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POST OFFICE LIMITED
AUDIT, RISK & COMPLIANCE COMMITTEE REPORT
setae The Current Operation of Suspense I Meeting
Title: Accounts Date: 27 July 2020
Author: Mark Underwood, Tom Lee & Tim Sponsor: Ben Foat & Alisdair Cameron
Input Sought:
The ARC is asked to note:
e The findings from KPMG’s review of Post Office’s current operation suspense accounts.
The ARC is asked to approve the recommended approach:
e Whereby KPMG are instructed to explore whether it is possible to perform the same
independent review, but for Post Office’s historical operation of suspense accounts.
Previous Governance Oversight
e Post GLO Settlement Programme SteerCo of 1 July 2020
¢ RCC 13 July 2020
Executive Summary
1. Allegations continue to be made that Post Office may have recovered sums from Postmasters
(including through civil and criminal proceedings) which were not ‘real losses’ to Post Office
as they were housed in suspense accounts and taken to profit by Post Office.
2. KPMG were instructed to review Post Office’s current operation of suspense accounts.
Although their findings include a number of points to consider in terms of how Post Office
could enhance best practice. In summary, given the robust and transparent investigations
process that is undertaken, these suspense accounts should not result in Post Office pursuing
Postmasters for sums it had or could eventually take to profit. This is because sums housed
in suspense accounts are either:
e not taken to a profit and loss account; or
e relate to unmatched transactions due to customers (not postmasters); or
¢ relate to surpluses rather than shortfalls.
3. BAU investigations and the Historical Shortfall Scheme provide mechanisms whereby
shortfalls can be investigated and/or resolved. However, this is unlikely to satisfy Post
Office’s detractors.
4. Thus, and at a cost of c£47k, it is recommended that the ARC approve instructing KPMG to
explore whether it is possible to perform the same type of independent review, but for Post
Office's historical operation of suspense accounts.
5. The ARC should note that any documentation which is produced and findings made, may be
disclosable as part of Post Office’s ongoing disclosure obligations to those it has prosecuted
historically and as part of any future claims made against Post Office as a result of historical
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practices, in both a civil and criminal context and in the context of any relevant investigation
or inquiry.
Questions addressed
1. What is a suspense account? What allegations have been made in respect of how Post office
operates suspense accounts?
2. What assurance does KPMG’s review give Post Office? What were the findings?
3. What options exist to Post Office for managing any historical and future suspense account
related claims?
4. What further work could KPMG perform over the historical operation of suspense accounts?
How much would this cost? What are the limitations and risks?
Report
History & Context
1. Post office uses suspense accounts:
e To house branch discrepancies arising as part of the normal course of trading and
which need to be cleared at the period end (either surplus or deficit).
e To house surpluses arising from Postmasters where the Postmaster does not agree the
surplus is due back to them.
e Totemporarily hold differences in payments moving between Post Office and its clients,
where the client and Post Office’s view of what is payable or receivable differ.
Differences are investigated but in some cases neither Post Office, the client, nor the
branch are able to determine the identity of the customer who performed the
transaction in question or the specifics of the transaction. For example, Post Office may
not be able to determine the details of the bank account to be credited. In such
situations, and following enquiries with branches, unresolved differences are moved to
Post Office customer creditor suspense account. Such discrepancies are held in its
suspense account to give time for customers and other parties to put forward more
information to explain what has happened.
2. A long standing assertion, made by applicants to the Complaint Review & Mediation
Scheme, Claimants in the GLO, and by Lord Arbuthnot is that:
e Post Office operates one or more suspense accounts in which it holds unattributed
surpluses including those generated from branch accounts;
e After a period of time, such unattributed surpluses are credited to Post Office's profits;
and
e Post Office therefore has recovered (through civil or even criminal proceedings) sums
from Postmasters which were not real losses to Post Office, as they were housed in
suspense accounts and ultimately taken to profit by Post Office.
