Super Micro’s new auditor: a step toward compliance, but what's next?

Super Micro engages BDO to audit 2024 annual report, but there is still a long road to regain compliance.

Source: the image was generated by ChatGPT when asked to illustrate a compliance plan.

Super Micro (Ticker: SMCI) announced on November 18, 2024, that the Company engaged BDO USA, P.C. (“BDO”) as its independent auditor, effective immediately. Hiring a new auditor is an important step for Super Micro, allowing it to prepare to release its delinquent 10-K and 10-Q reports and regain compliance with Nasdaq listing requirements.

In addition to a relatively standardized, formal filing to the SEC of Item 4.01 of Form 8-K, required for auditor changes, the Company also issued a separate press release on the same day. The press release described the engagement of BDO, characterizing the firm as one of the “…world's top five accounting firms network with over 115,000 professionals across its global network” (emphasis added):

SAN JOSE, Calif. -- November 18, 2024 -- (BUSINESS WIRE) -- Super Micro Computer, Inc. (Nasdaq: SMCI), a Total IT Solution Provider for AI, Cloud, Storage, and 5G/Edge, announced today that the Audit Committee of its Board of Directors has engaged BDO USA, P.C. (“BDO”) as its independent auditor, effective immediately. BDO is a member firm of BDO International, one of the world's top five accounting firms network with over 115,000 professionals across its global network and a recognized leader in audit and assurance.

The highlighted language is not a throwaway, nor just a courtesy nod toward the audit firm, a new vendor.

To regain compliance with the Nasdaq listing requirements, Super Micro had to ensure that the delinquent 10-K report was signed by an independent, PCAOB-registered audit firm. However, the SEC and the exchanges do not prescribe that companies hire an audit firm of a specific size or with a particular geographical presence. Moreover, I am unaware of a precedent where an exchange refused to approve a proposal to regain compliance because the audit firm is too small for the company.

If any of my readers know of such a precedent, I would love to hear about it.

Yet, there is a difference between regaining compliance and regaining market credibility and investors’ confidence. Suppose Super Micro hired a small, US-only audit firm. As I explained to Jacob Adelman of Barron’s, Super Micro is a large company that operates in multiple locations around the globe. Small accounting firms may not have sufficient resources, geographic coverage, or technical expertise to audit such a large, complex issuer.

“Smaller accounting firms may not have the resources or expertise to be as exacting as one of the bigger groups, which could accelerate completion of the audited financial reporting that Super Micro needs to maintain its Nasdaq listing, Usvyatsky says. But such a move could leave investors wondering if they had been unable to gain the trust of a larger firm, she says. “It does not help with restoring credibility with investors,” Usvyatsky says.”

My friend and frequent collaborator Francine McKenna, in her interview with Barron’s, wondered if even globally-distributed BDO has sufficient expertise given the firm’s limited exposure to companies of this size:

“Francine McKenna, who writes about auditing and corporate governance issues for The Dig newsletter, says that limited exposure to the nation’s highest-value companies could raise questions about its capacity to audit Super Micro.

“Is BDO ready to be working on a very fraught, protracted, potentially problematic audit?,” she says. “They’re already behind the eight ball.”

According to Barron’s, the next largest BDO clients last year were “dental care supplier Henry Schein, footwear maker Skechers, and hospital landlord Healthcare Realty Trust”, with market caps ranging from $6.4 billion to $9.5 billion, compared to Super Micro’s market cap which stood at ~ $19 billion as of November 22, 2024.

But why would BDO even accept the Super Micro engagement, considering previous audit firm EY’s sudden resignation and statement that it could not rely on management’s representations? How do you work with somebody you cannot trust?

Super Micro disclosed in its November 5, 2024, press release that its Independent Special Committee of the Board had completed some of its investigative work, and had not identified any cases of misconduct by senior management:

"The Special Committee has completed its investigation based on a set of initial concerns raised by EY. Following a three-month investigation led by Independent Counsel, the Committee’s investigation to date has found that the Audit Committee has acted independently and that there is no evidence of fraud or misconduct on the part of management or the Board of Directors. The Committee is recommending a series of remedial measures for the Company to strengthen its internal governance and oversight functions, and the Committee expects to deliver the full report on the completed work this week or next. The Special Committee has other work that is ongoing but expects it to be completed soon."

Reading through the fine print, based on the disclosure, the Committee did identify some issues that require remediation, but the issues are not as bad as EY alleged, according to Super Micro. According to the Company, the Committee did not identify managerial misconduct – arguably mitigating the tone at the top concerns and opening the door for BDO to accept the engagement.

While it is unlikely that BDO would have taken the job without seeing the full Special Committee report, the Company did not share details of the findings with the general public. Moreover, whether BDO — who is not bound by the findings — will identify additional issues, including accounting errors or internal control weaknesses, is still an open question.

One thing is clear. Given the noisy way the Company and EY parted ways, BDO will need to go through Super Micro’s financials with a fine-tooth comb before signing off on the 2024 results. That should translate into more work, more audit hours, and higher audit fees.

So, what’s next for Super Micro?

As I noted to Market Watch, there is a difference between submitting a compliance plan — which needs to be approved by Nasdaq — and regaining compliance.

“To remain listed Super Micro needs to submit to Nasdaq a plan of how they are going to regain compliance,” said Olga Usvyatsky, an accounting analyst and author of an accounting newsletter, Deep Quarry. “It is up to Nasdaq whether to accept or reject the plan.”

Were the Nasdaq to accept Super Micro’s plan, the company might get an extension to get current on its requirements, she added.”

Behind the paywall, I discuss selected clauses of Nasdaq listing rules and use Super Micro’s August 2018 delisting event to illustrate the possible compliance timeline.