POL00090839
POL00090839
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06/08 "99 10:01 FAX} HORIZON 4 REGO OL
{
Past Office Courtters Ltd
FACSIMILE TRANSMISSION }
‘
PLEASE DELIVER IMMEDIATELY UPON RECEIPT i
TO Jeff Triggs '
Slaughter & May
FROM . Keith Baines
Horizon Commercial
FACSIMILE
DATE 6September 1999
NUMBER OF PAGES 6
(including header)
COMMENTS As promised in my e-mail, here is a copy of the auditors’
letter re ALT. 376
POL00090839
POL00090839
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, Q. dasert .
BN ERNST & YOUNG (am tit Huse
1 Lambeth Patuee Ruaul
London $61 72U
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Mr D Miller 2. Wibb, Gaunan L ee 23 August 1999 I
Post Office Counters Ltd I
Gavrelle House Ranga ensurt toa i
2- 14 Bunhill Row i
London vied i
ECLY 8HQ . dunn, ;
Dear Mr er
HORIZON ACCEPTANCE TESTING _
I
As auditors of The Post Office we have been asked by Post Office Counters Ltd to provide
you with our views in respect of certain accounting integrity issues arising from tests I
performed by POCL on Horizon data in the live trial. i
We have not performed any validation of the issues or testing of the data. Our views
expressed in this letter are based on information provided to us by POCL resulting from f
their tests. This letter is not intended to provide any assurance over any data in the live trial
or over any results arising from tests of such data. ~
The live trial is limited to 323 outicts. We make our comments on the assumption that this
sample of outlets will be representative of the full network of outlets.
‘The following issue, as described to us hy POCL gives us concern as to the ability of POCL.
1o produce statutory accounts to a suitable degree of integrity. We understand that POCL
has attributed a severity rating of ‘High’ to this matter.
Incident 376. Data Integrity - In order to test the integrity of weekly polling of Horizon cash
account transactions, POCL are reconstructing a weekly total by outlet from daily Horizon
pollings. At present this control test is showing discrepancies in that certain transactions do
nol record the full set of attributes and this results in the whole transaction being lost from
the daily polling.
We are informed that an incident has also accurred where transactional data committed at
the counter has been lost by the Pathway system during the creation of the outlet cash
account and has not therefore been passed to TIP in the weekly cash account sub files.
Both types of incident result in a lack of integrity on each of the two data streams used by
POCL to populate its central accounting systems. We understand that the cash account data
stream is the primary feed for POCL's main ledgers and client reconciliation processes.
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above adelress, the partnership's principal place af business, I
Authored by The Institute of Chartered Accountants I
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HORTZON M REGO nee hos”
ERNST & YOUNG 23 August 1999
2
A major component of the current systems is the matching of the underlying transaction
stream to summary totals on the cash account. In the new Pathway service there are
currently lagged incidents where both the underlying transaction stream is incomplete and
where transactions are being “missed” when the service accumulates the summary cash
account line, It would appear from these incidenis that Pathway’s service is not capable of
detecting all rypes of these errors because of an underlying systems control deficiency.
It is a fundamental of any accounting system that it provides a complete and accurate record i
of all transactions. These discrepancies suggest that the ICL Pathway system is currently i
not supporting this fundamental.
POCL have informed us that these items have resulted in difficulties substantiating the cash i
account balances which form the basis of certain items in the balance sheet, We understand
thar the isgues are not artributable to specific outlets or to specific products on a continuing
basis. It E not therefore possible to quantify the likely impact on client balances, or the
resulting itnplications for POCL’s financial statements, as the incidents cannot be forecast.
i
The nature of the gaps in both the cash account and transaction data streams is such that
POCL believe that they would not be able readily to explain them, and that significant
balances might have to be written off to the profit and loss account.
We also underatand that POCL have identified a number of other incidents which also
impact onjthe accounts, ‘These may also be relevant to us in reaching our audit opinion, as
they may be indicative of further uncertainties.
IMPACT ON THE AUDITORS’ OPINION ON THE STATUTORY ACCOUNTS I
Horizon rdllout ‘will cause POCL to become dependent on Horizon data for the compilation
of certain balances feeding into its financial statements. In light of the uncertainties raised, '
and dependent on the scale of incidents, we may have to consider certain alternatives in
developing our audit opinion.
'
Given thejabove background, if these matters remained unresolved at the accounting year
end we would need to consider whether an unqualified opinion were appropriate. Under the
present circumstances there appear to be a number of uncertainties whose financial impact
cannot be quantified and which make an unqualified opinion unlikely to be available to us.
Should this be the case, we would have to decide between including a fundamental
uncertainty paragraph in our opinion or issuing a qualified andit opinion.
POL00090839
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El FRNST & YOUNG 23 August 1999
3
Fundamental Uncertainty
A fundamental uncertainty is given in citcumstances where we are unable to agree or to
disagree with the company on a specific issue. It is usually confined to a specific area of the
accounts without affecting those areas of the accounts where we are able to give a true and
fair view.
