POL00178577
POL00178577
Post Office Ltd — Strictly Confidential
To: From: Date:
General Managers (Retail Line) Rod Ismay 5 Oct 2004
General Manager (Network Support Services) Head of Risk & Control
Head of Client Accounting & Cash Management
Head of Security
Project Leaders — “Sales & Service Project”
ce:
Executive Committee
Group Head of Audit & Risk
Head of Compliance (Banking & FS)
Ernst & Young
Blackwood SPSO - Post Incident Review and Recommendations
1. Executive Summary
POL faces a potential loss of £451k at Blackwood. The chain of events, failures and learning
points are outlined in sections 3-5, but in summary several parts of POL had visibility of this
shortage but relied on the judgment of the Retail Line Manager to continue allowing the branch
to trade. Communications and decisions were taken at lower management levels without
escalation. Nor were there recognised channels for escalation in some areas.
The agent blamed the automated bureau system for the “accounting discrepancy” but we are
not aware of any other offices reporting similar issues. Whether or not theft is proven, failures
in supervision, reporting and escalation must be acknowledged. A challenge to systems
integrity, valid or otherwise, should not have been allowed to fester in this way.
Immediate actions focus on MI and communication. Plans for other audit visits are attached.
A full investigation and interviews is being led by POL Internal Crime.
2. Linkage to “Sales & Service Project”
The recommendations in this report include certain roles for the retail line. The retail line is
well placed for these, given its “hire and fire” responsibility.
The “Sales and Service Project” may take a different view of prime responsibilities. The
business must balance these different needs.
Question o/s
* Tony Utting - prospects of recovery, other arrests
© Martin Norman — cash activity levels — whether should have seen rems going to pocket
© Martin F — findings of the s60 issue at Newport Street SPSO. Cash numbers £47k declared and £522k
“generated”. 3 rems of £20k but recorded as one pouch in Horizon. Horizon doesn't allow that? System
blocking it from leaving suspense?
* Cash issues — ATM cash, LFS looks at current holdings and recent transactions rather than having long
run targets, procedural compliance failures with s60 autorems
* Post sevenoaks actions — call people
* Jennifer / Paul Dann follow up - Tuesday
© Tim top10 errors / branches
Post Office Ltd — Strictly Confidential
3. Sequence of Events
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April 04
The branch began declaring a shortage in its cash account
Audit visit confirmed this as £16k — referred to retail line
Branch had recently gone onto automated Bureau de Change
It had also reinstated an employee who had previously been
dismissed
July 04 Shortage £34k by mid July
2 visits by trainers — staff appeared to be operating as they should
RLM aware from outset but felt it inappropriate to suspend the agent
RLM informed Head of Area
Sept 04 Second audit visit confirmed the current shortage (£451k)
RLM again recommended branch remain open
Issue escalated to GM who decided on temporary closure
2 years overdue rent to POPH identified. Arrest made.
4. Observations
Business Area Observations
1 Retail The decision not to suspend earlier is questionable when the
Line shortage was there so long, become so large and had not been
explained after involvement of trainers and IT systems specialists.
Client Accounts
& Cash
Management
A fundamental principle of cash accounts is that “Balance due to
Post Office” (the residue of receipts and payments at the counter)
should equal the total of the “Cash and Stock Table”. Differences
should be investigated.
This branch has had an ever increasing discrepancy, which the agent
openly signed off against and attributed to problems with the new
automated Bureau de Change system.
From April to September, the “shortage” rose from £16k to £436k.
There was no ownership or process to chase this type of
discrepancy.
NBSC Support
NBSC National Problem Management Team had been in dialogue
with Fujitsu for at least 3 months. Next steps planned by NBSC were
for an “Environmental Check” at the branch (plug connection etc).
We understand from the Fujitsu account managers in POL IT that
they were not aware of this dialogue. Given the size and duration of
the issue they would expect to have been alerted.
2 Trainers
The branch had 2 visits to check how the staff were accounting for
transactions. Both times the trainers concluded that the staff were
accounting for transactions as they should.
3 Audit
Audit visits confirmed the shortage in April and September.
Blackwood appeared in the Audit Risk Model in the interim, but given
the openness of the declared shortage and the line involvement no
repeat visits were made until September.
Security
Internal Crime Team had not been made aware of this branch. Given
the value and duration of incident they should have been notified.
Other Group
Units (Property
Holdings)
Some subpostmasters occupy property owned by Royal Mail. Many
of these tenants are “MSPO” agents, individuals who took over
former directly managed branches in the early 1990’s. There are
some significant overdue debts and these were not communicated to
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[ the CA&CM agent debt teams. Blackwood was £22k in arrears.
