Supermicro plunges after auditor exits on unwillingness to back statements

Shares of Supermicro (SCMI) plunged on Wednesday morning after Ernst & Young resigned as the company’s auditor. This comes after the auditor raised concerns about “several matters” in late July. In its resignation letter, EY stated, that “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 and to be unwilling to be associated with the financial statements prepared by management.”

EY RESIGNATION: Shares of Supermicro were sharply lower after disclosing in a regulatory filing that on October 24, Ernst & Young LLP sent the members of the Audit Committee a letter of resignation as the company’s registered public accounting firm.

“In late July 2024, EY communicated to the Audit Committee concerns about several matters relating to governance, transparency and completeness of communications to EY, and other matters pertaining to the Company’s internal control over financial reporting, and that the timely filing of the Company’s annual report was at significant risk. In response, the Board appointed an independent special committee of the Board to review the matters and certain of the Company’s internal controls and certain governance procedures… EY and the Board received updates with preliminary information relating to the Review. As of the date of this Current Report on Form 8-K, the Review remains ongoing and final findings and recommendations have not yet been communicated to EY or the Board.

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 consistent with Principle 1 of the COSO Framework, about the ability and willingness of the Audit Committee and overall Board to demonstrate and act as an oversight body that is independent of the CEO and other members of management in accordance with Principle 2 of the COSO Framework, and whether EY could rely on representations from certain members of management and from the Audit Committee,” the filing noted.

In the resignation letter, EY stated that, “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 and to be unwilling to be associated with the financial statements prepared by management, and after concluding we can no longer provide the Audit Services in accordance with applicable law or professional obligations.”

Supermicro says that, “Although the Company recognizes EY’s decision is final, it disagrees with EY’s decision to resign as the Company’s independent registered public accounting firm – the Special Committee has not yet obtained all information relevant for the Review and has not concluded the Review. 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 conclusion of the Review,” the filing stated.

NO RESTATEMENT EXPECTED BY COMPANY: In a regulatory filing, Supermicro said the Chair of the Audit Committee discussed with Ernst & Young the reasons for EY’s resignation. The company has begun the process of identifying a successor independent registered public accounting firm. The company does not currently expect that resolution of any of the matters raised by EY, or under consideration by the Special Committee will result in any restatements of its quarterly reports for the fiscal year 2024 ending June 30, 2024, or for prior fiscal years.

SHORT SELLER ALLEGES MANIPULATION: Back in August, Hindenburg Research published a short said that “As far as auditor statements go, E&Y’s $SMCI resignation letter is about as strongly worded as I have seen. The next question may be: What does Nvidia do about a client whose auditor suggests they lack ‘a commitment to integrity and ethical values’? ‘We can no longer provide the Audit Services in accordance with applicable law.’ It seems E&Y determined it was bad enough that it could be illegal to work with them.”

DOJ INVESTIGATION: Last month, The Wall Street Journal’s Jonathan Weil and Ben Foldy reported Supermicro was  being investigated by the Justice Department following the short report by Hindenburg Research. A prosecutor at the U.S. attorney’s office in San Francisco recently has contacted people to seek information that appeared to be connected to a former employee who accused the company of accounting violations, reports the Journal. The probe is at an early stage, the sources added.

The Fly notes Supermicro makes computers used by companies as servers for websites, data storage and other applications such as AI algorithms. Among its customers are Nvidia (NVDA),  Intel (INTC) and AMD (AMD).

PRICE ACTION: In Wednesday morning trading, shares of Supermicro have dropped over 28% to $35.16.