Corporate Failure of Dick Smith Holdings

Executive Summary

The main objective of the report is to understand the reasons behind the corporate collapse of Dick Smith and the outcomes of the failure of company that can be learned. The report gives brief details of the operations and the businesses that company is involved in. The strategic reasons and the neglecting accounting policies behind the failure of the company is explained. The accounting policies which are wrongly interpreted to hype the financial records of the company are analysed. The report also find out the governance issues that had a direct impact on the failure of Dick Smith.. The last part of the report contains the lessons that other companies can learn from the case dick smith so that these events of corporate failure does not happened again.

Introduction

The main reason behind the corporate failure of any organisation is due to the wrong utilisation of corporate governance policy and lack of transparency in accounting systems. Every organisation has a particular reason behind their failure but most of the companies fail in the business because they fail to maintain a good governance policy. Popular Australian  Retail giant Dick smith, failed to put up their business because of the strategic mistakes and  use of poor governance policy. There are plenty of reasons for the downfall of the company among which few major points are the absence of the accounting policies framed by the AASB code of conduct and the APES 110.  The company’s board and management makes several mistakes that lead to the sudden fall of business.

Discussion

Summary of dick smith holdings Pvt ltd

Dick smith holdings was an Australian retail store that deals in the business of selling consumer components relating to electronic and electronic project kits. The company started its business in 1968, Sydney by Dick Smith and it later sold more than half of the shares (60%) 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.

Technical/Strategic errors that results in the collapse of the company:

In spite 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 (Bhasin 2016).

The management of the company give more focus to earn more profit by adopting unfair means. The management fails to maintain all the compliances that are required to list the company in the securities market. The decision of the management to list the shares in the market is to raise fund from the market and invest in the business. The company started to buy more inventory without making proper research of the market demand. This leads to the situation that most of the inventories of the company become obsolete and the organisation fails to realise the minimum amount to cover the loss that they have incur due to over buying of inferior products.

Due to the mismanagement of the inventory, the company have to face the problems like high debt, high volume of inventory, failure to utilise the surplus earnings and unable to generate sufficient sales margin to sustain in the competitive market of electronic sector.

It has been observed that the expansion plan of dick smith has become a major strategic failure of the company. The decisions of the inventory purchasing in the yearly 2015 was carrying too many obsolete stocks that were not marketable and thus overestimated by the management. This over purchasing of obsolete stock has results in to the creation of debts of 390 million that the company fail to repay any more.

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).

The companies in the retail sector should have efficient inventory management system which the management of dick smith fails to adopt. The retailers should know the age of their inventory of individual products as the inventory aging reports give the insight of the information about which products are on high demand and which are in the poor categories. This system is considered to be very effective for the retailers to keep track of their inventory when they are purchasing new inventories in high number. Due to the lack of research in the inventory management process the top management of dick smith holdings failed to control the large number of inventories and for that reason most of their inventories become useless and the company has to suffer huge loss.

Accounting practices used by dick smith holdings

The unreliable accounting policy that has been adopted by dick smith has led to the downfall of the company. The management of Dick Smith 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 the lenders about the real position of the business (Griffin and Maturana 2016).

Dick smith neglected the fact that it has never followed the AASB conceptual rules in recording the financial records. The AASB sets the concept that frame the structure of the financial statements for the use of the stakeholders. The objective of the AASB is to bring transparency in recording the financial statements so that the company can prepare a financial statement that will give a true and fair view of affairs of the company.

Further the rules of the AASB framework also assist the auditor of the company to give their opinion regarding the fact that whether the organisation has followed all the provisions that are required to maintain while preparing the financial statements. The AASB also prepared framework, which will help the stakeholders to interpret the financial statements, which leads to bring more transparency in the financial statements(Ghaniabadi and Mazinani 2017)..

The code of ethics of AASB states that the company should faithfully disclose all the material misstatements in the books of accounts and thereby protect the interest of the stakeholders. The ethical or faithful disclosure means that the company should prepare the financial reports in such a manner that it does not contain any error and that all the transactions are adequately recorded in the books of account. The organisation should give more importance on the fact that it does not try to hide any important financial transaction that could have effect the interest of the stakeholders. The organisation should maintain ethics that ensure that it has prepared the financial statements that is free from any error of omission and it reveal the true financial position of the company (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 unfair 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(Chircop and Novotny-Farkas 2016).

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 matters that is accountable for the disaster 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
• Shareholders interest should be protected
• The stakeholders role
• Disclosure and transparency
• The board responsibility

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
• The independence of the board
• 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 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 reveals 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).

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 and the company 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).

Dick smith also violated the APES 110 code of ethics for the professional accountants .The company does not asked there auditor to follow the rules framed by the APES 110. The APES110 standard includes both the ethical and professional behaviour that the auditors should maintain while doing the audit work of the company. The audit work requires high standard of knowledge as well as ethical behaviour. As the auditor verify all the financial transactions of the company and help the management in framing the internal control system, so they are aware of any manipulation that has been adopted by the organisation. It is the moral and ethical duty of the auditor to mention all the facts related to the manipulation of the financial transactions in the reports that are prepared by the auditor (Paul and Paul  2018).

Therefore, it can be realised that other than all other accounting policies the AASB notional framework and the APES 110 are the most vital framework that helps the accountant and the auditors to prepare a transparent and fair financial statement. The APES 110 ethical code helps the professionals to perform the professional services efficiently (Nagaraju, et al. 2016).

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).

The lessons that can be learned from the failure 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 Pvt ltd 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).

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 of 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 but 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 raised 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.

Wrong utilisation 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 hide the company’s actual value. This overvaluation results in to the fall of the share price of dick smith from 2.2 dollars per share to 0.35 cents per dollar.so 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 economical market importance 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

Along these lines, it very well may be inferred that the purpose for the breakdown of Dick smith is expected to the non-upkeep of viable strategy to contend with the rivals in the market, nonappearance of straightforward accounting principles and great corporate governance policies. The individual from the governing body of the organization received all shy of practices that prompted the control of the financial transactions of the organization. The administration used to blow up the stock estimation of the organization, which makes disarray for the clients of the financial explanation. The organization, additionally controlled the marketing projection by chronicle the limits that dick smith gets from the provider. These are the causes, which results in to distortion of the estimation of the association, which unfavorably influences the financial specialists intrigue.

Recommendations

On the basis of overall discussion about the corporate failure of Dick Smith, it is obvious that without the proper use of accounting policies, strategic planning and Governance policies there will is no businesses which survives in the todays competitive market. Every accounting policy and AASB standards comes with benefits and limitations and if due care is taken then we can reduce limitations to some extent. Customer Service in today’s market plays a crucial role in building reputation and for ongoing of the business, so it is recommended that customer service should be given the top priority and management must know evolving means expanding it means how accurate your system is and how user friendly it is. Lastly to be recommended is the data information which company provides must be true and fair so that the end users know what exactly they are investing into and creditors must have an proper information they needed to lend the money. All these recommendations helps the organisations to operate their business in true and fair way with put manipulating the system for their survival in the market.

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