Accounting and Finance: Dick Smith Holdings' Liquidation Report

This report provides a comprehensive analysis of the collapse of Dick Smith Holdings, a prominent Australian electronics retailer. It delves into the company's financial history, from its acquisition by Woolworths to its eventual liquidation. The report examines the manipulation of accounts, in...Read More

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Accounting
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Table of Contents
Introduction......................................................................................................................................2
Background......................................................................................................................................2
Prospect of Fundraising...................................................................................................................3
Manipulation of accounts and Accounting policy...........................................................................3
Corporate Governance and transparency in financial reporting......................................................5
Appointment of administrator, receiver, and liquidator..................................................................6
Position of creditors re receivership and liquidation.......................................................................7
Directors Duty.................................................................................................................................8
Conclusion:......................................................................................................................................9
References:....................................................................................................................................10

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Introduction
Until 2016 Dick Smith Holdings Limited was a top name in the electronic components,
electronic goods, and electronic project kits market in Australia. The company had a wide chain
of retail stores that used to sell these electronic products to the consumers. Dick Smith founded
the company in the year 1968 in Sydney with him and his wife as the owners of the company;
however, in the year 1982 Woolworths Limited acquired the company. In the year 2016, the
company was dissolved by creditors’ liquidation process.
It is shocking to imagine that a company of $520 Million in valuation could fall so
dramatically with in a period of three years, i.e. from 2013 to 2015. The dramatic fall of the
company was due to the evens that occur during this period of three years that ultimately resulted
in the dissolution of the company by creditors’ liquidation process in the year 2016. Analyzing
and assessing the reasons of this dramatic collapse of one of the brightest companies in
Australian Stock Exchange is the main objective of this document (Bill 2016). Though it seems
that the ending story of Dick Smith Company has been written during these three year period
from 2013 to 2015 however, it was nearly a half century ago that it was almost predestined that
the company will end up in liquidation process which materialized at the beginning of 2016. In
early January 2016 the company’s banks called in the administrator to bring an end to the
corporate veil of the company. The brief time that the company was listed in ASX and the
prosperity of the company even shorter period was only an illusion.
Background
The period in which the company was in the hands of Woolworths Limited since it was
acquired the company in the year 1982. During that period even when Woolworths was
performing excellently, the company never mentioned its acquired company, i.e. Dick Smith as a

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well performer that should have made the investors as well as other stakeholders more aware of
the probable fate of the company. In the year, 2012 Woolworths Limited took the company off
its hands by transferring the company to Anchorage Capital. Anchorage Capital brought the
company at a price of $115 Million in the year 2012, the company i.e. Dick Smith had no cash in
hand at that time. A year later the company was floated with a valuation of $520 Million is a
clear indication that the valuation was a faux and there was significant manipulation in
accounting records to come up with that valuation (Giacalone and Rosenfeld 2013).
Prospect of Fundraising
In the year 2013, the company in its prospectus for fund raising asked its investors to
invest in the business to earn substantial amount of return on their investments by showing the
valuation of the company at $520 Million. As already mentioned there was significant
manipulation to the accounts of the company to show such enormous valuation of a company
which Anchorage Capital was bringing at a price of $115 Million with little cash in its hand. The
window dressing of financial statements though helped the company initially but finally it the
lack luster performance of the company caught up with it thus, resulted in subsequent dissolution
of the company.
Manipulation of accounts and Accounting policy
The income statements of the company is analyzed for the last few years to assess how
the accounts have been manipulated by the management to suppress the deteriorating operating
and financial condition of the company over the last five years. According to the financial
statements of the company sales in the year 2012 was $1369.5 Million which is far outstretched
than the actual sales. The Profit after tax of the company in the year 2012 of $13.2 Million again
an aberration of its actual performance. As a result of the manipulation of accounting records the

