring," said Liang, after he settled.
Those accounting issues were highlighted in a January 2023 report by the activist short selling firm Spruce Point Management, which also pointed out Supermicro's related-party dealings. Still, the stock rose nearly fourfold over the course of 2023, as Supermicro's sales grew.
On Aug. 27 of this year, the activist firm Hindenburg Research reported on its own 3-month investigation of Supermicro. Hindenburg said that employees who had left amid the earlier accounting scandal were hired back. It described what it said were undisclosed related-party dealings. And it told of Supermicro's 2006 guilty plea for exporting banned technology to Iran, and of more recent sales to Russia and China.
In 2006, the company said it had set up an export-control program after becoming aware of the investigation.
In a letter to customers, CEO Liang called the Hindenburg report false and misleading. He promised to address its allegations "in due course." Asked by Barron's about a response, the company said nothing.
Three days after the Hindenburg report, Supermicro told shareholders that its June year 10-K would be late. The Sept. 30 announcement said Supermicro's board had formed a special committee to look into the company's accounting controls.
Wednesday 8-K reveals that E&Y had expressed concerns about Supermicro's candor and accounting controls as far back as July.
"Auditors typically perform an integrated audit on both the internal control environment of the firm and the financial statements," said accounting professor Bratten. "The better the internal controls over financial reporting, the less likely there are to be errors in the financial statements."
Write to Bill Alpert at william.alpert@barrons.com
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October 30, 2024 19:48 ET (23:48 GMT)
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