Case Study: Accounting Scandals and Financial Crisis of Dick Smith

This case study examines the financial crisis of Dick Smith Holdings Limited, an Australian retail chain, and the accounting issues that contributed to its collapse. The assignment analyzes the company's expansion plans, inventory management, and the manipulation of financial statements, including the overvaluation of inventory and misuse of supplier rebates. It explores the role of the auditors, Deloitte, and other factors such as unrealistic expansion and private label strategies, which impacted cash flow. The study highlights how the crisis could have been avoided through improved accounting practices, effective inventory management, and accurate demand forecasting. The assignment also discusses changes in accounting regulations post-crisis and whether the issues were entity-specific or of wider concern. The collapse resulted in significant losses for creditors, shareholders, and employees.

Accounting issues in Dick Smith’s Case 0
Accounting Scandal
Dick Smith’s Case

Accounting issues in Dick Smith’s Case 1
Question 1: Comprehensive overview of Dick Smith’s financial crisis
Dick Smith Holdings Limited was an Australian retail chain of consumer electronic goods.
The company had enjoyed firm growth in its sales revenue and successful listing on the
Australian Securities Exchange, prior to its collapse. The managers of the company had huge
expansion plans as they were highly focused on enhancing the level of their revenues with the
aim of achieving desired profitability. However, the expansion plans of Dick Smith had
become the major factor that contributed to the demise of the company in FY 2016 (The
National Business Review, 2016). The company had blocked huge amount of its surplus
earnings in its inventory for which the demand in the market fell down remarkably. As the
demand of its products declined Dick Smith had to face huge cash crisis while repaying the
large sums of its debt obligations in the market which became the major reason of its
collapse.
Question 2: Role of Dick Smith’s financial statements in its financial crisis
Accounting issues:
The financial statements of Dick Smith were carrying the inventories at the higher value than
the actual value that could be realised from the sale of such inventory because of its
obsolescence reason. Due to this the financial statements of the company were revealing its
profitable position. The sudden writing down of around $ 60 million dollar of the values of
inventories carried by Dick Smith along with the other assets impairment had made the
company experience a sudden downfall (Low, 2016). The long-term incorrect inventory
valuation in the financial statements could not be traced by the auditors of the company. In
order to retain the faith of its shareholders and other investors, Dick Smith’s management
team had been manipulating its financial statements using various dubious accounting
practices. Also, the company had misused the rebates provided by its suppliers by showing

Accounting issues in Dick Smith’s Case 2
them as the profits of the business to deceive the stakeholders of the company. The creditors
of the company had lost around $ 277 million and its shareholders lost around AUD 344.5
million and around 3224 employees of the company had to lose their job because of its
collapse (Milford. 2018).
Other factors that contributed to Dick Smith’s Collapse:
The acquisition of Dick Smith by a private equity firm called Anchorage Capital imposed
pressure on the company to achieve high sales target. Thus, with the motive of increasing its
sales, Dick Smith had invested large sums of money for the purpose of purchasing
inventories in huge quantum in 2015 (Milford. 2018). The said investment consumed a
significant portion of company’s retained earnings and also required the company to borrow
funds from banks and financial institutions. The unrealistic and costly expansion plan made
the company suffer huge losses as the demand of its products fell down in the highly
competitive electronic market of Australia, on account of change in the customer’s
preferences. The company was carrying inventories in large sums when it has to lose its
market share which made its inventory not saleable in the market. The chief providers of
financial assistance to the bank such as National Australia Bank and HSBC Australia denied
to help any further to the company and instead they announced that the collateral securities of
the company will be used to recovered the existing loans in case of any irregularity in
payment (Pash, 2016). Further, the private label strategy of company proved to be
inappropriate and imposed high competitive pressure on it. All this factors affected the cash
flows of Dick Smith miserably.
Question 3: Dick Smith’s crisis could be avoided in the following manner:
The financial crisis that was faced by Dick Smith could be avoided if Deloitte which was
appointed as the auditing firm of the company could have paid attention to the fraudulent

Accounting issues in Dick Smith’s Case 3
practices of the management of the company in manipulating the financial statements. Rather
than providing a clean report, the auditors must have provided an adverse opinion on the true
and fair view of Dick Smith’s financial statements. Inventory is the life blood especially in
the case of retail businesses and hence it must be managed appropriately. Any inventory
problem which either occurred in short-run or long run must be thoroughly assessed by the
auditors. The other way by which the said financial crisis could be avoided at Dick Smith was
the implementation of effective strategies which could not only reduce the floor of low-
margins but also promote the big brands of the company such as Samsung, Apple etc. and to
widen the shelf space for the brand products that the potential to generate high profit margins
for the company (Knight, 2016). It was also necessary for the management of Dick Smith to
predict the demand patterns of their products in the market before stocking up a huge pile of
its inventories so that the excessive blockage of funds in the same could have prevented and
the flow of cash in and out of the business could be managed. Further, Dick Smith must have
adopted adequate accounting policies and procedures to undertake its inventory valuations
and to account for the decline in the value of its inventory on timely basis (Malley, 2016).
Dick Smith’s Crisis: Entity specific or not?
The above issue was not merely entity specific rather there were wider and severe accounting
concerns.
Changes in accounting regulations post crisis:
The accounting regulations have been made more stringent after the occurrence of financial
crisis at Dick Smith. The regulators of accounting and auditing profession have increased the
level of penalties for the breach of the provisions and standards under the respective laws.

Accounting issues in Dick Smith’s Case 4
References:
Knight, E. 2016. The anatomy of Dick Smith's decline. Available at:
https://www.smh.com.au/business/the-anatomy-of-dick-smiths-decline-20160105-glzrll.html
Accessed on: 26.10.2018.
Low, C. 2016. Electrical storm: How Dick Smith went from a $520m sensation to the bargain
bin. Available at: https://www.smh.com.au/business/companies/electrical-storm-how-dick-
smith-went-from-a-520m-sensation-to-the-bargain-bin-20160107-gm1iq3.html Accessed on:
26.10.2018.
Malley, A., 2016. Dick Smith collapse raises more questions for accounting profession.
Available at: https://www.smh.com.au/business/companies/dick-smith-collapse-raises-more-
questions-for-accounting-profession-20160721-gqagz5.html Accessed on: 26.10.2018.
Milford. 2018. Lessons from Dick Smith’s collapse. Available at:
https://milfordasset.com/insights/lessons-from-dick-smiths-collapse Accessed on:
26.10.2018.
Pash, C., 2016. The 8 causes of Dick Smith's collapse. Available at:
https://www.businessinsider.com.au/dick-smiths-administrators-have-outlined-the-8-
underlying-causes-of-the-companys-collapse-2016-7 Accessed on: 26.10.2018.
The National Business Review, 2016. Analysis: Five serious questions about Dick Smith
collapse. Available at: https://www.nbr.co.nz/opinion/five-serious-questions-about-dick-
smith-collapse Accessed on: 26.10.2018.

Accounting issues in Dick Smith’s Case 5