Super Micro Computer’s stock has been in a tailspin since Ernst & Young dumped the company as an audit client about a year after it replaced Deloitte & Touche. If EY found something that Deloitte missed then the situation could get even trickier for the server maker that once seemed unstoppable.
There are enough red flags that Deloitte should be trying to find out what happened. EY in its Oct. 24 resignation letter said it no longer could rely on representations by Super Micro’s management or audit committee, citing “information that has recently come to our attention.” EY told Super Micro that the information it received raised questions about the company’s commitment to integrity and ethical values.
Super Micro said it appointed a special committee of directors, which hired a law firm and a forensic accounting firm to investigate. But details are scant. Super Micro didn’t release the full EY resignation letter or say what the information was that spooked EY. It won’t even say who is on the special committee.
If Deloitte were to pull its prior audit reports, or if Super Micro disavowed its prior numbers, it would constitute an event of default under the company’s credit agreements. That wouldn’t necessarily be a big deal, because the company may be able to get a waiver.
But the disruptions wouldn’t end there. If a new accounting firm couldn’t rely on Deloitte’s prior reports, it would have to audit the financial statements for years before 2024, meaning more time and expense before Super Micro could get its books in order.
That would make the risk of a Nasdaq delisting much more serious than it is now. The company has a Nov. 16 deadline to file a plan with Nasdaq to get current with its financial reports. After that, Nasdaq could grant a 180-day extension, but even that might not be enough time if Deloitte pulled its reports. Super Micro needs an auditor with global reach. There aren’t many. For its last few audits, Deloitte enlisted the help of its Taiwan affiliate.
Even before EY’s resignation, a former Super Micro employee, Bob Luong, in a lawsuit this year alleged the company in some instances recognized revenue improperly from fiscal 2020 to 2022, when Deloitte was still the auditor. The Justice Department has opened a probe. An attorney for Luong told the judge at a Sept. 26 hearing that “the Department of Justice contacted us too,” according to a court transcript.
