Discuss about the Accounting Theory for Case Study on Dick Smith.
Dick Smith Holdings Limited was a renowned company but it gets collapsed on January 2016 due to implementation of unethical accounting standards and for representing the financial reports falsely. This essay is a research regarding the various probable causes and reasons for collapse of the firm in such a short period of time. In addition to this, the stakeholders who have been mainly affected have also been highlighted here. Lastly, the accounting theories have also been discussed, implementation of which might have saved the firm from getting collapsed.
Dick Smith Holdings Limited was formerly known as Dick Smith or Dick Smith Electronics or DSE. It is a wide chain of retail stores of Australia that sold hobbyist electronic components, electronic project kits and consumer electronics goods. The particular company successfully expanded in New Zealand but not in many other nations. It is enlisted in the Australian Stock Exchanges and was founded in the year 1968 in Sydney (Dicksmith.com.au. 2016). Dick Smith is the founder of the firm and is headquartered at Chullora in Australia. As per the annual report of the company, it has been found that the firm possesses about 3300 numbers of employees (Dicksmith.com.au. 2016).
It has been found that the particular company Dick Smith got collapsed in the month of January in the year 2016 (News.com.au. 2016). The exact reasons behind this incident were unknown to everyone. However, the newly appointed administrator McGrathNicol identified the probable reasons and causes for the collapse of the firm Dick Smith in a very short period of time. The reasons that a McGrathNicol has recognized for the collapse of Dick Smith include – a series of enormous inventory buying failures that are united with an ill-thought out and expansive expansion. In addition to these, McGrathNicol also recognized some accounting issues within the operation and regulation of the firm. Thus, he identified that the firm’s accounts were running under losses for last six months and it has been found that till the month of December 31st of the year 2015, the specified firm made a loss of about $ 116.7 million (News.com.au. 2016). From the detailed analysis of the provided article, it can be said that there were various accounting issues within the firm Dick Smith. These include – firstly, a series of enormous inventory buying failures in combination with an ill-thought out and expensive expansion. As the expense of the sustainable growth of the organization increased, the business suffered to maintain its performance (Deegan 2013). It has been found that the expansion plans of Dick Smith ate up its surplus earnings and thus it needs significant borrowing at the similar period of time as with the change in the customer behavior and preferences, the company began to lose its market share. Moreover, the expansion plans of the company were unchecked and most of the decisions of inventory purchasing in early to mid 2015 was carrying too many stocks that were not marketable and thus was overestimated (News.com.au. 2016). Moreover, the cash receipts were also insufficient in order to meet the commitments. Anchorage purchased Dick Smith for $ 20 million from Woolworths and made $ 500 million after floating the amount on the stock exchange nine months later (News.com.au. 2016). Thus, Dick Smith collapsed with debts of about $ 390 million (News.com.au. 2016). In addition to this, the revenue growth of the firm was based on store growth and the commercial sales at low margins. The firm was left with a significant level of inactive and outmoded stocks. The firm was unable to generate sufficient sales or margin in order to improve the pressure of cash (Groot and Selto 2013). Furthermore, Dick Smith was unable to achieve favorable credit terms that affect the stock levels, store presentation and product mix. Additionally, the cash flow of the firm put pressures on the banking covenants by breaching that might not be remedied.
The stakeholders of the firm Dick Smith who have been affected by the collapse of the company include – ten former Dick Smith managers and directors of the firm who were called to court in order to answer the questions regarding the collapse of the organization (Bonin 2013). Additionally, the other stakeholders include – the representative of the private equity firm that is Anchorage Capital Partners’ Bill Wavish and Phillip Cave (News.com.au. 2016). Moreover, the creditors of the firm Dick Smith, staffs of the firm and the lenders of the company will receive some of the total they have owned and thus they are likely to suffer a significant shortfall. As per McGrathNicol, the unsecured creditors i.e. the gift card holders might also suffer due to the collapse of the company (News.com.au. 2016).
According to Deegan (2012), it can be said that the management of the company Dick Smith was motivated to manage the firm in the way they did was believe to earn more profit. The company was listed successfully in the stock exchange in late 2013. Thus, the management of the particular company expected to enjoy strong sales growth, underpinned by new lines of business and an expansion plan. On the other hand, the intention of the company was to increase revenue of the firm and also to generate profitability (Al-Htaybat and Alberti-Alhtaybat 2013). As per the detailed study, it can be said that the accounting issues like – high debt, enormous inventory buying failures, failed to utilize surplus earnings and unable to generate sufficient sales or margin are responsible for the collapse of the organization Dick Smith.
Opined to Baxter (2014), it can be stated that the particular case study regarding the collapse of the company Dick Smith can be explained through various accounting theories like – AASB Conceptual Framework, material statement, AASB Code of ethics and APES 110.
