Analysis of the Rise and Fall of Dick Smith Holdings Limited: A Report

This report critically analyzes the rise and fall of Dick Smith Holdings Limited, a prominent Australian retailer of consumer electronics. It investigates the company's journey from its inception in 1968 to its collapse in 2016, highlighting key events such as the acquisition by Anchorage Capital Partners and the subsequent listing on the Australian Stock Exchange. The report examines the role of management, corporate governance practices, and financial reporting, particularly focusing on the issues surrounding the 2013 prospectus for fundraising, including potential manipulation of inventory and sales figures. It discusses the responsibilities of regulatory bodies like AASB and ASIC in ensuring fair value disclosures and ethical business practices. Furthermore, the report explores the use of real activities management and earnings management strategies and their impact on the company's financial health, ultimately leading to the company's downfall. The analysis integrates both quantitative and qualitative information from various sources to provide a comprehensive understanding of the factors contributing to Dick Smith's failure.

A Report on the Rise and Fall of Dick Smith 1
A REPORT ON THE RISE AND FALL OF DICK SMITH
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A Report on the Rise and Fall of Dick Smith 2
The Rise and Fall of Dick Smith Holding Limited
Executive Summary
Dick Smith Holdings Limited listed was a well-known retailer of consumer electronic
products in Australia. The company was on the list of the firms quoted on the Australian Stock
Exchange as DSH. DSH was a large and famous electrical retailer in Australia. The company
sold a range of electronic products including mobility, entertainment, office and other electronic
products. Having it roots dating back to 1968 with the sole owner bring Dick Smith and his wife,
the company has exchanged ownership at some point being owned by Woolworths Limited 1982
to 2012. Just before the collapse, Dick Smith was owned by a private equity firm (Anchorage
Capital Partners). The company dealt with a diverse array of electrical products across close to
393 stores in Australia and New Zealand boundaries. Before the downfall, the company used to
network and connect with the consumers by operating under four umbrella brands namely, the
Dick Smith, David Jones Electronics as powered by Dick Smith, the MOVE and Move by Dick
Smith Sydney International Airport. The fall of the company in 2016 has been attributed to a big
deviation from the targeted profits. Following the downfall, the board of Directors and the
creditors appointed administrators and receiver managers to take over the management affairs of
the company henceforth. Joseph Hayes, William Harris, Matthew Caddy and Jason Preston were
appointed as voluntarily administrators while Ferrier Hodgson, Jim Steward, Ryan Eagle and Jim
Sarantinos as the receiver manager. The administrators and the receiver managers were required
to secure the business operations of the company following the fall and also investigate the
issues surrounding the failure. The receivers and administrators were also required to report their
findings to the Australian Securities and Investment Commission (ASIC) on the possible
violations that were made by the company’s management leading to the fall.

A Report on the Rise and Fall of Dick Smith 3
Introduction
There have been many issues surrounding the management of multinational corporations
in the recent past. The issues range from poor corporate governance practices, manipulation of a
corporation’s books of accounts and lack of transparency in financial reporting. The
aforementioned factors together with ethics in decision making are very important things that
ought to be observed when it comes to management of a multinational company of Dicks Smiths
kind. The spectacular fall of Dick Smith Holdings Limited in 2016 really sparks many questions
about the role of the management in ensuring shareholders wealth is maximized. While the root
issues surrounding the collapse of Dick Smiths Holdings limited may be attributed to inventory
changes and an untimely equity floatation of the business, a more inquiry into the affairs
following the fall shows a broader scope on the issues of disclosure that might have been avoided
by the company’s Directors and management (ABC News, 2018). More importantly, a critical
analysis of the prospectus issued in 2013 shows that very little information about inventory was
disclosed. The Australian Corporations Act stipulates all the pertinent information that should be
disclosed by a prospectus before its issue for any fundraising. Dick Smith might have failed to
disclose all the details of the financial statements which are required by the investors and their
professional advisors in reasonably making an informed decision regarding the purchase of the
company's shares. AASB and ASIC are bodies that further outlines the regulatory guidance that
is meant to protect the interest of the investors and creditors in a company. This paper intends to
analyze critically the circumstances leading to the rise and fall of Dick Smith Holdings Limited
since it was acquired by Anchorage Capital Partners in 2012 and the eventual eminent fall in
2016 and report on the findings. To do this both quantitative and qualitative information from a
number of sources will be integrated into the report. Moreover, corporate governance principles

