Super Micro Computer Inc. was an early beneficiary of the artificial-intelligence boom. But with the server maker under an accounting cloud, Super Micro now needs its chief executive to step down so it can fully realize the benefits of that trend.
Last week, the abrupt resignation of the company's auditors Ernst & Young marked the second time in six years under Chief Executive Charles Liang's leadership that Super Micro has been accused by of improper internal financial controls. The company faces the possibility of a second delisting, as it delayed and still has not yet filed its annual report for fiscal 2024.
Deloitte & Touche's last audit of the company took place in fiscal 2023, and Super Micro $(SMCI)$ asked shareholders to ratify EY as its new auditors at its 2023 annual meeting. One accounting expert, Francine McKenna, said that it is going to be tough for the company to find another auditor among the remaining Big Four accounting firms that Super Micro has not worked with. The remaining two, KPMG and PWC, would likely want big management changes at the top, such as the resignation of the CEO and possibly the CFO, and a new audit committee, according to McKenna, a former MarketWatch reporter.
"They are obviously a very complex, problematic, recidivist, high-profile company," McKenna said. "They have allegations by the DOJ, they have an activist short-seller report. Is another Big Four, either KPMG or PWC, going to take them on?"
One precedent cited by McKenna, who writes The Dig, a newsletter on accounting, audit and corporate governance, comes from 2004, when electronics components maker Molex's outside auditor resigned in another so-called noisy resignation. Ernst & Young took over as Molex's auditors in 2004 on the condition that its CEO and CFO resign.
The clock is ticking for Super Micro to find a new auditor as the company has until Nov. 16 to submit a plan on its timeline to file its annual report, which has to be approved by the Nasdaq. The company will be hosting a business update call on Tuesday, but it will not release earnings.
More recently, there was a similar situation in 2016 at Marvell Technology Inc. $(MRVL)$, which fired its co-founding husband-and-wife team, CEO Sehat Sutardja and President Weili Dai, after accounting issues led to an audit-committee investigation into its revenue-recognition policies, and probes by regulators. The co-founders remained on Marvell's board at the time. Marvell's investigation found no evidence of fraud but said that the "tone at the top" included pressure to meet revenue targets.
Liang co-founded Super Micro with his wife, Sara Liu, who is described in the company's last annual report from fiscal 2023 as senior vice president and director, and has had various positions, including treasurer.
Super Micro has seen revenue boom recently thanks to surging demand for artificial-intelligence servers, and at their highest point of 2024, Super Micro shares were up more than 300% on the year. But while Liang led the company to great heights, he's remained in charge for a precipitous fall in the stock price, as investors weigh the accounting concerns as well as margin pressures in the AI-server business. It is also being probed by the Department of Justice, and its stock has now erased its year-to-date gains.
Super Micro said in an SEC filing it doesn't believe that the ongoing review of its financial controls will lead to a restatement of past financial results and it disagrees with EY's decision. But the matter has become a dark cloud over the stock. Liang should step down so that the company can regain the trust of Wall Street and customers. A Melius Research analyst recently hypothesized that customers are now paying attention to Super Micro's saga, which could help competitor Dell Technologies Inc. $(DELL)$ down the line.
A Super Micro spokesman referred to the company's past statements on the matter, and did not provide a comment on the board's continued support of Liang.
Comments from Ernst & Young, cited in a regulatory filing by Super Micro, indicated that the auditors believe the company's board and audit committee are not independent from the CEO. EY said information it received as part of a special committee review "raised questions, including about whether the company demonstrates a commitment to integrity and ethical values" consistent with good financial-control principles, and "about the ability and willingness of the audit committee and overall board to demonstrate and act as an oversight body...independent of the CEO."
EY added that the company was "unwilling to be associated with the financial statements prepared by management," according to the filing.
Accounting experts said it is extremely rare for an audit firm, especially one of the Big Four, to disclose their reasons for resigning.
"I suspect this happens a lot more than we see, except that the audit firms don't talk about it," said Shiva Rajgopal, a professor of accounting and auditing at Columbia Business School. "This is the nuclear option. This must be really bad, otherwise they would not have gone public."
