Deloitte In The Cross Hairs, As Dick Smith Case Rambles On

Two years after one of the biggest consumer electronics retail failures in Australia, Deloitte are still trying to extract themselves from the $400M Dick Smith train wreck but they are having no luck before the Courts.

NSW Supreme Court Justice Michael Ball has ordered Deloitte to supply a further laptop containing data of its audits of failed retailer Dick Smith after failing to strike out claims made in two shareholder class actions that allege the firm’s accounting work on the retailer was negligent.

The order issued last month is just one of several actions that remain in the NSW Courts relating to the multimillion dollar collapse of the retailer whose former directors stand accused of not disclosing the full facts relating to the collapse of the mass retailer.

Currently shareholder action is being taken against former CEO Nick Abboud and ex-CFO Michael Potts they stand accused that Dick Smith management did not correctly account for its inventory especially house brand products that executives such as former Marketing Director Neil Merola said was “stacking up in their warehouses” when it did not sell through.

Nick Abboud former Dick Smith CEO leaves the NSW Supreme Court

ChannelNews exclusively revealed at the time that the retailer had three years of supply of batteries.

Inventories at the retailer increased from $171 million to $293 million between June 2013 and June 2015. Dick Smith also wrote down $60 million of inventory in late 2015.

As a result of failures to disclose information in their financial statements the former directors are accused of not giving a true and fair view of its financial position in the 2013, 2014 and 2015 financial years.

The order over the laptop, issued on April 24, came after the court ruled against the firm’s application earlier in the month to strike out the claims, saying they did not have “sufficient specificity” and did not outline what the firm should have done.

The class actions allege that had Dick Smith’s “financial statements been corrected, or a qualified audit opinion issued in respect of them, [the retailer] would not have floated and been listed on the ASX and [the class action shareholders] would not have acquired their shares” according to the Financial Review.

The NSW Court has been told that Deloitte’s failure to identify these inventory issues during its audits of the company meant the firm failed to conduct its audits according to the required auditing standards and that they did not exercise reasonable skill and care, and engaged in misleading and deceptive conduct, according to the class actions.

Deloitte wants the court to strike out certain allegations against the firm because they did not have “sufficient specificity” and did “not identify what it is Deloitte ought to have done”, according to the judgment by Justice Ball.

Justice Ball dismissed the strike-out application because the case the firm must fight “emerges sufficiently from the pleading so that it will not be caught by surprise”.

He added that “Deloitte knows that it needs to consider the requirements of the Auditing Standards that have been identified by the plaintiffs [those bringing the class actions] and consider the question whether any testing it did in relation to [inventory] provisioning met those standards”.

Justice Ball wrote that “it is not necessary for Deloitte to know what provision the plaintiffs say ought to have been made. It is sufficient that they know (which is obvious from the pleading) that the provision would have been sufficiently large to cause the accounts to be corrected or qualified because the misstatement was material”.

Currently there is an abundance of funds to continue the legal action against those involved in the collapse of Dick Smith.

The Findlay shareholder class action is being funded by Vannin Capital and run by Corrs Chambers Westgarth.

The Mastoris shareholder class action is being funded by Investor Claim Partners and run by Johnson Winter & Slattery.

There are two further claims over the collapsed retailer, by the receivers against the retailer’s ex-CEO Mr Abboud and ex-CFO Mr Potts and non-executive directors, and by NAB and HSBC against Mr Abboud and Mr Potts.

The four claims are scheduled to be heard together in February 2020.

The defendants in each of the four proceedings have also filed cross-claims against Deloitte.