A settlement between
Super Micro Computer Inc.
and the U.S. Securities and Exchange Commission illustrates how an aggressive focus on quarterly financial performance and a lack of training and internal controls can undercut efforts to comply with financial reporting rules.
The SEC on Tuesday fined the San Jose, Calif.-based manufacturer of computer servers $17.5 million over allegations the company and its former chief financial officer prematurely recognized revenue and understated expenses.
Supermicro’s accounting practices violated antifraud, reporting, books and records, and internal accounting controls provisions of federal securities laws, according to the SEC. In its settlement, the company neither admitted nor denied the SEC’s findings.
Chief Executive Charles Liang said the company was pleased to resolve the matter. “Supermicro is committed to conducting our business ethically and transparently,” Mr. Liang said in a statement. “We fell short of our standards, and we have implemented numerous remedial actions and internal control enhancements to prevent such errors from recurring.”
Mr. Liang, who the SEC didn’t accuse of misconduct, was required under a related settlement to reimburse the company $2.1 million in stock profits he received during the time the accounting errors occurred.
The company’s former CFO, Howard Hideshima, also settled claims that he had engaged in improper accounting and caused internal accounting control failures. He agreed to pay $300,000 in illicit proceeds and interest and a $50,000 penalty.
A lawyer for Mr. Hideshima said the former Supermicro executive was gratified to resolve the matter without admitting or denying the SEC’s allegations.
Supermicro improperly accelerated revenue recognition and reporting in a variety of ways, according to the SEC. The regulator said the company booked sales on goods sent to warehouses and not yet delivered to customers, shipped goods to customers prior to customer authorization and shipped incorrectly assembled goods to customers.
In one instance, Supermicro shipped goods to a customer that didn’t want them delivered for another month. The customer asked for the shipment to be rejected, and asked why it was being shipped early, according to the regulator.
“Can you please help to approve this shipment to help with our quarter end?” a Supermicro salesperson requested, according to the SEC. “I was instructed by our management to push all the orders out before our quarter end which is also our year end.…We will just need your special support for this time.”
Supermicro also improperly reduced liabilities accrued for its marketing program to avoid recognizing some expenses unrelated to marketing, the SEC said.
The practices resulted in certain financial statements between 2014 and 2017 containing materially misstated financial information, the SEC said. Supermicro ultimately was unable to file financial reports for nearly two years, the SEC said, which resulted in the company’s stock being suspended from trading for a period and then delisted from the Nasdaq.
Supermicro finally filed its full-year financials for the fiscal year 2017 in May 2019. In the filing, the company said it had conducted an investigation into its accounting practices and found a series of material weaknesses in its internal controls. The weaknesses included an aggressive focus on quarterly revenue and a failure by executives to establish and promote a control environment with an appropriate tone of compliance, the company said at the time.
Supermicro has since improved its internal controls and reorganized its management team, the SEC said. The company was relisted on the Nasdaq Global Market in January.
—Jack Hagel contributed to this article.
Write to Dylan Tokar at [email protected]
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