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Accounting Ethics Of Dick Smith Electronics

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Question:

Discuss about the Accounting Ethics of Dick Smith Electronics.
 
 

Answer:

The company which is formerly called the Dick Smith, Dick Smith Electronics or DSE was till the year 2016, was an Australian wide chain of the different retail stores that went on to sell the consumer electronic goods. It also sold hobbyist, the components of electronics and the various electronic project kits. The chain went on to expand successfully into the country of New Zealand but was very unsuccessful in the countries. The company was founded in the country of Sydney in the year 1968 by Dick Smith and was also owned by him and his wife until they sold the company Woolsworths limited during the year 1982.

During the year of 2012, the company was acquired by the company anchorage Capital Partners and the company was floated by them in the Australian Securities Exchange by the onset of the next year. By the end of the year of 2015, December month, the price of the share of the company fell by 80% and during the month of January 2016, a halt in the trading of its shares was requested. Then during the year 2016, January, the company dick smith Hodgins Limited along with its associated companies went under administration by its creditors. During the month of February of the same year, a statement was released by the receivers of the company for some detailed information and that led to the closure of all of the stores of the company since the efforts of selling the stores of the company failed many a times. About 2460 staff in the country of Australia along with about 430 in the country of New Zealand went redundant due to the closures of these stores. The last of the store of the company was closed in May 2016.

In the same month and year, the online retailer Kogan.com purchased the company’s brands, trademarks, intellectual property along with the online business of the company in the countries of Australia and New eland. Then Kogan.com launched the company as the online only technology retailer in the countries of Australia and New Zealand.

Then during the month of July, 2016, the company was placed for liquidation in order to settle the money that was payable by the company to the creditors[1]

In respect of the economic theory, the failure of the Australian retailer is somewhat in line with the dynamic economy. The businesses today do utilise the various different economic resources as efficiently and effectively as possible due to the intense competition that the company is facing today.

The failure of the company has led to the following opportunities to be considered:

  • The diverse financial disclosures and the non-timely information for making the investment decisions
  • The uneconomic results from the administration and the management of the company due to the over exerting power of the creditors
  • The delays in providing the financial information from the management.
  • Over serving by the insolvency professionals
  • Conflicts between the interest and he soft landings of the directors of the failed companies [2]

The company had many competitors such as JB Hi-fi, Harvey Norman etc. the company offered many deep discounts well before the time of Christmas but even then, and the company was not able to improve its sales. And it was well below the expected ones. But the company was expecting hug profits as could be seen from the prospectus of the company [3]

But even then, the investors still believed that the company was worth an amount of $ 520 million when it was just worth of $20 million. The investors and the other regulators looked long and hard towards the private equity floats. The investors need to do their homework before they invest their hard earned money in any business [4]

 


There have been many of the public hearings into the collapse of the electronics retailer and it has revealed many of the accounting questions relating with the rebates that are being offered by these companies. But this is not the only company which is accused of chasing the fees for the purposes of inflating the profits

The following led to the failure of the company:

  • The demand in the consumers electronics market is very high and hence there are many changes that takes place in the patterns of the consumer demands [5]
  • The company had a very strong bonding in the market which was mush greeter than enjoyed by its competitors and hence, there is also a higher cost base. This is considerable exposure to and also reliance on the products market which is very fast moving and enhanced.
  • The company was losing its share in the market and it was also undergoing a reduction in the sales. The growth in the revenue was based on the strong growth and also, the commercial sales had very lower margins of profit.
  • The expansion plan of the company required some financial commitment and also utilised many of the cash resources and required a supplier commitment and also required the borrowings to be made from the bank [6]
  • The decision of inventory that were made in the environment were not in line with the demand of the consumers and the company was left with a major amount of obsolete and an inactive stock and this required a major write-down.
  • The clearance sales were not able to generate enough sales or the margins alleviated the pressure of cash [7]
  • The company had unfavourable sales which led to a negative impact on the levels of the stock, on the product ix and on the presentation of the store.
  • The pressures on the cash flows led to the banking covenants which caused the breach that could not be remedied [8]

There is a need for an accounting standard that are able to clarify the principles of revenue recognition which would be applicable from the year 2018, in theoretical terms, the standard must address some of the issues that concerns the way the rebates are treated in the books of accounts.

But also, it is also true that solely relying on the new accounting standards is not required [9]

The profession of accounting is covered by the code of ethics which requires the accountants to act in the public interest and the main reason behind the same is the fact that the code provides some of the principles that rely on the support for the professionals since as they navigate the complex business for making the decisions. These are the decisions that include the treating of the revenue by the companies and strict adherence to the following of the requirements as have been laid down by the accounting standards.

 Each one failure of the company would undermine the constant urge of the principles based approach rather than the regulation which is the best way of forward.

