EY resigns from Super Micro audit over 'integrity'

Ernst & Young LLP resigned as the auditor to troubled server maker Super Micro Computer Inc., citing concerns about the company's governance and transparency. The shares plummeted the most in six years. 

The Big Four firm raised questions about the company's commitment to integrity and ethics, according to a filing that Super Micro released on Wednesday.

"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," Ernst & Young wrote. 

The resignation comes after news broke last month that the Department of Justice had launched a probe into an ex-employee's claims that Super Micro violated accounting rules. A month earlier, Super Micro said it would delay its annual financial filings and that a special committee was evaluating internal controls over financial reporting. The company said Wednesday it would hold a quarterly "business update" call with investors next week.

David Paul Morris/Bloomberg

This kind of public criticism by an auditor is "extremely rare and a huge red flag," said Olga Usvyatsky, an accounting analyst. In two other high-profile auditor resignations this year — from SunPower Corp. and Tingo Group Inc. — the companies were ultimately delisted, she wrote in an analysis earlier this month. 

Auditor turnover is generally uncommon among large companies. More than half of S&P 500 firms have had the same auditor for more than a quarter century, according to data compiled by Bloomberg. 

Scrutiny has intensified on Super Micro since a former employee, Bob Luong, alleged earlier this year in federal court that the company had sought to overstate its revenue. Short-seller Hindenburg Research subsequently referenced Luong's claims in a research report about Super Micro, alleging "glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures, and customer issues."

Super Micro said it doesn't expect the issues to lead to revisions in previously issued financial reports and that it has begun looking for another auditor. The company said it disagrees with Ernst & Young's decision to resign, but has taken the concerns expressed seriously and will carefully consider findings and suggested actions by the suggested special committee.

Ernst & Young said it agreed only with portions of Super Micro's regulatory filing. The auditor didn't co-sign Super Micro's statements that the company doesn't expect changes to previously issued financial results. In its resignation letter, Ernst & Young said it's "unwilling to be associated with the financial statements prepared by management." 

The resignation may fuel more doubt in the validity of past company financial disclosures, wrote Woo Jin Ho, an analyst at Bloomberg Intelligence. It "reinforces the need for greater corporate governance, which may require leadership change." 

The company sells high-powered servers for data centers and has experienced an explosion in demand for its wares amid the artificial intelligence boom. At one point earlier in the year, its shares had quadrupled. The stock plunged 33% to $33.05 at 2:01 p.m. Wednesday in New York, the worst intraday drop since October 2018.

Trouble for Super Micro could help its rival in the AI server market, Dell Technologies Inc., pick up market share, wrote Amit Daryanani, an analyst at Evercore ISI.

In 2020, Super Micro resolved an investigation by the Securities and Exchange Commission into its accounting by paying a $17.5 million penalty. Super Micro didn't admit or deny the regulator's allegations as part of its settlement.

In a statement, Super Micro said it remains focused on delivering on our customer commitments, product roadmaps, and robust growth and expansion."