Special Committee, supported by outside counsel
Cooley LLP and forensic accounting firm Secretariat Advisors, LLC,
finds no evidence of misconduct on the
part of management or the Board of Directors and that the Audit
Committee acted independently
No restatement of reported financials
expected
Board adopts recommendations of the Special
Committee and appoints new Chief Accounting Officer, approves the
transition to a new CFO and authorizes additional executive hires,
along with other measures to strengthen the Company
Super Micro Computer, Inc. (Nasdaq: SMCI) (the “Company”), a
Total IT Solution Provider for AI, Cloud, Storage, and 5G/Edge,
today announced that the independent Special Committee formed by
the Company’s Board of Directors has completed its review (the
“Review”). As announced on August 30, 2024, the Board of Directors
formed this committee in response to information that was brought
to the attention of its Audit Committee.
Among its findings, the independent Special Committee determined
that the resignation of the Company’s former registered public
accounting firm, Ernst & Young LLP (“EY”) and the conclusions
EY stated in its resignation letter were not supported by the facts
examined in the Review, the Special Committee’s interim findings
reported to EY on October 2, 2024, or the Special Committee’s final
findings.
Key Findings of the Special
Committee
On November 5, 2024, the Company announced that the Special
Committee’s investigation preliminarily found that the Audit
Committee had acted independently and that there was no evidence of
fraud or misconduct on the part of management or the Board of
Directors. The Special Committee’s final findings support those
initial findings, and the Company is now disclosing the details of
the Review, along with measures recommended by the Special
Committee.
The Special Committee’s investigation was intended to assess
whether the information brought to the Audit Committee’s attention
by EY, and certain other matters identified during the Review,
raised substantial concerns about (i) the integrity of the
Company’s senior management and Audit Committee, (ii) the
commitment of the Company’s senior management and Audit Committee
to ensuring that the Company’s financial statements are materially
accurate, (iii) the Audit Committee’s independence and ability to
provide proper oversight over matters relating to financial
reporting, and (iv) the tone at the top of the Company with regard
to rehiring certain former employees and financial reporting.
The Special Committee’s key findings are summarized as
follows:
- Management and Audit Committee integrity: The evidence
reviewed by the Special Committee did not raise any substantial
concerns about the integrity of Supermicro’s senior management or
Audit Committee, or their commitment to ensuring that the Company’s
financial statements are materially accurate.
- Audit Committee independence: As to the matters
investigated by the Special Committee, the Audit Committee
demonstrated appropriate independence and generally provided proper
oversight over matters relating to financial reporting. The Special
Committee also had no reservations about the independence of the
Audit Committee and each of its members.
- Appropriate tone at the top: With respect to the
rehiring of former employees, the tone at the top of the Company
was appropriate and fully consistent with a commitment to proper
financial reporting and legal compliance.
Formation of the Special Committee and
the Process of Its Investigation
In late July 2024, EY communicated to the Audit Committee
concerns about certain matters related to governance, transparency,
and the Company’s internal control over financial reporting. In
response, the Board appointed a new director to the Board and
formed the Special Committee to review these matters. The Special
Committee engaged independent outside counsel Cooley LLP and
forensic accounting firm Secretariat Advisors, LLC to aid in an
investigation on behalf of and at the direction of the Special
Committee.
Specifically, as part of its review, the Special Committee
investigated issues related to:
- Rehiring certain employees who resigned in 2018 following an
investigation in 2017 by the Audit Committee regarding sales and
revenue recognition practices (the “2017 Audit Committee
Investigation”).
- Current sales and revenue recognition practices, particularly
around quarter-ends, as well as with respect to merchandise returns
and warranties.
- Export control matters related to prevention of sales or
diversion to restricted countries.
- Related party disclosures.
The Special Committee is comprised of Susie Giordano, an
independent member of Supermicro’s Board of Directors. Mrs.
Giordano, an experienced attorney, joined the Board in August 2024
specifically to lead the Special Committee’s efforts to review the
matters outlined above, independent from any existing Directors.
Mrs. Giordano has over 25 years of experience advising management
and boards of directors, as well as extensive management experience
at some of the world’s leading technology companies.
The Special Committee’s rigorous investigation took over three
months, with independent counsel devoting over 9,000 hours and the
Secretariat forensic accounting team over 2,500 hours for the
Review. As part of that process, the following investigative
actions were taken:
- Extensive document collection, review, and analysis of roughly
4.1 terabytes of data, consisting of over 9 million documents from
89 individuals and an additional hard drive collection.
- Conducted 68 witness interviews of current and former
employees, management, advisors, and Board members.
- The Special Committee employed more than 50 attorneys from
Cooley and outside contract review attorneys, and employed a team
of forensic accounting specialists from Secretariat.
- Extensive meetings with Deloitte and EY, the Company’s former
auditors.
The Special Committee has confirmed that the Company cooperated
fully, and that the Company, Board, and the Audit Committee
promptly complied with all requests for information, documentary
evidence, and access to relevant witnesses.
