What happens at Super Micro Computer? What investors need to know:

The day after the report was released, the company again announced the delay in its required SEC filing.

Last month it was reported that the Department of Justice (DOJ) was investigating Supermicro, and the news triggered a plunge in shares. The probe is in its early stages and few details are known. It will take time to find out more. What we do know is that the Justice Department has begun contacting people with relevant information and has been in contact with a former Supermicro employee turned whistleblower who filed a lawsuit in April.

Note that many companies are under investigation by the Department of Justice. In and of itself this is not a cause for great concern, but given the context I think the concern is more than justified.

Then, just a month later, on Tuesday, October 29, Ernst & Young (EY) announced that it was severing its relationship with Supermicro. In a filing with the SEC, EY said it was resigning based on recent information that meant it “can no longer rely on the representations made by management and the audit committee” and that it could not do its job “in accordance” with applicable law or professional obligations.

This came after EY contacted management in July with concerns about internal controls and accounting practices. The special audit committee was then set up, but EY was clearly not satisfied with the results.

Sudden resignations from a company's registered public accounting firm are not usually a good sign, but the detailed nature of EY's resignation statement makes this truly damning in my opinion. Although many of the SEC and Hindenburg's claims remain unproven and the company continues to deny them, I would stay away from this stock at this time. It's one thing for a motivated short seller to make damning statements about a company. It’s a completely different thing for an accountant – whose incentives are aligned with his customer – to make them.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

What happens at Super Micro Computer? What Investors Need to Know: was originally published by The Motley Fool