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Witness Name: Martin Charles George Ferlinc
Statement No 1: WITN08610100
Dated: 11/05/2023
POST OFFICE HORIZON IT INQUIRY
FIRST WITNESS STATEMENT OF
MARTIN CHARLES GEORGE FERLINC
I, MARTIN CHARLES GEORGE FERLINC, will say as follows
Introduction
1. My name is Martin Charles George Ferlinc and my date of birth i i
My home address i:
2. This witness statement is made following a request, inviting me to assist the
Post Office Horizon IT Inquiry under Rule 9 of the Inquiry Rules 2006. The
request was dated 3 April 2023.
3. 1am a former employee of Post Office Limited, employed in various roles from
October 1979 until I left the business in March 2011.
4. During my career, I experienced several organisational reviews which
sometimes involved changing the name and/or status of Post Office e.g. Post
Office Counters, Post Office Counters Limited, Post Office Network, Post Office
Limited. As I am unable to recollect the precise timeline of each change with
certainty, I have used the term Post Office throughout my statement.
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5. Following on from paragraph 4 above, the terms used to describe the range of
branches and their staff changed many times while I worked for Post Office e.g.
branches with employees were called branch offices (“BOs”), crown offices or
directly managed branches at various points in time. For the purpose of my
statement, I refer to them as crown offices and crown office staff. Some sub-
post offices were managed by a franchise partner but people in charge of sub-
post offices were generally called postmasters, sub-postmasters, sub-
postmistresses or agents at various points in time. For the purpose of this
statement, I have used the term sub-postmasters. Where I refer to branches, I
am referring to all post offices i.e. the collection of crown offices and post offices
run by franchisees and sub-postmasters.
6. As my roles, job titles and reporting lines changed several times over a career
spanning over 31 years, exact years of events, changes in my roles and
reporting lines have not been easy to recall or may have been misremembered
but I have recorded dates that I believe to be correct to the best of my
knowledge. Similarly, any reference to the names or job titles of Post Office
colleagues during that period has been done to the best of my recollection.
7. Asthave not worked for Post Office since March 2011, this statement has been
made without access to any documentation other than that provided by the
Inquiry.
8. While over 40% of the documents provided to me were written or dated after I
left Post Office, and reflect updated processes or opinion, some of these have
helped trigger memories of processes in place prior to March 2011.
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9. The information I have provided in this statement uses my own words (without
legal representation) and is based on my own personal memory of events,
which I have tried to recall to the best of my ability.
Relevant Background
10.1 have been asked to provide a brief outline of my professional background and
an overview of relevant roles during my career at Post Office.
11.Post Office — Postal Officer (Counter Clerk) 1979 — 83. I joined Post Office in
October 1979 after the completion of A Levels. For the first few years, I worked
at different crown offices (in the Nottingham area) as a counter clerk. In the last
year or two, my responsibilities included the role of completing the branch's
cash account (cash account duty).
12. Royal Mail Letters (Mails Circulation Officer) 1983 - 1986. It was quite common
at that time for counter clerks to gain experience of head office roles, after a
few years of working in a crown office. I was selected to join the Mails Team
(Royal Mail) in Nottingham.
13.Post Office Assistant Branch Manager 1986 - 1987. I opted to return to Post
Office during a Royal Mail Group reorganisation (where Royal Mail Letters,
Parcelforce and Post Office Counters were being separated into different
business units). I was initially placed into a crown office assistant manager type
role, with a combination of counter, back office and cash account duties.
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14.Post Office Branch Manager 1987 - 1989/90. At some point (possibly around
1987), I was promoted to the role of branch manager at the crown office where
I was already working, reporting to the Area Manager (Nottingham).
15.Audit Manager (Nottingham) 1989/90 - 1993. My memory is that there were
plans to close the branch where I was working, as part of a crown office closure
programme. Following a discussion (rather than an interview), I was invited to
move to a vacant Audit Manager role in Nottingham, before my branch closed.
