'What was the role of the auditor?'

"If finances are found to have been mis-stated in prior periods the question will be asked 'What was the role of the auditor'," one senior audit partner said.

Deloitte has been Dick Smith's auditor since 2013. Prior to that, Deloitte vetted the group's financials as part of Woolworths, whose accounts Deloitte has audited for over a decade.

"[Receivers] Ferrier Hodgson will go after anyone they can and Deloitte will be in the firing line along with directors and management," an industry insider said.

Deloitte chalked up $1.3 million in fees with Dick Smith for the 2013-14 financial year, including $784,000 for investigative accounting services in the lead-up to Anchorage Capital's controversial float of the retail group.

Experts reject any suggestion that the high level of non-audit fees in this period breaches independence guidelines, saying it is standard practice because auditors are best placed to make assumptions about future forecasts.

Inventory valuation is fundamental, particularly in a retail audit. Inventory is one of the biggest items on a retailer's balance sheet. As such, it is also one of the biggest sources of risk.

But seasoned company directors say that while Deloitte will "take a knock in the tabloids" over the episode, senior management and Dick Smith's board stand to cop the most heat.


"There will be collateral damage to lots of people but on solvency issues directors and senior management are at the forefront of the decision," a company director on several blue chip boards said.

"They [management and the board] will have engaged their own independent experts to get a brutal perspective. The auditor plays a catch-up game," he said.

New regime

Questions are also being raised about whether a new auditor reporting regime, due to start in 2017, could have averted this disaster.

Broad consensus says "No". But it should reduce the shock factor.

New "extended audit reports" will require auditors to call out key areas of risk and outline in some detail the stress testing undertaken to satisfy themselves about the financial performance and position of the company.

In the past, this information was for audit committee and senior management eyes only.

The Financial Review understands many as 20 large listed entities conducted dry runs of this new format behind closed doors in 2015.


Hearing device maker Cochlear and infrastructure giant Downer EDI took the courageous step of making these reports public ahead of the mandatory deadline.

Ferrier will be eager to see if Deloitte compiled a "shadow" extended audit report and presented it to Dick Smith's audit committee for the reporting period to June 28, and, more importantly, if it called out inventory and going concern issues as key audit matters.

Such a report, if it exists, it will be available on discovery should Ferrier commence legal proceedings.

Some company directors are confident the new regime will improve audit quality, while skeptics say key audit matters will end up being vanilla and less useful.

Unstoppable momentum

Most industry pundits feel the episode won't tarnish Deloitte's reputation in a meaningful way and won't dent the momentum it's established in the ASX200 audit space.

Deloitte performs 24 ASX200 audits, worth $35 million in combined fees, according a University of NSW analysis of auditor remuneration disclosures by ASX200 companies' in 2013 and 2014 annual reports.

This compares to PricewaterhouseCoopers which performs 58 worth $228 million, Ernst & Young which owns 55 worth $164 million, and KPMG with 48 generating annual billings of $157 million.

Historically considered a light-weight in big audit engagements, Deloitte has been painstakingly taking market share, investing heavily in experts. It pulled off a coup luring high-profile PricewaterhouseCoopers executive Richard Deutsch to head its audit division in 2014.

Last year, Mr Deutsch flagged increased investment in the firm's assurance team over the next three years as it commits resources to raid a handful of big ticket ASX 100 audits from rivals.