Dick Smith Case Study: Accounting Theory and Corporate Governance

This report analyzes the collapse of Dick Smith, a major Australian retail chain, attributing its failure to strategic errors, dubious accounting practices, and weak corporate governance. It details the company's history, highlighting its inability to adapt to market changes, poor cost control, and flawed expansion plans. The report exposes the manipulation of financial records through overvalued inventories and the use of real activities management to disguise poor performance. Furthermore, it identifies governance issues such as board interference, lack of transparency, and disregard for independent directors' advice. The report concludes by outlining key lessons for other companies to avoid similar failures, emphasizing the importance of strong governance, ethical accounting, and strategic adaptability.

Running head: ACCOUNTING THEORY
Accounting Theory
Name of the Student
Name of the University
Author note

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Executive Summary
The aim of the report is to analyse the reasons of collapse of Dick Smith and the lessons that
can be learned from the failure of the company. The report gives brief details of the company
and the type of business that the company do. The strategic errors of Dick Smith have
become the reason behind the failure of the organisation. The accounting policies that have
been adopted by the company to manipulate thefinancial records of the company are
analysed. The report also points out the governance issues that led to the collapse of Dick
Smith. The last part of thereport contains the lessons that other companies can learn from the
case Dick Smith so that these events of corporate failure does not happened again.

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Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Overview of Dick Smith holdings Private Limited....................................................................3
Strategic errors that results in the collapse of the company.......................................................3
Accounting practices used by Dick Smith holdings..................................................................5
Governance issues that is responsible for the failure of Dick Smith.........................................7
The lessons that can be learned from the collapse of Dick Smith:..........................................10
Conclusion................................................................................................................................12
References................................................................................................................................14

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Introduction
The reason behind the failure of any organisation is due to the lack of a strong
corporate governance policy and the absence of a transparent accounting system. Every failed
company has specific reason of failure but the main reason that is associated with all the
companies is their negligence in maintaining a good governance policy. Dick Smith, which is
recognised as one of the largest retail chain in Australia, has collapsed due to their strategic
errors and the poor execution of the governance policies. The company’s board and
management make several mistakes that lead to the sudden fall of business.
Discussion
Overview of Dick Smith holdings Private Limited
Dick Smith Holdings Limited has been an Australian retail store that deals in the
business of selling consumer electronic components and electronic project kits. The company
was founded in Sydney in the year 1968 by Dick Smith who later sold 60% of the shares to
Woolworths in 1980 and hold 40% of the shares and later on 2016 they ceased the operation
of the business. The company was suspended for trading in the Australian stock market by
the Australian securities exchange on sixth of January 2016.
Strategic errors that results in the collapse of the company
The major strategic errors for which the company fails to continue its operation are
stated below;
Despite of realising the high competition in the consumer electronics market, Dick
Smith never tried to understand the change of demand of the consumers and neglected the
requirement of analysing the demand of the market.

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The system of cost control of Dick Smith is very poor, for which the company never
realised the fact that it is incurring high cost of office maintenance in comparison to the
revenue generating capacity of the organisation (Bhasin 2016).
Dick Smith does not have any strategy to prevent the factors for which the sales
figures declined during the last financial years.The company measure the revenue growth
based on the store growth and the sales at low margin. This become the reason that the
organisation has never being able to understand the fact that their actual sales figure is falling
(Brooks and Oikonomou 2017).
The expansion plan of the organisation has become a major failure. They expansion
plan is so large that it requires huge capital, and the company even by utilising all the cash
resource, bank borrowings and considerable supplier commitment, failed to fulfil the required
amount (Carnegie and O’Connell 2014).
The products of Dick Smith failed to fulfil the requirement of the consumers for
which the inventory of the company filled with obsolete stocks. The organisation never tried
to improve the quality of their product and for that, they have been denied by the market.
The company tried to clear the obsolete items from the inventory but even by doing
so, they failed to cover the pressure of poor cash generation and the cash inflow of the
company started to decline continuously.
The company’s inability to get conducive credit terms affected on the process of
operation and storing of the obsolete items. The level of obsolete items increased day by day,
which forced the company to sale goods at lower or at no profit margins. Due to the declining
sales figures, the company failed to get credit from the suppliers and the banks also refused to
give them any fresh loan (Darrat et al. 2016).