3. These allegations were first made in the context of the Complaint Review & Mediation
Scheme?. Second Sight’s? final report, published in 2015, claimed they had been informed
that at each year end, substantial unreconciled balances existed on many individual
suspense accounts and that these unreconciled balances for the 2014 financial year were
approximately £96 million in respect of Bank of Ireland ATMs and approximately £66 million
1 ‘Project ‘Sparrow’ which, broadly speaking ran from 26 August 2013 — 01 February 2016.
2 The firm of independent forensic accountants instructed to investigate each of the applicants cases accepted into the Scheme
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in respect of Santander. They said that “these unmatched balances represent transactions
from individual branches that occurred in the preceding 6 months” and they “..remain
concerned that these balances may include transactions that ultimately should be credited
back to individual branch accounts".
4. In its ‘Reply’ to the Second Sight Report, Post Office stated that Second Sight had
misunderstood the information provided by Post Office. The balances of £96m and £66m
were taken from routine trading balances yet to be settled with other organisations at a
particular month end. In other words, they represented amounts due to other parties, not
amounts that were unreconciled and which may be due to Postmasters.
5. Second Sight were also provided with details of the credits released from Post Office’s
suspense accounts to profit for the period 2008 to 2013. As there was a 3 year retention
period - no amounts at that time had been released for the years 12/13 and 13/14. The
total gross credits released from suspense to profit from 2007/8 onwards was as follows:
Years released to profit Value
2010/11 £612,000
2011/12 £207,000
2012/13 £234,000
2013/14 £104,000
2014/15 (YTD at the point provided) £8,000
6. In its reply to Second Sight, Post Office stated that amounts should be considered within
the overall context of Post Office performing around 2.5 billion transactions per annum,
with a combined value in the order of £60bn. The amount of unresolved credits that end
up in Post Office’s P&L (at the time) was therefore less than 0.001% of all transactions (by
value) undertaken by branches.
7. Allegations continue to be made in respect of Post Office’s suspense accounts. In February
2020 Lord Arbuthnot wrote to Nick Read. In Nick’s response, he committed to better
understanding how Post Office operates its suspense accounts. Nevertheless, in the House
of Lords on 18 June 2020, Lord Arbuthnot complained that the Terms of Reference for the
recently announced ‘Independent Review into the Post Office Horizon IT System and Trials’
do not “say anything about the likelihood of the Post Office improperly making a profit from
the sub-postmasters, or about the suspense accounts”.
KPMG’s Suspense Account Review
8. KPMG were instructed to review how Post Office currently operates its suspense accounts.
The scope of this review was as follows:
e Confirm the number of relevant suspense accounts operated by Post Office into which
sums are placed which could, theoretically, relate to discrepancies at a branch level and
from which any unmatched sums may be taken into a Profit and Loss (P&L) account.
e For these accounts, assess whether how they are operated reflects the associated
documentation and best practice.
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e Identify whether there are any gaps / challenges within existing processes which could
result in risk to Post Office and or Postmasters.
e Assess whether the current resolution criteria adopted by Post Office for dealing with
discrepancies appears ‘fair and reasonable’ to both Post Office and Postmasters, based
upon KPMG’s understanding of best practice.
« Comment on any further work that Post Office might want to consider.
KPMG’s Findings
9. KPMG identified 4 relevant suspense accounts which are currently operated by Post Office;
details of which are provided within the table on the following page. In summary, given the
robust and transparent investigations process that is undertaken, these suspense accounts
should not result in Post Office pursuing Postmasters for sums it had or could eventually
take to profit.
10.This is because sums housed in suspense accounts:
e are either not taken to a profit and loss account; or
e relate to unmatched transactions due to customers (not Postmasters); or
¢ relate to surpluses rather than shortfalls.
11.For completeness and although purely hypothetical, included at Annex 1 is a worked
example for how a postmaster could repay a shortfall which Post Office has or eventually
could take to profit via a suspense account. Post Office is not aware of any examples of this
having taken place and it requires, for example:
« a Postmaster not following process;
e refunding a customer, prior to an investigation taking place and without contacting Post
Office;
e not recording the refund on Horizon; and
e not recalling the refund during the subsequent investigation.
Owing to its nature therefore, it would extremely difficult if not impossible for Post Office
to prevent.
