Supermicro: Board member finds no mistakes, but recommends new managers

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Supermicro washes its hands in innocence, but is looking for new top managers: the chief financial officer and chief legal officer are to be replaced, a new chief accountant has been appointed and there is to be a separate chief compliance officer. This is the result of an internal investigation following serious allegations by the former auditor EY and the short-selling firm Hindenburg Research.

Server manufacturer Super Micro violated the rules of the US Securities and Exchange Commission between 2015 and 2017 and recognized future revenue as income too early, while at the same time understating expenses. The result was incorrect business figures. This resulted in a fine of around 18 million US dollars in 2020, and several employees had to leave the Californian company in 2018.

There are new allegations this year. Hindenburg Research criticized close family and financial ties between Supermicro and some suppliers. Supermicro had also manipulated its sales again and violated export bans. And auditor EY terminated the cooperation because Supermicro violated two principles of ethical corporate behavior. The company did not show sufficient commitment to integrity and ethical values, nor did it take its control function seriously enough. Basically, EY could not trust the management's statements and did not want to be associated with its books.

Because EY threw in the towel, Supermicro was unable to present an audited financial report. However, this means that the company is in breach of the rules for its stock market listing. According to its own statements, it is working on clearing up this matter.

One-woman committee with 50 lawyers

The Board of Directors also appointed a special committee to get to the bottom of the allegations. This committee consisted of a single person, the lawyer and independent board member Susie Giordano. She called in more than 50 lawyers and forensic accountants.

Giordano now reports that the documents inspected did not give rise to any significant doubts about the integrity and commitment to correct financial statements on the part of leading managers and the audit committee. This committee and its members were also independent and had duly monitored the preparation of the financial statements.

Revenues, refunds and warranty payments were correctly accounted for. Giordano also saw no evidence that employees had tried to circumvent export restrictions or that anyone in the company had known that products sold were being diverted to unauthorized countries. In addition, the investigation did not identify any products that went to Russians or to Russia contrary to the restrictions in force at the time of delivery.

As far as transactions with affiliated companies were concerned, these were either disclosed as required or not subject to disclosure at all. In one case, a business partner had become an affiliated company in the current year, which would also be disclosed in the next annual report.

Employees removed after scandal returned

The allegation that Supermicro rehired nine of the employees dismissed in 2018 or used them as consultants, including the former CFO, has been confirmed. However, these decisions were made on the basis of "reasonable business judgment". The internal processes had been carried out correctly and appropriate regulations against malversation were in place.

However, Giordano found cases in which it was not ensured that these regulations were adhered to. This is the responsibility of the Head of Finance, who is also Chief Compliance Officer, which is why he is to be replaced. However, this will not take effect immediately, but only once a successor has been found.

According to the communiqué, however, there are no indications that these errors were due to improper motives or a lack of consideration for correct accounting. In some cases, the documentation of instructions and training was "inconsistent or vague". In addition, management had failed to immediately inform auditors EY and the board's audit committee of its intention to re-employ the individuals who left in 2018.

Share price rises sharply

In addition to replacing the Head of Finance and Compliance, Giordano also recommends replacing the Chief Legal Officer and the Chief Accountant. The latter has already been replaced. In future, Supermicro should separate the positions of Chief Compliance Officer and Chief Financial Officer, expand the legal department and improve training and supervision.

Following the release of the summary of the report on Monday, Supermicro shares rose more than 28 percent on the NASDAQ. However, the price is still some way below the level of October, shortly before EY terminated the cooperation.

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