The Big Exit | How One Auditor Walked Away from Super Micro
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The Governance Shortfall: Inside Super Micro’s Auditor Crisis
On Wednesday, shares of the high performance server and storage solutions provider faced renewed selling pressure after the unexpected resignation of its audit firm, Ernst & Young LLP(EY)
In July 2024, EY alerted the Audit Committee about several concerns related to governance, transparency, internal controls, and the risk of delayed filing of the company's annual report. In response, the Board formed an independent Special Committee to investigate these matters, engaging Cooley LLP and forensic accounting firm Secretariat Advisors, LLC. Although EY and the Board received preliminary updates on the investigation, the final conclusions have not yet been shared.
The ongoing review raised doubts for EY regarding the company’s adherence to the COSO Framework principles for internal controls. EY questioned the company’s commitment to integrity, the independence of the Audit Committee, and the reliability of management’s and the Audit Committee's representations.
In its resignation letter, EY expressed its inability to rely on these representations or be associated with the company's financial statements, citing legal and professional obligations.
Despite the developments, Super Micro has indicated no expected changes to previously issued financial statements. The company plans to provide a Q1/FY2025 business update next week. However, it’s surprising that management didn’t include preliminary Q1 results in Wednesday's announcement, which could have mitigated the negative impact on its stock.
Super Micro is nearing a Nasdaq deadline to either regain compliance with listing requirements or submit a plan. With the auditor’s unexpected departure, it may be difficult for the company to present a viable plan, raising the risk of a near-term delisting.
This resignation comes at a critical time for Super Micro, as its rapid growth requires substantial working capital. Based on management’s projections, FY2025 cash needs could reach up to $3 billion, likely necessitating additional capital early next year. However, raising funds without audited financials could be challenging, potentially forcing Super Micro to relinquish market share to competitors like Dell Technologies or Hewlett Packard Enterprise.
In my view, EY’s departure increases the likelihood of a prolonged accounting review, which could hinder Super Micro’s ability to secure funding for anticipated growth. Therefore, it is crucial for the company to report strong preliminary Q1/FY2025 results and present a positive outlook next week.
Super Micro Computer’s troubles continue, as its auditor resigned due to concerns over management’s integrity and the Audit Committee's independence. This situation makes it unlikely for the company to achieve compliance with Nasdaq requirements soon, raising the potential for a near-term delisting.
With a need to re-enter the capital markets in early 2025, audited financials remain essential. A failure to secure funding could result in significant market share loss to major competitors like Dell Technologies and Hewlett Packard Enterprise.
Given these challenges, the increased risk of prolonged financial review, and a likely near-term delisting, I am reaffirming my "Sell" rating on Super Micro Computer's common shares.
On Wednesday, shares of the high performance server and storage solutions provider faced renewed selling pressure after the unexpected resignation of its audit firm, Ernst & Young LLP(EY)
In July 2024, EY alerted the Audit Committee about several concerns related to governance, transparency, internal controls, and the risk of delayed filing of the company's annual report. In response, the Board formed an independent Special Committee to investigate these matters, engaging Cooley LLP and forensic accounting firm Secretariat Advisors, LLC. Although EY and the Board received preliminary updates on the investigation, the final conclusions have not yet been shared.
The ongoing review raised doubts for EY regarding the company’s adherence to the COSO Framework principles for internal controls. EY questioned the company’s commitment to integrity, the independence of the Audit Committee, and the reliability of management’s and the Audit Committee's representations.
In its resignation letter, EY expressed its inability to rely on these representations or be associated with the company's financial statements, citing legal and professional obligations.
Despite the developments, Super Micro has indicated no expected changes to previously issued financial statements. The company plans to provide a Q1/FY2025 business update next week. However, it’s surprising that management didn’t include preliminary Q1 results in Wednesday's announcement, which could have mitigated the negative impact on its stock.
Super Micro is nearing a Nasdaq deadline to either regain compliance with listing requirements or submit a plan. With the auditor’s unexpected departure, it may be difficult for the company to present a viable plan, raising the risk of a near-term delisting.
This resignation comes at a critical time for Super Micro, as its rapid growth requires substantial working capital. Based on management’s projections, FY2025 cash needs could reach up to $3 billion, likely necessitating additional capital early next year. However, raising funds without audited financials could be challenging, potentially forcing Super Micro to relinquish market share to competitors like Dell Technologies or Hewlett Packard Enterprise.
In my view, EY’s departure increases the likelihood of a prolonged accounting review, which could hinder Super Micro’s ability to secure funding for anticipated growth. Therefore, it is crucial for the company to report strong preliminary Q1/FY2025 results and present a positive outlook next week.
Super Micro Computer’s troubles continue, as its auditor resigned due to concerns over management’s integrity and the Audit Committee's independence. This situation makes it unlikely for the company to achieve compliance with Nasdaq requirements soon, raising the potential for a near-term delisting.
With a need to re-enter the capital markets in early 2025, audited financials remain essential. A failure to secure funding could result in significant market share loss to major competitors like Dell Technologies and Hewlett Packard Enterprise.
Given these challenges, the increased risk of prolonged financial review, and a likely near-term delisting, I am reaffirming my "Sell" rating on Super Micro Computer's common shares.
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With Nasdaq's 60-day grace period set to expire in about two weeks, the company faces a potential delisting in the near future. Concerns have been raised following reports of key partner Nvidia shifting customer orders to competitors in Taiwan and subdued demand for the company's liquid cooling solutions. The risk/reward outlook ahead of Tuesday's business update seems unfavorable. Even if the company performs well, investors may be critical given recent developments, while weak results and guidance could be interpreted as confirmation of market share losses.
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