A Report on the Rise and Fall of Dick Smith 4
that might have been violated by the management of Dick Smiths Holdings Limited are
reviewed.
Issues Surrounding the Prospectus for Fundraising in 2013
In the business world of today, it is common to find corporations trying to ‘‘dress up’’ the
company to look like it is performing well financially so as to persuade people to buy shares
from it. The prospectus for selling shares in 2013 by Dick Smith might not be far from this.
According to insider information from the company, Dick Smiths management is suspected to
have manipulated the stock inventories and sales figures of the company to look that the
company was making progress and yet that was not the case (Yeates, 2018, np.; Montgomery,
2018, np). This saw the company purchasing excessive levels of inventory so as to aggressively
fulfil the alleged rapid expansion of stores and thereby calling for rebates from the suppliers as a
way of boosting earnings in the short run.
Since Dick Smith had been transited from being a subsidiary of Woolworths to the
ownership of a private equity owner- Anchorage Capital, there was an increased pressure to the
listing of the company on the Australian Stock Exchange (The Conversation, 2018). Keeping in
mind that Anchorage Capital had purchased the company at $ 115 having paid only $ 20 million
in cash, there was a big desire for the company to realize a high stock price when it was listed
and hence a significant profit from the sale of shares. This aggressiveness for profits of share
price was the beginning of failures for the electronics company (Yeates, 2018, np.).

A Report on the Rise and Fall of Dick Smith 5
Malpractices in the 2013 Prospectus Fundraising
As of November 25, 2012, the inventory account for Dick Smith was at $ 370 million.
Just the day after, on November 26th, the inventory was written down to a tune of $ 58 million
bringing down the accounting figure to $ 312 million. This write-down gave the company a
‘‘false'' profit figure of $ 58 million on the profit and loss account. To add insult to the injury, the
dubious write down was never mentioned in the 2013 prospectus despite it being one of the
material information required to be included in a prospectus. Moreover, the report was never
mentioned in the auditor's report by Deloitte as the investigating accounting firm (Montgomery,
2018, np.). Nevertheless, the management of Dick Smith is guilty of not disclosing all the
material information as required by the law.
The Role of AASB and ASIC in Fair Value Disclosures
A number of researchers have exposed the ‘‘evils’’ the management for many
corporations usually do regarding the information contained in a prospectus. An individual
research conducted by Campel Harvey, Shiva Rajgopal and John Graham on executives in
Australia revealed that close to 78% of them admits considering sacrificing the long-term value
of the company for the sake of getting quicker ‘‘smooth'' earnings (Graham, Harvey and
Rajgopal, 2018, np.). This is a worrying trend that could jeopardize the economic conditions of a
company and the overall economy of the country. ASIC and the Australian Competition and
Consumer Commission (ACCC) requires companies to use ethical means of acquiring earnings
((Asic.gov.au, 2018, np.; Bolt, 2004, pp. 85). This means that Dick Smith violated a number of
consumer laws in its issue of the prospectus in 2013. AASB also requires managers to maintain a
constant predictability of earnings in the financial statement disclosures (Carlin and Finch,
2008). This is required so that there is a reduction of information risk that can boost or reduce the

A Report on the Rise and Fall of Dick Smith 6
price of stocks. The management of Dick Smith appears to have set the prospectus disclosure at a
position difficult to be maintained.
The Australian Corporations Act contains a general provision for disclosure tests that
should be conducted on a prospectus. The Act provides that for a prospectus to be valid it must
contain all the pertinent information that investors and professional stock analysts deem
reasonably necessary to be provided and can affect their decision during the assessment of the
share price prospects of the issuing company. The regime of protection of investors is therefore
offered by the law and the shareholders can feel pain for having being denied their rights to get
all the relevant information as clearly enshrined by Corporations Disclosure Act. (ABC News,
2018) Since the information contained in the prospectus for Dick Smith Holdings was corrupted,
financial consultants could have found it difficult to offer informed advice to their clients. The
prospectus for Dick Smith Limited, therefore, was made of distasteful elements.
The Practice of Manipulating the Sales Figures, Accounts and Stock Inventories of the
Company
There are a number of strategies today that unethically motivated managers employ today
in order to meet short-term organization targets. Most of these strategies are against good
corporate governance practices and can have detrimental effects on the value of the firm in the
long run. The most common are:
Real Activities Management
It is very common to find that most private equity owners are usually undertaken primarily with
an aim of increasing the value of the firm within a short time. This is normally done through the
selling of non-core company assets and discontinuation of some unprofitable business segments

