Analysis of Dick Smith's Corporate Governance

This assignment provides an in-depth analysis of Dick Smith's corporate governance practices, focusing on their compliance with ASX Corporate Principles and Recommendations. The report evaluates the company's management structure, risk management policies, and ethics code, highlighting areas of strength and weakness. The analysis is based on publicly available information, including Dick Smith's annual reports and website content.

Running head: INTEGRATED REPORTING: ACCOUNTING
Integrated reporting: Accounting
Name of the student
Name of the university
Student ID
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2INTEGRATED REPORTING: ACCOUNTING
Table of Contents
Part A.........................................................................................................................................3
a. Ratio table.......................................................................................................................3
b. Discussion of ratios providing indication of receivership...............................................3
Part B..........................................................................................................................................4
a. Red flag from common size balance sheet......................................................................4
b. Additional information from cash flow statement..........................................................5
Part C..........................................................................................................................................5
a. Principle 2 – Structure of the board to add value............................................................5
b. Principle 4 – Safeguard integrity in corporate reporting.................................................7
c. Principle 7 – Recognise and managing risk....................................................................7
d. Principle 3 – Act ethically and responsibly.....................................................................8
Reference..................................................................................................................................10

3INTEGRATED REPORTING: ACCOUNTING
Part A
a. Ratio table
Ratio & Formula Workings Calculation
1 Current ratio = Current
assets/Current liabilities
389979/316527 1.23
2
Quick ratio = (Cash + Short-term
marketable investments + Account
receivables)/Current liabilities
(29511+53323+10460)/316527 0.29
3
Cash ratio = (Cash + Short-term
marketable investments)/ Current
liabilities
29511/316527 0.09
4a
Inventory turnover = Cost of
goods sold/Average inventory
(Times)
992828/((293044+253814)/2) 3.63
4
b
Days inventory held =
365/Inventory turnover (number of
whole days, round up)
365/(992828/((293044+253814)/2)) 100.52
5a
Receivables turnover =
Revenue/Average receivables
(times)
1319670/((53323+46688)/2) 26.39
5
b
Days of sales outstanding =
365/Receivables turnover (number
of whole days, round up)
365/(1319670/((53323+46688)/2)) 13.83
6 Debt/Assets = Total debt
(liabilities)/Total assets x100 (%)
339374/508521*100 66.74
7 Debt/Equity = Total debt
(liabilities)/Total equity x 100 (%)
339374/169147*100 200.64
8 Interest coverage = EBIT/Interest
payments (times)
(53379+4111)/4111 13.98
9 ROE = Net income/Average equity
x 100 (%)
37905/((169147+166940)/2)*100 22.56
10 ROA = Net income/Average assets
x 100 (%)
37905/((508521+451171)/2)*100 7.90
b. Discussion of ratios providing indication of receivership
Quick ratio – it measures the company’s liquidity through stating the ability of the company
for making the payment towards current liabilities without selling the long-term assets of the
company (Williams and Dobelman 2017). It can be seen from the annual report and

4INTEGRATED REPORTING: ACCOUNTING
calculation table that the quick ratio of the company is only 0.29. It states that the quick
assets of the company are significantly lower as compared to the current liabilities. Therefore,
to pay off the short-term obligations the company have to sell its long-term assets. As most of
the businesses use the long-term assets for generating revenues, selling these assets will not
only hamper the operations of the company but also will create an assumption in the mind of
the investors that the company is not able to generate sufficient earning to make payment for
the short-term obligations (Palepu, Healy and Peek 2013). The quick ratio of 1 state that the
company’s quick assets are equal to its current liabilities and the short-term liabilities can be
paid off from the quick assets. However, the quick ratio of Dick Smith for the year ended
2015 was just 0.29 that is clearly indicating that the quick assets are significantly low to pay
off the short-term obligations of the company. Therefore, it is providing an indication that the
company can go into receivership (Weil, Schipper and Francis 2013).
Debt equity ratio - it is a long-run solvency ratio used to evaluate the long-term soundness of
the company’s financial policies. It shows the portion of assets financed through borrowing
and portion that is financed by the shareholders fund (Coates 2014). The debt equity ratio of
100% shows that the company’s assets are equally financed by creditors and shareholders.
Usually the creditors like low ratio that is less than 100% for debt to equity as low ratio
indicates greater protection of their money. Further, the high debt to equity ratio indicates that
the company is highly leveraged and overburden of interest can lead the company to
unsustainable position. As it can be seen that the debt equity ratio of the company is more
than 200%, it is giving an indication that the company can go into receivership (Brochet,
Jagolinzer and Riedl 2013).

