Dick Smith accused of inflating earnings to meet performance expectations

Patrick Hatch
July 12 2016
The Age
Dick Smith’s top brass have been accused of deliberately buying too much stock to inflate earnings by booking supplier rebates as profits, while using commercial sales to cover up weak in-store performance.
Lawyers for Dick Smith’s receivers and bankers have sent letters to the defunct retailer’s former directors and managers alleging a series of “wrongful acts” that contributed to its collapse in January, according to The Australian Financial Review.
The letter accuses Dick Smith management of buying excess stock and booking the supplier rebates, which are for marketing or customer discounts, as an increase in profit or reduction in marketing expenses, the AFR reports.
The letter, from Norton Rose Fulbright, says the company was buying stock based on the rebates it could book, rather than customer demand, the AFR reports.
The alleged behaviour began in at least July 2014 and was motivated by a “concern and focus” on meeting or exceeding the performance expectations set out in Dick Smith’s prospectus.
Dick Smith is also alleged to have private label suppliers withdraw invoices they had issued without rebates and reissue them with rebates and an equivalent increase in the cost of the stock, the AFR reports.
The receivers also reportedly raised concerns that Dick Smith may have used sales to commercial customers to cover up poor like-for-like sales growth at stores.
Dick Smith made no or minimal profit from commercial sales but they helped boost its sales figures, the AFR reports.
The letter alleges that Dick Smith’s Hong Kong office was used to facilitate commercial sales and negotiate on “non-traditional” items such as suitcases, which included extra rebates.
The letter reveals that auditor Deloitte questioned Dick Smith’s use of rebates in September 2015, and by October, consultants has identified about $180 million of “problem inventory” that needed to be written down by $60 million.
Dick Smith announced the $60 million writedown a month later, leading to a 70 per cent crash in its share price.
The iconic retail chain owed more than $400 million to creditors, including about $140 million to National Australia Bank and HSBC, when it collapsed in January, just two years after its $520 million float.
Ten former Dick Smith directors and managers will face the NSW Supreme Court from September to be grilled by receiver Ferrier Hodgson on the collapse.
Administrator McGrathNicol’s report into the collapse is due out on Wednesday.