Dick Smith Electronics Audit Failure

This assignment examines the collapse of Dick Smith Electronics, focusing on the audit failure that contributed to the company's downfall. It analyzes the responsibilities of both management and auditors in maintaining financial transparency and preventing such a scenario. The report discusses the importance of adherence to accounting standards (ASA) and the consequences of neglecting these guidelines.

AUDITING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
1. Factors related to the corporate collapse............................................................................1
2. Factors identified by Auditors............................................................................................4
Recommendations..................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Auditing is the main concept which is used in the business to have better transparency in
operations of company. In given scenario, this has been seen that the management of Dick Smith
Electronics is using various techniques which led to collapse of business. Auditors of this
company did not implement ethical practises which in turn made the business collapsed. Poor
practising of corporate governance practices like lack in transparency in financial reporting and
internal control tools are the main causes because of which collapse of business occurred.
TASK
1. Factors related to the corporate collapse
Corporate collapse refers to the financial bankruptcy or insolvency of an organisation
followed by legal statement of termination of existence of company. However, such phenomenon
is not an instant one. This is a regular procedure where the signs and symptoms emerge over
years.
In many cases, the causes are financial and one can assess the financial variables under
firm’s financial reporting to estimate a corporate collapse. Because, these kind of collapse
change in different manner, various definitions of corporate collapse accrues. However, this is
not an easy task to identify about whether a corporate collapse is imminent or a recovery is easy
or possible. There are various tools or factors that are required to be used by the auditors in order
to create transparency (Sikka and Willmott, 2010). It is the responsibility of an auditor who is
bound by a code of ethics to have better transparency. Dick smith company's insolvency arise
due to lack of effective governance practices and lower transparency in corporate governance
and internal control system that make the firm to get into collapse. These factors are discussed in
detail:
Corporate governance: This is the rules and regulations which company is adopting
while running their operations effectively. This is the system through which firms are directed
and managed. BODs of a company are accountable for governance of their organisations.
Shareholders' also play the role of appointing directors and auditors and also assures that
appropriate corporate governance layout is implemented. There are some of the responsibilities
which are required to be includes in board. These are:
 Fixing the firm's strategic aim,
1

 Rendering the leadership to put BODs' into effect,
 Controlling the management of firm and
 Reporting to shareholders about their stewardship.
These actions are subjected to laws, rules, regulations and shareholders in AGM.
The accounting profession is largely bound by ethical code of conduct which renders
accountants to act in public interest. However, this code renders principle based support for
professionals because they navigate about what can be complicated firm environment to frame
decisions like treatment of revenue and stock which not only render with rigid application of
standards and the law, but also to comply with the enthusiasm of what they try to attain
(Christopher, Ogunyom and Badejo, 2012). This is obvious that enhanced regulation gradually
get tipping point where the auditor's concentrate shift to compliance during expenses of exercise
of professional verdict.
Accounting profession carries values and expertise to firms and community at a broad
level and occupies a situation of trust in the society.
Low transparency in financial in financial reporting: Financial reporting of the
company did not provide better transparency amongst various stakeholders which in turn makes
the disbelief among them which force to make the firm into winding up of the process. Financial
reporting is the main thing which is highly required by the investors before making any
investment decisions. But, under the given case, this transparency was not provided to the
potential investors which force the firm to winding up.
Low transparency in internal control system: Internal control system is the main task
that are needed to attain by the management and the auditors in an effective manner which may
lead to make the business operations effective. Under the given case, auditors and the
management did not concentrate on internal control system that may lead to make business
operations into winding up procedures.
These are the basic thing which forced the firm into collapsing it. If these factors would have
overcome , then this situation will not arise.
There are some of the mistakes which were committed by the auditors that is why Dick
smith Ltd is collapsed. Some of them are mentioned hereunder:
Under auditor's report on the demise of Dick Smith, pinpointed dubious accounting tools which
are better-known under the industry.
2

 The practices, covering manipulating sales figures and stock saw Dick Smith
buying extra amount of stock for filling their extension of outlet and bank rebates
from suppliers to assist earnings.
 Investments by private equity are ever undertaken with the purpose of expending
the value of the company. This was done via selling non-core assets, discounting
non-profitable firm segments and looking to enhance skills in the remaining firm.
 The remaining firm are then sold as profitable- and crucially- emerging firms.
Under Dick Smith case, potential owners were attracted to the IPO with an
anticipation of an emerging firm. This enables that directors placed tremendous
demands on management and pressure on staff to buy extra stock (Orme, OBE
and Chair, 2014). This kind of strategy is possibly inter-connected to its float on
the ASX last year, rendering directors with incentives to follow aggressive
development which causes to enhance in floor stock and its warehouse.
These are the mistakes which were made by the management and the auditors of the company.
However, these kind of practices leads the firm to wind up of the Dick smith Ltd.
Dick Smith's main concern of disposable consumer electronics is mostly competitive, has
less profit margins, and stock.
More frequently, Dick Smith business winding up process bringing more stock which
was having worth that is lower than they could sell it for. However, their suppliers renders
discounts and rebates which were framed to help marketing and render consumer discounts, Dick
Smith rather than implementing their supplier rebates to highly inflate their sales figures.
(Attama, 2015).
Main factor behind collapsing of business is that the firm paid too much amount for stock
which was not able to sell profitably. Hence, the firm was not able to generate enough sales and
revenues but in reality, they quoted sales figures highly inflate. However, auditors were the main
people who fail to assess these problems in an effective manner. This is the reason, they frame
these kinds of problems and this may lead to collapsing of firm’s operations.
Lack in transparency under financial reporting is the main cause which leads to winding
up of firm. However, this has also been cited that the auditors need to provide transparency in an
effective manner so that business would run effectively and stakeholders would get better
3

