Auditing and Accounting Issues Leading to the Collapse of Dick Smith Electronics Ltd

ACCT6006 Auditing
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Introduction
This report is developed for developing an understanding of the auditing and accounting
issues that lead to the collapse of an ASX listed entity, that is, Dick Smith Electronics Ltd. The
company has recently gone into liquidation largely due to adoption of unethical accounting
standards and fraudulent financial reporting practices. In this context, this report intends to depict
the reasons responsible for the company collapse such as breach of Australian Accounting
Standards and lack of adequate accounting practices. The analysis of the annual report of the
company for the year 2014-2015 is also undertaken for identifying the issues related to its going
concern, reasons for auditors giving unmodified audit opinion for the financial year and the legal
liability of the auditors in the overall case of the company.
1. Brief History of Dick Smith Electronics Ltd and the Explanation of Reasons Causing
Company Collapse
Dick Smith Electronics Ltd was an Australian chain of retail stores listed on ASX that is
involved in selling of consumer electronics good. The company was established in the year 1968
and conducts successfully its retail chain stores in the Australia and in New Zealand. It is known
to provide employment to about 3300 employees and Dick Smith is known to be the founder of
the company. The company gets collapsed in the year 2016 and the main reasons that are
responsible for its failure is use of unethical accounting practices and processes. The major
reason that is responsible for the failure of the company that were identified were use of massive
inventory purchasing failures and its costly expansion plans. The management remains highly
focused on increasing revenue and creating profits at the expense of fostering the sustainable
growth of the business for promoting its long-term growth and development. The expansion
plans of the company declines its excessive earnings potential and also lead to accumulation of
high level of debt. The change in the customer preferences in the retail sector decrease its market
share and responsible for placing it into the receivership with debt of more than $440 million by
the banks (The Dick Smith Group, 2016).
It was identified by the administrator that the company was carrying out its operations
under a loss during the year 2015-2016 of about $116.7 million due to failure of its expansion
plans. The company failed to maintain its market performance with the changing preferences of
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the customers and thus the excessive inventory purchase in the year 2015 was not able to be
converted into sales and also was overvalued. The company cash receipts were not able to meet
its commitments due to lack of adequate cash resources. The loss incurred by the company
during the period 2015-2016 was largely due to poorer expected sales and margins, write down
of inventory, lease provisions and asset impairments. Thus, it can be said that improper financial
management practices of the firms was highly responsible for causing its liquidation (Parker,
2016).
2. Breaching of Australian Accounting Standards by the Directors of the Company
Dick Smith requires the development and presentation of its financial reports as per the
AASB accounting standards that underline the presentation of the financial statements to the
end-users. The AASB standards requires the development and presentation of financial
statements as per the AASB framework that requires improving reliability and relevancy in the
financial reporting process to protects the interests of the end-users. The director’s of the
company are alleged to adopt the manipulated accounting practices regarding valuation of
inventory and as breached the AASB 102 standards that require inventory to be valued at the
lower of cost and the net realizable value. Also, the directors are alleged to breach the Australian
accounting standard of using bank rebates from suppliers for boosting its earning potential. It has
allegedly used the rebates for inflating the profits and thus depicting higher earnings in its
financial statements. Rebates relate to the cost of gods sold and are required to be captured under
the AASB 102 inventories. The company has adopted the use of rebates that is realizing money
from the suppliers for using their goods rather than purchasing the products that are required by
the customers. These rebates obtained from the suppliers were booked as profits in the
company’s financial statements and this resulted in inflating their earnings potential (The
Conversation, 2016).
In addition to this, the directors have not complied with the fundamental qualitative
characteristics of the AASB conceptual framework of relevance and faithful presentation. The
company as per these characteristics failed to depict relevant and accurate financial information
to the end-users and thus is not able to protect the interests of its investors. The directors as per
the AASB conceptual framework are required to verify the financial statements for ensuring that
they are materially correct and depicts error-free information to the end-users. The directors also
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