5. Recommendations
[ica Barone wy eee a mete S
1. I Suspensions / Non Suspensions — Richard Bar Oct 04
Decisions Sue Huggins
Decisions to be mandatory for all Alwen Lyons
cases of branch irregularity > £10,000
and > 1 month old, and not
dependent on audit visit
Authority delegated to Retail Line
Managers, but must obtain GM
authority for non-suspension where
irregularity > £25,000 and > 1 month
old.
2. I Suspensions / Non Suspensions — Case reporting: I Oct 04 Early
Reporting knowled:
All decisions to be forwarded to Richard Bar! suspensions
CA&CM Debt Recovery Team e Huggins helps support
lard 9 column Excel I Alwen Lyons our I
proc
Summarisation recovery
FAD Branch Agent where possible
RLM Jennifer Robson from final
Date £Value Ageing remuneration
Decision JR
Reason
Summary monthly re
cases to GMs and Heads of CA&CI
Risk and Security.
3. I Branch Cash Accounts — Jennifer Robson I Oct 04 We will
Monitoring & “Debt Collection” certainly
CA&CM Debt Recovery Team to highlight the
include the cash account lines for top values to
shortages and surplus within their RL for
remit. discreps. We
then need to
land
the business
process fe
action. JR
4. I Debt Collection — Priority and Retail ard Barker I Nov 04
Line Sue Huggins
RLMs to ag ind enforce Alwen Lyons
commercially viable debt recovery
plans with agents within a month of
identification of the issue
5. I CA&CM Management information Vicky Noble Nov 04 Similar to 3
Pack above. Our
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Post Office Ltd — Strictly Confidential
Risk & Control Team to work with Top 10 would
CA&CM in defining an MI pack for probably
branch monitoring include
Pack to include high value shortages, Authorised
surpluses, errors and suspense. Also /unauthorised
to reflect “frequent offenders’ Jennifer Robson I 6 Oct 04 shortages
national distributions and key Top 10 aged
variances. errors by value
to fed into the
Short term actions to identify areas risk model JR
for “Top 10” reporting and
investigation (eg. high value errors,
shortages, unauthorised suspense
etc)
CA&CM Exceptions & Escalation Vicky Noble Nov 04
High value and aged exceptions from
the CA&CM MI Pack to be reported to
GMs for further action and to Audit
Team and Security Team for input
and possible branch investigation
Agent Credit Ratings — Initially and I Jennifer Robson I Dec 04 We do a credit
updates check on
Update and deploy policies for credit prospective
vetting at recruitment and for periodic agents
updates (CS200). I'm
awaiting more
info from HR
Sie}
Other Overdue Debt Information Jennifer Robson I Oct 04 We are now
CA&CM Debt Recovery Team to be advised on
copied monthly on all other business POPH bad
units aged debt with subpostmasters debts.
and franchisees — may only relate to Awaiting info
the Property Holdings records. from LS on
any reasons
why we could
not take from
remuneration
on POPH’s
behalf. Need
strategic
decision but
will work with
Damion Taylor
(and others)
once agreed
JR
NBSC Problem Management — Ruth Holleran Oct 04
Escalation
Cases of significance by value and
age (irregularities > £25,000 and > 1
month old) or by significance of
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challenge to the integrity of POL IT
systems should be e: ated to [
Director Commercial Contracts — fan
O'Driscoll ]
10.
NBSC Problem Management —
Monitoring
NBSC internal processes for
recording and resolving incidents to
be reviewed
Ruth Holleran
11.
Audit Frequency
Introduce checkstep around risk
based plan of branches identified for
audit. Do not automatically discount
branches which have been visited
recent!
Martin Ferlinc
Oct 04
12.
Audit Risk Model and Reporting
Conclude prioritisation and reporting
project with GMs (end October)
Consider reporting on “risk model’
branches which we choose not to visit
as well as those we do.
Martin Ferlinc
fe}
Q
g
13.
Provisions and Write Offs
New CA&CM MI pack to be used in
determining provisions in month end
processes
Vicky Noble
Oct 04
14.
Future Post-incident Reporting
Audit and Security to agree on
mechanism for single, prompt
reporting of sequence of e
recommendations
its and
Rod Ismay
Tony Utting
Nov 04
15.
Losses Data
Provide first half year losses data in
CA&CM, reconcile to S data and
draw out root causes
Rod Ismay
Alison Bolsover
data
16.
