SEC Fines Supermicro $17.5 Million for Accounting Violations
Accounting is the organization of financial information for businesses. The SEC fined Super Micro Computer, Inc. for prematurely recognizing revenue and understating expenses. This violation highlights the importance of following GAAP principles such as revenue recognition and matching principles.
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Presentation Transcript
SEC FINES SUPERMICRO $17.5 MILLION FOR VIOLATING ACCOUNTING PRACTICES Because audits matter
What even is accounting? What does the SEC want with Super Micro Computer, Inc? How does fraud happen? Super Micro s risk, gamble, and fine. SOME CONTENT BASICS TO THIS PRESENTATION
ACCOUNTING IS Accounting is the organization of financial and non-financial information concerning businesses and corporations. Accounting pertains to the economic activities of an organization and conveys this financial information to investors, creditors, management, and regulators. Accounting is also a really complex thing to understand so here s what you should know for this special presentation: known as Generally Accepted Accounting Principles (or GAAP). Professional accounting is subject to rules and standards overseen and regulated by the Securities & Exchange Commission (SEC) is the governing body of the accounting profession. The Financial Accounting Standards Board (FASB) which is NET INCOME = REVENUES - EXPENSES
U.S. SEC V SUPERMICRO, INC The Securities & Exchange Commission is a big deal. The SEC enforces federal securities laws, proposes securities rules, and regulates the securities industry, which is the nation's stock and options exchanges, and other organization activities, including accounting practices. Supermicro, Inc. is an informational technology company based in San Jose, California that specializes in computer servers as well as various other computer services and products. Supermicro was alleged to have prematurely recognized revenue and understated expenses between 2014- 2017.
GAAP outlines specific rules regarding revenue and expenses of a company. These principles are core elements of the accrual basis of accounting. TWO ACCOUNTING RULES TO LEARN AND LIVE BY The Revenue Recognition Principle states that revenue shall be recorded when earned, and not when the related cash/cash equivalent is collected. The Matching Principle states that expenses incurred during a period be recorded in the same period in which the related revenues are earned.
THE IMPORTANT THING IS THAT THEY DID THE WRONG THING AND DIDN T GET AWAY WITH IT Remember: Net Income = Revenue Expenses Also remember that Supermicro reported revenue early and understated expenses Supermicro prematurely reported revenue by: Booking sales on goods sent to warehouses that had not yet been delivered to customers Shipped goods to customers prior to their authorization, including improperly assembled shipped goods Supermicro understated expenses by: Improperly reducing liabilities accrued for its marketing program to avoid recognizing some expenses unrelated to marketing
NET INCOME = REVENUES - EXPENSES Here s how the violations by Supermicro inflated their net income. Recognizing revenues prematurely increases total revenues for the period Understating expenses, or reporting them at lower values, will increase net income Ex) Supermicro records $100,000 in revenue prematurely despite earning $75,000. Supermicro also records expenses at $25,000 instead of the correct amount of $50,000. According to the formula this means Supermicro s Net Income = $100k - $25k = $75k Supermicro s Actual Net Income = $75k - $50k = $25k That s a $50,000 difference!
As a result of their negligence and accounting violations: Top current/former executives were fined Supermicro was unable to file financial reports for nearly two years after 2017 Supermicro s stock was suspended from trading for a period and delisted from NASDAQ SUPERMICRO FINED $17.5 MILLION, THE In good faith: Supermicro conducted an investigation into its accounting practices and found a series of material weaknesses in its internal controls; END Including an aggressive focus on quarterly revenue and a failure by execs to establish and promote a control environment with an appropriate tone of compliance. Supermicro has since improved its internal controls and reorganized its management team. Supermicro was relisted on the NASDAQ market in January 2020. Supermicro Fined $17.5 Million Over Accounting Violations - Dylan Tokar, 09/26/2020 https://www.wsj.com/articles/supermicro-fined-17-5-million-over-accounting-violations-11598481716
