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Dick Smith collapse raises more questions for accounting profession

Via The Sydney Morning Herald : As the receivers, administrators and Australian Securities and Investments Commission work through the wreckage of Dick Smith’s collapse, it is increasingly clear the accounting profession has questions to confront.

In its administrator’s report, McGrathNicol sets out its opinion on the reasons for the business failing.

The role of rebates from suppliers, their influence on management purchasing decisions and their ability to mask the reality of earnings figures is clear. In 2014-15, $72 million was reported as earnings before interest, tax, depreciation and amortisation. With rebates and advertising subsidies excluded, this figure would be adjusted to a $119 million EBITDA loss.

The auditors signed off on Dick Smith’s accounts in August 2015. Voluntary administrators were appointed on January 4. The consequences of the accounting treatment of rebates is part of the story of Dick Smith’s collapse and will undoubtedly be a focus of further questioning. It’s not the only instance where rebates have been an issue.

This year, Target was in the spotlight for the way its accounting team had been treating rebates leading to inflated earnings. Wesfarmers’ investigation led to multiple staff leaving the business.

In Britain, the giant retailer Tesco was alerted to issues with the accounting treatment of rebates in 2014 after a whistleblower contacted the company’s general counsel. Tesco first flagged it as being an overstatement of first half profits but it was later found to have been an overstatement of performance for the previous three financial years. The Tesco case is still under investigation by the Serious Fraud Office and the Financial Reporting Council.

These issues around interpretation of accounting standards arise in multiple entities in numerous jurisdictions. They are well known and understood within the International Financial Reporting Standards (IFRS) framework.

The ubiquitousness of the problem and the seeming subjectivity of the global accounting standards in ensuring consistent and transparent application is likely of little comfort to Dick Smith’s 3300 former employees in Australia and New Zealand or the investors who are set to lose their money.

These issues around interpretation of accounting standards arise in multiple entities in numerous jurisdictions. They are well known and understood within the International Financial Reporting Standards (IFRS) framework.

The ubiquitousness of the problem and the seeming subjectivity of the global accounting standards in ensuring consistent and transparent application is likely of little comfort to Dick Smith’s 3300 former employees in Australia and New Zealand or the investors who are set to lose their money.

A new accounting standard clarifying the principles for revenue recognition is due to come into effect from 2018. In theory it should address some of the issues concerning the way rebates are treated.

However, solely relying on the continued introduction of new accounting standards is not what is required.

The accounting profession is bound by a code of ethics that requires accountants act in the public interest, and it’s there for a good reason. The code provides principles-based support for professionals as they navigate what can be complex business environments – to make decisions such as the treatment of revenue and inventory that not only comply with strict application of standards and the law, but also comply with the spirit of what they seek to achieve.

Yet each company failure has the potential to undermine the profession’s constant urging that a principles-based approach, rather than more regulation, is the best way forward.

There is no doubt that increased regulation eventually reaches a tipping point where the auditor’s focus shifts to compliance at the expense of the exercise of professional judgment.

But no matter how strongly we warn against a “tick-the-box” mentality and the potential for more adverse outcomes, the fact is regulators are getting increasingly frustrated and we seem intent on giving them every reason to intervene.

The accounting profession brings value and expertise to business and society more broadly and occupies a position of trust in the community.

Being entrusted with such a social licence comes with responsibilities and high expectations – for the profession’s sake, we need to have high expectations of ourselves.

Alex Malley is chief executive of CPA Australia

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