This was either in 1989 or early 1990. My new role reported to the District Audit
Manager (North Midlands District), from whom I received on the job training. As
Audit Manager, I was responsible for scheduling audits of branches in my area
but the majority of my time was spent at branches, performing audits. These
audits were primarily to verify assets physically on hand at the branch and
involved constructing a cash account to the last declared figure, which utilised
my experience of performing the cash account duty at a crown office. I had two
team members and audits that I attended included one or both of them.
16. Audit Manager 1993 - 1995. As part of a major business reorganisation in 1993
(structuring Post Office into seven regions), job selections were informed from
an exercise called “Skills Analysis”. I was identified as suitable for one of three
audit manager roles in the Midlands Region and reported to the newly
appointed Regional Audit Manager (Midlands). I worked from an office in Derby
(with a small team of auditors based in Nottingham, Derby and Stoke). The role
was essentially the same as the one in the North Midlands District but with an
expanded area and more team members. I vaguely recall attending a one-week
internal audit course during the 1990s. I do recall the course being held in
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Chesterfield and provided by Post Office’s Internal Audit Team (National Audit)
but cannot recall the dates involved.
17.Regional Audit Manager 1995 - 1998/99. Following the departure of the
Regional Audit Manager (Midlands Region), I successfully applied for the
vacant role (around 1995). This followed an interview selection process and
resulted in me moving to the regional head office in Birmingham, leading a team
of auditors in the region, reporting to the Finance Director (Midlands).
18.Regional Audit Review Project 1998/99. I was seconded to National Audit (Post
Office’s Internal Audit Team) to work on a project. The project looked at
reviewing the structure of the existing seven regional audit teams, with a focus
on standardising branch audit practices across the UK. The project involved
consultation with interested parties and also benchmarked against practices
adopted by the branch auditing functions of other organisations/companies.
The outcome of the project was the creation of a new national branch auditing
team for Post Office, with a centralised management and admin structure
(based in Chesterfield), reporting to the National Audit Team. I have struggled
to recall the exact dates of this project or when the project was concluded.
19.Head of Network Audit — 1999 to 2000. After the creation of the new national
team of branch auditors, I successfully applied for the new role of Head of
Network Audit, following an interview process. Upon my selection, my initial
focus was on setting up the new team, against an implementation plan. This
plan would have involved recruiting team members, documenting new and
standardised processes, baton passing files, tools and equipment (from the
seven regional structures) and providing training and guidance for auditors in
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new/revised processes. I cannot recall the exact date of when the new team
commenced but my memory is that, during the early months, I reported to a
role within National Audit (Post Office’s Internal Audit Team).
20.Changes in Job Title and Branch Audit Reporting Line 2000 - 2006/08. The
Network Audit Team was originally designed to report within the National Audit
Team. Possibly as a result of a business wide organisational review (which also
removed the seven regional boundaries), National Audit moved
(organisationally) from Post Office to within Royal Mail Group. They then
became known as Royal Mail Internal Audit & Risk Management but continued
to perform auditing activities within Post Office (as well as other parts of the
Royal Mail Group). However, it was decided that the Network Audit Team would
stay within Post Office (rather than moving with National Audit). At this point,
my reporting line changed for a temporary and very short period (and I cannot
recall their role/name) and ended up reporting to Alan Barrie (Operations
Director) for a further short period. My whole team was then absorbed into the
Security & Investigations Team. This was at a time when the Security &
Investigations Team was undergoing its own structural review. On completion
of that review, I was selected to a similar role, with auditors now also completing
security inspections (at the same time as a branch audit). I believe my role was
now called National Audit & Inspections Manager and reported to Tony Marsh,
Head of Security & Investigations. I believe that his job title changed to Head of
Security & Audit but investigations staff remained within his remit. For reasons
I cannot recall, but possibly due to a further organisational review, my team
moved to the Finance Directorate and I reported to Rod Ismay (I believe his
role was Head of Risk & Control at that time), who reported to the Finance
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=
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Director. Although my job title and reporting line changed over this period, my
overall responsibility (of leading the team that performed branch audit activity)
did not change.