transparency so that business could lead to make their business operations effectively. A better
transparency is important for any business to get the sustainable development. But, in this case,
company's auditors did not act as per their duties which was imposed by ASA 315. This is the
reason, these kinds of problems arise (Walabyeki, 2011).
Internal control system is the main thing that is required to be effectively implemented.
The auditor is responsible for recording entire lacking in internal control system. But in this case,
it is the problem of auditors and BODs who did not mark or record these issues in internal
control system.
However, it has also been assessed from the given case that auditor needs to adhere with
rules and regulations while auditing any business. If any problem occurs, then it is the duty of
them to record the same and report to the concerned authorities in order to make transparency.
These are the problems which were faced by company. This is the reason; it comes into
winding up. If these issues were have overcome then winding up of the firm would not happen.
2. Factors identified by auditors
An auditor of Dick Smith Electronics has found that there is poor corporate governance
in organisation. Nowadays, it is crucial for organisation to grow with the concept of corporate
governance where it is offering interesting perspectives for authorities, leadership, wealth
creation, etc. and to effectually deal with the conflicts which are being faced by the entity.
Corporate governance essentially refers to actions which are taken by directors to run their
company in an appropriate manner. There are many principles in corporate governance where
organisation has to comply with these so that they can manage their business function. Corporate
Governance is that system where board of directors are responsible to control and monitor all
activities which are being operated by them (Ravendren, and Ramalu, 2017). In this,
organisation is responsible to manage all activities where they can reduce negative influence of
factors which are affecting their business operations. Along with this, it is the responsibility of
board of directors to set company’s strategic aim; supervise the management of business;
reporting to shareholders about their stewardship and many more.
Financial management is also considered as a failure to get success of organisation. Here,
auditors of Dick Smith Electronics found that accounting department of this company is not
making proper budget where they can track the expenses that will be made by them. Thus, it is
showing cutting price in profit margin during the year. Other issue is there is no customer
4

strategy, where organisation can fulfil their requirements. For this, manager has to adopt
appropriate strategies where they can easily target customers. Along with this, they have to
understand forwards and backwards which are playing role in the development of influencing
their strategies.
Poor management, it encompasses with number of activities i.e. planning, controlling,
organising, directing and communicating. These are having cardinal rule where management has
to work upon that at all the times. A most common problem is facing by company is to grow
beyond their management resources (Ontario Securities Commission, 2014).
Apart from this, sales of this company is showing higher through which their net profit
are arising. So with the help of this, company is taking high amount of loan and not paying debts
to in time period. This problem is also identified by auditor because there is no higher authority
to check sales on regular basis. Another issues is also identified by the auditor under which no
proper planning was done by management . It is their responsibility to make proper plans, if ones
the plan fails, then it became difficult for organisation to attain success and make actionable
strategy.
Recommendations
According to Australian Auditing Standard, ASA 315, auditor has to perform risk
assessment on regular basis through which basic identification of threats related with financial
report can be done. Also, they can use the information which has been received from previous
auditors through which it can be determined that what changes are required which gives effect to
current audit. But it is a responsibility of company also to maintain all records and provide
valuable information to auditor through which they can conduct audit in an appropriate manner.
Further, auditor has to use professional judgment in order to determine what standards have to be
complied by organisation. If auditor finds out that organisation is not providing reliable and
authenticate information to them, then they are having authority to complain with higher
administration so that they can get valuable information. Along with this, whatever investment is
made by organisation should be properly recorded in the books of accounts in order to maintain
their books on regular basis. Moreover, they have to adopt those strategies in which they can
determine the risk in a proper manner. Besides this, they should comply with all rules and
regulations in which they manage the risk which is related with corporate governance. Through
5

the same, roles and responsibilities of directors which have to be performed by them will be
determined.
An auditor of this company have to constantly ask for the reports of accounts or
documents.. With the help of these documents, it becomes easy for them to identify the area
where Dick Smith Electronic will face threats regarding managing financial reports.
CONCLUSION
From the above mentioned report, it can be concluded that the management and auditors
are responsible for leading firm in bankruptcy. If they would have taken effective plans or
actions, then this may not have happened. This is the main responsibility of an auditors which are
needed to adhere the ASA standards while auditing. But, under this case, nothing was happened.
6

REFERENCES
Books and Journals
Alabede, J., 2012. The role, compromise and problems of the external auditor in corporate
governance. Research Journal of Finance and Accounting. 3(9).
Sikka, P. and Willmott, H., 2010. The dark side of transfer pricing: Its role in tax avoidance and
wealth retentiveness. Critical Perspectives on Accounting. 21(4). pp.342-356.
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Yang, K. and Jia, X., 2013. An efficient and secure dynamic auditing protocol for data storage in
cloud computing. IEEE transactions on parallel and distributed systems, 24(9), pp.1717-
1726.
Dube, I., 2011. Company Bill 2009, JPC report and International Perspective of Corporate
Governance.
Attama, U. P., 2015. Auditors and Distress In Nigerian Banks: A Study of Selected Banks In
Nigeria (Doctoral dissertation).
Walabyeki, J., 2011. The Accounting Gatekeeper: The Role of the External Auditor in Corporate
Governance in Uganda.
[Online]
What is an audit? [Audit]. Available through: <https://www.pwc.com.au/assurance/audit.html>.
Accessed on 7th August 2017.
7