Accounting Theory and Contemporary Issues

This document discusses the various issues that led to the collapse of Dick Smith Holdings Limited, including governance issues, accounting issues, and strategic failures. It also provides lessons learned from the company's downfall.

Running head: ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Accounting Theory and Contemporary Issues
Name of the Student:
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1ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Executive summary:
An Australian chain of retail stores Dick Smith Holdings Limited mainly used to sale electronic
goods (consumer), electronic components (hobbyist) and electronics kits for projects in
Australia, and New Zealand before expanding to several other countries. Despite rapid growth at
the beginning of company’s tenure, suddenly the collapsed to the ground before being closed
down in 2016. This document clearly indicates the various issues ranging from governance to
accounting; strategic failures and errors to weak internal control systems as the contributing
factors to the eventual collapse of the company. Detailed discussion on the issues affecting the
company and contributing to the downfall of the company are discussed below.

2ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Contents
Executive summary:........................................................................................................................1
Introduction:....................................................................................................................................3
Issues in Dick Smith Holdings Limited:..........................................................................................3
Governance issues:..........................................................................................................................4
Change in the market:..................................................................................................................4
High inventory and store cost network:.......................................................................................4
Decline in sales and market share:...............................................................................................5
Implementation of expansion plans fast:.....................................................................................5
Wrong inventory decisions:.........................................................................................................6
Inability to generate enough sales to alleviate the pressure on cash purse of the company:.......6
Expensive sources used to finance:.............................................................................................6
Crushing loan demands:..............................................................................................................7
Accounting Issues:...........................................................................................................................7
Strategic issues:...............................................................................................................................7
Lessons learned from Dick Smith:..................................................................................................9
Conclusion:....................................................................................................................................11
References:....................................................................................................................................12

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4ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Introduction:
Dick Smith Holdings Limited was founded by Dick Smith in 1968 and was completely owned by
him and his family until major portion of such holding was sold to Woolworth Limited in 1980.
In fact they sold the remaining portion of their holding to the company after 2 years. Initially
started with a meagre capital of AU$610 in 1968 at a $15 rent premises in a car parking area the
business grew rapidly in initial years. The company quickly become a house hold name with
consumers from different segments using electronic products offered by Dick Smith. Number of
publicity stunts including few by Mr. Smith himself helped the company to attract eyes balls of
the customers to the company and its products. However, by January, 2016 the company lost
80% of its share value from the share value when it first listed its shares in ASX in 2013. As a
result the major creditors of the company placed the company into administration resulted in the
closure of the company after a lengthy acquisition process.
Issues in Dick Smith Holdings Limited:
The issues in Dick Smith that eventually led to the complete closure of the company were multi-
dimensional in nature. An email sent to Jamie Tomlinson in March, 2018 by the chairman of
Dick Smith holdings Limited, Rob Murray read as following,
“There are no horrible skeletons in the cupboard.” Rob Murray further claimed in this mail that
unlike other retailers Dick Smith manages its extended lease liabilities and supplier rebates pretty
well and are integral to the business operations of the company (Abhayawansa and Guthrie,
2014).
However, within 9 months following this email Dick Smith collapsed leaving the stakeholders of
the company shell shocked. The creditors left with $260 million short from their dues resulted in

5ACCOUNTING THEORY AND CONTEMPORARY ISSUES
huge loss to them as well as other stakeholders of the company. The massive failure and collapse
of the company is illustrated from the fact that banks only get to realize half of their dues from
the company. There were number of reasons that contributed to the ultimate downfall of the
company. A brief discussion on the reasons that left the stakeholders of the company completely
dumbstruck are enumerated below (Baran, 2013).
Governance issues:
Governance issues were the main issues that resulted in the collapse of the company. The
management which was responsible to conduct the affairs of the business failed to discharge its
responsibilities efficiently resulting in the eventual closure of the company. The governance
issues in specifics are discussed below.
Change in the market:
The change in the market is one of the main reasons that contributed to the massive loss to the
company. The company operated in a highly competitive electronic market which is prone to
rapid changes. The changes in the demand pattern of the consumers is the highest in consumer
electronic goods. A company which fails to keep term of with continuously changing market
preference and demand patterns is bound to struggle to keep pace with the competition. In case
of Dick Smith the change in the market certainly contributed to the eventual outcome in the
fortune of the company. The inability of the management to keep pace with changes in the
market resulted in loss of revenue and profit to contribute to the collapse of the company in 2016
(Behson, 2011).

