The root cause of the scandal is corporate power and its ability to hound and silence people into submission.

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

The Horizon computer system scandal at the Post Office will forever be known as one of the worst miscarriages of justice in the UK.  The case has once again shown the UK to be a hotbed of corruption and cronyism where in pursuit of profits and private gains innocent people are bludgeoned to silence and submission.

Background

The Post Office Limited (POL) is a public corporation of the Department for Business and Trade. In 2018/19, it had revenues of £972m.

Around 1999, POL began trials of its new Horizon software for accounting and stocktaking at its network of branches. The danger signs were evident during the trial period, but the system was rolled out in 2000 to all branches. The software designed by Fujitsu had faults which resulted in some subpostmasters accounts showing false shortfalls. For example, a subpostmaster tried to record a receipt of £8,000 and the computer screen froze. She hit the Enter key again and again. Every hit increased the receipt and the system recorded that she had received income of £32,000, which was not the case.

In April 2015, a report identified about 12,000 communications failures each year and software defects at 76 branches, but directors insisted that the system was not at fault for the shortfalls.

Between 1999 and 2015, POL accused some 3,500 postmasters, of theft, fraud and false accounting. It racially profiled subpostmasters into headings such as “negroid types”, “Chinese/Japanese types”, “dark skinned European types” and other categories which may have influenced the decision to prosecute.

Subpostmasters were suspended without pay and their homes were raided. A number made up the shortfalls from their personal savings and by borrowing. Full details are still emerging but some 983 sub-postmasters were wrongly convicted of fraud, and a number received prison sentences. At least four, may be more, committed suicide.

In March 2017 with support from a no-win no-fee law firm, some 555 subpostmasters brought a group case in the High Court against the Post Office.

Whilst awaiting a hearing, at the recommendation of Prime Minister Theresa May, POL chief executive Paula Vennells (CEO for 7 years to April 2019) was awarded a Commander of the Order of the British Empire (CBE) honour in December 2018 for “services to the Post Office and to charity”. In April 2019, she stepped down. Her final year remuneration, pay and bonuses, was £717,000. She was also an ordained minister, a member of the Church of England ethics committee and shortlisted to be the Bishop of London. From February 2019 to March 2019 she was an adviser to the Cabinet Office.

In December 2019, the High Court produced a 300 page judgement in the case of Alan Bates and Others v Post Office Limited. It found that the Horizon system was full of bugs, errors and defects, and the Post Office and Fujitsu knew that the system was defective. POL settled out-of-court for £58m. However, £46m went on legal costs, leaving only about £20,000 for each claimant. Subsequently, a number of criminal convictions were overturned and further compensations were mooted. The issue of wrongful convictions and perversion of justice remained but no Minister or regulator intervened.

In January 2024, ITV broadcast Mr Bates vs the Post Office, a drama based on the scandal. It resonated with the public mood and led to a huge stir on social and main stream media, and in the year of a general election the government finally moved.

The Prime Minister announced that special legislation to quash wrongful convictions would be enacted. A number of compensation schemes, so far funded from public purse, have been announced.

After over 24 years, the issues are unlikely to be easily laid to rest. An Inquiry launched in September 2020 is yet to report. A number of parliamentary committees are examining the issues. However, there are numerous unanswered questions about the culpability of various parties.

FAILURES

The State

The government is the sole owners of POL and appoints its directors and had access to considerable inside information. Performance related pay and a bonus culture was part of the policy to make POL a self-sustained business.

Despite rising number of prosecutions, considerable media coverage, 2015 interventions by parliamentary committees and individual legislators, and a prime time BBC documentary, no Minister intervened to ask questions, at least publicly.  Nobody at the Department of Justice showed any concern at the mass prosecutions. Ofcom, the regulator should have been concerned by the extent of alleged frauds and their implications for the services provided by POL, but did nothing. The extent of fraud alleged could have persuaded the Serious Fraud Office or the Crown Prosecution Service to act, but none did.

Sir Ed Davey, 2010-2012 Minister for Post Office and postal policy has said:

“When I met Alan Bates and listened to his concerns, I put those concerns to officials in my department, to the Post Office and to the National Federation of Postmasters and it’s clear they all were lying to me.”

Questions need to be asked about the failures of the apparatus of the state and the culture of cosying up to corporations.

Corporate Governance

Under Section 172 of the Companies Act 2006 directors have a duty to have regard for the interests of employees, suppliers, customers, community and high standards of business conduct. The High Court judgement showed that directors failed to discharge their legal duties.

Between 2000 and 2023 POL had over 80 directors, and all must have known that the Horizon system was flawed, but embraced a denial mode. This boosted performance-related pay but led to injustice for thousands.

The Post Office had a number of non-executive directors (NEDs). These part-timers chaired the audit, risk, compliance, remuneration and numerous other committees. A key role of the NEDs is to challenge management, including the CEO, on financial and operating issues and the strategy to execute the company’s objectives. Did they ask any questions about the failures of the Horizon system, mass court cases and prosecutions?