We set out below the likely wording of a fundamental uncertainty paragraph based on the
unpredictable differences between stecams of data from the same originating system at the
counter: i
“ Fundamental Uncertainty
In forming our opinion, we have considered the adequacy of the disclosures made in the
accounts conceming the uncertainties in respect of client balances. Certain differences have
arisen between streams of data from the same originating source within the client transaction
processing system, and these have caused uncertainty as to the balances due to or from
clients arising from counter transactions. There is also uncertainty in respect of the client
fee income and subpostmasters remuneration arising from such transactions. Details of the
circumstances relating to this fundamental uncertainty are described in note [x]. Our opinion
is not qualified in this respect.”
Extracts from Accounts:
1, FUNDAMENTAL ACCOUNTING CONCEPT
POCL acts an agent for several clients. Accounting for the transactions performed on
behalf of these clients is fundamental to the integrity of POCL*s accounts. Certain
differences have arisen between streams of data from the same originating source
within the client transaction processing system, and these have caused uncertainty as
to the balances due to or from clients arising from counter transactions. There is also
uncertainty in respect of the client fee income and subpostmasters remuneration
atising from such transactions.
The directors have adopted the data which they deem to have the most reliable
supporting evidence in the circumstances. Where unreconciled credit balances arose i
then these have been retained as liabilities in the balance sheet. Unreconciled debit
balances have been written off to the Profit and Loss Account.
The accounts do not include any adjustments that would result if the adopted data
streams were subsequently fonnd to have been inappropriate.”
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06/00 "80 10:01 FAY HORTZON St RECO P diss”
i] ERNST & YOUNG 23 August 1999
4
Qualification of the Accounts
If we disagreed with the treatments and/or balances in respect of counter transactions,
because we were able to substantiate alternative figures or if the impact on the accounts was
so pervasive as to impact on the integrity of the full financial statements, then we would
issue a qualified opinion.
We recognise that ICL Pathway may offer fixes to the issues raised by POCL. Given
POCL.'s dependence on the individual transaction data streams, in respect of incident 376, I
we suggest that im order for the fix to justify downgrading the severity from the current I
“[ligh” rating attributed by POCL, it is essential that data obtained from further testing in H
the live trial area be provided. demonstrating the effectiveness of the fixes. This will require F
the inclusion of reliable controls within the Horizon system to demonstrate non-recurrence
of the issues. Evidence of the effectiveness of these controls over a tcasonuble period will
be required
This letter is intended for the use of Post Office Counters Ltd in respect of the Business
Impact Analysis of Proposed High Acceptance Incidents, We do not assume responsibility
in respect of its contents to any person other than Post Office Counters Ltd.
We are aware that you may wish to make this letter available to the Independent Arbitrator i
in the Horizon dispute resolution process. We are prepared to allow this, although any use }
the Independent Arbitrator makes of this information is at their own risk.
‘This letter has been prepared for your private use. Subject to the foregoing, it should not be
disclosed to any third party without our written consent.
Yours sincerely
GRO
Emst & Young
POL00090839
POL00090839
Received Sep 06 11:04AM (02:48) on Sand}
06/08 “98 10:01 FAX I
WORKSRV3 printed INC37D3A06D6A2E on Sep 06 11:08AM 1999 *
HORIZON M REGO en sp dae”
Ei] ERNST & YOUNG » _. I
Z \'
* : 7 I
Mr O Miller . 23 August 1996 i
Post Qtlice Counters Led . vege
Gavtelle House ‘ sedan
2+ 14 Bunhill Row Direct Line F
Loadon
ECLY 8HQ . ,
NS Direct Fax \
ny
Dear Mr Méfler
HORIZON ACCEPTANCE TESTING
‘As auditors of The Post Office we have been asked by Post Office Counters Ltd to provide
vou with our views in respect of certain accounting integrity issues arising from tests
pecformed by POCL on Horizon data in the live trial.
We have not performed any validation of the issues or testing of the data, Our views
expressed in this letter are based on information provided to us by POCL resulting from
their tests, This letter is not intended to provide any assurance over any data in the live trial
oruver any results arising from tests of such data.
The live trial is limited to 323 outlets. We make our comments on the assumption thar this
sunple of outlets will be representative of the full network of outlets.
The following issue. as described to us by POCL gives us concern as to tite ability of POCL
to produce statutory accounts tu a suitable degree of integrity. We understand that POCL I
has atuributed a severity rating of ‘High’ to this matter. 1
Incident 376. Data Integrity - In order to test the integrity of weekly polling of Horizon cash
account Wansactions, POCL are reconstructing 2 weekly total by outlet from daily Horizon I
pollings. At present this control test is showing discrepancies in that certain transactions do
not record the full set of attributes and this results in the whole transaction being lost from
the daily polling. I
We are informed that an incident has also occurred where transactional data commitied at
the counter has been lost by the Pathway system during the creation of the outlet cash
account and has not therefore been passed to TIP in the weekly cash account sub files. i
Both types of incident result in a Jack of integrity on each of the two data streams used by
POCL to populate its central accounting systems. We understand that the cash account data
stream is the primary feed for POCL's main ledgers and client reconciliation processes.
4 we 4 Lats! partners’ names
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