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High inventory and store cost network:
At its time Dick Smith had a much larger store network compared to any of its competitors in the
market. The company stored high valued inventory in all of its stores across the globe. With
consumer preference changing rapidly the company failed to sale these stocks resulted in huge
loss to the company due to non-moving and slow-moving of high value inventories. The
management despite high inventory and store costs continued with its exposure on high valued
fast moving computer stocks. The huge loss suffered by the company due to the non-movement
in highly valuable inventory in the stores resulted in significant amount of loss to the company.
This was again one of the reasons contributing to the closure of the company.
Decline in sales and market share:
The company experienced significant decline in its sales and consequently in the market share in
the industry. The inability of the governing body of the company to arrest the decline in market
share and reverse the trend of falling sales eventually caught up with the company and its fortune
to contribute to its collapse (Merkert, 2012).
Implementation of expansion plans fast:
The company expanded its business rather very fast without properly analysing the effects of
such expansion on the financial performance and business operations of the company. Expansion
plans must be analysed at great length to contemplate the effects of such plan on cash resources,
operating strategy, operational effectiveness and other aspects of business. Without proper
consideration to all these factors the management implemented number of expansion plans rather
very quickly. As a result the company borrowed too much funds from banks which increased its
liabilities as well as operating expenditures in the form of interest on borrowed funds. This

7ACCOUNTING THEORY AND CONTEMPORARY ISSUES
adversely affected the financial performance of the company which eventually led to the inability
of the company to repay its debts properly.
Wrong inventory decisions:
The inventory decisions made by the company was not consistent with the operational strategy
and the market demands. As a result the company end up inventing too much on non-moving and
slow moving items. As a result at the time of closure, i.e. in 2016 the company had considerable
amount of obsolete and inactive inventory. The company had to write down major portion of its
non-moving stock resulting in huge loss to the company. This also had a major implication on
the final outcome of the company (Mind the ‘little things’ when planning big events, 2015).
Inability to generate enough sales to alleviate the pressure on cash purse of the company:
The company failed to generate enough sales to alleviate the pressure on cash purse of the
company. The inability of the management to increase sales as needed to deal with the ever
increasing expenses of the company is failed to alleviate the pressure on the company’s cash
purse. As a result the company faced with cash shortages and failed meet its daily requirements
of cash to smoothly run its business operations. The final result was that the company failed to
continue in the long run and collapsing in 2016.
Expensive sources used to finance:
As already mentioned that the company hurriedly implemented number of expansion projects
without much thought behind it. As a result the company took expensive loans with unfavorable
terms. As a result the company end up incurring huge expenditure on financing these loans. In
addition, the operating expenses increased significantly due to higher rate of interest changed on

8ACCOUNTING THEORY AND CONTEMPORARY ISSUES
these loans by banks and financial institutions. The increase amount of expenses played a huge
part in the closure of the company (NZ Herald, 2019).
Crushing loan demands:
Again crushing loan demands with huge amount of borrowing to finance expansion projects
increased the pressure on the company which eventually succumbed the company to its closure.
The company failed to meet the crushing loan demands and ended up breaching the loan terms
and conditions. This also resulted in final closure of the company.
Accounting Issues:
The revenue growth of the company was mainly fueled by the growth in store and not in actual
growth in sales. Thus, the financial statements and accounting records failed to show the actual
reality of revenue and profit and loss position of the company. The failure of accounting system
to correctly disclose the true and fair position of the company was also one of the factors
contributing to the final collapse of the company. This is mainly because the management was
able to convince the stakeholders of the company through the financial statements that the
performance of the company is not alarming whereas it was inclining (The Importance of Ethical
Marketing Practices, 2015).
Inability of the financial statements of the company to properly disclose the true and fair
financial position of the company also contributed to the end result of the company. The
accounting records were manipulated to window dress the financial position and performance of
the company to show a better picture of the company.

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Strategic issues:
The board of directors of the company has failed to use appropriate strategy to ensure long term
growth of the company. The inability to forecast the future and take necessary steps to deal with
the changing circumstances resulted in failure of the company to continue in the long run. The
following discussion shall help in understanding the faults in strategic issues of the company.
Inability to use technological development to innovate new and modified products:
Despite the ever increasing consumer demand and changes in tastes and preferences of the
customers the company has failed to develop new and better electronic goods. This resulted in
decline of sales as the customers started using other stores and companies to buy electronic
goods. The management must have taken necessary steps to improve the quality of its products
to attract new customers as well as keeping the existing customers (Union Would Be “Bad for
Business”, 2015).
Failure to properly manage the retail chains:
The management has no standard policy to manage the stores in all across the globe. In fact the
stores in different parts of the country were not centrally connected to each other. This resulted
in improper management of different stores of the company. As a result the efficiency of the
stores contributed to lack of performance of the company. The improper strategy to manage the
operations in different stores contributed immensely to the failure of company as a whole.
Lack of coordination between the stores:
Since there was no centralized policy to manage the operations of the stores hence, there was
lack of coordination between the stores. This resulted in lack of communication between the