It is unfair to load the public purse with the entire compensation bill. Pressures need to be mounted on executive and non-executive directors to contribute and also face the music for failure to discharge their statutory duties.

In common with other large companies the Post Office had an internal audit department, which normally reports to audit committee. It should have regularly examined the risk management strategies, tested the Horizon system, examined internal controls, investigated exceptions and traced the ultimate location of the flawed transactions. In the Management Letter of 27 March 2011, the external auditors Ernst & Young (see below) seem to have identified some issues:

“The outsourcing of Post Office Limited’s (POL) IT function to a third party service provider (Fujitsu) creates a degree of complexity and difficulty for POL in gaining assurance that there are adequate”

“We noted that POL are not usually involved in testing fixes or maintenance changes to the inscope applications; We were unable to identify an internal control with the third party service provider to authorise fixes and maintenance changes prior to development for the in-scope applications”.

At the very least, this should have required a response from the internal audit, but what did it do? Was it silenced by a culture of cover-up?

External Auditors

Under the Companies Act 2006, auditors have unhindered access to all files, documents, employees and officers to enable them to form an opinion on financial statements. Ernst & Young (EY) were external auditors of the Post Office from 1986 to 2018. They were in office during the key period 1999 to 2015. A total period of 32 years in office is long enough to develop a cosy relationship between management and auditors to reduce their scepticism. In the final two years of their term as auditors EY collected £1.8m in fees, including £226,000 for “other assurance services”.

Section 386 of the Companies Act 2006 requires companies to “keep adequate accounting records” and “to show and explain the company’s transactions”. However, the flaws of the Horizon system suggest that the company did not meet this requirement and returns from various branches were not adequate.

As part of their statutory duties, auditors are required to assess whether in their opinion adequate accounting records have not been kept, or if returns have not been received from branches not visited by them. EY always indicated that they were satisfied and did not express any reservations.

This position becomes difficult because EY (see above) had already identified some deficiencies in the accounting systems. On 2 August 2010, in an internal POL report headed “Horizon – Response to Challenges Regarding Systems Integrity”, the Head of Product and Branch Accounting at Post Office drew attention to media coverage of the Horizon scandal and wrote (pages 19-20) that:

“Ernst & Young and Deloittes are both aware of the issue from the media and we have discussed the pros and cons of reports with them. Both would propose significant caveats and would have limits on their ability to stand in court, therefore we have not pursued this further.”

“The external audit that E&Y perform does include tests of PoL’s IT and finance control environment but the audit scope and materiality mean that E&Y would not give a specific opinion on the systems from this.”

“It is also important to be crystal clear about any review if one were commissioned – any investigation would need to be disclosed in court. Although we would be doing the review to comfort others, any perception that POL doubts its own system would mean that all criminal prosecutions would have to be stayed. It would also beg a question for the Court of Appeal over past prosecutions and imprisonments”.

Ernst & Young were aware of the problems. They did not carry out a systems-based audit but continued to reply upon the flawed system. How were they able to satisfy themselves that internal controls and resulting accounting records were sound enough to enable them to issue unqualified audit opinions.

In 2015, a forensic report by Second Sight documented extensive use of suspense accounts to gloss over errors. What did EY do about unreconciled cash and other balances?

The ongoing litigation, parliamentary hearings, press coverage and the possibility that POL may have to compensate subpostmasters should have resulted in consideration of contingent liabilities. No evidence of that can be found in the accounts for the relevant periods. What questions did EY ask and what replies did they receive?

A full independent investigation of the audits from 2000 to 2015 is needed.

Judiciary

Most of the prosecuted subpostmasters had no legal representations. About 700 of the 983 sub-postmasters’ convictions were privately initiated by POL. Each defendant was told that his/her case was unique. Lawyers acting for POL did not tell them or the courts that there were other cases, which prevented them considering any precedents, case law and possible faults.

Until the High Court case (POL tried to have the judge removed), various courts, persuaded by eminent law firms hired by POL, accepted the POL’s assertion that Horizon was accurate and robust. The legal system’s class and financial bias failed subpostmasters and must be reformed.

Fujistu

Fujitsu is deeply entrenched in state procurement. Former Treasury Minister told parliament that “Fujitsu. In 2010, we found that it was deeply entrenched across the whole of central government. Its performance in many of these contracts was woeful”.

Yet, the company continues to receive public contracts.  It is now clear that it knew of the faults in the Horizon system but did nothing to prevent accusations of fraud and subsequent convictions. It needs to face the cost of its role.

Overall, the POL scandal, like so many others, is an outcome of the cosy system of regulation and corporate governance, underwritten by the state. The root cause of the scandal is corporate power and its ability to hound and silence people into submission. Numerous changes are needed and the prime focus must be to shackle corporate power, make Ministers, regulators, executives and auditors publicly accountable.

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