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Account Description Houses Deficits Postmast Are unmatched sums KPMG Findings Summary
and or Surpluses? er taken to P&L?
Affecting?
Branch This is a holding account within I Deficits and I Yes No. These accounts relate I Branch Deficits
Snapshot. branch accounts which allows I Surpluses potentially to discrepancies identified I KPMG’s assessment is that Post Office are moving
Current Postmasters to investigate I due to Postmasters by Postmasters and which I towards best practice. There is an established, robust
Balance: discrepancies that have arisen result in a Postmaster I and timely investigation and resolution process which is
£355,204 within their branch without the either repaying (deficit) or I undertaken in conjunction with Postmasters and the
need = to recognise and being repaid (surplus) I development of a tailored training course encompasses
potentially settle the amount at amounts. the key aspects of best practice. In addition, the level
their trading period end. of monitoring and oversight is robust ensuring there are
Local Branch discrepancies arising at Resolution of these I no unauthorised transactions and aged balances do not
Suspense. the period end are posted to this discrepancies is either in I build up.
Current account. The balance on this cash or via Postmaster’s
Balance: £0 I account must be cleared before personal accounts in the I Whilst operational documentation provides Post Office
the branch can complete their Group Ledger. with a clear audit trail, there is a lack of formal detailed
period end roll over. process documents and_ inconsistencies between
documented and actual practices.
Depending on the value of the
discrepancy, the balance is Branch Surpluses
either made good through the Policy and procedures are unclear and Postmasters are
Postmaster putting cash into the not routinely informed when surpluses arise on their
office (if less than £150) or can personal accounts in the Group Ledger. The timeliness
be ‘settled centrally’ (if over of repayment is dependent upon the value of the surplus
£150) meaning the balance is and is in direct contrast to the branch deficit policy.
moved in to the Postmaster’s
personal account in the Group There is a currently a backlog into investigations of
Ledger. surpluses and monitoring of branch surpluses is
inconsistent.
Discrepancies can be
investigated after they are
made good or posted to the
Postmaster’s personal account
in the GL
Agent This account holds surplus I Surpluses potentially I Yes Yes. This accounts house I Formal policies in place regarding when amounts can be
Creditor. discrepancies which Post Office I due to Postmasters surpluses from which I released to the P&L account. Though operational policies
Current believes are due to Postmasters, unmatched items can be I are clearly understood, they are informal and not yet
Balance: but that Postmasters dispute released to the Post Office I fully documented.
£17k being due to them. P&L account after 5 years.
However, as this account
relates to surpluses which
are disputed by the
Postmaster (as opposed to
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Account
Description
Houses Deficits
and or Surpluses?
Postmast
er
Affecting?
Are unmatched sums
taken to P&L?
Post Office) any improper
operation should not result
in Post Office potentially
pursuing Postmasters for
monies it had already or
could eventually take to
profit
Customer
Creditor:
Current
Balance:
£3.5m
This account holds amounts
repaid to Post Office from third
parties due to issues identifying
who the money is owed to.
Third parties include Santander,
MoneyGram and
customers.
held in
Amounts are
Camelot
this
account, pending inquiry from
the customer.
Surpluses potentially
due to customers
No. These
monies
relate to
customers
who cannot
be traced
due to
inaccurate
data.
Yes. This account houses
surpluses from which
unmatched items can be
released to the Post Office
P&L account after 6 years
or earlier where specific
policy is to do so.
However, as this account
relates to unmatched sums
potentially due to
customers (as opposed to
Postmasters) any improper
operation should not result
in Post Office potentially
pursuing Postmasters for
monies it had already or
could eventually take to
profit.
An established level of best practice in respect of
documentation, monitoring and resolution
A good level of operational documentation provides a
clear audit trail and monitoring ensures there are no
unauthorised transactions to or from the account.
All amounts posted in this account are investigated with
the relevant branch prior to being posted in this
account.
No evidence that amounts posted to this account would
relate to branch discrepancies which were previously
repaid by a Postmaster.