The profession if accounting brings in value and expertise to the business and also to the society which occupies a place of trust in the community today. When a social license is being given to the company, then there are high expectations from that company. In the case of this company too, the man issues were the following:

  • The parties never agreed on the book value of the inventory of the Dick smith at the time of the sale transaction
  • The parties did not have proper accounting for that transaction

The company claims that Woolsworth made a very small gain after undergoing a series of devaluation and provisions. Following this, during the year 2015, the company surprised the market by stating that it required a writing down of the inventory of $ 60 million and this even when the company’s financial statements were audited just 3 months before ad there were no adverse findings by the auditor.

Then in the receivership, the secured creditors decide whether the offer of selling the business would be acceptable or not. The banks and the receivers solely have the information pertaining this offer. In case the loan goes into default, then the banks would increase the return by the way of running down the meter on the penalty interest. In the case of dick Smith, it has already been more than 60 days since the receivers and the administrators had been appointed but the receivers and the shareholders had no information relating with the same. The meeting of the secured creditors was delayed [10]

The reciters extended the time that was given to the company in order to submit the report due to the ASIC. The creditors and the shareholders had no information. The Australian insolvency firms do not generally produce the financial statements that do not lead to the shareholders in understanding as what has happened to the company since the company was last reported as going concern [11]

 

References:

ABC News  Dick Smith CEO Abboud resigns, Grover to take over, 2017.

Australia, D.  About Us | Dick Smith, 2017.

Business Insider Australia. Dick Smith creditors have put the electronics retailer into liquidation, 2017.

Fortune.com. The 5 Biggest Corporate Scandals of 2015, 2017.

Malley, ADick Smith collapse raises more questions for accounting profession, 2017.

NewsComAu. Report into Dick Smith collapse reveals management failures, 2017

Radio National . Dick Smith collapse shines a light on retail accounting practices, 2017

SmartCompany . Dick Smith collapses into voluntary administration – SmartCompany, 2017

The Conversation . The ugly story of Dick Smith, from float to failure, 2017

The Conversation . The ugly story of Dick Smith, from float to failure, 2017

True, D. Dick Smith fears turn true, 2017.

Australia, D. (2017). About Us | Dick Smith. [online] Dicksmith Australia. Available at: https://www.dicksmith.com.au/da/about/ [Accessed 8 May 2017].

The Conversation. (2017). The ugly story of Dick Smith, from float to failure. [online] Available at: https://theconversation.com/the-ugly-story-of-dick-smith-from-float-to-failure-55625 [Accessed 8 May 2017].

Radio National. (2017). Dick Smith collapse shines a light on retail accounting practices. [online] Available at: https://www.abc.net.au/radionational/programs/breakfast/dick-smith-collapse-shines-a-light-on-retail-accounting-practice/7883492 [Accessed 8 May 2017].

Fortune.com. (2017). The 5 Biggest Corporate Scandals of 2015. [online] Available at: https://fortune.com/2015/12/27/biggest-corporate-scandals-2015/ [Accessed 8 May 2017].

News. (2017). Dick Smith CEO Abboud resigns, Grover to take over. [online] Available at: https://www.abc.net.au/news/2016-01-12/dick-smith-ceo-nick-abboud-resigns/7083026 [Accessed 8 May 2017].

SmartCompany. (2017). Dick Smith collapses into voluntary administration - SmartCompany. [online] Available at: https://www.smartcompany.com.au/finance/dick-smith-collapses-into-voluntary-administration/ [Accessed 8 May 2017].

NewsComAu. (2017). Report into Dick Smith collapse reveals management failures. [online] Available at: https://www.news.com.au/finance/business/retail/mcgrathnicol-releases-dick-smith-report/news-story/c2897a8cf8023b3f7490b7f16c2781c2 [Accessed 8 May 2017].

Malley, A. (2017). Dick Smith collapse raises more questions for accounting profession. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/retail/dick-smith-collapse-raises-more-questions-for-accounting-profession-20160721-gqagz5.html [Accessed 8 May 2017].

Malley, A. (2017). Dick Smith collapse raises more questions for accounting profession. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/retail/dick-smith-collapse-raises-more-questions-for-accounting-profession-20160721-gqagz5.html [Accessed 8 May 2017].

true, D. (2017). Dick Smith fears turn true. [online] Skynews.com.au. Available at: https://www.skynews.com.au/business/business/national/2016/01/05/dick-smith-banks-appoint-receiver.html [Accessed 8 May 2017].

( The Conversation. (2017). The ugly story of Dick Smith, from float to failure. [online] Available at: https://theconversation.com/the-ugly-story-of-dick-smith-from-float-to-failure-55625 [Accessed 8 May 2017].

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