Sales & Service Project
Communicate headline question
about future ownership of branch
financial control to the project
Vicky Noble
Done
17.
Rolling Losses
Investigation of “case study” branches
from the top 10 worst branches in
section 7 of this report
Jennifer Robson
Rod Ismay
5 Oct 04
Team are
looking at this
however we
can only
18.
1 Staff Reward Schemes
Incentivise identification of suspicious
activity in branch cash accounts —
provide £25 rewards for su ssful
identification of offending branches
Vicky Noble
Oct 04
POL00178577
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Post Office Ltd — Strictly Confidential
“Stop Gap” Response to Issues in Branch Cash Accounts
. Identify offices of concern based on best available data — with particular focus on high
cash and high “shortage”/suspense offices (focussing on the risk indicators under
Sevenoaks and Blackwood). Also consider high error rate offices
. Decide whether branch warrants an audit visit, an order to remit cash back or a
challenge of the CACM / debt recovery plans.
. Whether making physical visits or desktop reviews, we may need to ask for or
challenge decisions about (non) suspension and debt recovery
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Post Office Ltd — Strictly Confidential
1.1. Can we see any other such danger branches from data today?
Blackwood appears by far the worst branch. At the end of August, nationally, there were:
* 6,667 offices with a shortage ranging from 1p to Blackwood’s £0.4m. Total shortages
nationally were £1.6m
e There were also 6,127 offices reporting surpluses (ie. more cash and stock than
expected based on transactions). These ranged from 1p to £78k and totalled £1.4m
nationally
The top ten “shortage branches” and action plans are as follows. In general they have had
little in their suspense accounts but have reported intermittent or long standing shortages.
Some have also had high value and high frequency of error notes.
Shortage I Office FAD Findings / plans
£000
451 Blackwood SPSO. 364632 I Audited 23/9 and suspended. Write off likely
82 Hertford Street BO 007205 I Audited 15/9 and no discrepancy. Appeared to be an
accounting error which reversed the following week, but
we are now to re-audit. It had not been possible to verify
ATM contents at the 1* audit.
70 Shortheath Rd 123900 I Audited 15/9 and a further £70k (total £140k) agreed as
SPSO loss. Legal action under way
32 Kings Cross IFPO. 177005 I Audited in June which led to this shortage being identified.
RLM not agreed debt recovery plan yet. To be escalated
to GM.
25 Honor Oak Park 125007 I Understood to be a 4 week old query about a cash
SPSO remittance. Escalated for resolution in CACM.
16 Albany Road FPO 482611 I Audited 30/9 and a further £16k (total £32k) agreed as
loss. Branch had high frequency of errors.
16 Ringmer SPSO 169907 I Amount reversed the following week. CACM investigating
before we commit audit visit
13 Woodbridge FPO 201130 I Audit in w/c 4/10. Shortage has been rolled in the books
for at least 2 months. Was OK at last audit in April 04,
but has had high error rates since then
12 Northwood MSPO 255020 I Audit in w/c 4/10. Long standing shortage and many
errors
10 Longborough SPSO_ I 273247 I Audit in w/c 4/10. Low error rate, but a £3k surplus
moved to £10k shortage a month ago.
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Post Office Ltd — Strictly Confidential
There are also a large number of branches declaring high value surpluses. Again some of
these are long standing. It is not clear what these relate to, nor how they are being dealt with.
On the face of it shortages are the immediate risk to the business, but surpluses may be
equally indicative of branch problems. We will therefore explore the following top ten “surplus
branches’ too in the short term.
Surplus
008405 BLACKPOOL BO 78,151
488641 MARKET DRAYTON MSPO 55,465
374207 HILL STREET SPSO 44,000
004900 CAMBERLEY BO 34,496
223618 PUTSON SPSO 34,364
308549 NORTH PETHERTON SPSO 30,720
328329 BLACKFELL SPSO 30,604
210424 CROWHILL SPSO 29,382
082007 ARDGOWAN ROAD SPSO 25,035
158642 BLACKPILL SPSO 24,986
7.2 Could the shortages be understating the exposure?
Yes, if the branch “suppressed” (or stole) moneys paid in by customers, or if it created fictitious
outpayments. The audit visits can only confirm cash and stock on hand. Verification of
transactional data is reliant on front end and CACM back end controls.
With regard to Blackwood, Security have taken the Horizon terminals to Fujitsu. Transaction
data will be re-run and will help answer this question.