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The continuous failure to generate cash inflow from the market leads to the failure of
repayment of the loans that they have taken from the banks. The company’s strategy of
expansion has forced it to take loan and that results in to the increase of the liability of the
company which they failed to repay. The company adopted the strategy of repaying the loan
by selling the obsolete stocks at a low price, but that strategy failed as the loan amount was so
high that it becomes impossible for the company to settle the loan only by selling the obsolete
stocks.
Accounting practices used by Dick Smith holdings
The dubious accounting policy that has been adopted by Dick Smith has led to the
failure of the company. The management of the company started to manipulate the sales
figure and the inventory position. To get loan from the market the company started to over
value the inventories and confused thelenders about the real position of the business (Griffin
and Maturana 2016).
The major manipulation that Dick Smith done is that it started to purchase excessive
amounts of inventories in order to fill the rapid extension of stores and avail discount from
suppliers to boost earnings. This process results in to manipulation in the revenue figures of
the company as the company started to record the discounted figure of stock as a part of their
revenue. The revenue figures were overvalued and that misguided the borrowers to grant loan
to Dick Smith (Ghaniabadi and Mazinani 2017).
Beside manipulation in recording the inventories, the company also adopted unfair
accounting policies in recording the transactions of the transfer of shares of its subsidiary
company to Woolworths. At the time of listing the private equity owners of Dick Smith
realise a high price and make significant profit, which they never disclose in their financial

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statements. This results in to the violation of the accounting principles that is practised by
most of the companies of Australia (Legenzova 2016).
The accounting policy for investment in private equity has never been followed in a
transparent way by the management of the organisation. The objective of investing in the
private equity is to increase the value of the firm but the management of Dick Smith utilised
the invested amount for the fulfilment of their own interest and not for the improvement of
the company. Due to non-disclosure of the invested amount in the private equity the
stakeholders never have get an idea about the actual utilisation of the fund that has been
invested (Demerjian, Donovan and Larson 2016).
Dick Smith adopted wrong methods in recording the sale of non-core assets and
discontinuing the non-profitable segment of the company, which in turn effects the business
of the company.
The company has adopted a tool called real activities management in recording their
financial transactions. The real activities management is a method of recording the
accounting entries in a way that will alter the financial results in order to mislead the users of
the financial report. Dick Smith’s management by using this accounting policy intentionally
reduces the expenditure cost of research and development, the timing of the sale of fixed
assets and overproduction that generates excess inventory in order to lower the cost of goods
sold. These practices initially gives positive financial results but it helps to hide the negative
impact which helps the management to mislead the users of the financial statement and
results in promoting unfair practices that later leads to failure of the business
activities( Chircop and Novotny-Farkas 2016).
Therefore, the adoption of real activities management system has made it possible for
the management of the company to disguise the unfair practices in the day-to-day

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transactions of the company and that leads to the manipulation of the accounting entries in
the books of the company.
Deloitte, the auditor of Dick Smith, has also stated that the adoption of the real
activity management system of recording the transactions has led to the failure of the
company. Deloitte in its report stated that Dick Smith intentional overvalued their inventory
and inflated the sales figures by recording the discounts availed from the suppliers as actual
sales (Alexander et al. 2018).
Therefore, the adoption of the real activity management has led to the adoption of
unfair and nebulous accounting policies, which become a major factor for the fall of the
company.
Governance issues that is responsible for the failure of Dick Smith
The good governance policies includes the following points
 Setting up of a base for effective governance framework
 Protection of rights of the shareholders
 Protection of shareholders interest
 The role of stakeholders
 Disclosure and transparency
 The responsibilities of the board
Beside these six points there are three specific rules, which ensure that the company is
following a good corporate governance policy these, are
 The role of the CEO should be separated from the role of the chairman of the board
(Shamsabadi, Min and Chung 2016)
 The independence of the board