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financial statements showed a way better picture of the company than the actual position of the
company. Due to the window dressing of the company’s financial performance and position the
company continued payment of dividend to its shareholders which further deteriorated the
financial position of the company. The trend of manipulation of accounts continued as the 2013
results though showed a reduced amount of profit after tax at $6.7 Million, it was still way more
than the actual profit of the company (Speelman et al. 2014). The manipulation of the accounts
by charging depreciation at lower rates than should have been charged, by not providing for
expenses which needed to be provided, by inflating sales, and suppressing the expenditures the
management showed a better picture of the company than the reality. The manipulation of the
accounts of the company could have easily been detected had the auditors been more cautious
and careful in discharging their duties and responsibilities in accordance with the professional
code of conduct and ethics to which they are subjected to. The sales figure of the company
showed an increase as per the income statement of the company in the year 2014 with $1227.60
Million and the astonishing fact was the after tax profit of the company which according to the
income statement of the company was $42.10 Million, highest in the last five years. A careful
study of the financial statement would have made it clear that unlike other years the company
had charged much less amount of depreciation in its books. The sudden change in charge of
depreciation along with reduction in the amount of provisions made for different expenditures as
compare to the amount of provisions made by the company in earlier years are clear indications
of manipulations of accounts. The sales figures were inflated to show better operating results of
the company than the actual performances of the company in these years. In fact just the year
before the company went into creditors’ liquidation, i.e. in the year 2015 the company according
to its financial statements showed an after tax profit of $43.40 Million which is the highest

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amount of after tax profit that the company has posted in last 10 years of its operations (Creasey
et al. 2016). Considering that the company went into compulsory liquidation process as a result
of petition of its banks it is amply clear that these sales figures as well as the consequent after tax
profit figures all are inflated to show a better financial position of the company than the actual
financial position of the company. In 2016 after continuous failure on the part of Dick Smith
Holdings Limited to fulfill its commitments towards the banks the company went into a
creditors’ liquidation process. This clearly shows the lack of transparency in financial reporting
and accounting process.
Corporate Governance and transparency in financial reporting
The responsibility of the management of an organization is to not only manage the
financial and operational activities of the organization but at the same time to give necessary
importance to the corporate governance aspects of an organization. Corporate governance is the
accumulation of different processes, systems and methods used by the management to direct and
control the operations of an organization to achieve its objectives. The company had huge chain
of retail stores however, the way it operated its retail chains across the country it left lot to be
desired. The management in these retail stores of the company across different parts of the
country did not had any standard set of operational rules and regulations. Thus, the management
of different retail stores used different corporate practices to run business operations (Finkler et
al. 2016). This played a crucial role in the outcome of the company’s failure. It is important for
any organization to have a standard set of corporate governance rules and regulations that are to
be followed by its employees and workers to help the organization in its endeavor to achieve its
desired objectives. As a result of lack of corporate governance rules and regulations in the retail

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stores the company failed to make optimum utilization of its resources which contributed to the
ultimate dissolution of the company (Cui ey al. 2016).
The financial reporting of the company is another aspect of its functioning whether the
transparency was quite low. In fact, a look at the financial statements over the last decade until
its ultimate dissolution will make it clear that the management has changes its accounting
policies and principles quite frequently. The changes in the method of charging depreciation on
fixed assets to reduce the charge of depreciation in the last few years of its business operations
was a clear effort on the part of the company to portray a better financial and operating position
of the company than the actual reality. The company has also not followed the international
financial reporting standards in order to prepare and present the financial statements of the
company rather it has only followed the domestic mandatory standards to prepare its financial
statements. Thus, the lack of transparency in financial reporting of the company has always been
an issue with the stakeholders of the company. The fact that the company-undergone changes in
the ownership structure because of firstly being sold to Woolworths Limited in 1982 than again
to another company in the year 2012 have also not helped the matter. Because of the changes in
ownership the financial reporting processes has also undergone significant changes that have
only further reduced the transparency in financial reporting process (McKinney 2015).
Appointment of administrator, receiver, and liquidator
Since its listing in the ASX in December 2013 the company lost more than 80% of its
initial, listing prices of its shares as of January 04, 2016. This compelled the management to

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request for halt in trading of its shares. However, the very next day, i.e. on 5th of January, 2016
National Australia Bank and HSBC Bank of Australia, two of the major creditors of the
company, placed it into administration as a result of continuous failure on the part of the
company to fulfill its commitment towards them in respect of the loan and borrowings (Cox and
Hazen 2016). The board of the company appointed McGrath Nicole as administrators whereas
the creditors, i.e. the two banks mentioned above, appointed Ferrier Hodgson as the same.
Subsequent to this event on January 12 the Chief Executive Officer of the company, Mr. Nick
Abboud stepped down from his post in the company. However, on 25th February, 2016 Ferrier
Hodgson announced that they have failed to secure buyer / buyers for the company and thus,
have decided to close down the 363 DSE stores in different parts of Australia and New Zealand.
As result of this decision, almost 2500 jobs were lost, these are the workers working in these
stores. However, the online business of Dick Smith in Australia and New Zealand along with the
trademark of the company was purchased by the Ruslan Kogan’s founded Kogan.com; though
the liquidators and the receivers of Dick Smith did not disclose the amount paid by Kogan to
acquire the online business and the trademark of the company. The creditors of the company
according to the reports have suffered a loss to the tune of Australian $260 Million because of
the liquidation of the company. The final settlement with the creditors of the company was made
on 25th of July 2016 with whatever left of the company as on that date after the completion of the
liquidation process. However, no proper account of liquidation process was published but the
unsubstantiated report suggested that the creditors of the company suffered a huge loss because
of the liquidation of the company (DeTienne and Wennberg 2013).

