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Deloitte dragged into Dick Smith directors’ legal battle

Deloitte dragged into Dick Smith directors’ legal battle

The consulting firm comes under fire over its auditing of Dick Smith's financials

Credit: Dreamstime

Deloitte Touche Tohmatsu has been drawn into the legal battle being waged between the receivers of failed retailer, Dick Smith, and its former directors.

Dick Smith Holdings’ (DSH) receivers, Ferrier Hodgson, in conjunction with National Australia Bank (NAB) and HSBC – two of Dick Smith’s largest creditors – mounted a legal action in March against former directors and executives of the collapsed electronics retailer in a damages claim worth millions.

Broadly speaking, the legal action alleges that Dick Smith’s earnings in 2015 were inflated thanks to the use of a “rebate maximising” strategy that compelled managers to make stock purchasing decisions based on rebates instead of customer demand.

The collapse of the retailer in early 2016, along with the closure of its stores, followed close behind a $60 million inventory write-down revealed in late 2015. The rebate-focused inventory buying policy was one of the one of the main triggers of the company’s collapse, according to a subsequent creditors’ report.

The claim filed against the former directors, including former Dick Smith CEO, Nick Abboud, and former CFO, Michael Potts, allege that the company’s directors and officers breached their duties to Dick Smith Holdings – as a publicly-listed company – through failures associated with a rebate-driven buying policy.

“While under the control of its former directors and officers, DSH adopted a policy for the DSE Group of seeking to obtain and maximise certain types of rebates from suppliers,” the receivers’ claim against the former directors stated.

“This policy led to the purchase of inventory on behalf of the DSE Group being driven by the rebates available, rather than being driven by current or likely future customer demand.

“A substantial part of the inventory purchased because of this policy was unsaleable at all or for an appropriate margin within an appropriate timeframe because there was no or inadequate customer demand (Bad Stock),” the court documents allege.

Ultimately, the receivers allege that, despite the potential problems arising from this so-called “Bad Stock”, the company’s directors and officers failed to put in place and implement any adequate procedures, practices or systems to monitor the purchase and impairment of inventory by the Dick Smith Group.

Now, thanks to fresh cross-claims filed by representatives for at least two of the company’s former executives, Abboud and Potts, the firm charged with auditing the retailer’s financials in 2014 and 2015, Deloitte Touche Tohmatsu, has also been drawn into the line of fire.

According to a cross-claim filed with the NSW Supreme Court on 14 July, if Abboud is found liable to the charges laid against him by Dick Smith Holdings’ receivers, the former CEO’s legal team will launch cross-claims against Deloitte for “damages and/or contribution”.

Until now, Deloitte’s involvement in the case had remained relatively peripheral, and the firm had escaped being officially joined in the legal action. Now, with the latest cross-claims from the former directors’ camp, the firm could see itself pulled front and centre in the ongoing legal battle.

Abboud’s cross-claim against Deloitte broadly alleges that, during the period in question – specifically the 2014 and 2015 financial years – the firm, in its capacity as the auditor of Dick Smith’s financial reports, did not raise major issues with the company’s accounting treatment of supplier rebates or its associated inventory controls.

“The representation is implied from Deloitte’s description of the FY15 Audit Rebate Procedures…and the fact that Deloitte, having performed the FY15 Audit Rebate Procedures, did not identify and report any material deficiency in the controls and systems in place at DSH in respect of recording, calculating and recognising rebates,” the court documents stated.

Ultimately, if the allegations against Deloitte made by Abboud’s legal team can be established in court, it could open the door for the consulting firm to come under fire for at least some of the factors leading up to the electronics retailer’s demise.

For its part, Deloitte remains confident of its position.

“Deloitte stands behind its audit and will continue to do so,” a spokesperson for Deloitte told ARN. “We won’t comment further while the matter is before the court.”

The case continues.

Meanwhile, the legal firm representing hundreds of the failed tech retailer’s shareholders, Bannister Law, revealed on 20 June that it had commenced the legal process to file a class action against DSHE Holdings (receivers and managers appointed) (in liquidation) in the Supreme Court of NSW.

It is understood that nearly 1,000 people have registered to take part in the action.

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