SuperMicro's Accounting Problem Deepens with New Whistleblower Case
THE WILDCARD
Supermicro (SCMI), a prominent AI server manufacturer, has been in the hot seat in recent months for accounting related problems. It is yet to become a scandal, but truth will show soon.
Its auditor, Ernst & Young (EY), resigned in October 2024 after it raised serious concerns about Supermicro's internal controls, governance, and accounting practices. Its stock price has gyrated substantially ever since. The recent whistleblower case once again put spotlights on the company.
The whistleblower, Bob K. Luong, alleged that…
Improper Revenue Recognition: Supermicro improperly recognized millions in revenue before actually delivering goods to customers. This could lead to significant financial restatements and loss of investor trust.
Shipping Defective Products: Luong claims that Supermicro shipped equipment with missing parts to make its financials appear better than they were. This could result in customer dissatisfaction, returns, and damage to the company's reputation.
Collusion with Business Partners: The allegations include claims that Sara Liu Liang, the CEO's wife and cofounder, along with her brother Edmond Liu, negotiated with the CEO of Compuware to delay payments and adjust terms of sale while still allowing for early revenue recognition. This could lead to legal and regulatory scrutiny, as well as potential fines and penalties.
Supermicro’s case has evoked memories of similar cases against WorldCom and Enron during the first decade of the 21st century.
WorldCom's Accounting Scandal
WorldCom, once a leading telecommunications company, was embroiled in one of the largest accounting scandals in history. From 1999 to 2002, senior executives, including CEO Bernard Ebbers, orchestrated a scheme to inflate earnings by over $11 billion. The fraud was uncovered in 2002, leading to the company's bankruptcy and criminal charges against key figures.
Enron's Accounting Scandal
Enron, an energy company, became synonymous with corporate fraud. Executives used complex accounting tricks to hide debt and inflate profits, leading to the company's collapse in 2001. The scandal resulted in significant financial losses for investors and employees, and criminal charges against top executives.
Supermicro has a history of regulatory issues. In 2020, the company paid a $17.5 million penalty to the SEC for prematurely and improperly recording revenue. The recent allegations of accounting manipulation and undisclosed transactions have attracted the attention of the U.S. Justice Department, which has begun an investigation into the company.
Supermicro can be a good candidate for option traders in the near term as its stock price will be driven by headline news and market sentiment. Embrace for volatility if you plan to long or short it.