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.
The auditing standards offer some clues about what may be happening behind the scenes. An auditor normally has no obligation to make further inquiries or do any additional work after it certifies a company’s books. The exception is if new information comes to light that could affect the auditor’s conclusions.
If that happens, the auditing standards say the firm should determine “as soon as practicable” what the facts are and whether they existed as of the date of its prior audit report. The auditor also should request the company’s cooperation “in whatever investigation may be necessary.”
If the auditor decides it needs to withdraw a prior audit report, it is supposed to advise the company to tell investors not to rely on it and to disclose the newly discovered facts.
Deloitte was Super Micro’s auditor for two decades, up through the June 30, 2023, fiscal year, after which it was dismissed. EY was hired for fiscal 2024, and quit before completing its audit. Super Micro has said it believes it won’t have to restate previous financial reports. EY in an Oct. 29 letter to the company said it had “no basis to agree or disagree” with that statement. Deloitte has been mum.
Deloitte has been in a pickle with Super Micro before. Super Micro restated its financial reports for fiscal 2015 to 2017 and later paid a fine to settle Securities and Exchange Commission claims of widespread accounting violations. That doesn’t instill confidence that Deloitte got its audits right the first time in the years since then.
The stakes are higher now. Persuading another major audit firm to sign on under the current circumstances would be an impressive feat. EY in its resignation letter said it was “unwilling to be associated with the financial statements prepared by management.”
Why would any other auditor feel differently?
Write to Jonathan Weil at jonathan.weil@wsj.com