ZKO Plc was an UK listed company that produced digital audio equipment for the retail market. The company’s products were sold throughout Europe, North America, Australia and Canada, and were widely regarded as the best in the market. Indeed, during the period 1995 to 2001, the company’s digital audio equipment consistently won high praise from both consumer groups and retail critics.
In January 2002, however, ZKO Plc suddenly went into liquidation. The company failed with debts amounting to £105m.The failure of the company was headline news around the world with press speculation focusing on the possibility of large scale financial reporting irregularities and potential management fraud. However, in April 2002 the company receivers published their findings. Their report indicated that whilst some unacceptable accounting irregularities had been evident in the company’s published financial reports for a number of years, the principal cause of ZKO Plc’s failure had been inadequate control within its revenue cycle operations – in particular the management of debtor payments.
The company receivers’ report concluded that:
whilst substantial profits were generated by sales transactions these profits were rarely converted into cash based resources. Moreover, the company increasingly maintained an unhealthy and somewhat excessive level of debtors, many of which were clearly irrecoverable.
Required
Describe the main function of a sales system for a company such as ZKO Plc and explain the inherent risk associated with the failure of such a system.
Describe the primary function of debtor management and explain the separation of duties necessary for adequate debtor management in a company such as ZKO Plc. Indicate the problems that may occur in a debtor management system when such separation of administrative powers does not exist.