Split with EY the Latest Bad News for Super Micro

Accounting giant Ernst & Young recently took the extraordinary step of firing one of its clients, Super Micro Computer. A public filing last week by the California-based maker of computer servers revealed EY used remarkably strong language in severing the relationship, perhaps owing to the severity of its misgivings.

“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,” EY said in its resignation letter. The move came as EY was auditing Super Micro’s financial statements for the fiscal year ending on June 30. Although Super Micro objected to EY’s conclusions, that didn’t stop the company’s stock price from entering a tailspin in the wake of the disclosure.

Notably, Super Micro’s filing said EY questioned the company’s adherence to the so-called COSO Framework for internal controls. Issued by the Committee of Sponsoring Organizations of the Treadway Commission, the industry-standard guidance lays out a series of principles to instill confidence in data and information. EY apparently questioned Super Micro’s “commitment to integrity and ethical values,” one of the COSO Framework’s foundational principles. EY also said it had concerns “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 late July 2024, EY communicated to the Audit Committee its concerns about several governance, transparency and completeness of communications matters, among others. It also expressed concern that the timely filing of Super Micro’s annual report was at risk. In response, the Board appointed an independent special committee to review EY’s concerns. This eventually led Super Micro to file an 8-K on November 1, 2024 regarding a third amendment to its loan, which, among other things, extended its deadline for providing audited financials and added a covenant requiring Super Micro to maintain at least $150 million of unrestricted cash at all times.

EY’s strongly worded resignation isn’t unprecedented. In a Form 8-K filed earlier this year, Florida-based BorrowMoney.com said it had been dropped as a client by Barton CPA, “citing concerns regarding the integrity of management related to an ongoing SEC investigation.”

EY’s resignation is the latest in a string of bad news for Super Micro. In August, the company announced it would not file its annual report on time. Soon after, short-selling firm Hindenburg Research reported it had identified “glaring accounting red flags” at Super Micro. In September, a Department of Justice investigation into the company came to light. A whistleblower lawsuit filed earlier this year appears to have triggered the federal probe. And now, on top of the avalanche of bad news, Super Micro is faced with a daunting challenge fundamental to its operations: it must find a new auditor – not an easy task given the details made public in EY’s resignation.

The latest market selloff of Super Micro stock is pointing the way to a spectacular crash to end the year for a company that was, at one point, a darling of the tech sector. Buoyed by investors’ enthusiasm for all things artificial intelligence, Super Micro’s stock joined the S&P 500 index in March. By the end of trading on Nov. 1, a 45% drop in the value of Super Micro shares in one week had erased the entire run-up in the value of the stock in 2024.

Investors holding out hope that Super Micro will pull out of its nosedive should listen for a “business update” from the company on Nov. 5. They should also consider the chances (slim) that a beleaguered company would plan to announce good news on the same day as a presidential election, when most eyes will be elsewhere.