In the interim, a summary graph of key client streams by week is shown below. The peaks and
troughs broadly reflect “double pension payments” and other bank holiday period activity. The
decline in pensions activity might be expected based on migration to card account. However,
the decline in Giro deposits may warrant explanation. The nil banking deposits in week 25
data also require explanation.
Blackwood Key Txn Trends
300 a ce
250 bt Nee We
200 rate e aie a eee ae: Ree es —a— Giro dep
150 Sc ah UB, Pensions
100 I — Pr etre APT/Banking
0 - -
~
3
=
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Post Office Ltd — Strictly Confidential
8. How do we decide where to go on audits?
Our assets audit risk model draws on many tried and tested data streams:
« Reinstated agents — past suspensions being the concern
e Cash specials — may indicate unexpectedly high cash usage
¢ Nil discrepancies — ie. too good to be true?
e Repayment schemes — branches where debts are already in existence
« Management concerns — ad hoc concerns
e Cheques held at period end — none should remain on site at end of day
« Previous asset findings — past experience of this branch
e Error notice activity at this branch — number and value
¢ Losses at this branch
¢ ONCH (cash holdings) variances against “target” - £ and %
¢ “Discounted cash” — declaring high values in unexpected denominations
¢ Cash rises in the week and month on month
A review of the model began last month and is exploring new data streams. These may
include:
¢ Branch / demographic profiling
ONCH variances against predictions
Hardship applications
Frequent queries on cash/stock remittances
High levels of reversal transactions
Abnormal transaction trends
Our audit visits to date this year (periods 1 to 5) can be summarised as:
606 Transfers
668 Closures
78 Robbery / burglary
47 Other
1,200 Risk based visits
2,599 Total number of audits
The risk based audits include the following:
60 From Internal Crime team leads
50 Audit managers directly alerted to issues
350 Compliance only audits
740 ‘Full asset based audits driven by the risk model
1,200
Up to period 4 we have been able to perform all the audits which our risk model identified as
“high” or “immediate high” risk. We have had resource constraints in Scotland.
Prior to “Sevenoaks” we had suspended DMB asset audits due to low incidence of problems
and higher degree of segregation of duties. We have reintroduced DMB audits and will cover
5% of them by Christmas.
Our basic risk model for week 25 identified 364 branches of most concern. 220 of these were
then discounted on grounds of having been audited not long ago or that they were the lowest
priority of the population. 50 of the offices discounted had risk indicators arising purely from
the last audit report rather than new issues. The remainder had error notices or losses
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Post Office Ltd — Strictly Confidential
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exceeding £1k each week. On further review, 2 of these offices are now to be prioritised for
urgent audit despite having been visited recently. This is because they are now reporting high
shortages.
19. Update re Actions post Sevenoaks (o/s email updates)
Retail Line
Alwen
1.
Branch supervisory controls:
1.1. RLMs to formally monitor holiday and absence -
managers and assistants
1.2. Reinforce personal responsibility of managers for whole
branch operation and requirement for at least sample
checks of stocks
1.3. Revisit policy - individual or team balancing?
Conclude on branch “sanctions”
Cash
Management
Martin N
FOIN
Monitoring cash statistics (inc ATM)
Monitoring cash remittance discrepancies:
4.1. Time lag exceptions (& review principles of matching
including our “risk appetite”)
4.2. Frequent offender reports in “late rems”
Exceptions reporting to include Cash Account figure as
well as ONCH declaration and target
IT/ CA&CM
Vicky
Fujitsu / Horizon change:
6.1. Front end range checks (inc £ and fx)
6.2. High value and trend exception reports
6.3. Renegotiate POL rights of data access + Horizon
interrogation terminal [Internal Crime submitted High
Level Blueprint on this]
6.4. Set CACM authority for rem reversals
6.5. Reporting of frequent reversals
6.6. High value reporting of ‘stock units’
6.7. User ID exception reports re logon times and evidence
of segregation of duties
6.8. Dual sign off for high cash offices
6.9. Cash declaration (blind) + exceptions
Audit
Rod
Audit & Inspections branch visits:
7.1. Short term — reinstate DMB audits and make “top 10”
visits based on cash data streams
7.2. Update audit risk models and review quality of data in
risk model feeds
7.3. Confirm time lag checks in audit of rems
Business wide I 8. Escalation of issues:
communication
HR 9. Exit — update process to ensure effective absence records,
Jennifer / Jeff
Fail — “Leavers
processes” for
DMB
challenge about balancing / errors history and a pre-exit cash
count.
Network
Support
Ruth
. Cash centres — clear inward rem processing backlog — this
is clouding the errors issue
10