AIS The directors and managers of consumer electronics chain Plextronix have been accused of inflating earnings to

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Question:

AIS

The directors and managers of consumer electronics chain Plextronix have been accused of inflating earnings to meet market expectations by deliberately buying too much stock, recording rebates[1] from suppliers as profits and disguising weak retail sales with low-margin commercial sales.

In their report to creditors, Plextronix's administrators[2] outlined many alleged "wrongful acts" that contributed to the retailer's demise.

Craig Delahue, appointed as the receiver and administrator alleged that the banks were misled into providing loans to Plextronix. Mr Delahue foreshadowed claims against Plextronix executive directors for misleading and deceptive conduct. He alleged that directors and officers breached their duties by failing, for example, to have proper reporting systems and controls in place.

Plextronix collapsed in January 2016 owing more than $400 million to creditors, including about $140 million to NAB and HSBC, and depriving consumers of $20 million in dishonoured gift cards.

Craig Delahue told creditors that 10 former Plextronix directors and managers would be examined in the NSW Supreme Court and questioned about their role in what appears to be a well orchestrated financial scheme when Plextronix was purchased from Megamarket Capital Partners in September 2012 for $94 million and then floated[3] 15 months later, in December 2013, for $520 million, making a five-fold return on its investment.

[1] Rebate is a form of buying discount and is an amount paid by way of reduction, return, or refund that is paid retrospectively. It is a type of sales promotion that marketers use primarily as incentives or supplements to product sales.

[2] Voluntary Administration is a process where an insolvent company is placed in the hands of an independent person who can assess all the options available, and generate the best outcome for a business owner and for creditors.

[3] The term ‘float’ refers to the regular shares a company has issued to the public that are available for investors to trade. Floating a company on the stock market involves selling a percentage of your company in the form of shares to stock market investors. These could be institutional investors or private investors/ individuals.

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According to the receivers[1], from at least July 2014 Plextronix's management undertook a program of "maximizing" rebates by suppliers. This involved buying excess and unsaleable stock and recording certain types of rebates as an increase in profits or a reduction in marketing expenses rather than spending the rebates on marketing and customer discounts.

Any excess rebate was recorded as a reduction in the cost of sales in the month that the rebates were negotiated (potentially before the sale of the stock and before the receipt of the agreed support). This practice was in breach of accounting standards. This practice occurred undetected because the executive directors and non-executive directors of Plextronix did not have systems in place to ensure adequate reporting or management of stock purchases.

Plextronix documents showed that the Board and management were concerned about the market's perception of the company's performance and its financial indicators in the short term. By reason of Plextronix's treatment of rebates (in breach of accounting standards), Plextronix was able to 'borrow' profit from a subsequent year.

Plextronix also engaged in a practice of "uplifting" invoices[2] for private label goods from as early as December 2014. The scheme involved suppliers withdrawing invoices they had previously issued without rebates and issuing new invoices with rebates, which led to an equivalent increase in the cost of the stock. These rebates were booked as a reduction in marketing costs, even though the invoice showed a direct link between the (increased) cost of the stock and the rebate. Under accounting standards, the rebates should have been treated as a reduction in the cost of inventory. Non-executive directors were unaware of this behavior but took no steps to ensure that a comprehensive internal control system was in place.

A receiver is a person appointed by a court, government regulator, or private entity to manage debt consolidation for a company.

[2] I.e. increasing the values stated in the invoices.

a) Explain the major underlying ethical dilemma concerning Accounting Information Systems (AIS) in this case. Your answer must explain why the behavior you have identified is unethical. [5 marks]

b) The parties involved had multiple motivations for the actions described in the case. Identify four (4) parties (stakeholders) that may have been harmed, and the interest each had that was in conflict with the interests of at least one other party. You must explain four (4) separate conflicts in this answer. [HINT: It is recommended that you answer this question in a format similar to: “X’s desire to… was in conflict with the interest of Y to…”]. [10 marks]

c) Senior managers will no doubt claim that the “uplifting” and other practices described in the case were motivated by a desire to ensure that shareholder wealth was maintained, which is a basic principle of the COSO Enterprise Risk Management framework. Explain how deficiencies in the implementation of two (2) of the seven (7) elements (principles) underlying the Internal Environment (the top level of the COSO ERM framework) may have contributed to the problems described in the case study. [6 marks]