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 The independence of the audit committee
Dick Smith has never followed the following steps in framing there governance
policies. The board members always try to interfere in the activities of the business, which
leads to the occurrence of conflict of interest (Magnan, Menini and Parbonetti 2015).
The board of directors of the company does not maintain any transparency in framing
any accounting policy and always try to manipulate the financial transaction of the
organisation.
The role of independent directors is of immense importance in framing a transparent
and unbiased governance policy, but the board of members of Dick Smith never give
importance to the decision of the independent directors. The executive directors who are
aware of all the activities of the company always keep the independent directors away from
the actual incidents that are going within the organisation. This leads to major disaster of the
organisation (Buckby, Gallery and Ma 2015).
The independent directors are the persons who always give preference to protect the
public interest, but if the company try to hide all the material facts that are related with the
business from the independent directors, then it will bring major concern about the failure of
the company. Dick Smith does not reveal the practices that they have adopted to manage their
independent directors, which becomes one of the major issue for the collapse of the
organisation (Michelon, Pilonato and Ricceri 2015).
The directors of Dick Smith in the year 2015 received more than 2 million tax-free
cash by declaring dividend, which they never disclose. This indicates that the corporate
governance does not follow any kind of ethics while doing business. The company always try
to manipulate the funds that they raise from the market (Williams 2017).

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Non-compliance of the listing laws and regulations have become a regular practice for
the members of the board, which damaged the credibility of the directors 0f, the company and
the company also lose its reputation from the market. The directors always try to inflate the
financial statements of the company and for that reason, they always interfere t in the role of
the chief executive officer and the chief financial officer of the company. This becomes a
major violation of the corporate governance principles (Khaneja, Bhargava and Gupta 2017).
The board members of the company also engaged in the related party transactions,
which raise the problem of conflict of interest. The members of the board give priorities to
protect their interest and that leads to the manipulation of the financial records (Abid and
Ahmed 2014).
After fourteen months from the date on which Dick Smith collapsed, the receivers
sued eight of the former directors and claim damages from them on the ground that they have
breached their duties while acting as the director of the company.
After the directors, the role of the auditors of the company comes under scrutiny. In
the case of Dick Smith it is found that even the auditors warned the board of directors about
the wrong practices they are doing in maintaining the accounts of the company the directors
does not responded on that issue and refused to accept the facts that are pointed out by the
auditors (Paul and Paul 2018).
The negligence of the auditors’ notes is another governance issue that leads to the
failure of Dick Smith. The auditors are the main persons who detect any financial
misstatements of the company and the company should respond to the queries that have been
raised by the auditors. Dick Smith never discloses any notes that are given by the auditors
and suppress all the material misstatements that they intentionally recorded in their
accounting system (Nagaraju et al. 2016).

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Non-disclosure of the material facts is another governance issue of the company that
leads to the failure of Dick Smith. It is the basic need of transparent governance system that
the company should disclose all the facts that have material effect on the business and is
related with the protection of the public interest (Xu, Gao and Hammond 2017).
Dick Smith has never taken any step to disclose any facts that is related with the
unfair practices that they have adopted to manipulate their inventory and the sales figure of
the company. This non-disclosure of material misstatements has resulted in the collapse of
the market value of the shares of the company and ultimately become the main cause for
which the company has to shut down its operation (Salim, Arjomandi and Seufert 2016).
The lessons that can be learned from the collapse of Dick Smith:
Dick Smith once recognised as one of the leading electronic store in Australia has
collapsed due to the lack of transparency in their accounting policy and the absence of a good
governance system. The company has started to manipulate its accounts while it started to
expand the network of its stores. Dick Smith does not follow the compliances that are
required for the companies that are listed in the Australian securities exchange (Kenney, La
Cava and Rodgers 2016).The lessons that can be learned from the collapse of Dick Smith
Holdings Private Limited are stated below:
Adoption of effective inventory management system
The inventory problem started from the month of June of the financial year 2015 and
in November 2015 the company disclosed that it has to write down the value of the
inventories by 20% of its inventory value. The company started to manipulate the value of the
inventory by storing the obsolete products in their stores and valued these obsolete stocks at
their original value (Bryan, Rafferty and Wigan 2017).

