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Super Micro auditor EY resigns, citing ‘integrity’ concerns

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Ernst & Young LLP resigned as the auditor to troubled server maker Super Micro Computer Inc., citing concerns about the company’s governance and transparency. The shares plummeted the most in six years. 

Ernst & Young raised questions about the firm’s commitment to integrity and ethics, according to a filing that Super Micro released on Wednesday. “We are resigning due to information that has recently come to our attention which has led us to no longer be able to rely on management’s and the Audit Committee’s representations,” Ernst & Young wrote. 

The resignation comes after news broke last month that the Department of Justice had launched a probe into an ex-employee’s claims that Super Micro violated accounting rules. A month earlier, Super Micro said it would delay its annual financial filings and that a special committee was evaluating internal controls over financial reporting. The company said Wednesday it would hold a quarterly “business update” call with investors next week.

Super Micro Computer headquarters in San Jose, California
Super Micro Computer headquarters in San Jose, California

David Paul Morris/Bloomberg

This kind of public criticism by an auditor is “extremely rare and a huge red flag,” said Olga Usvyatsky, an accounting analyst. In two other high-profile auditor resignations this year — from SunPower Corp. and Tingo Group Inc. — the companies were ultimately delisted, she wrote in an analysis earlier this month. 

Auditor turnover is generally uncommon among large companies. More than half of S&P 500 firms have had the same auditor for more than a quarter century, according to data compiled by Bloomberg. 

Scrutiny has intensified on Super Micro since a former employee, Bob Luong, alleged earlier this year in federal court that the company had sought to overstate its revenue. Short-seller Hindenburg Research subsequently referenced Luong’s claims in a research report about Super Micro, alleging “glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures, and customer issues.”

Super Micro said it doesn’t expect the issues to lead to revisions in previously issued financial reports and that it has begun looking for another auditor. The company said it disagrees with Ernst & Young’s decision to resign, but has taken the concerns expressed seriously and will carefully consider findings and suggested actions by the suggested special committee.

Ernst & Young said it agreed only with portions of Super Micro’s regulatory filing. The auditor didn’t co-sign Super Micro’s statements that the company doesn’t expect changes to previously issued financial results. In its resignation letter, Ernst & Young said it’s “unwilling to be associated with the financial statements prepared by management.” 

The resignation may fuel more doubt in the validity of past company financial disclosures, wrote Woo Jin Ho, an analyst at Bloomberg Intelligence. It “reinforces the need for greater corporate governance, which may require leadership change.” 

The company sells high-powered servers for data centers and has experienced an explosion in demand for its wares amid the artificial intelligence boom. At one point earlier in the year, its shares had quadrupled. The stock plunged 33% to $33.05 at 2:01 p.m. Wednesday in New York, the worst intraday drop since October 2018.

Trouble for Super Micro could help its rival in the AI server market, Dell Technologies Inc., pick up market share, wrote Amit Daryanani, an analyst at Evercore ISI.

In 2020, Super Micro resolved an investigation by the Securities and Exchange Commission into its accounting by paying a $17.5 million penalty. Super Micro didn’t admit or deny the regulator’s allegations as part of its settlement.

In a statement, Super Micro said it remains focused on delivering on our customer commitments, product roadmaps, and robust growth and expansion.”

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Accounting

Vanguard settles target-date fund investor case

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Vanguard agreed to pay $40 million to settle a potential class-action case over steep capital-gains taxes that hit thousands of investors in the firm’s target-date funds.

In the Nov. 6 preliminary settlement awaiting approval in Philadelphia federal court, the asset management giant did not admit any guilt or wrongdoing. However, the payout would add on to another $6.25 million in fines and restitution against Vanguard in 2022 in the settlement of a case filed by Massachusetts regulators on behalf of investors who absorbed capital gains — and the accompanying tax burden — when the firm opened the lower-cost institutional share classes of the funds to midsize retirement plans it had previously shut out from them in 2020.

