Dick Smith: Brief History And Analysis Of Financial Malpractices

Introduction to Dick Smith and its Segment

Dick Smith is one of the most reputed electronics companies, to have ever been come out of Australia. Of late it had been entangled itself in a series of financial problems, which proved too much for the company. These problems led to the eventual downfall of the company, and the company had finally found itself liquidated in the year 2016. These had some large scale implications, even putting the work of is chief auditor Deloitte in question. The financial malpractices and manipulations had been called into some serious questioning, which led to the preparation of this report, where a detailed and analytical view has been adopted for the purpose of looking into this delicate matter, which had caused a major uproar in the Australian retail market.

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Brief History and Collapse:

            DSHE Holding Limited, which was earlier known by the name of Dick Smith Holding Limited, was an Australian retailer of consumer electronic products and services. It was one of the most popular chains of retail stores based company, which used to sell electronic goods, electronic components and project kits.  Australia’s success had led to the creation of New Zealand. This electronic based company was founded in the year 1968 by Mr Dick Smith, and was also owned by him and his wife (Www.DickSmith.com, 2018). The company had primarily two different segments, for ensuring convenient operations; one was the Dick Smith Australia and Dick Smith New Zealand.

The company used to connect and communicate with its large number of customers mainly with the help of the four physical mediums, namely the Dick Smith, Move, David Jones Electronics Powered by Dick Smith itself and MOVE by Dick Smith Sydney International Airport. The company boasted of a strong network of roughly around three ninety three stores spanning across Australia and New Zealand. This vast network of stores included at least three fifty one Dick Smith Stores, 10 MOVE Stores, at least four MOVE Stores by Dick Smith and roughly around twenty eight David Jones Electronics stores, powered by Dick Smith Stores. The company had ceased its operations, in the year 2016, and had filed for its liquidation on the 25th of July, of the same year.

This huge electronic company, which used to be one of the most sought after companies in the electronic arena of Australia and New Zealand had liquidated itself on the 25th of July, in the year 2016, leading to the loss of, one of Australia’s very own companies in the electronics arena. For the untimely collapse of this giant, it has only itself to blame (Akbar & Ahsan, 2014). The various reasons for the collapse of this electronic giant are as follows:

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  • Faulty management of inventory: One of the most important causes of the downfall of the company has been the inefficient management of its inventory, which had causes accumulation of large number of stocks, which had remained unsold. Faulty implementation and short-sightedness are some of the major issues in this section. The inventory problems of the company had started during the second half of 2015, where it had to write down the value of inventory by 20% by approximately $60 million.
  • Problem of private equity: The purchase of Dick Smith from Woolworths by Anchorage Capital had sown the seeds of dissension and discord, which was one of the prime reasons for its downfall. The parties had not agreed on the book value of the company’ inventory at the time of the sale, the parties also had opposing accounting for the sale and most importantly, Anchorage had floated the capital with a market valuation of $520million, which was clearly ridiculously high, considering the initial price with which it was sold initially by its founder to Woolworths, valued at just $25 million.
  • Breach of Australian Accounting Standards:

Reasons for the Collapse of Dick Smith

            The company had breached many provisions of the Australian Accounting Standards, not only once, but on a number of occasions. The blatant breach of the Accounting standards, had taken place (Rahman, 2013). The role of rebates from the suppliers of the company, their excessive indulgence and influence on the purchasing decisions of the management and their masking of the actual earnings figures has been pretty much clear.

Breach by Directors:

The directors had a major role to play in the collapse of the company, as they had breached many different provisions of the Australian Accounting Standards. Former directors consisting of Bill Wavish, Phil Cave, Rob Murray, Jamie Tomlinson and Company Executives Nick Abboud and Michael Potts, breached their duties and various provisions of the Australian Accounting Standards, by failing to install adequate systems in relation to rebates and inventory management. This is a clear breach of the AASB 102, where it states adequate steps must be taken in case of fair treatment of inventory and rebates must be properly treated in the books of accounts (Www.afr.com, 2018).

 In the year 2014-15, a staggering amount) of $72 million had been reported as earnings before interest, taxes, depreciation and amortisation. It had led to the breaching of ASA 240, whereby usage of fraudulent mechanisms had been seen (Www.aasb.gov.au, 2018). In the case of Sick Smith, the former directors had tried to choose the products for the purpose of maximising rebates, which actually is the money retailers receive from the suppliers for stocking and promoting goods, rather than on the products and goods, which the consumers had actually wanted to buy. Receiver Company Ferrier Hodgson, had also alleged that the directors of Dick Smith had breached the Australian Accounting Standards, by booking its rebates much before the actual products were sold and money was paid.

The company had continued to chase rebates, for the purpose of inflating the profits, which has led to breach of the trust of the fiduciary relationship between the company and its stakeholders (Www.abc.net.au, 2018). The accounting treatment of the rebates had some repercussions on the financial and overall well-being of the company, which has been regarded by experts as one of the chief reasons for the downfall and collapse of the electronic giant. Thus, in these ways, the directors of the company has been able to breach the Australian Accounting Standards.