Detailed Findings for the Specific
Issues Investigated by the Special Committee
Rehiring employees
- The investigation focused on the rehiring of nine individuals,
either as employees or as independent contractors, who had
previously resigned from the Company following the 2017 Audit
Committee Investigation.
- The Special Committee regarded the lack of any finding in the
2017 Audit Committee Investigation that these individuals had
engaged in conduct that was intended to cause the Company’s
financial results to be misstated as an important factor in
assessing the Company’s decision to rehire them.
- The Company’s decision to rehire certain individuals was the
product of reasonable business judgment.
- The Company generally had appropriate processes for rehiring
these individuals and ensuring proper guardrails were in
place.
- There were, however, lapses, including in ensuring guardrails
were always in place and observed. The Special Committee determined
that, because the Company’s Chief Financial Officer/Chief
Compliance Officer (CFO/CCO) had primary responsibility for the
process of rehiring these employees, he had primary responsibility
for process lapses.
- The Special Committee found no evidence indicating that any
process lapse resulted from bad faith, improper motives, or lack of
regard for accurate financial reporting or compliance, on the part
of the CFO/CCO or anyone else.
- These lapses included instances of not promptly informing the
Company’s Audit Committee and/or independent auditor of certain
rehires or plans to rehire some of these former employees,
including not informing EY prior to entering in June 2024 into a
now terminated consulting arrangement with the Company’s former
CFO, who had resigned following the 2017 Audit Committee
Investigation.
- The Special Committee found certain instances where the
documentation, tracking, training, and instructions around
appropriate guardrails were inconsistent or vague.
Revenue recognition and sales practices
- Based on a thorough review of 52 sales transactions from April
1, 2023 to June 30, 2024, including two sales transactions
specifically designated by EY, the Special Committee did not
disagree with any of the Company’s revenue recognition conclusions
for any quarter during this period.
- The Special Committee reviewed underlying sales transaction
information (including sales orders, purchase orders, shipping
documents, payment information, and the Company’s revenue
recognition determinations), discussed transactions with accounting
personnel, and conducted email reviews as appropriate. The sample
was focused on sales that included large dollar amounts,
involvement of rehires, discussions with now former auditors,
customers with high sales concentrations at quarter ends, and/or
changes in delivery dates.
- The Review also examined merchandise returns and warranty
practices to assess if there was any pattern or practice of
shipping non-working or incomplete products near quarter ends.
- Based on its investigation, the Special Committee did not
disagree with the Company’s revenue recognition conclusions.
Additionally, the Special Committee did not find evidence of a
pattern or practice of the Company shipping incomplete products at
or near quarter ends to recognize revenue.
- The evidence reviewed by the Special Committee did not give
rise to any substantial concerns about the integrity of
Supermicro’s senior management or Audit Committee, or their
commitment to ensuring that the Company’s financial statements are
materially accurate.
- The Audit Committee demonstrated appropriate independence and
generally provided proper oversight over matters relating to
financial reporting.
Export control matters
- The Special Committee also reviewed 11 specific export
transactions noted by EY. The Review focused on whether, at the
time of shipment, transactions complied with relevant U.S. export
laws and regulations. The Special Committee also reviewed certain
allegations of export control violations contained in a
short-seller report released on August 27, 2024 (the “Short Seller
Report”).
- The Special Committee relied in part on work conducted as part
of the Company’s regular compliance processes by outside counsel
and on a separate export control review recently conducted by other
outside counsel. In addition, the Special Committee investigated
sales data from these transactions and conducted a targeted email
review and collection of documents from 34 individuals.
- The Special Committee did not see any evidence suggesting that
anyone at the Company tried to circumvent export control
regulations or restrictions, or that anyone at the Company was
aware that any of its products might be diverted to a prohibited
end user or location. The Special Committee also did not identify
products that were sold to Russian customers or shipped to Russia
in violation of export controls or sanctions laws that were in
place when products were shipped.
- Based on its Review, the Special Committee concluded it appears
the Company has implemented a reasonable program for compliance
with applicable export control regulations.
Related party disclosures
- The Special Committee also reviewed the Company’s disclosures
regarding related parties in light of allegations in the Short
Seller Report.
- The Special Committee concluded that, with respect to the
related parties identified in the Short Seller Report, they were
(i) previously fully disclosed as required, (ii) not required to be
disclosed by applicable disclosure obligations or (iii) in one
case, the party became a related party during fiscal year 2024 and
will be fully disclosed in the Company’s annual report on Form 10-K
when filed.
Measures Recommended by the Special
Committee
As a result of these findings, the Special Committee recommended
that the Company take the following measures to strengthen the
Company’s governance and support the dynamic growth of the business
operations:
- Transition to a new Chief Financial Officer: In light of
the Company’s rapid recent growth and the Company’s ambition for
future growth, the Company should appoint at the soonest
practicable time a new CFO with extensive experience working as a
senior finance professional at a large public company.
- Appoint a Chief Accounting Officer: The Company should
appoint a Chief Accounting Officer, which will create an additional
layer of accounting standards and oversight.
