Super Micro Computer shares have tanked about 40 percent in two sessions as its Ernst & Young auditor resigned over corporate governance and internal financial control concerns.
The tech company, which manufactures computers for companies to use as servers for artificial intelligence algorithms, data storage, and websites, disclosed a resignation letter in an Oct. 30 filing. It shared reasons why the accounting firm was “unwilling to be associated” with Super Micro management’s financial statements.
In July, according to the resignation letter, Ernst & Young already flagged the audit committee’s concerns with Super Micro’s management. These concerns related to the “governance, transparency and completeness of communications, and other matters” regarding internal financial controls, “and that the timely filing of the company’s annual report was at significant risk.”
This took place before Hindenburg Research, a prominent short seller, published an August report identifying alleged issues surrounding the firm’s accounting practices following a three-month investigation.
Hindenburg claimed that, through interviews with former senior employees and industry experts and reviews of records, it uncovered “glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures, and customer issues.”
In response, the tech company announced it would postpone its annual filing to review corporate controls, hire a forensic accounting firm, and establish an independent special committee to conduct a thorough probe. Months later, financial statements have yet to be released, which could threaten its status on the Nasdaq Composite Index.
Despite these developments, the resignation letter indicated that Ernst & Young may have captured further information that prompted its decision.
“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,” the letter stated.
This is not the first time Super Micro has encountered issues with its accounting practices.
In 2020, the company paid the Securities and Exchange Commission a $17.5 million penalty after the Wall Street regulator determined that Super Micro inappropriately and prematurely recorded revenues.
“Reporting revenue in the wrong period gives investors a distorted view of a company’s financial condition,” said Melissa Hodgman, then-Associate Director in the SEC’s Division of Enforcement, in a statement. “The SEC will continue to hold executives accountable when they exploit insufficient internal controls.”
Super Micro will host a conference call for its fiscal year 2025 first-quarter business update.
The Epoch Times reached out to Super Micro for a request for comment.
Market Reaction
Super Micro stock, which has a market cap of $17 billion, has struggled this year.While shares are up more than 1 percent year-to-date, they have tanked 66 percent over the last six months. This included a sharp 33 percent selloff—the second-worst drop on record—once the Ernst & Young letter was published.
Its shares had soared 1,300 percent over the past five years, driven by the artificial intelligence hype, with tech titan Nvidia as its third-largest customer.
Twelve analysts have maintained a “Hold” rating. Argus Research downgraded Super Micro’s rating from “Buy” to “Hold.”
Rival server makers Dell Technologies and Hewlett-Packard Enterprise initially rallied midweek after the news on the prospect of gaining market share. However, their shares slumped as much as 4 percent in intraday trading to close out the month.
The Nvidia office building in Santa Clara, Calif., on May 31, 2023. (Jeff Chiu/AP)
The company could also be at risk of being delisted from the Nasdaq Composite Index.
Super Micro announced on Oct. 29 that it received a Sept. 17 notice from Nasdaq, confirming that postponing the company’s annual financial report meant it was not complying with the exchange’s listing rules.
Under Nasdaq’s rules, the company will have 60 days to file its report or submit a plan to regain compliance. The deadline is mid-November.