5INTEGRATED REPORTING: ACCOUNTING
Part B
a. Red flag from common size balance sheet
Borrowings – borrowing has adverse impact on the financial performance of the company.
Increase in the debt indicates that the company is moving towards unstable financial status.
Further, the interest on debt will overburden the company and at a point of time will lead the
company to unsustainable position (Lawrence 2013). It can be observed from the annual
report of the company that it raised new borrowing amounting to $ 70,500,000 during the
year 2015. Further, the borrowing of the company is 13.86% of total assets which is a
significant portion. Therefore, the borrowing of the company under the current liabilities of
the balance sheet is a serious red flag that indicates that the company can go into receivership
(Loughran and McDonald 2016).
b. Additional information from cash flow statement
 Cash from operating activities – it has been identified that the cash from the operating
activities of the company has been reduced from $ 52,177 thousand to -$ 3,940
thousand over the years from 2014 to 2015. It led to the reduction of cash and cash
equivalent balance for the years ended 2015. This in turn, will reduce the available
current assets to pay off the current liabilities (Hilton and Platt 2013)
 Proceeds from borrowings – It can be seen that the proceeds from borrowing for the
company has been increased to $ 12,500 thousand in 2015 from $ 57,598 thousand of
2014. This additional borrowing increased the debt equity ratio of the company.
Further, during the year repayment of the borrowings reduced from $ 57,598 thousand
to $ 52,000 thousand over the year from 2014 to 2015. This further increased the debt
portion of the asset as compared to the equity (Daily, Kieff and Wilmarth 2014).

6INTEGRATED REPORTING: ACCOUNTING
Part C
a. Principle 2 – Structure of the board to add value
(i) Board structure of Dick Smith
The board of the company for the year ended 2015 includes the following members –
 Robert Murray – Independent non-executive chairman
 Nicholas Abboud – CEO and Managing director
 Jamie Tomlinson – Independent non-executive director
 Lorna Raine – Independent non-executive director
 Robert Ishak – Independent non-executive director
 Michael Potts – CFO and Finance director (Dicksmith Australia 2018).
As per ASX Corporate Principles and Recommendations 3rd edition, Principle 2 the board –
 Have nomination committee that has (i) at least 3 members, of which majority are the
independent directors (ii) chaired by the independent director (iii) members of
committee (iv) charter of committee (v) at the closing of each reporting period
individual attendance for the members and number of times committee met
 Committee – During May 2015 the board extended role of remuneration committee
for incorporating the functions of nomination committee. The nomination and
remuneration committee charter includes the details regarding the selection of
directors and the procedures of appointment that set out the procedures used by the
company for addressing the succession issues of the board. It further ensures that the
board has required balance of knowledge, skill, diversity, independence and
experience for enabling them to perform the responsibilities and duties efficiently.