- Appoint a Chief Compliance Officer: The Special
Committee found that the Company’s ability to properly oversee and
monitor guardrails related to the rehired employees was impacted
because the CFO/CCO functions were combined longer than
anticipated. It recommended that the Company promptly appoint a
separate Chief Compliance Officer.
- Appoint a General Counsel and Expand the Legal
Department: The Company should appoint a General Counsel and
expand the number of in-house attorneys to a level commensurate for
a company of Supermicro’s size and complexity, particularly in
light of its recent rapid growth and future growth ambitions.
- Improve Training and Guardrail Monitoring: The Company
should further invest in its systems and processes to track all (i)
training that is not currently included in its computerized
tracking, and (ii) guardrail monitoring and reporting.
- Improve Training and Guardrail Review: The Company
should evaluate its training program regarding sales and revenue
recognition policies and practices, including the appropriate role
of accounting personnel in the sales transaction process, as well
as streamline and revise its current active guardrails to remove
unintended ambiguity from monitoring.
Company Adopts All of the Special
Committee Recommendations
The Board has adopted all of the Special Committee’s
recommendations. To address the Special Committee’s
recommendations, and being mindful of the Company’s rapid business
growth over the past two years in helping to lead the AI
revolution, the Board has instructed management to add additional
experienced, senior talent commensurate with the Company’s size and
complexity today and to prepare for its future growth.
Specifically, the Board’s action in adopting all of the Special
Committee’s recommendations includes the following updates and
planned measures:
- The Company has begun a process to search for a new Chief
Financial Officer. David Weigand will continue to serve as the
Company’s CFO until the Board has named his successor.
- Additionally, the Company is accelerating its search for a
Chief Compliance Officer and for a General Counsel.
- Kenneth Cheung has been appointed Chief Accounting Officer. Mr.
Cheung is currently the Vice President of Finance and Corporate
Controller of Supermicro and previously served as the Vice
President of Operations at the Company.
- The Company will continue expanding and enhancing its training
programs as part of its commitment to continuous improvements in
its financial controls and compliance processes.
Current Financials
As announced on November 18, 2024, in its compliance plan to
Nasdaq, the Company believes it will be able to complete its Annual
Report on Form 10-K for the year ended June 30, 2024, and its
Quarterly Report on 10-Q for the fiscal quarter ended September 30,
2024 and become current with its periodic reports within the
discretionary period available to the Nasdaq staff to grant.
As previously disclosed, the Company does not anticipate any
restatements of its quarterly reports for the fiscal year 2024
ended June 30, 2024, or for prior fiscal years.
Cautionary Statement Regarding Forward Looking
Statements
Statements contained in this press release that are not
historical fact may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Such forward-looking
statements may relate, among other things, to (i) the actions the
Company will take to adopt and address the Special Committee’s
recommendations, (ii) the timing for the Company’s completion of
its Annual Report on Form 10-K for the year ended June 30, 2024,
and its Quarterly Report on 10-Q for the fiscal quarter ended
September 30, 2024 and becoming current with its periodic reports,
and (iii) the Company’s anticipation that it will not have any
restatements of its quarterly reports for the fiscal year 2024
ended June 30, 2024 or for prior fiscal years. Such forward-looking
statements do not constitute guarantees of future performance and
are subject to a variety of risks and uncertainties that could
cause our actual results to differ materially from those
anticipated. Additional factors that could cause actual results to
differ materially from those projected or suggested in any
forward-looking statements are contained in our filings with the
Securities and Exchange Commission, including those factors
discussed under the caption "Risk Factors" in such filings.
About Super Micro Computer, Inc.
Supermicro (NASDAQ: SMCI) is a global leader in
Application-Optimized Total IT Solutions. Founded and operating in
San Jose, California, Supermicro is committed to delivering first
to market innovation for Enterprise, Cloud, AI, and 5G Telco/Edge
IT Infrastructure. We are a Total IT Solutions provider with
server, AI, storage, IoT, switch systems, software, and support
services. Supermicro’s motherboard, power, and chassis design
expertise further enable our development and production, enabling
next generation innovation from cloud to edge for our global
customers. Our products are designed and manufactured in-house (in
the US, Taiwan, and the Netherlands), leveraging global operations
for scale and efficiency and optimized to improve TCO and reduce
environmental impact (Green Computing). The award-winning portfolio
of Server Building Block Solutions® allows customers to optimize
for their exact workload and application by selecting from a broad
family of systems built from our flexible and reusable building
blocks that support a comprehensive set of form factors,
processors, memory, GPUs, storage, networking, power, and cooling
solutions (air-conditioned, free air cooling or liquid
cooling).
Supermicro, Server Building Block Solutions, and We Keep IT
Green are trademarks and/or registered trademarks of Super Micro
Computer, Inc.
All other brands, names, and trademarks are the property of
their respective owners.
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version on businesswire.com: https://www.businesswire.com/news/home/20241202905643/en/
Media Contact: PR@Supermicro.com
Super Micro Computer (NASDAQ:SMCI)
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