A Report on the Rise and Fall of Dick Smith 7
as a way of looking to improve the efficiency of the business operations. However, this was not
done for Dick Smith. Instead, the management sought to employ dubious accounting methods
such as the use of rebates so as to make the value of the company appear as better (Montgomery,
2018, np.). This strategy has been referred by accounting researchers as “real activities
management”. Real activities management is the divergence of the management from the ethical
standard operation procedures of a company to the restructuring of transactions so as to alter the
financial results and hence misleading both the existing and prospective investors of the
company through the financial reports (GUNNY, 2010, pp 870). Since real activities
management makes use of ‘‘legitimate’’ transactions away from the interpretations of the
existing accounting standards and the Australian Corporations Law, it is difficult to be detected
and it can be easily integrated into the normal day to day business operations of the company.
Real activities management, however, has been identified to eventually lower the value of the
company in the long run.
Earnings Management
Apart from real activities management, there is also another management malpractice
referred to as earnings management (EM). The strategy involves myopic reduction of the
research and development expenditures, price discounts and ‘‘timely’ ’sale of the fixed assets of
the company so as to meet short-term earnings targets. This has an effect of over-production or
overstocking of inventory in order to lower the cost of goods sold and hence indicating that that
financial results of the company are positive (GUNNY, 2010, pp 860). Despite it being risky,
earnings management has been found to be one of the commonly used malpractice tools of
management in the attainment of earnings benchmarks (Graham, Harvey and Rajgopal, 2018,

A Report on the Rise and Fall of Dick Smith 8
np.). Both Earnings Management (EM) and real activities management (RAM) have negative
trackable impacts on the value of the company.
Manipulation of Book of Accounts
The accounting practice is usually guided by a code of ethics that requires professional
accountants to act in the best interest of the public by providing their services diligently,
professional and with due care. Since the fall of Dick Smith in 2016, the accountancy profession
has been put on the spot on their role in providing a ‘‘caveat emptor’ ’on the financial
performance of the company (Malley, 2018, np.). The accountant code of practice also requires
that accountants should be able to navigate all kinds of complex business environments by
making decisions regarding treatment of revenues that not only comply with AASB and IFRS
requirements but also in conformity with the spirit of what the company is seeking to achieve
(Aasb.gov.au, 2018). It is because of the ubiquitousness of the accountants and the management
at Dick Smith that lead to lack of consistent transparency and hence the loss of jobs of close to
3300 employees and billions of dollars to the investors who lost their money.
The main problem that might have seen a false financial position at Dick Smith has
been identified to the issue of rebates from suppliers. This practice is what influenced the
management to purchase excess amounts of inventories with the motive of making an increase in
earnings (Financial Review, 2018, np.). Between 2014 and 2015, Dick Smith reported $ 72
million as earnings before interest, depreciation, amortization and tax. If the issues of rebates and
advertising subsidies claimed by the company could be excluded, the profit figure could be
adjusted downwards resulting to a loss of $ 119 million EBITDA (Malley, 2018, np.). It is
therefore evident that the failure of Dick Smith is a result of the accounting treatment of rebates.

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Poor Corporate Governance Arrangement Issues at Dick Smith in Financial Reporting
When it comes to ethics in decision making, managers are required to make many
organizational decisions that can pass through the ‘‘ethical funnel’’. Research has shown that
only a few managers are ethical in their decisions and are able to pass through the ethical funnel
(Prempeh and Odartei-Mills, 2015). Ethics requires that managers should be guided by ethical
values to ensure that they provide financial statements in reporting that reflects the true and fair
view of the company's statement of financial position. Good corporate governance practice also
requires that managers:
 Should not exaggerate the quality or the durability of the products they deal with.
 Should assist in protecting and correcting the environment in which they operate without
the supervision of relevant authorities or demands from the public (Ceil, 2012).
 Should not exaggerate the cash flows of the company they manage by ‘cooking’ books so
that the firm appears to be performing well and hence getting lower interest on loans
from banks and higher quotations of the firm’s stock prices and yet that is not the true
case.
It is however sad to discover that the above issues were never adhered to by the
management of Dick Smith. In any other organization, corporate governance practice should
clearly separate the duties of the different stakeholders so that every party should discharge their
duties and responsibilities according to the relevant professional standards required of them
(Rankin, Stanton, McGowan, Ferlauto, & Tilling, 2012, p. 188). At Dick Smith, this appears to
have not been the case, and the management might have colluded with the directors in
‘‘cooking’’ the books of accounts.

