Question

Conduct research about the ‘Centro case’, described in the Australian Financial Review article by Adele Ferguson: “Dick Smith directors hit with legal action from receiver”.

Using the AREA framework, find parallels of the situation of Dick Smith with the Centro case. Discuss with your group in class, the role of the board of directors as well as their relationship with the executive management of a company and consider whether directors should be held personally liable in these cases.

ANALYSE:(30-50words):Identify the issue and why it matters. Detemine what you find out.

RESAERCH:(200-250 words): Present relevant facts and evidence, or issues.

EVALUATE & ANSWER:(200-250 words): Provide your opinion of these themes or issues you have identified, justified by the evidence you have gathered and evaluated.

Answer 1

Identify the issue and why it matters. Determine what you find out:

• What did the Centro directors do wrong
• What did the D Smith directors do wrong
• What was the role of the directors in each case
• How was this role breached
• Who is liable in each case
• What were the punishments

Present relevant facts and evidence, or issues

Centro Case:

Judge found that directors breached their duties when they approved financial statements for 2006-07 without disclosing that Centro was required to repay billions of debt within months The debts no disclosed in the financial statements were well known by directors Error included $1.1 Billion debt that arose due to misinterpretation of the accounting standards for short-term deb .The director’s of Centro did not examine closely the final reports, and claim they only need financial literacy not a working knowledge of accounting standard.Director’s didn’t recognise that almost $3 billion of liability that had to be repayed within 12 months was a current liability, but claimed the accounting standards and recently changed making it difficult to understand.

Company CEO and CFO failed to make declaration that financial records were proper and complied with relevant laws Final verdict penalised CEO with fines, CFO was disqualified for two years from managing corporations, and 6 other directors were ordered to pay court declarations and costs.

Mr D Smith Case:

Directors sued by receivers trying to recover hundreds of millions of debt from creditors .Directors allegedly failed to put in place good systems for rebates and inventory management.Also alleged that 2015 earnings were inflated by managements pursuit of rebate stock creating stockpiles of unsellable products.Directors allegedly didn’t following accounting standard AASB102 by using rebate system to report higher Gross profit and net profit

The auditor, Deloitte said that D smith complied with accounting standards in 2015

Director’s duties:

• Duty to exercise care and diligence
• Duty to act in good faith
• Duty to disclose conflicts of interest
• Duty not to misuse position
• Duty not to misuse information
• Duty not to trade whilst insolvent
• Duty to act in accordance with other provisions of the CAC Act or enabling legislation of a commonwealth authority

Provide your opinion of the themes or issues you have identified, justified by the evidence you have gathered and evaluated.

Mr D Smith and Centro case are both similar in regard to their implications against directors. Both cases are implying the standard of knowledge and care given by a director should be high enough that any mistakes approved by them are now their personal liability. While in the case of Centro, it was the negligently misidentification of $3 Billion of liabilities as non-current that led to the charges; in the D Smith case it was the intentional use of buying up rebate stock with little saleability to reduce costs and increase profits that led to D smith’s downfall. The role of the directors in the Centro case was to approve financial reports and ensure they were accurate representations that followed the accounting standards.

While the judge said the directors didn’t act dishonestly, it was clear they should have known that a liability to be repaid within 12 months is classified as current.

The role of the directors in the D smith case was to appropriately manage inventory and debt to keep the company solvent and profitable. Instead they bought up bad stock at rebates to inflate profits.By misinterpreting their current liabilities as long term, the directors in the Centro case breached their duty to exercise care and diligence; as you do not require expertise on accounting standards to know what a current liability is.By promoting a rebate driven buying strategy for stock, the directors of the D smith were potentially breaching their duty to act in good faith, as they were buying up stock that would look like a smaller expense on the balance sheet, but at the ultimate detriment of sales.

While the directors in the Centro case should clearly be held liable for such a clear mistake and breach of duty; the director’s of D smith aren’t as clearly liable. There were many checks and balances, including professional auditors who gave them the go ahead for their financial reporting and dividend payment.