Those clients rushed into the cheaper shares in a move described by The Wall Street Journal as an “elephant stampede” that caused the target-date funds to sell 15% of the products’ holdings in transactions saddling taxable-account investors with a capital-gains distribution that was 40 times any previous level, according to the March 2022 lawsuit. Less than a year after reducing the minimum-asset requirement for institutional shares to $5 million from $100 million, the firm merged them together with the retail versions of the funds. That adjustment caused no tax impact, leading experts to question why Vanguard didn’t simply do that in the first place.

“You got these huge capital gains that had to be distributed, and that was really the big problem,” said Daniel Sotiroff, a manager research senior analyst of passive strategies for Morningstar Research Services. “Vanguard actually did kind of mess this one up.”

Representatives for Vanguard didn’t respond to requests for comment on the case or the settlement.

READ MORE: How Vanguard’s tax-bomb target-date funds slammed wealthy investors 

It and the plaintiffs had indicated in September filings that they reached agreement in private mediation that month. The investors accused Vanguard and its top executives of breaching their fiduciary duty, aiding and abetting that breach, gross negligence, breaking the covenant of good faith and fair dealing, unjust enrichment and violations of several state laws. In the course of discovery, Vanguard deposed 10 of the plaintiffs and produced 250,000 documents.

The company agreed to the settlement “solely to eliminate the burden and expense of further

litigation,” and nothing in it is “an admission or finding of any fault, liability, wrongdoing or damage whatsoever or any infirmity in the defenses that [the] defendants have asserted, or could have asserted,” according to court filings.

“Defendants have denied, and continue to deny, that they have committed any act or omission giving rise to any liability or violation of law,” the “stipulation of settlement” document stated. “Defendants have asserted, and continue to assert, that the conduct was at all times proper and in compliance with all applicable provisions of law, and they believe that the evidence developed to date supports their positions that they acted properly at all times and that the action is without merit.”

In the agreement ordering Vanguard to pay $40 million to target-date investors who paid the tens or even hundreds of thousands of dollars in taxes three years ago, the plaintiffs agreed to take roughly 15% of the “best-case scenario” payment of $259.5 million in damages, according to their filing for approval of the settlement. The settlement agreement limited attorney fees to no more than one-third of the award and capped litigation expenses at $985,000. If the settlement gets preliminary approval, the plaintiffs would then reach out to potential class members for their reaction before seeking the final green light on the agreement.

The cash settlement “provides an immediate recovery to impacted Vanguard [target-date fund] investors and avoids the considerable risks of continued litigation in this complex class action,” the filing stated. “Plaintiffs and class counsel believe that the case has merit, but they recognize the significant risk and expense that would be necessary to prosecute Plaintiffs’ claims successfully through class certification, continued fact and expert discovery, summary judgment, trial and subsequent appeals, as well as the inherent difficulties and delays complex class action litigation like this entails. As previewed in the parties’ class certification briefing, which focused almost exclusively on damages model issues, proving damages would be risky, complicated, and uncertain, involving conflicting expert testimony.”

READ MORE: Vanguard to pay some — not all — of tax bills created for TDF investors

Besides the substantial payout, the case helped remind financial advisors and their clients of the potential risks involved with holding mutual funds in taxable accounts, Sotiroff said. ETFs or separately-managed accounts could help avoid the tax surprises in non-retirement holdings, even though target-date funds may not be as readily available in that form.

“If you’re going to hold a mutual fund, you have to expect that you’re probably going to get some capital gains distributions from it,” Sotiroff said. “You’re always potentially on the hook for a capital gains distribution.”

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Accounting

M&A roundup: Aldrich and GHJ expand

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Aldrich, a provider of financial, wealth, tax, and business transaction strategies based in Salem, Oregon, has acquired HMA CPA, an accounting firm based in Spokane, Washington.

The Aldrich Group of Companies includes Aldrich CPAs + Advisors LLP, a Top 75 Firm, as well as Aldrich Wealth LP, a registered investment advisory firm with over $6 billion in assets under management, and Aldrich Advisors Capital LP, which provides advisory services for business transactions. 

