Dick Smith accused of inflating profits before collapse

Dick Smith's former directors have been accused of deliberately inflating earnings prior to the company's collapse.

Lawyers Norton Rose Fulbright, representing the receivers Ferrier Hodgson, sent letters to the electronic reseller's former directors alleging a number of "wrongful acts", according to the Australian Financial Review.

The accusations include deliberately buying excess stock to inflate earnings from recording supplier rebates as profits or a reduction in marketing expenses.

Dick Smith is also alleged to have private label suppliers withdraw invoices without rebates and reissue them with rebates.

The letter said that Deloitte had questioned Dick Smith about the rebates in September last year, identifying $180 million in unsellable stock. A month later, Dick Smith was forced to write down $60 million on inventory.

While retail sales underperformed, Dick Smith's directors used commercial sales to cover weak store performance, the receivers claimed.

Dick Smith's Hong Kong subsidiary was allegedly used to facilitate commercial sales, which made no or minimal profit, along with negotiating non-traditional sales for extra rebates.

The receivers also alleged that secured creditors National Australia Bank and HSBC, which are owed approximately $140 million in debt, were misled into providing loans to Dick Smith based off incorrect financial reporting.

Norton Rose Fulbright has been contacted for comment. Dick Smith's online shop is now owned and operated by Kogan.

Administrators report imminent

Mystery still surrounds exactly how the retailer, which reported earnings of $79.8 million in 2015, fell into administration with approximately $400 million in debt.

Receivers Ferrier Hodgson's report revealed that the company owes nearly $10 million in employee entitlements, however, individual employee names were redacted.

Administrator McGrathNicol previously stated all employee entitlements would be paid in full, but stockholders would miss out on any return on their investment. Dick Smith had issued $160 million in stock before it collapsed.

All other unsecured creditors names are yet to be released. The administrators report is expected to be released on Wednesday.

Directors to be interrogated

Ferrier Hodgson confirmed that it would examine Dick Smith's former directors in public proceedings as part of its investigation.

Directors confirmed to be called up for questions include chief executive Nick Abboud, chief financial officer Michael Potts, chairman Robert Murray, former chairman Phil Cave, company secretary David Cooke, and non-executive directors Jamie Tomlinson, Lorna Raine and Robert Ishak.