The AASB conceptual framework sets out the particular concepts that underlie the presentation and preparation of the financial statements for the external users. The objective of this framework is to assist the AASB in the promotion of the harmonization of the regulations, accounting procedures and standards in order to represent the financial statements (Aasb.gov.au. 2016). The other goal of this framework is to assist in developing the future accounting standards of Australia and also to review the present accounting standards. Additionally, the AASB framework assists the auditors of an organization to form an opinion regarding if the financial statements conform or not with the accounting standards of Australia. Moreover, this particular framework also helps the financial statements users to interpret the information that is provided in the financial statements prepared in conformity with the accounting standards of Australia (Aasb.gov.au. 2016). Therefore, it can be said by using this accounting standards, the auditors of the firm Dick Smith might have verified the financial statements as well as they could also conform the factor that whether the accounting department is following the standards or not. These might have saved the firm from getting collapsed as the framework identifies the objective of the financial statements, its qualitative features in order to determine the usefulness of the information and also to illuminate the concepts of capital and capital maintenance.
Materiality is considered as one of the elements of the fundamental qualitative features. As rightly stated by Biondi and Zambon (2013), any information and data is counted as material if misstating it or omitting it might affect the decisions of a user, as the decisions are made based on the financial information regarding a specified reporting entity. In other way round, it can also be said that materiality is considered as an entity-specific aspect of relevance that is prepared on the basis of magnitude or nature or both of the items of the financial report of an entity (Aasb.gov.au. 2016). Therefore, the auditors and the accountants of the organization Dick Smith should put focus on the particular element of the fundamental qualitative features that is materiality. Then this might have helped the auditors to understand or identify the misstated or omitted information in the financial reports of the firm and this might have saved the firm from getting collapsed.
On the other hand, the AASB Code of ethics imply the faithful representation of the financial reports that represent the financial condition of the firm along with its economic phenomena in both numbers and words (Aasb.gov.au. 2016). This represents the phenomena faithfully and the depiction would have three features – neutral, free and complete (Aasb.gov.au. 2016). Ethical or faithful representation implies that the financial information in the financial reports should be error free and without any omissions but it does not indicate that the information will be accurate in all aspects. Thus, it can be said that the firm Dick Smith should represent its data and information in the financial reports ethically. The organization should not falsely represent its losses for six months as profits as the faithful representation helps an organization from getting collapsed.
APES 110 is the code of ethics for the professional accountants, thus, the accountants of the firm Dick Smith should follow the ethics in order to avoid any type of confusion and error within the financial reports of the organization (Rutherford 2016). APES 110 standards are composed of both ethical and professional requirements that are needed to relate the control and performance of professional services with different kinds of assignments (Apesb.org.au. 2016). Thus, it can be said that if the professional accountants of Dick Smith had implemented and followed this APES 110 code of ethics, then the firm might not have suffered from getting collapsed.
Therefore, it can be said that among all the accounting theories, AASB Conceptual Framework, and APES 110 are the most important as the framework helps the accountant and auditors to understand whether the financial statements are conformed or not. In addition to this, APES 110 code of ethics guides the professional accountants to conduct and perform the professional services accurately.
Aasb.gov.au. 2016. Conceptual framework. [online] Available at: https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx [Accessed 5 Sep. 2016].
Al-Htaybat, K. and von Alberti-Alhtaybat, L., 2013. Management Accounting Theory Revisited: Seeking to Increase Research Relevance. International Journal of Business and Management, 8(18), p.12.
Apesb.org.au. 2016. Accounting Professional and Ethical Standards Board. [online] Available at: https://www.apesb.org.au/page.php?id=12 [Accessed 5 Sep. 2016].
Baxter, W.T., 2014. Accounting theory. Routledge.
Biondi, Y. and Zambon, S. eds., 2013. Accounting and business economics: Insights from national traditions. Routledge.
Bonin, H., 2013. Generational accounting: theory and application. Springer Science & Business Media.
Deegan, C., 2012. Australian financial accounting. McGraw-Hill Education Australia.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Dicksmith.com.au. 2016. Dicksmith.com.au. [online] Available at: https://www.Dicksmith.com.au/da/ [Accessed 5 Sep. 2016].
Groot, T. and Selto, F., 2013. Advanced management accounting. Pearson Higher Ed.
News.com.au. 2016. Truth about Dick Smith revealed. [online] Available at: https://www.news.com.au/finance/business/retail/mcgrathnicolâ€releasesâ€dickâ€smithâ€report/newsstory/ c2897a8cf8023b3f7490b7f16c2781c2 [Accessed 5 Sep. 2016].
Rutherford, B.A., 2016. Articulating accounting principles: Classical accounting theory as the pursuit of “explanation by embodiment”. Journal of Applied Accounting Research, 17(2), pp.118-135.