Brief Analysis of the Annual Report:

Breach by Directors

The financial statement of any company helps in understanding and gauging the correct state of affairs of the company. The financial statements of any company help in presenting the facts and figures about the various operations, undertaken by the company, throughout the year. At the end of it all, it shows the amount of profit or loss earned or incurred at the end of the year. It also helps in stating the financial implications of any wrong move, strategy undertaken by the company. This is also true on the part of Australian electronic giant Dick Smith. There have been various instances, where the deliberate errors and manipulations had been visible.

The financial manipulations:

The company had increased the marketing and sales cost by a staggering $17,609 million, through the use of the rebates provided it throughout by its suppliers. It was intended by the suppliers for supporting them in increasing their marketing cost. On the contrary, the company had decreased its occupancy and rental expenses, by $14, 031, while the other expenses of the company had increased by $15,899 (Www.nzherald.co.nz, 2018).

Thus, we could see manipulations of varying degree. Here the practices, involved manipulation of sales figures and stock inventories which provided the scope to Dick Smith for purchasing unnecessary amounts of inventory for the purpose of filling the rapid expansion of stores and bank rebates from suppliers for the purpose of boosting its earnings. There have been many more indications of the operations inefficiency of the company, which perhaps were one of the many reasons, which had led to the fall of this electronic giant (Low, 2018). The cash flow statement, which again, is one of the most important financial statements of any company, which helps in showing the cash position of the business at the end of year, had its own share of complications. It has revealed negative balance of cash emanating operating activities which additionally confirms the operational incompetence and inadequacy of its business. The aggregate debts of the business had also increased which is seen in the annual reports of the business.

There are some other indications as well. There has been a substantial amount of increase in the total amount of debt in the aggregate capital and financing structure of the business. There should be proper parity in the capital structure of a business, consisting of the right balance of capital structure with the proper balance of equity and debt capital. Such kind of semblance or parity was nowhere to be seen in the financial statements of Dick Smith. On the contrary, there was an increase in the debt capital by $70,500 million, lease liabilities had also increased by $543 million

Brief Analysis of the Annual Report

A share price trading history of Dick Smith has been provided below, showing the various anomalies, since the company had first become public: 

There has also been an increase in the lease liabilities, provisions. Moreover, there has been wide range of instances where it has been seen that the current assets of the company have continued to decrease in the financial year of 2015, while on the other hand, the financial assets of the company have increased.  After analysis of the reports, it was very difficult to find the cause for such irregularities and discrepancies, except for manipulation of accounts with a deliberate attempt (Malley, 2018). It can be said that such kind of financial downturn in fortunes and repeated instances of financial manipulations have led to an unfavourable amount of loss of reputation of the business. These instances of financial indiscipline on the part of the executives of Dick Smith had increasingly taken place after its formal entry and listing of shares in the Australian Securities Exchange (Sundgren &Svanström, 2014).

Signs of Going Concern problem:

            There existed many different indications of the impending problems of going concern, which indicated that the company might be at risk. Some of these have been mentioned below:

  • Drastic fall in the earnings per share from $0.59 to $0.05, from 2014 to 2015.
  • Fall in the gross profit of the company from $308,002 in 2014 to $184,397 in 2015.
  • One of the most important reasons, which indicated a problem of going concern was the excessive fall in the net profit of the electronic business form $140,190 in 2014 to $19,826 in 2015 and another appalling point which indicated the problem of going concern was the fall in the total comprehensive income of the company from $146, 484 to $19,442 (asx.com.au, 2018). These were some of the interesting observations, which could indicate the problems of going concern, which was faced by the company.
  • Cause of Unmodified Audit Report:

            Audit report is one of the most important aspects of the audit which is conducted by any outside Audit Company on the concerned organisation. The audit report can be regarded as the ‘Holy Grail’, which is heavily pursued by the stakeholders, specially the investors of any company (Akbar & Ahsan, 2014). This is because the audit report helps in decoding the financial well-being of the company, where they are all going to put their money.  In the case of Dick Smith, it is not an exception either. Here, the company which is responsible for conducting the audit of the company is Deloitte, which is one of the largest audit companies in the world. It is also included in the list of the big four audit companies in the world, namely, KPMG, PWC and E&Y.

Thus, the stakes becomes high, in cases, where the audit is conducted by such a big company, chances of foul play also increases, when the company which has been audited has been in the public spotlight for all the wrong reasons. Here a couple of interesting observations had been revealed, which must not have escaped the eyes of Deloitte. Some of these interesting observations included, the expansion plan, which was aimed at improving the sales of the business as well as the net profit of the business; however it wasn’t true at all. None of it happened, on the contrary, the company went down with its corrupt inventory strategies (Www.nbr.co.nz, 2018). These corrupt and ineffective inventory management strategies of the electronic giant and its overvalued obsolete stocks had been continuously taking place and were being carried out by the business from the year 2014.