Financial terms of the deal were not disclosed.  All four HMA partners and 25 employees will be joining Aldrich, which has $86 million in revenues and 500 team members across the U.S. and India. Aldrich ranked No. 72 on Accounting Today‘s 2024 list of the Top 100 Firms.

The acquisition of HMA CPA will enable Aldrich to expand to the Spokane and Coeur d’Alene, Idaho, area, by adding HMA’s four partners and their employees. Financial terms of the deal were not disclosed. 

“We share with HMA a commitment to serving our people, our clients, and our communities and are honored to build on HMA’s 40-year legacy,” said Aldrich CEO partner John Lauseng in a statement Tuesday. “We are excited to work together to help Spokane and Coeur d’Alene-area companies, owners and employees meet their financial goals.”

HMA was founded in Spokane in 1983 and has grown by expanding its services and through acquisition. In addition to Kevin Sell, HMA’s other owners, Kristi Bushnell, Laura Hays and Mike Whitmore, will be joining Aldrich, along with their colleagues.  

“Joining Aldrich will allow our team to deliver even more value to our clients, as well as create growth opportunities for our professionals,” said HMA CEO Kevin Sell in a statement. “Aldrich shares our entrepreneurial spirit, and we look forward to providing more services to our Spokane area clients through Aldrich CPA + Advisors, Aldrich Wealth, and Aldrich Capital Advisors.”  

After the deal, Aldrich now has eight offices in the Western U.S. across Oregon, California, Colorado, Utah and Washington. 

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Accounting

IFAC names Jean Bouquot its president

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The International Federation of Accountants announced Jean Bouquot as its president and Taryn Rulton as deputy president.

Bouquot will serve a two-year term through November 2026, previously having served as IFAC deputy president since November 2022.

“It is my honor to serve as IFAC president,” Mr. Bouquot said in a statement. “Together with my fellow board members, I will work on behalf of all IFAC members, convene the profession and its stakeholders to highlight the role and activities of IFAC, and always advance the profession in the public interest.”

IFAC offices

Bouquot has over 44 years of audit experience at EY with exposure to international activities. He currently runs his own practice in Paris. He joined the IFAC board in November 2020, nominated by Compagnie Nationale des Commissaires aux Comptes and Conseil National de l’Ordre des Experts-Comptables.

He was formerly president of the CNCC, formerly president and deputy president of the Compagnie Régionale des Commissaires aux Comptes de Versailles et du Centre, and is currently a board member of IFAC Network Partner organization Fédération Internationale des Experts-comptables et commissaires aux Francophones.

Rulton, elected as IFAC deputy president, joined the board in November 2020. She has over 30 years of experience across the U.K. and Australia with a background spanning the banking industry, Big Four firms KPMG and EY, government, private companies, non-governmental organizations and universities.

She is currently chief commercial officer at La Trobe University in Melbourne, Australia, and serves on multiple corporate boards and committees in the not-for-profit and public sectors, including as chair of audit and risk committees. She has standard-setting experience and completed two terms on the Australian Accounting Standards Board.

The IFAC also announced new and re-appointed board members.

New appointments: 

  • Josephine Su Han Phan (CPA Australia)
  • Michael Niehues (IDW/WPK, Germany)
  • Patricia Stock (SAICA, South Africa)
  • Mark Vaessen (Royal NBA, Netherlands)
  • Lei Yan (CICPA, China)
  • Ahmad Almeghames (SOCPA, Saudi Arabia)

Reappointments:

  • Greg Anton (AICPA, USA)
  • Tashia Batstone (CPA Canada)

The IFAC Council also approved new member and new associate organizations. The admissions were approved at the 2024 IFAC Council hybrid meeting, with a physical location held in Paris on Nov. 6-7.

New IFAC members:

  • Colegio de Contadores Públicos de Pichincha y del Ecuador
  • Consejo General de Economistas de España
  • Emirates Association for Accountants and Auditors

New associates:

  • Institute of Chartered Accountants of the Maldives  
  • Ordre National des Experts-Comptables Algériens
  • Ordre des Professionnels Comptables du Burundi
  • Ordre National des Experts Comptables du Gabon

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