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Position of creditors re receivership and liquidation
The position of the creditors of the company is very difficult to express in words.
According to the reports they have suffered losses of paramount proportion as a result of the
complete failure of the company. The two major creditors of the company, i.e. the National Bank
of Australia and HSBC Bank of Australia, who have put the company into administrations
suffered huge losses too along with other creditors (Nowicki 2015). The total loss to the creditors
as a result of the liquidation and subsequent dissolution of the company was well above
Australian $250 Million and the two banks were the major creditors to lose huge amount of
funds in the process. However, there was no other option left to these creditors as the company
failed repeatedly to fulfil its commitment of repayment of loans and borrowings on time. The
major reason for the inability of the administrators and receivers to not been able to realize the
assets of the company was the lack of interests on the part of the buyers to acquire the company.
Thus, the liquidators were compelled to close down the 363 DES stores in Australia and New
Zealand which if, could have been sold by the receivers would have helped them to realize
substantial amount of profit to repay the part of debt to the creditors of the company. Thus, the
position of the creditors of Dick Smith Holdings Limited was financially very fallible as they lost
huge amount of funds as a result of the failure of Dick Smith and its subsequent dissolution.
Directors Duty
The directors of the company have certainly failed to fulfill their responsibilities towards
the company which culminated to the final dissolution of the company. However, the worst fact
was the involvement of some directors in insolvent trading which is not acceptable and is a
punishable offence under the Corporations Act, 2001. The role of the directors of Dick Smith
Holdings Limited in insolvent trading should have been investigated and if found guilty of such

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offence the guilty directors shall accordingly be punished. The directors found guilty of insolvent
trading shall be personally liable to the creditors and other partiers in respect of the new debt
incurred after the insolvency of the company. Thus, the directors of Dick Smith will be
personally liable to make good the debts incurred by the company after the company has become
insolvent (Brigham and Ehrhardt 2013).
Conclusion:
Based on the above discussion it is clear that the management of an organization has a
huge role in the progressive development of such organization. Thus, the management should
discharge its duties carefully to ensure that an organization is in the right path of achieving its
objectives. The failure of Dick Smith is reminder to all of us the consequence of irresponsible
behavior on the part of the management of an organization.

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References:
Bill, A., 2016. From the Managing Partner. Newsletter.
Giacalone, R.A. and Rosenfeld, P. eds., 2013. Impression management in the organization.
Psychology Press.
Speelman, E.N., Groot, J.C.J., García-Barrios, L.E., Kok, K., Van Keulen, H. and Tittonell, P.,
2014. From coping to adaptation to economic and institutional change–trajectories of change in
land-use management and social organization in a Biosphere Reserve community, Mexico. Land
Use Policy, 41, pp.31-44.
Creasey, T., Jamieson, D.W., Rothwell, W.J. and Severini, G., 2016. Exploring the relationship
between organization development and change management. Practicing Organization
Development: Leading Transformation and Change, Fourth Edition, pp.330-337.
Finkler, S.A., Smith, D.L., Calabrese, T.D. and Purtell, R.M., 2016. Financial management for
public, health, and not-for-profit organizations. CQ Press.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage
Learning.
Nowicki, M., 2015. Introduction to the financial management of healthcare organizations.
Health Administration Press.
McKinney, J.B., 2015. Effective financial management in public and nonprofit agencies. ABC-
CLIO.
Cui, X., Peng, S. and Zhou, W., 2016. Study on Legal Protection of Stakeholders After the
Malicious Dissolution of the Company. Management & Engineering, (23), p.141.

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DeTienne, D.R. and Wennberg, K., 2013. Small business exit: Review of past research,
theoretical considerations and suggestions for future research.
Cox, J. and Hazen, T., 2016. Business organizations law. West Academic.