McKenna said it's possible a smaller, lesser-known accounting firm could take the company on as a client, but she fears that that a smaller firm "would not have the experience, competence or the national-office backing - the oomph, the gravitas - to get these these guys to shape up," she said. She added that regulators would likely not be as hard on the company if there are significant changes at the top. "The only way they could come out of it is if one of the other Big Four agreed to take it on and insisted on significant management and board changes."
In 2018, the Nasdaq began its previous delisting procedures. Super Micro $(SMCI.UK)$ did not file its fiscal 2017 financial reports on time, saying it had to compile and analyze certain information to finalize the documentation and complete a related audit-committee investigation. In January 2020, it was approved for relisting, and Liang was ordered by the Securities and Exchange Commission to reimburse Super Micro $2.1 million for stock profits he realized during the accounting period under question.
In one example of how close the company's board is to Liang, in March 2020, Super Micro's board agreed to give him a one-time payment of up to $8 million if the company's stock price met certain targets, to reward him for his "valuable contributions and loyal service" particularly during through the period "when the company was not current in its SEC filings."
Liang was not accused of wrongdoing at that time, but then-Chief Financial Officer Howard Hideshima was charged with prematurely recognizing revenue and understating expenses over a period of at least three years, and the company paid a $17.5 million civil penalty, without admitting or denying the SEC's finding.
Hideshima, who was ordered to pay $350,000 to the SEC, now says on his LinkedIn page that he is working as a consultant for Ablecom Technology Inc., a manufacturing partner of Super Micro run by Steve Liang, Charles's brother. Charles Liang and his wife own 10% of Ablecom.
The company has disclosed all of these related-party associations in its 10K filings, except for mentioning that its former CFO, who was charged in its former accounting debacle, still works for companies associated with Charles Liang. Steve Liang and another brother, Bill Liang, are also on the board of Ablecom. These related parties were highlighted as problematic in a short-seller report in August by Hindenburg Research.
Liang repeatedly has said in interviews over the past few years that the company fixed the internal-control issues that led to its previous delisting, including in an interview to MarketWatch in 2023.
This past August, when Hindenburg detailed what it found as red flags, it also highlighted a whistleblower lawsuit filed against the company in April, in which the plaintiff, Bob Luong, alleged how Super Micro misallocated revenue to hardware from services to inflate margins in its hardware business. A recurring concern among Wall Street analysts has been the low gross margins in its server business, even as revenue has surged due to a boost in sales for AI data centers.
In early September, Super Micro said that the Hindenburg report was misleading and that it does not expect its delayed annual report to contain materially different results from those already reported. Liang also said in a letter to investors and customers that the Hindenburg report contained "misleading presentations of information that we have previously shared publicly." In July, after EY told the board's audit committee about its concerns about Super Micro's financial controls, an independent special committee was formed to review certain internal controls and certain corporate-governance procedures.
Liang owns over 11% of Super Micro stock, according to FactSet, but he is also seen as a key to the company, which warned in its fiscal 2023 annual report that it had no succession plan. "His experience in leading our business and his personal involvement in key relationships with suppliers, customers and strategic partners are extremely valuable to our company," Super Micro said in that August 2023 filing. "We currently do not have a succession plan for the replacement of Mr. Liang if it were to become necessary."
In a June 2023 interview with MarketWatch, Liang was asked about a succession plan, and said the company "was planning, for sure," but he declined to provide any further details. Liang has been an early advocate for green computing, a key issue coming up now with power-hungry AI servers. He was described in a report by short-seller Spruce Point Capital Management in early 2023 as "a genius" by a former employee and described as a "counter-thinker."
"It's a liability. If he were to go, there's nothing behind him. There's a vacuum," the former employee told Spruce Point Capital at the time.
Now the company should start to think about succession earlier than expected, or risk that customers will make their future purchases elsewhere, all while investor trust dwindles. If Liang were to step down, Super Micro potentially could get a Big Four auditor to help it regain the confidence of the financial community.
As the saying goes, something appears to be rotten in Denmark, and the CEO needs to give someone else the chance to return the company to its former glory.