7INTEGRATED REPORTING: ACCOUNTING
 Skills and qualification – the directors are selected based on their relevant and
extensive expertise and experience. They bring variety of experience and skills to the
board that includes the business and industry knowledge, operational, corporate
governance and legal experience (Dicksmith Australia 2018).
(ii) As per the Principle 2, the nomination committee shall have at least 3 members,
majority of which shall be independent. However, the committee of Dick Smith
has 6 members, out of which 4 members are independent. As there is no
maximum limit for the number of members Dick Smith could enhance the board
structure and management under Principle 2.
(iii) The board shall have sufficient size do that the requirement of business can n=be
met and the required changes to the board’s composition can be managed without
any disruption (Brigham and Ehrhardt 2013). If the numbers of members are
enhanced, it will enhance the financial, managerial, operational and reporting
procedures more transparent and efficient. Further, the business will be able to
comply with the required regulations and strategic goals to improve the
performances.
b. Principle 4 – Safeguard integrity in corporate reporting
As per the requirement the board of the company established audit and finance
committee. Main purpose of the board is to carry out the auditing, accounting and the
financial reporting and risk management obligations and responsibilities. Under the charter,
committee shall have at least three members and the majority of the board shall be non-
executive independent member. The current members of the committee are Lorna Raine,
Jamie Tomlinson and Robert Ishak. Each of these directors is considered as non-executive
director and independent (Dicksmith Australia 2018). Further, the members shall be
financially literate and must be familiar with accounting and financial matters with 1 member

8INTEGRATED REPORTING: ACCOUNTING
at least shall be financial professional or qualified accountant. All the committee members of
the company are financially literate and Jamie Tomlinson has more than 12 years of
experience as Chief Financial officer of large public company. Moreover, Lorna Raine is the
qualified chartered accountant.
c. Principle 7 – Recognise and managing risk
As per the requirement of ASX the company views the effective risk management as
the key for maintaining and achieving the strategic and operational objectives. The
management and identification of the company’s risks are the important priority for the
board. The risk management is evaluated and managed by audit and finance committee and is
governed by audit and finance committee charter that is viewed at investor centre at the
company’s website under heading of corporate governance. The management regularly
evaluates and monitors the efficiencies of the plans and process for risk management and the
employee’s performances for implementing them (Dicksmith Australia 2018). Moreover, the
management regularly reports to the board and the audit and finance committee regarding the
risk management and identifies the material risk. It also identifies the extent to which the
ongoing risk management of the company efficiently manages, identifies, addresses and tests
the issues related to management of risk.
d. Principle 3 – Act ethically and responsibly
The board identifies the requirement for observing the highest standards for business
conduct and corporate practice. Accordingly, it adopted the formal code of conduct that is
required to be followed by all the officers and employees. Further, the company set out the
code of conduct on various matters that includes business conduct, ethical conduct,
compliance, information security, privacy, interest conflicts that is available at investor centre
at the company’s website under heading of corporate governance. It has been identified that
the cash from the operating activities of the company has been reduced from $ 52,177

9INTEGRATED REPORTING: ACCOUNTING
thousand to -$ 3,940 thousand over the years from 2014 to 2015. It led to the reduction of
cash and cash equivalent balance for the years ended 2015 (Dicksmith Australia 2018).
However, nothing was mentioned regarding this in their AGM. Therefore, the company
violated the Principle 3 under ASX Corporate Principles and Recommendations 3rd edition
that stated that the company must act ethically and responsibly.
Therefore it is concluded that, except the principle 3 for acting ethically and
responsibly, the company is following and maintaining other principles like principle 2,
principle 4 and principle 7.

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Reference
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice.
Cengage Learning.
Brochet, F., Jagolinzer, A.D. and Riedl, E.J., 2013. Mandatory IFRS adoption and financial
statement comparability. Contemporary Accounting Research, 30(4), pp.1373-1400.
Coates IV, J.C., 2014. Cost-Benefit Analysis of Financial Regulation: Case Studies and
Implications. Yale LJ, 124, p.882.
DAILY, J.E., KIEFF, F.S. and WILMARTH JR, A.E., 2014. Introduction. In Perspectives on
Financing Innovation (pp. 13-16). Routledge.
Dicksmith Australia., 2018. Dick Smith | The Best in Tech at Amazing Prices. [online]
Available at: https://www.dicksmith.com.au/da/ [Accessed 7 Apr. 2018].
Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley &
Sons.
Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and
Economics, 56(1), pp.130-147.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A
survey. Journal of Accounting Research, 54(4), pp.1187-1230.
Palepu, K.G., Healy, P.M. and Peek, E., 2013. Business analysis and valuation: IFRS edition.
Cengage Learning.

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Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific
Book Chapters, pp.109-169.