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Dick Smith, Ongoing Court Case Coverage

Former Dick Smith CEO Nick Abboud is back in the dock at the NSW Supreme Court today to continue to answer questions about the retailer’s collapse, with barristers suggesting he has not given straight answers regarding whether he wanted Deloitte auditors brought around to his view of the company’s accounting practices.

In this afternoon’s session, Abboud was shown an email from himself to Michael Potts regarding Deloitte and O&A rebates, where he suggested he may “change companies” if issues were not resolved.

He claimed he was “confused” at the time of the email and that he wanted the issue resolved. Barristers suggested that he instead had a strong view and wanted people changed if they did not share it, which he denied. Barristers suggested that he was adopting the theme of deflecting responsibility during the court case, when he did not deflect responsibility while running the company. He denied this, as well as assertions that obstacles raised by auditors should be overcome wherever possible.

He was asked if the statement regarding “changing companies” referred to changing auditors, and he said he did not recall despite being asked several times. Barristers charged that the meaning of his statement was obvious and that an “honest and truthful person” giving evidence would give a straight answer confirming that he was contemplating changing auditors. They said he was refusing to give straight answers to difficult questions, which he denied.

Abboud this morning said he tried to be very familiar with how the business was trading and the nature of the stock it carried. He told the court that there were stock clearance programs every two or three months.

He said he did recall times when stock was sold at a loss. Barristers put to him that he would have become aware of a buildup of stock that could not be sold at a profit or through clearance channels, which he denied – he said he only had a high level of detail, not a low level. He also said he could not recall a precise definition of “end of life” stock, or whether he would have known why stock was marked “end of life” at the time. He was shown a paragraph describing the classification from his own affidavit.

He was also shown end of life office computer stock for October 15, in a spreadsheet. The stock in question was all purchased less than 12 months prior to the spreadsheet being prepared, and barristers put to Abboud that it had been in the end-of-life category for longer than its age – meaning stock was purchased and put straight into end of life. Abboud said he never received the report, and buyers would have made those decisions. Barristers said that the effect – at least in the office computer category – would be that the stock would not reflect obsolescence, which Abboud confirmed.

The court heard that the stock had received significant rebates over the previous 13 months. Barristers suggested that some of the stock should have been considered and treated as Discontinued, rather than End of Life. Abboud said that, based on the months cover and methodology, End of Life would have been the correct classification to the best of his recollection.

He was also shown end of life accessories stock for the same date. Again the age of stock and time spent in end of life were close across stock, and barristers put to him again that the stock was purchased and put straight in end of life. Abboud confirmed that accessories typically sold at high margins and it was possible to make profit even at heavy discounts. He confirmed that in normal trading conditions he would expect to move the stock easily at a profit.

The court was shown an email from Bill Katis to Abboud in the same period regarding a requested plan to improve PB Connect sales.

This included significant catalogue discounts on products such as 3.5mm audio cables. One cable was discounted by 40% and yet maintained a 200% second margin. He was also shown a discount on batteries for the same period, which he said had a long shelf life.

One such pack of batteries was also selling at a 130% margin despite the discount. Abboud agreed that it was running at a high months cover and very new despite being in end of life. He confirmed that in normal trading times such high discounts would not have been needed.

Abboud was asked about an FAC meeting regarding 2014 accounts, and said he did recall suggestions around improving recording of O&A rebates as detailed in his affidavit.

He was asked if he believed at the time that the auditors thought company O&A rebate recording processes weren’t good enough and that they had taken a long time to check them, and that the processes should be improved, which he confirmed. The court saw an email chain between him and Michael Sullivan about the issue.

He confirmed that in November 2014 he believed correct O&A paperwork was important. He did not recall this responsibility being shifted from buying to finance. Another email suggested that Abboud wanted the O&A rebate audit process to proceed more smoothly in 2015, barristers said.

Another email from Abboud to Tomer Bar-Ami regarding O&A rebates directed him to make sure paperwork was 100% compliant.

The court also saw a paragraph from Dick Smith’s 2014 annual report regarding inventory.

Abboud confirmed that, when he signed off on the accounts, he believed that the first sentence in that paragraph was true, though attempted to bring up Deloitte as well.

