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To: Secretary of State
. Baroness Neville-Rolfe
From: Richard Callard, ShEx, (x3814)
Date: 3 December 2015
Purpose: To make you aware of two issues that are currently being considered and
I investigated by Post Office Limited (POL), following the last Board meeting.
Recommendation: That you:
A. Note that due to a material accounting error, the 2014/15 exceptional charges
of POL were understated by an amount currently estimated to be e£85m
fi . Whilst this is a non-cash movement and
should not affect POL’s funding position, this will require a restatement of
their POL’s prior-year2014/15 accounts.
B. Note, separately, that POL has re-assessed ¢hei*plans to implement *hei-new
IT systems. Initial-views-are-thatthere-could-be-aAn el 1 month delay and at
an additional cost to the programme -of £60m are likely. WAs-noted below,
work is-underwayte-assesons the-mitigating actions-available which-are-not
swithoutrisk, and theany impact on POL’s future funding position is in
progress.
C. Note that both issues are being further investigated by POL management and
Board--and. ill provide further advice-as the pesiti 7
We will provide a further update late next week.
I Timing: Routine (although the need to restateement-ef accounts will become public
late next week at the earliest, as POL issue their interim accounts for mid-2015/16).
Background
Accounting Error
1. During the preparation of the 2015/16 interim accounts, POL-has discovered an
accounting error relating to the previous year which impacts the balance sheet
and income statement through-aad the exceptional items charged to last year’s
accounts. The error is material and the 2014/1 5-prier-year accounts will need to
be restated.
2. The error relates to the provision made in the accounts in relation to
compensation to subpostmasters as they sign to leave POL as part of Network
Transformation. Data from an excel spreadsheet that was used to prepare the
accounts was not being pulled in to the accounts in full, and was itself
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incomplete and didn’t reflect the underlying data held elsewhere in the
organisation. This meant that the provision in last year’s accounts! was
understated by c£85m for the year (c£50m for the 6 months ended 30 September
2014), although POL has yet to confirm the final amount.
3. Work is continuing at POL to understand the full extent of the error-which-is
non-eash-related. Work to date has shown that payments to exiting
subpostmasters have not been effected and POL’s current view is that this does
not affect the cost of the Network Transformation programme, or POL’s funding
position, although investigations are ongoing.
4. The CFO, who arrived in January, had already reported to the Board that the
financial reporting environment was not strong enough and had started a
detailed programme of remediation. He fully acknowledges the unacceptability
of the position, has replaced the financial controller of POL and has
commissioned a systematic programme to review and document controls,
supported by KPMG, to ensure there are clear lines of responsibility and control.
He will be meeting with Mark Russell of ShEx on Friday next week to explain
how this error occurred and how it will be prevented in future. We will also
request a formal written report. A new chair of the Audit & Risk Committee
joins the Board in January, and will bring further scrutiny and review.
5. The disclosure in the interim accounts due to be published in the next couple of +———(Formatted: indent: Left: 0 cm, Hanging: 0.75 em }
weeks could require sensitive handling, and ShEx will be liaising with BIS and
POL comms. HMG, through the Secretary of State for BIS, owns 100% of
POL’s parent, the shares in-the Postal Services Holding Company Limited
(PQo0SH)-+# B hieh s POL. PoSH’s accounts have not been
finalised for 2014/15, meaning this change will be Fhis- means the POL error
will correctly reflected in POoSH’s 2014-15 annual accounts without
restatement (although this could cause a delay in filing). which-has-not-yetbeen
finalised POoSH falls within the BIS Departmental boundary, but we have
been advised Fthis error dees-will not impact the BIS's Group 2015-16
accounts, and-is-notas it thoughtis deemed not material enough to require a
restatement of the those national-accounts.
IT Update
6. As part of POL’s transformation, the company is updating all aspects of its IT
system, including front office hardware and software. The total estimated cost
of this programme is c£280m over the next three years.
2 For reference, original accounts stated - Full year operating profit before exceptionals: £100m. Post exceptionals:
£(85)m. Balance Sheet net assets £395m.
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7. This is a complex programme using a number of different suppliers. Over the
last six months POL has commissioned a very detailed and integrated work
programme from their new Director of Transformation. His analysis shows that
initial timetables were too ambitious and did not allow for sufficient testing and
rollout of front office IT. He considers that the programme will require 11
additional months, and (if not mitigated) an additional cost of around £60m.
8. POL are examining mitigating actions in preparation for a specially convened
Board call on 17" December. The key mitigating action is to request that the
current front office supplier, Fujitsu, extend their current contract with POL
given that they have already recently updated and refreshed the front office
software in preparation for the transition to a new supplier. Fujitsu had
previously declined to participate in the original procurement process,
generating increased cost and complexity for the IT programme by forcing POL
to move to a new provider.
9. Continuing with Fujitsu would significantly reduce costs and technical
complexity, and recent changes in management at Fujitsu have made them more
amenable to continuing the relationship with POL. POL are therefore
examining this option confidentially, which would require some form of
financial settlement with the winning supplier IBM, and taking legal advice on
the procurement law risks. This work also considers the impact this issue may
have on POL’s funding position. We will provide further advice following the
call on 17 December.
Copied to:
Perm Sec, SpAds; Mark Russell (ShEx), Howard Orme (Finance), Justin Manson
(ShEx), ShEx POL Team, Charu Gorasia (Finance), Nick Gordon (Finance), Tobi
Adetimilchin (Finance), Claire French (Comms), Matt Barker (Comms), Emma Bye
(Legal)
Advice received from:
Finance SpAds Press Legal Analysts
Tobi Nick King/ I Claire French Emma Bye N/A
Adetimilehin I Salma Shah
Have devolution issues / impacts been considered?
Devolution Issues WA
No
Have equality impacts been assessed?
Equality Analysis ‘Impact on Families’
N/A N/A
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