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stores to contribute to the declining sales in different stores. The ever increasing inventory
balance due to non-movement in stock was mainly due to the lack of communication between
stores of the company as no information were exchanged between the stores (Australian
Financial Review, 2019).
Ineffective strategy to handle stores and inventories:
The stores and inventories of the company have piled up each year as sales started to decline.
This is mainly due to the strategic failure on the part of the company to invest in proper
inventories. The inability of the company to manage its stores properly as said earlier was again
one of the main contributing factors to the eventual collapse of the company.
Lessons learned from Dick Smith:
From the discussion in this document the following important lessons have been learnt.
The importance of proper governance:
The importance of proper governance to the long term growth and sustainability of the company
is immense. It is important to take proper decisions to manage an organization effectively. The
management failed to govern the business of Dick Smith properly to end up piling loss. This
finally caught up with the fortune of the company and it collapsed in the month of January 2016.
Importance of an effective, clear and concise strategy:
It is important to have an effective, clear and concise strategy in place to manage the resources of
the company effectively to achieve the organizational objectives. In case of Dick Smith it lacked
such a strategy to use its resources effectively in the business operations of the company.
Accounting issue:

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The accountant of the company failed to disclose the true and fair picture of the company in its
financial statements. Thus, it is important to follow the relevant accounting standards to record,
summarize and classify the financial transactions properly to disclose the true and fair financial
performance and position of an organization in the financial statements of the company.
Role of auditors:
The important role that auditors play in verifying the financial statements of an organization is
extreme and can be understood from the fact that despite continuous under performance of Dick
Smith, the inability of the auditor to report the same in the financial statements also contributed
to the eventual collapse of the company. Thus, conducting audit properly is important for an
organization to survive.
Expansion strategy should be taken after proper discussion:
A company should conduct necessary analysis and discussion before taking any final decision in
relation to the expansion strategy of the company. Such decisions should never be taken
haphazardly. It is important to assess the implications of expansion on each and every aspect of a
business before taking final decision in this respect.
Negotiating with the banks for favorable credit terms:
Negotiations shall be held with banks before taking financial assistance for new projects to take
loans at favorable credit terms. This will help an organization to reduce the operating
expenditures to increase its profitability.

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Recommendations:
On the basis of the lessons learnt from the collapse of Dick Smith Holding Limited the following
recommendations are made:
I. Appointing qualified professionals in the management of a company to ensure that it is
managed properly.
II. Instituting strong internal control system within the organization.
III. Having an effective strategy to manage inventories.
IV. Effective utilization of resources of the organization.
V. Proper communication and coordination between different units of an organization.
VI. Using proper accounting system to record financial transactions properly.
Conclusion:
Continuing from the above discussion it is safe to state that the primary factors that contributed
to the final collapse of Dick Smith were of multi-dimensional. These include governance issues,
strategic issues, management issues, accounting issues and other issues. The inability of the
management to operate the business properly resulted in complete collapse of the company in
2016. Thus, proper management of an organization is key to the survival of an organization and
the failure in tis front is the main reason behind the failure of the company.

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References:
Abhayawansa, S. and Guthrie, J. (2014). Importance of Intellectual Capital Information: A Study
of Australian Analyst Reports. Australian Accounting Review, 24(1), pp.66-83.
Australian Financial Review. (2019). What killed Dick Smith? Inside the Dick Smith collapse.
[online] Available at: https://www.afr.com/business/retail/appliances/what-killed-dick-smith-
inside-the-dick-smith-collapse-20160908-grbgw6 [Accessed 27 May 2019].
Baran, M. (2013). Knowledge Management in Organizations. The Case of Business
Clusters. Management and Business Administration. Central Europe, 21(4), pp.110-119.
Behson, S. (2011). The relative importance of organizational justice dimensions on employee
outcomes: a critical reanalysis using relative weights analysis. Organization Management
Journal, 8(4), pp.205-217.
Merkert, R. (2012). Research in transportation business and management. Research in
Transportation Business & Management, 4(7), pp.1-2.
Mind the ‘little things’ when planning big events. (2015). Nonprofit Business Advisor,
2015(307), pp.5-8.
NZ Herald. (2019). Revealed: What caused Dick Smith's collapse. [online] Available at:
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11674299 [Accessed
27 May 2019].
The Importance of Ethical Marketing Practices. (2015). Journal of Business Management &
Economics, 2(3), pp.17-28.

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The Importance of Proper Concussion Management. (2012). Pediatric Annals, 41(9), pp.344-
345.
Union Would Be “Bad for Business”. (2015). Management Report for Nonunion Organizations,
38(11), pp.4-5.