Signs of Going Concern problem

These corrupt practices and strategies had started to create some serious implications upon the electronic business and the same had resulted in the untimely closure of this large business (Www.theconversation.com, 2018). The key troubles and problems for the business had started way back in the year 2014, when this electronic company, had ceased to be a subsidiary of Woolworths Company and had become public by listing itself in the Australian stock exchange.  The troubles of ineffective and inefficient handling and management of the inventory management of the business is one of the reason due to which the business faced liquidation at such an untimely manner.  

Liability of Auditor towards third parties:

            Deloitte being the auditor of Dick Smith has the legal liability of answering the questions, as to why they had provided an unmodified report on the 30th of June, 2015. An auditor of any company has the legal responsibility to provide an explanation of the report provided by them after examining and auditing different aspects of the performance of their clients. The auditors have a limited legal liability towards the third parties, who are going to use their financial audit reports before investing in their clients. The auditors have a special relationship with the different third parties, based on the reasonable amount of foresight, exercised by them, while preparing the audit report. Thus it can be seen that the auditors not only have an obligation to bring out the deficiencies in their client’s internal control systems, to the attention of the management of their clients, but also towards their third parties, who use their reports for taking important financial decisions, which might impact their future.

Some related observations:

            The finances of the company had been disorganised and had been in total disarray, for well over a decade, which is why the role of the auditor, whose responsibility is to investigate into such disorganisation of finance, comes into question (Blay & Geiger, 2013). Deloitte, being one of the most sought out auditors, has been Dick Smith’s auditor since 2013. Before that, Deloitte looked after the electronic company’s financial statements, reports and working as a part of Woolworths, whose accounts Deloitte has audited for well over a decade.

Deloitte had taken a total of $1.3 million as fees for its services, from Dick Smith for the 2013-14 financial years, including a staggering amount of $784,000 for conducting investigation into the  accounting services leading up to  Anchorage Capital’s contentious floating of the retail group in the Australian Securities Exchange (Reid, 2018). The clearance which was given to the company by the publication of an unmodified audit report, which perhaps had acted as a clean chit, has been called into question. Experts suggest that there has been a financial foul play and payment of the exorbitant fees has been an indication of the financial corruption, which might have crept in the investigation and audit of the financials of the Dick Smith.

Conclusion:

            One of the most important aspects of any financial audit is financial fair play, which is expected to be kept in mind while preparing the financial reports of any company. Perhaps this was not the case with Dick Smith and its Auditor Deloitte. The company went down because of its corrupt malpractices, improper management of its inventory, excessive inflation of its sales, financial manipulations and many other similar reasons.

These kinds of financial improper management and manipulations must be kept in check, in order to ensure financial fair play, which would ensure the faith on the fiduciary relationship which the company has with all of its financial as well as non-financial stakeholders. The electronics company wouldn’t have been in dire straits, if it had looked after the long term implications of its short term actions. Looking after the company in a just and fair manner, by taking into account the problems of each and every department and resorting to all the legal ways for solving these problems is one of the best ways rather than looking after short term gains of temporary nature.

References

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Australian Accounting Standards Board (AASB) – Home. (2018).

Australia, D. (2018). Dick Smith | The Best in Tech at Amazing Prices. 

Blay, A. D., & Geiger, M. A. (2013). Auditor fees and auditor independence: Evidence from going concern reporting decisions. Contemporary Accounting Research, 30(2), 579-606.

Dick Smith directors hit with legal action from receiver. (2018). 

Dick Smith hearings reveal questionable accounting of rebates. (2018).

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Hapsoro, D., &Suryanto, T. (2017). Consequences of Going Concern Opinion for Financial Reports of Business Firms and Capital Markets with Auditor Reputation as a Moderation Variable: An Experimental Study. European Research Studies, 20(2), 197.

Low, C. (2018). Dick Smith to close all stores, 3000 staff to go.

Maguire, J. S., Strickland, P., & Frost, W. (2013). Familiness as a form of value for wineries: a preliminary account. Journal of wine research, 24(2), 112-127.

Malley, A. (2018). Dick Smith collapse raises more questions for accounting profession. 

Rahman, A. R. (2013). The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of its Participative Review Process. Routledge.

Reid, E. (2018). Shock as electronics stores close for good. 

Revealed: What caused Dick Smith’s collapse. (2018). 

Subscribe to The Australian | Newspaper home delivery, website, iPad, iPhone & Android apps. (2018). 

Sundgren, S., &Svanström, T. (2014). Auditor?in?charge characteristics and going?concern reporting. Contemporary Accounting Research, 31(2), 531-550.

The ugly story of Dick Smith, from float to failure. (2018). 

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