Super Micro is a computer server producing company based in California. It conducts its businesses under the NASDAQ Stock Market and therefore is required to keep and file strict financial records for different periods. However, from at least FY 2015 through FY 2017, the company was engaged in improper accounting and several violations, resulting in a hearing and certain fines and restrictions (The Securities and Exchange Commission, 2020). The purpose of this paper is to study this case and define what auditing techniques and theories could have assisted or did assist in resolving it.
Case Description
To begin with, there were several severe and deliberate violations for the purpose of obtaining a certain benefit. Other than failing to file real financial statements, the company also violated section 8A of the Securities Act of 1933 by engaging itself in fraudulent deals (The Securities and Exchange Commission, 2020). Revenues were recognized prematurely, and financial statements were materially and deliberately misstated, thus breaching the Security Exchange Act of 1934.
According to the Securities and Exchange Commission (2020), “Super Micro also improperly under-reported certain expenses by misusing its cooperative marketing program to pay a variety of unrelated expenses, such as warehousing costs for goods at quarter end” (p. 3). What is more, employees were pushed to maximize revenue and minimize expenses, which means they were forced to break the law.
Apart from improper accounting, the company failed to follow delivery rules. Shipment of goods to Super Micro’s customers was made without following proper channels and industry standards, and such problems were repeated from month to month (The Securities and Exchange Commission, 2020).
On some occasions, a number of clients were forced to accept deliveries before due dates, and even after they tried to refuse to do it and explained their reasons, the company insisted. Therefore, such actions flouted generally accepted accounting principles (GAAP) (Larkin & DiTommaso, 2018). At the end of almost every quarter, Super Micro’s employees were made change shipment terms and hold the bill of lading, abusing carriers’ and clients’ rights.
Violation Discovery
The violations mentioned above were not detected at once. After filing a Form 8-K with the Commission on August 3, 2017, the company announced its inability to file its FY 2017 Form 10-K (The Securities and Exchange Commission, 2020). Then, Super Micro “disclosed that it was performing an audit committee review to permit its auditor to complete its audit of the financial statements” (The Securities and Exchange Commission, 2020, p. 10).
After that, it became evident that there were several weaknesses in the company’s Internal Control over Financial Reporting, and it appeared that previously filed financial statements could not be relied upon (The Securities and Exchange Commission, 2020). Therefore, the violations were discovered by internal auditors, and additional reviews that lasted from 2017 to 2019 proved that all financial statements since FY 2015 had to be restated.
Case Resolve
To resolve the case, a number of restrictions were imposed on the company. To begin with, Super Micro was made to cease and desist from committing or causing any violations (The Securities and Exchange Commission, 2020). Then, the company was given ten days to “pay a civil money penalty in the amount of $17,500,000.00 to the Securities and Exchange Commission” (The Securities and Exchange Commission, 2020, p. 12). Additional interest would accrue in case the timely payment was not made.
Applying Auditing Techniques and Theory
Although Super Micro was tried before the Securities and Exchange Commission, an audit is still needed to be conducted to determine the extent of financial violations. The auditor assigned to this case should first lay down auditing strategies before commencing the whole process.
First, the type of business and accounting process used in the industry where super micro operates should be determined. The auditing team should familiarize itself with such information to make a plan and learn the nature of the audit to be used. Finally, the company’s internal accounting control status should be ascertained to enable auditors to decide whether to design their own testing or use the available financial statements.
Since Super Micro deals in computer servers, the expertise of a specialist would be of great importance to help bring out some issues. According to the Auditing Standards (AS 1210) of the Public Company Accounting Oversight Board (PCAOB), the accurate evidential matter can only be obtained if an individual with exceptional skill and knowledge is engaged in the investigations (DeFond & Lennox, 2017). As an auditor may sometimes encounter complex and substantive matters associated with financial statements, a specialist may be needed.
As mentioned above, Super Micro detected numerous material weaknesses in its internal control systems and financial reporting. Precisely these problems have inhibited it from recording transactions as recommended by the GAAP (Larkin & DiTommaso, 2018). Taking into account the company’s violations, it would be appropriate to design tests on the financial statement assertions to determine the actual and correct information on the transactions. Additionally, it would be imperative for the audit team to carry out its own substantive audit tests instead of relying on the already existing financial records, which are marred with irregularities.
Further, a number of internal control tests must be carried out. They would make it possible to ascertain if documents such as payrolls, deliveries, and invoices conform to the GAAP, PCAOB, and AICPA standards (DeFond & Lennox, 2017). As mentioned above, material weaknesses were identified in most financial statements filed by Super Micro to the Commission (The Securities and Exchange Commission, 2020).
According to PCAOB, internal controls should be tested in case of lack of clarity or unavailability of financial records (DeFond & Lennox, 2017). In this case study, most transactions cannot be traced from their origin to their inclusion in the financial statements (The Securities and Exchange Commission, 2020). Therefore, to verify and obtain evidential matters pertaining to the actual operating and accounting records, the audit team must test internal controls.
Similarly, an auditor should conduct several substantive tests to validate financial statements and supporting documents. First, confirmations should be sent to the banks to obtain records of end cash balances (DeFond & Lennox, 2017). Since the company occasionally overvalued its inventory to show high profits, it would be imperative to evaluate the period-end physical inventory count (The Securities and Exchange Commission, 2020). Correspondently, verification of the value of fixed assets should be done to ascertain if fixed assets records match with the physical resources on the ground.
To further verify issues associated with the financial statement assertions, confirmations should be sent to third parties. This will help evaluate any form of communication between super micro and other entities (Swieringa, 2018). Since some employees used to send emails to customers threatening them to accept goods, confirmations should be designed and sent to all entities to gather proofs (The Securities and Exchange Commission, 2020).
Moreover, accounting estimate comparison should be conducted to ascertain all evidential matters are material to financial statements developed by the firm. These are the auditing techniques that may assist in resolving the discussed case.
References
DeFond, M. L., & Lennox, C. S. (2017). Do PCAOB inspections improve the quality of internal control audits? Journal of Accounting Research, 55(3), 591-627.
Larkin, R. F., & DiTommaso, M. (2018). Wiley not-for-profit GAAP 2018: Interpretation and application of generally accepted accounting principles. John Wiley & Sons.
Swieringa, R. J. (2018). The early years of the financial accounting foundation and the financial accounting standards board, 1972 to 1980: The “special relationship” with the AICPA. Journal of Financial Reporting, 3(1), 127-130.
The Securities and Exchange Commission. (2020). The United States of America before the Securities and exchange commission: Super Micro Computer, Inc. Web.