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Corporate Governance Principles Violated by Dick Smiths Management
Act Ethically and Responsibly
The principle of ‘‘Act ethically and responsibly’’ requires that the management should
always act in a manner that the company is going to become better so that the investors and other
stakeholder’s interests are going to be fulfilled (Asx.com.au, 2018, np). This principle with the
normative stakeholder’s theory. For Dick Smith, management should have acted in the best
interest of the company’s stakeholders a fact which should not have seen the collapse. The
management never acted ethically in the issue of the prospectus and in the treatment of the rebate
item in the books of accounts before the inventories were actually sold. This eventually led to the
eventual massive loss of funds belonging to the shareholders.
The Principle of Timely and Balanced Disclosure
Good corporate governance practices require managers to make timely, accurate,
transparent and balanced disclosure of information during financial reporting. A balanced
disclosure of financial statements means that the information contained in the report should
reflect a true and fair view of the company’s financial position. (Rankin et al., 2012, pp. 193).
The timely and transparent disclosure also helps the stakeholders to make informed decisions
regarding whether to buy or sell shares. Dick Smith never provided a true picture of the financial
situation of the corporation. The principle of timely and disclosure is in line with sentiments of
the legitimacy theory which propounds that a company should be legitimate in social and
environmental reporting (Charpac.com.au, 2018, np.). The management of Dick Smith is alleged
to have diverted the financial disclosure role to suit their own short-term selfish interests of
bonus pay.

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The Principle of Recognition and Management of Risk
The corporate leaders for Dick Smith Limed failed to form a structure for risk
recognition and management for the corporation they run. This was against the corporate
governance principle of risk recognition and management why requires that aspects of risk are
realized and dealt with using internal controls that are set by the management (Shen, 2010, pp.
87). If the managers of Dick Smith could have looked at the risk profile of the company earlier,
the company could not have collapsed. Risk recognition and mitigation play a very important
role in financial management. As supported by the agency theory, the management is the agents
of the shareholders and they are supposed to do all it takes to ensure that the company continues
in operation into the foreseeable future without having to wind up its operations (Zhang, 2009).
The move by Dick Smith to write off $ 60 million in 2015 which indicates that the risk profile
for inventories was never considered.
Appointment of Administrator, Receiver, and Liquidator
When a company is in a financial difficulty, the secured creditors and the Board of
Directors may decide to put the company in a receivership. This means that company is in
liquidation. In this case a receiver manager and an administrator are appointed. A receiver
manager is a person who is entrusted by the creditors to manage the affairs of the company soon
after liquidation (Asic.gov.au, 2018). The Board of Directors also have to appoint administrators
to take over the management affairs of the company henceforth. As for Dick Smith, Joseph
Hayes, William Harris, Matthew Caddy and Jason Preston were appointed as voluntarily
administrators while Ferrier Hodgson, Jim Steward, Ryan Eagle and Jim Sarantinos as the
receiver managers. The administrators and the receiver managers were required to secure the
business operations of the company following the fall and also to investigate the issues

A Report on the Rise and Fall of Dick Smith 12
surrounding the collapse of the giant electronic retailer. The receivers and administrators were
also required to report their findings to the Australian Securities and Investment Commission
(ASIC) on the possible violations that were made by the company’s management leading that led
to the fall.
The Position of Dick Smiths Creditors Regarding the Receivership and Liquidation
There are two types of creditors according to the corporations Act, the secured and the
unsecured creditor. A secured creditor is an individual or a business whose money is owed by
another person for providing goods, service or finances but does not have security attached to it.
A secured creditor is the one who has lent funds and have a security attached to the money lent.
During liquidation, the secured creditors are paid first and the unsecured have to wait for the
secured to be settled. Moreover, secured creditors have a big role in voting for liquidation’s per
the provisions of Australia’s Corporations Act and AASB, the creditors of Dick Smith decided to
for the winding up of the company. This move was meant to facilitate recoupment of the losses
they had incurred in their lending’s to the company. It is estimated that the total amount that was
owed by Dick Smith amounted to more than $ 260 million. One of the administrators -
McGrathNicol took over as the liquidator for companies after the creditors had voted in favor of
their liquidation (The Sydney Morning Herald, 2018, np.).
The Duties of Directors During Insolvent Trading
Directors usually have a big role in ensuring that the company is always solvent and
will remain solvent. To do this, the directors have a duty to constantly assess the level of risk by
taking caution when expanding the business operation of the organization. As for Dick Smith, it