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Super Micro Computer Inc.’s Improper Accounting Research Paper

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Updated: Sep 18th, 2022

As a company producing computer servers, Super Micro was found guilty of improper financial accounting by the securities and the exchange commission. In the FY 2015 through to 2017, the company engaged in fraudulent deals breaching a number of sections of securities act of 1933. The company prematurely recognized revenue and deliberately misstated financial statements amounting to grievous violation of the Securities Exchange Act of 1934.

Poor internal control was widely witnessed as employees were pushed to maximize revenue and minimize expenses. Goods were delivered to the customers before due dates as stipulated in the terms and in the process undermining generally accepted accounting principles (GAAP) (Larkin and DiTommaso 391). Through its employees, the company illegally changed shipment terms, delivered incomplete goods, and held the bill of lading abusing the rights of its carriers. Due to these gross violations, the security and exchange commission delivered cease-and-desist injunction barring the company from conducting some of its activities. Although the super micro has been fined $ 19.5 million, a detailed audit should be carried out to ascertain the extent of fraud.

Before commencing the audit process, auditor should first understand the client, the kind of business being conducted, and the accounting process. An audit company needs to draw a comprehensive strategy audit plan that would be used in the whole process. The accuracy of accounting system including internal control structure being used by the company in question should be verified. The nature of audit to be employed must be decided on earlier enough.

Generally, auditor is simply an expert of financial matters. However, when faced with complex scenarios like in the case of Super Micro which deals with computer technologies, the auditor may require services of a specialist. According to auditing standards (AS 1210) of the PCAOB, a specialist is an individual with special skills and knowledge in a given field (Krishnan et al. 153). To obtain correct evidential matter from the substantive tests while evaluating the books and technological property of Super Micro, the help of a specialist would be of great significance.

In the case of Super Micro, it would not be appropriate to design tests on the financial statements assertions provided by the company. The firm has inadequate internal control system and fundamental financial reporting is not done. This can be supported by the fact that it presented wrong financial statements on net sales to the securities and the exchange commission, and was forced to alter them. The company does not keep proper financial records to avoid backlash from its employees who have in some occasions tried to expose some of its dealings. The risks of material mistreatments are higher since a number of its employees engage in fraudulent acts by threatening customers and carriers through personal emails to accomplish company demands. Therefore, the auditing team should carry out its own substantive audit tests to help in exposing the fraud being practiced in the firm.

The internal control tests that should be adopted include inspection of all the documents such as payrolls, deliveries, and invoices. Approvals in terms of signatures, stamps, and check marks should be inspected to assess any illegal dealings. Observations of internal controls that are used by the firm and their effectiveness must be made. According to PCAOB, transactions should be traced from the origin to their inclusion in the financial statements (DeFond et al. 593). The control element on the business should be put into perspective. This is due to the fact that in some cases recognition of revenue is done upon shipment of goods without customer authorization, prior to delivery, before obtaining customer acceptance, and sometimes with incomplete or damaged shipments.

Communication records are some of the pieces of evidence that can be used to detect any illegal practices in an organization. To evaluate such, direct communications between third party and Super Micro should be assessed. This can be done through designing confirmation requests and sending them to the other stakeholders involved in the business. The main aim would be to obtain information about particular items affecting financial assertions. According to AICPA auditing standards, upon establishment of confirmations, they can be sent to the third parties and feedbacks evaluated (Swieringa 128). If evidence obtained is inadequate, more confirmations can be sent.

In the case of Super Micro, validations can be sent to the carriers and customers whose rights have been infringed by the firm through illegal financial practices. Shipment processes between the company and some of its customers were marred with irregularities as they could in some occasions be threatened by employees through emails to accept goods when they do not need them. A number of goods could be hoarded in carriers’ stores against their will. Such information can be obtained through sending confirmations.

Comparison of account estimates would prove crucial to ascertain all evidential matters are material to financial statements developed by the firm. It would also ensure approximations are reasonable and records of the company’s business operations are true. It would also help to establish if all estimations conform to the GAAP and Securities Exchange principles. Changes of principles in the industry are always disregarded by the organizations in the business.

As such, their methods of operation should be evaluated to ensure they conform to the new accounting pronouncements. According to AS 2110, an accounting estimate should be conducted to ensure new entries in the industry adhere to the operating strategies (Acito et al. 15). The comparison of industry’s estimates and super micro’s would be significant to ensure new entries which are conducting business with the firm are following the rules. Pursuant to AS 2505, comparisons should be done to check any form of litigation claims. Such information would enable the auditing team to assess damages or infringements by the firm.

Lastly, to ensure all the Super Micro’s financial statements and supporting documents are valid, complete, accurate, and without errors, some substantive tastings must be conducted. Confirmations should be sent to the banks requesting accounting records of end cash balances. Accounts receivable balances for the costumers must be verified to ensure they are correct. Super Micro in most cases failed to update its inventory records; therefore, it would be suitable to evaluate the period-end physical inventory count. A specialist should verify if the values of all the assets are reasonable and conform to the market prices. The records of fixed assets should be substantiated to check if they match physical possessions. Loan balances should be ascertained by the lenders as well as approved dividends.

In conclusion, the fraudulent acts committed by super micro are serious and need detailed auditing to establish their full extent. A specialist familiar with technological assets should be engaged to help the auditing team in the investigations. Confirmations should be sent to the third parties conducting business with the firm to obtain more information. The firm has no adequate internal control systems as records of financial statements are not sufficient. On one occasion, it gave wrong net sales records to the securities and the exchange commission. Therefore, auditing team should conduct their own substantive testing.

Works Cited

Acito, Andrew A., Chris E. Hogan, and Richard D. Mergenthaler. “The Effects of PCAOB Inspections on Auditor-Client Relationships.” The Accounting Review, vol. 93, no.2, 2018, pp. 1-35. Web.

DeFond, Mark L., and Clive S. Lennox. “Do PCAOB Inspections Improve the Quality of Internal Control Audits?” Journal of Accounting Research, vol. 55, no.3, 2017, pp. 591-627. Web.

Krishnan, Jagan, Jayanthi Krishnan, and Hakjoon Song. “PCAOB International Inspections and Audit Quality.” The Accounting Review, vol. 92, no. 5, 2017, pp. 143-166.

Larkin, Richard F., and Marie DiTommaso. Wiley Not-for-profit GAAP 2018: Interpretation and Application of Generally Accepted Accounting Principles. John Wiley & Sons, 2018, pp. 382-413.

Swieringa, Robert J. “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, vol. 3, no.1, 2018, pp. 127-130. Web.

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