Analyzing the Collapse of Dick Smith: A Study of Breach of Accounting Standards and Unmodified Audit Report

This report analyzes the collapse of Dick Smith, a popular Australian electronics company, due to financial manipulations and breach of accounting standards. It also examines the unmodified audit report by Deloitte and the signs of going concern problem. The report provides a brief history of the company, a detailed analysis of the annual report, and the liability of auditors towards third parties. The subject is Auditing Theory and Practice, and the course code is not mentioned. The college/university is not mentioned.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student
Name of the University
Author note

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Table of Contents
Introduction:...............................................................................................................................3
Brief History and Collapse:........................................................................................................3
Breach of Australian Accounting Standards:.............................................................................5
Breach by Directors:..............................................................................................................5
Brief Analysis of the Annual Report:.........................................................................................6
Signs of Going Concern problem:..............................................................................................8
Cause of Unmodified Audit Report:..........................................................................................9
Liability of Auditor towards third parties:...........................................................................10
Some related observations:..................................................................................................10
Conclusion:..............................................................................................................................11
References:...............................................................................................................................12

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Executive Summary:
Dick Smith was one of the most recognisable electronic retail companies of Australia.
During the initial phase of the company, it had garnered an enormous fan following and had
already become a household name in Australian household. Although due to a series of
financial manipulations and mal practices, the company suffered, which led to its untimely
dissolution. In this report, an analytical approach has been adopted for looking into this
matter. This report has been divided into various sections, including a Brief History and
Collapse, Breach of Australian Accounting Standards, including an enquiry into the causes of
the unmodified report by the auditors.

3AUDITING THEORY AND PRACTICE
Introduction:
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.
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,

4AUDITING THEORY AND PRACTICE
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:
 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.

5AUDITING THEORY AND PRACTICE
Breach of Australian Accounting Standards:
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

6AUDITING THEORY AND PRACTICE
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:
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

7AUDITING THEORY AND PRACTICE
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 (Www.news.com.au, 2018).
A share price trading history of Dick Smith has been provided below, showing the
various anomalies, since the company had first become public:

8AUDITING THEORY AND PRACTICE
(Source: Factset, Public announcements)
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:

9AUDITING THEORY AND PRACTICE
 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 (Www.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

10AUDITING THEORY AND PRACTICE
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. 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.

11AUDITING THEORY AND PRACTICE
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

12AUDITING THEORY AND PRACTICE
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.

13AUDITING THEORY AND PRACTICE
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396.
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http://www.aasb.gov.au/
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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.
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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),
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https://www.smh.com.au/business/companies/dick-smith-to-close-all-stores-3000-
staff-to-go-20160225-gn3ios.html
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Retrieved from https://www.smh.com.au/business/companies/dick-smith-collapse-
raises-more-questions-for-accounting-profession-20160721-gqagz5.html(Malley,
2018)
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2943761/
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