He confirmed as well that accounts had to be true and fair in his view. He was asked if in 2013 when he signed the accounts, he adopted the management’s view of the accounting over Deloitte’s view, as they had differed. He confirmed this, in spite of his previous insistence that he relied on Deloitte for accounting information.

He was asked if he recalled his state of mind at the time, which he declined. He said he relied on Deloitte to review Fawaz’s accounting, but barristers pointed out that they had and he had not taken their advice despite them finding the accounting was wrong. He was asked if he recalled the Board and FAC turning their mind to whether or not to accept Deloitte’s view of the accounts over their own at any point, and he said he could not.

Abboud was shown a paper from 2014 on vendor rebates that was sent to Deloitte, as well as a transcript from a 2016 hearing confirming that he had approved it beforehand.

He said he approved the concept of going to Deloitte, but not the paper itself, which he claimed to have never seen. Barristers put to him that he had seen the document at the time, which he denied. He confirmed that price protection rebates were also negotiated over and above trading terms, but said they were not called O&A rebates. He said he was not aware of the content of the paper, as it was never sent to him. Barristers asked if he approved of Michael Potts attempting to persuade Deloitte to come around to the company’s view of accounting, and he said he approved a discussion rather than persuasion. He said he was not involved in Potts’ meeting either.

The court saw a letter to Deloitte from 2014, signed by Abboud.

Barristers questioned Abboud about this statement and bookings at the time, in particular surrounding income from a conference in July 2015 that was booked as part of 2014 income. Barristers charged that he did not care if the document was true or false when he signed it, and he said he had relied on Potts and Mills’ advice when doing so. Barristers asked if he had assumed they were right or if he had checked himself, and he said he did not check himself because he had “a whole finance team” to check it. He said Potts was comfortable for him to sign the letter, though he did not recall what Potts had said specifically. Barristers charged that Deloitte wanted both his and Potts’ signatures, and would not have asked for his signature otherwise.

Abboud confirmed that Potts had in 2015 sought legal advice over the private label uplift, though he said he could not recall the detail. He denied directing Potts to seek legal advice. He was asked if he was aware that the company was seeking legal advice on revising the process on private label rebates to include a third party.

An email from private label director Mario Cocciolone to Abboud detailed a recommendation by Potts that advice from accounting firm PKF Lawler should not be put in writing because it could cause “issues” with Deloitte.

Abboud was asked what he thought these “issues with Deloitte” could have been referring to, but he said he did not remember. Barristers charged that he did not want Deloitte to see the advice from PKF Lawler on trading terms. He was asked why he did not write back and request the opinion in writing to show the auditors, and said he did not recall. It was put to him that the reason was that he would have wanted to conceal the advice from Deloitte and that thus he was not relying on Deloitte with regard to uplifting private label invoices.

Abboud was taken back to his testimony from last week regarding whether he would terminate employees found to be making deals with companies to mark up their products so Dick Smith could claim inflated O&A rebates. He was asked what “code of conduct” the buyers breached, to which he responded that the whole point of O&A was to gain marketing support. Barristers asked if there was a published code of conduct, which Abboud confirmed. He was shown an email from Potts to himself regarding a call from audit partner David White about the issue, and an attached policy document.

He was asked if he told Potts to draft a policy, and he said he did not remember, though he said he recalled the incident “at a high level”. It was put to Abboud that the incident was similar to the private label policy, with both involving suppliers uplifting prices to generate O&A. Barristers noted that Potts in his email did not point out this similarity.

Abboud was asked if he thought this policy was serious, and how it would affect the uplift he had been told was going on. He said that buyers signing the document would be confirmation that they were not involved in uplift as they agreed to the terms of the policy. He was asked which term in the policy specifically prevented this practice, and after pointing to the highlighted paragraph, was asked how it prohibited O&A uplift. At this point an objection cut off this line of questioning.

The plaintiff’s barrister instead charged that Abboud had known about the uplift practice despite his assertions to the contrary. He was returned to an email shown last week regarding a contingency meeting to make up a $2 million profit shortfall.

It was put to Abboud that “the only sensible explanation” for point 2 was to collect extra O&A by changing net terms in supplier agreements.

Abboud has now been excused, with CFO Michael Potts not to be called – his evidence will be documentary in nature. The hearing has been adjourned until 10am next Monday, November 2.

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