Super Micro Computer Stock Plummets After Ernst & Young Resigns Over Financial Concerns

Shares of Super Micro Computer

Super Micro Computer (SMCI) saw its stock plummet by over 30% on Wednesday morning after the company disclosed that accounting firm Ernst & Young (EY) had resigned from its audit role. This sudden departure has raised serious concerns among investors, and the market reacted strongly as SMCI shares tumbled.

EY’s decision came as a surprise, as the accounting firm had been in the process of conducting an audit of Super Micro's financials for the fiscal year that ended on June 30, 2024. In its resignation letter, EY cited issues that prompted the firm to distance itself from the company. Specifically, EY said it could “no longer rely on management's and the Audit Committee’s representations” and was “unwilling to be associated with the financial statements prepared by management.” The letter further indicated that EY was unable to continue providing audit services “in accordance with applicable law or professional obligations.”

Super Micro responded to EY’s resignation in its 8-K SEC filing on Wednesday, stating that it “disagrees” with the decision and acknowledging that the audit process remains incomplete. According to the filing, a Special Committee has been formed to conduct a review, although it has “not yet obtained all information relevant for the Review and has not concluded the Review.” Super Micro emphasized that it is taking EY’s concerns “seriously” and intends to carefully review the Special Committee’s findings, along with any recommendations for corrective measures.

The resignation of EY marks another major challenge for Super Micro, especially after a critical report from Hindenburg Research two months prior. Hindenburg, known for its short-seller activity, released a report alleging “accounting manipulation” and other issues within Super Micro’s operations. This report, based on a three-month investigation, identified several “glaring accounting red flags,” evidence of undisclosed related-party transactions, and alleged export control and sanctions violations. Hindenburg also disclosed it was shorting Super Micro’s stock, which caused immediate ripples in the market. Following the release of this report, Super Micro postponed the filing of its annual report, leading to an additional 20% drop in its stock on August 28. To date, Super Micro has not filed its 2024 annual report, which adds further uncertainty to its standing with investors and regulatory bodies.

Adding to the complications, in September, the Wall Street Journal reported that the U.S. Department of Justice (DOJ) had launched an investigation into Super Micro. The report noted that the probe was in the “early stages” and focused on possible accounting violations within the company. According to the Journal, a prosecutor from the U.S. Attorney’s office in San Francisco requested information regarding a former employee alleged to have been involved in these accounting discrepancies. While the details of the investigation remain limited, its mere existence adds another layer of scrutiny over Super Micro’s financial practices.

The growing concerns over Super Micro’s accounting practices and corporate governance come after a period of rapid growth for the company. Earlier this year, SMCI’s stock enjoyed a strong rally as investor excitement around its role in the AI data center market reached new heights. However, as suspicions surrounding its accounting practices continue to unfold, SMCI’s market gains have eroded, and the stock is now down over the past six months.

For Super Micro, the confluence of EY’s resignation, the Hindenburg allegations, and the DOJ investigation has intensified pressures on its leadership to provide clarity to investors. The company’s delayed 2024 annual report remains a focal point, as analysts and stakeholders await a resolution to these lingering concerns. Moreover, the findings of Super Micro’s internal Special Committee, which may address the issues flagged by both Hindenburg and EY, are expected to play a pivotal role in restoring—or further damaging—investor confidence in the company.

In the meantime, Super Micro has indicated that it intends to cooperate fully with the Special Committee's review and will consider any necessary actions based on its conclusions. However, the company's path forward remains uncertain, as it faces the dual challenges of addressing internal financial concerns and navigating increased regulatory scrutiny. The situation underscores the importance of transparent corporate governance and rigorous financial oversight, particularly for companies like Super Micro, which are positioned at the forefront of high-stakes sectors like artificial intelligence.

The road ahead for Super Micro remains fraught with obstacles. If the company can successfully address the issues raised by EY and satisfy both its investors and regulatory bodies, it may be able to stabilize and refocus on its growth strategy in the AI-driven data center market. However, without clear resolutions to these mounting concerns, Super Micro risks further erosion of its market value and credibility in the tech and financial communities.