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When a smoke grenade is detonated, the room is filled with a haze of translucent smoke, and will dissipate at the end of the enemy's turn. Two of the bosses, Tricky and the Auditor, utilize a limitless supply of smoke grenades to increase their chances of killing you. You have two options if an enemy tosses a smoke grenade: end your turn and let the smoke dissipate, or blindly attack the enemy. Your attacks will miss most of the time, but you could get lucky and score a hit. A good idea is to use up all your AP and then toss a grenade, allowing you to accurately hit your enemies, while they cannot hit you consistently. Your enemies are still able to move around and will attempt to shoot/maim you as if the smoke cloud wasn't there. This can be used to your advantage to draw enemies into your firing range without exposing you to as much danger.
Read more about smoke grenades at Wikipedia