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The company also bought excessive inventory by anticipating a sales level which they
have never achieved in the past year. They have never been able to achieve that sales level
which led to the excessive storing of unsold products. The company does not have that
infrastructure to store such a large volume of unsold products for which the products become
obsolete and nothing can be realised from these products in future (Huang, Ho and Fang
2015).
The company started to dispose off the obsolete stock by giving huge discounts to the
consumers for which the sales figures slashed down by 70%.The management of the
company try to manage the situation by taking alternative route of funding; however, this
policy of the company failed as the alternative fund proves to be insufficient to fulfil the
short-term inventory requirement of the company. Dick Smith’s total liability for this
mismanagement inventory rose to 340 million, which the company failed to recover (Kieso,
Weygandt and Warfield 2016).
So the lessons that can be learned from the collapse of the company is that to operate
a business efficiently an organisation should prepare a systematic inventory management so
that it can avoid the problems that Dick Smith faced.
Misuse of private equity funds
Private equity funds are not beneficial if these are not managed properly. The role of
private equity group Anchorage capital in Dick Smith’s recent collapse has proved that
private equity funding is not beneficial for the company unless it has been properly utilised.
Anchorage capital purchased Dick Smiths business from Woolworths by paying 20
million dollars and floated the shares of the company in the Australian securities Exchange
with a market valuation of 520 million dollars. The company is so highly valued that it hides
the company’s actual value. This overvaluation results in to the fall of the share price of Dick

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Smith from 2.2 dollars per share to 0.35 cents per dollar. Therefore, the company’s decision
to float the shares in the market through IPO has become a major failure and considered to be
reason of the shutdown of the business of Dick Smith (Firth and Gounopoulos 2017).
So from the failed strategy of Dick Smith it can be learned that without making a
proper valuation of a company it will not be beneficial for a company to float its share in the
market. As in most of the cases it is found that, the companies engaged in the practice of
overvaluing their organisation to raise more fund from the market but this strategy often fails
and that results in to the collapse of the company (Issacharoff and Eagles 2015).
In competitive market priority should be given to customer service
The electronics market in Australia have few number of efficient companies to serve
the customers so this makes the electronics market very competitive in Australia which
forced the companies to provide high quality of services to the customers otherwise
customers will reject the products of the company and that will results into the failure of the
company.
Dick Smith has never given priority to serve the customers, so more complaints came
from the customers about the company’s product. The raising level of customer
dissatisfaction has led to the failure of the company.
Therefore, it can be learned from the case of Dick Smith that customer services
should be given higher priority in order to create a long-term impact in the world of
competition.
Conclusion
Therefore, it can be concluded that the reason behind the collapse of Dick Smith is
due to the non-maintenance of effective strategy to compete with the competitors in the

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market, absence of transparent accounting principles along with good corporate governance
policies. The member of the governing body of the company adopted all short of practices
that led to the manipulation of the financial transactions of the company. The management
used to inflate the inventory value of the company, which creates confusion for the users of
the financial statement. The company also manipulated the sales figure by recording the
discounts that Dick Smith receives from the supplier. These are the causes, which results in to
misrepresentation of the value of the organisation, which adversely affects the investors’
interest.

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