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Recommendations Included within the KPMG Review
12. The KPMG report includes a number of points to consider in terms of how Post Office could
improve its operation of suspense accounts to enhance best practice. These include:
e Implementing and documenting policies and procedures including details of
ownership, format, content and version control for all relevant suspense accounts.
e Ensuring all processes are adequately documented and that policies are consistently
applied within the documentation.
e Implementing an overarching branch discrepancy process document linking all
relevant policies and processes.
e Formalising the reporting and review by senior management of suspense accounts and
investigation outcome metrics.
e Undertaking a review of the branch deficits written off centrally to identify whether
any Postmasters are regularly benefitting from the policy.
e Reviewing the policy and process for branch surpluses with specific focus on:
i. Communicating surpluses to postmasters.
ii. Repayment timescales not being determined by value.
iii. Timeliness of investigation process.
iv. Aligning the branch deficit and branch surplus policies and expectations.
e Implementing a process to address the current backlog that has arisen in the
investigation of branch surpluses and the resolution of old branch surpluses that are
in dispute to ensure:
i. Repayments are made in a timely manner; and
ii. Where appropriate, amounts are moved into the Agent Creditor Account.
13. All recommendations are being taken forward, and will be implemented through BAU over
the course of the 20/21 financial year.
Next Steps
14. Although the KPMG report gives Post Office assurance that its current operation of
suspense accounts should not result in sums being pursued from Postmasters which Post
Office has already or could also take to profit via a suspense account, the scope of the
review did not include Post Office’s historical practices.
15. If a historical error, in relation to the operation of suspense accounts, was to adversely
affect a branch, this would almost certainly manifest itself as a shortfall. The Historical
Shortfall Scheme provides a mechanism for shortfall claims to be investigated. The only
caveat to this is if their claim relates to a period of time for which the branch in question
was operating on HNGA. This is because HNGA related claims are ineligible for the Scheme.
16.However, any such ‘suspense account related claim’ which relates to a period during which
HNGA was in operation at the branch in question would still manifest itself as a shortfall
and can therefore be investigated through current BAU processes (which KPMG have found
to be transparent and robust).
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17.Nevertheless, this is unlikely to satisfy Post Office’s detractors and the allegations will
continue. As such it is recommended that the ARC approve instructing KPMG to explore
whether it is possible to perform the same independent review, but for Post Office’s
historical operation of suspense accounts. It may not be possible, owing to the timeframes
involved (2000 - 2019), key personnel no longer being in the business and documentation
being destroyed in line with retention schedules (prior to legal holds being in place). KPMG
has provided a cost estimate of £47k to complete this work.
18.If it is possible, the ARC should note that any documentation which is produced and findings
made, may be disclosable as part of Post Office’s ongoing disclosure obligations to those it
has prosecuted historically and as part of any future claims made against Post Office as a
result of historical practices, in both a civil and criminal context and in the context of any
future investigation or inquiry.
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Annex 1 - Theoretical example for how a Postmaster could repay a shortfall which Post
Office has or eventually could take to profit via a suspense account?:
Step
Customer
Branch
Postmaster
balance
POL
Bank
balance
A customer makes a £10 deposit in branch.
balance
balance
balance
+£10
The customer complains the deposit has not
been received in the associated banking
account. By way of an example, this could be
as a result of the Postmaster incorrectly
recording the account details on Horizon.
-£10
+£10
The Postmaster chooses to refund the customer
£10, without recording it on Horizon
-£10
+£10
The bank refunds £10 to Post Office.
-£10
+£10
Prior to Post Office moving £10 to its Customer
Creditor Account, Post Office investigates with
the branch in question any sums originating
from transactions performed within that
branch. If the Postmaster does not recall
refunding the customer - the £10 would be
moved to the Customer Creditor Account.
~E10
+£10
At the end of the trading Period (having still not
recalled refunding the customer) the
Postmaster chooses to make good the £10
shortfall.
-E10
+£10
If after 6 years the amount remains
unmatched, it is released to Post Office’s Profit
& Loss Account
-£10
+£10
Thus, Post Office has received £10 from the
Postmaster but still houses the original £10
within its Customer Creditor Account
-£10
+£10
3 For simplicity, this table ignores any applicable transaction fees.
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