Retailers Charged With ‘Rebate’ Fraud As Dick Smith Case Continues
Dick Smith directors and former senior executives now face the real possibility that they could be charged with fraud offences, if investigators of the $400 million collapse of the mass retailer, decide that there is enough evidence relating to the manipulation of rebates and information to the market.
At the weekend detectives from Britain’s Serious Fraud Squad charged former executives of supermarket giant Tesco after a two-year investigation into rebates and incentives paid by suppliers to the retailer.
At the heart of the scandal was the misuse of rebates – financial incentives provided by suppliers to retailers. An insider blew the whistle on how the supermarket chain was overstating profits to the tune of £263 million by incorrectly booking rebates from suppliers.
The accounting scandal engulfed Tesco in the biggest crisis in its history, with $2.9 billion wiped off the company’s share price within hours of the supermarket admitting in September 2014 that it had overstated income from its suppliers.
At this stage there is no evidence to suggest that Dick Smith executives have committed offences however evidence being delivered under oath in the New South Wales Supreme Court could lead to charges that the market was misled.
According to Deloitte, who were Dick Smith auditors the company didn’t breach accounting standards.
The court was told that Deloitte undertook comprehensive testing on the accounting for vendor rebates.
A lot of the court proceedings so have been about dodgy practices that saw inventory spin out of control.
The Court also heard that Dick Smith was buying products because the suppliers would give them rebates. For example, they buy $10,000 of stock, the supplier gives them $1000 in rebates, they put that in the accounts as profit.
Non-executive director and former Woolworths chief financial officer Bill Wavis who was called to give evidence said that it was he who counselled former Dick Smith CEO Nick Abboud how to use rebates from manufacturers and distributors instead of having to borrow from banks or finance companies.
Wavish is no novice to the inner workings of retail. The now retired retailer who made millions from the acquisition and sale of Dick Smith has held key roles at Woolworths, he was the former chairman of Myer from where several Dick Smith executives were recruited.
Wavish was a director of the electronics empire until he retired in May 2015, eight months before it was placed into voluntary administration and then liquidation in July 2016, owing creditors $390 million.
According to an article by The Australian Financial Review, Wavish said maximising rebates involved getting extended credit from suppliers rather than banks during the Christmas period. “The skill is instead of needing to go to banks for these facilities, you go to the suppliers for those facilities and when you go to the suppliers you say, ‘I have a nice big Christmas order and I want a nice credit for this’.
“And instead of paying at the end of December, you are paying in at the end of January or early February, which gives you six weeks extra credit,” he said. “That’s what I taught and that’s what was done.”
The controversial rebate scheme being implemented by Dick Smith in an effort to shore up falling profits and poor cash flow is set to come under further scrutiny this week. At one stage Wavis, instructed Nick Abboud to fly to the 2015 CES show in Las Vegas in an effort to deal directly with Panasonic executives who he wanted to deliver higher rebates.
Earlier this year Wesfarmers subsidiary Target revealed profits had been deliberately overstated by getting foreign suppliers to pay cash rebates just prior to balance date.
It has triggered a debate around accounting standards, executive remuneration, particularly short-term incentives, and the value shift between suppliers to retailers, which has created tensions and allegations of bullying by some suppliers. It has also raised questions about innovation. If retailers are squeezing suppliers, leaving less money to reinvest, is the practice stifling innovation?