Accounting Theory & Contemporary Issues: Analysis of Dick Smith Holding Ltd Collapse

ACCOUNTING THEORY & CONTEMPORARY ISSUES 1
Accounting Theory & Contemporary Issues
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Introduction
It is very hard to identify causes of corporate failure because there are various aspects
to investigate such as financial stability, inappropriate and dishonest accounting treatment, or
external factor like fluctuation of business cycles. According to Reserve Bank of Australia
report, Dick Smith Holding Limited collapse is a well-known case in order to determine
corporate failure relate to not only these sectors but also poor corporate governance and lack
of transparency in financial reporting (Kenney et al, 2016). This report wills analysis strategic
errors which were contributed to collapse in terms, of Dick Smith. Also, it will include
negligence of accounting practice, ethical management and governance issues that were
causes related to the downfall of Dick Smith. Having the analyzed failure of Dick Smith, it
will draw a conclusion and provide lessons to clients who want to comprehend corporate
breakdown Dick Smith as well as comply with the report for a marketing tool purpose.
Background of Collapse Dick Smith Holding Ltd
Dick Smith Holding Limited started from a small electronic shop in 1986 was the
most trusted and loved franchised electronic retail shop over the country. The company had
expanded the business to 363 stores and approximately 2980 employee across Australia and
New Zealand, however, it was reported $520 million market capitalization floated on the
Australian Securities Exchanges by private equity group Anchorage Capital in 2013.
Unfortunately, the company experienced a fall in its share price which was more than 80% in
2015 December. In January 2016 a halt in the trading of the company was applied and then it
was placed into administration consequently in the same month by the creditors. In that order,
Dick Smith Holding Ltd. steadily ceased the stores in the critical monetary circumstance and

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finally announced that closed down all the stores by Ferrier Hodgson which took over Dick
Smith in 2016 (Keating, 2016). In fact, the collapse and failure of Dick Smith Holding
Limited had been foreseen from unethical and risky practice due to the pressure of expanding
business and profit. Consequently, around 3000 employees lost their job because of closing
business and it was both directly and indirectly harmful influence in the entire economy in
Australia.
Strategic Errors
Strategic planning is inevitable in most of the organizations because it defines the
direction of management such as setting priorities or resources and achieves the goal
successfully. Although management is efficient internally, incorrect strategic planning can
generate critical problems to a corporate (Steiner, 2010).
The failure of business strategy and planning which intentionally manipulated
earning figures for income smoothing purpose of Dick Smith emphasize the importance of a
proper strategic plan in a corporation. Inventory management of Dick Smith is one of a
precedent. They claimed a rebate from supplier to increase profit into the accounts from
purchase exceed products and they lean on rebates to keep on a certain level of the cash flow.
Also, they choose the negotiated supplier to maximize rebate and recommended the products
no matter what customer’s preferences. As a result, the cost of inventory has reached $350
million between 2014 and 2015 and old inventories were discounted by 70%. Thus,
remaining massive debt from exceeded inventory led to collapse Dick Smith, also poor sales
activities mixed with economic recession accelerated the status quo (Whitbourn, 2016).
Another strategic error is the failure of online business which is a vital distribution
channel within a very competitive market including Bunnings, JB Hi-Fi, Office Works,