. Compliance Risk & Assurance Manager —2006/08 - 2011. Soon after a further
organisational review (which I had believed to be around 2006 but documents
I have seen suggest that this may have been “2008” (POL00085682) (3), the
responsibility for the network auditors was transferred to the Network
Directorate, with agency trainers and network auditors performing a new joint
role. While I no longer had any operational responsibility for branch auditors,
there was a short period of time where maintaining or developing compliance
and conformance audit programmes (that were used during audits) were
maintained by my team. In addition, a risk model (that helped inform a schedule
of audits) continued to be managed by my team. My new role reported to the
Head of Compliance (Keith Woollard), who had an expanded team and initially
reported to the Finance Director. At a later point (possibly around 2009/10),
Keith's reporting line moved to a new Legal and Compliance Director. Keith left
the business towards the end of 2010 so I reported to his replacement (Paul
Meadows) for the final three months of my career. My role from 2006/8 onwards
focused on providing management information on compliance audit activity and
mystery shopper findings (in the form of a Compliance KPI pack) to a range of
internal stakeholders and also informed assurance work/statements to external
partners and clients (e.g. Bank or Ireland, NS&l, DVLA, UKPA etc), especially
around regulatory matters. I also managed a risk register and took minutes at
Post Office Risk & Compliance Committee (a subcommittee of the Post Office
Executive Team).
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22. Following a reorganisation that was announced in 2010, and after just over 31
years of working in various roles within different Post Office structures, I chose
to leave the business. My last day of service was 26 March 2011.
The audit process and the policies/practices in place
23.1 have been asked to provide an account of my role and the policies/practices
in place and any changes.
24. In all my audit roles, I held a management position, focusing on leading a team
of branch auditors (from a local team of two people in 1989/90 to a national
team of circa 100 team members in the early to mid-2000s).
25.When I joined a District Audit Team (in 1989/90), my memory is that an Audit
Manual was a small typed booklet. While there were established policies and
processes in place in respect of auditing branches within the North Midlands
District, I do not recall any documented processes. As this was in an era when
computers were not used in the audit department, audit findings were
documented on a paper-based form (called P32) and paper files were
maintained for each branch and stored in folders in filing cabinets.
26.In 1993, when regional audit teams were set up, the Midlands Regional Audit
Manger looked to standardise practices from across the old districts that made
up the new region. I suspect that similar activities took place in the other six
regions. When I took up the Midlands Regional Audit Manager post in 1995, I
decided to centralise the audit operation in the Midlands Region. As Windows
based computers were just being introduced to the Midlands Audit Team in the
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mid-1990s, I decided to change our practices so that paper-based audit
documents and files were replaced by documents on Word and Excel.
27.My memory is that National Audit (Post Office’s Internal Audit Team) held
national workshops (either six monthly or annually) to help facilitate the sharing
of experiences and practices across the seven regions. My view, from attending
some of these workshops, was that each individual region tended to have
slightly different approaches and were organised or operated slightly differently
as suited their region.
28.As part of the Review of Regional Audit Project (led by National Audit) in around
1998/99, the practices in place across the seven regions were examined. One
of the outputs of this review was to develop an Audit Policy Manual and Audit
Process Manual that would aid a uniform approach for branch audits in all post
offices across the UK. I cannot recall the dates and reasons for subsequent
changes to processes, but many would have been to reflect new products and
change in practice at branches. These manuals were version controlled with
details of changes.
Organisational Structure
29.1 have been asked to consider documents POL00085682, POL00085769,
POL00086765, POL00086831, POL00088445, POL00083966, POL00033398
in answering questions about organisational structure but note that
POL00085682, POL00085769, POL00086765, POL00086831, POL00088445
were dated or appear to be written after I left Post Office in 2011.
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30.As mentioned in paragraphs 18, 19 and 20 above, the Network Audit Team was
designed with the intention of it reporting within Post Office's Internal Audit
Team (National Audit). This changed when National Audit moved to Royal Mail
Group. Subsequent changes to the organisational structure and reporting line
of the Branch Audit Team were generally aligned with Post Office
reorganisations, often linked to cost reduction (sometimes reducing the number
of auditing roles) as Post Office sought to become a more competitive business.
3
are
.As the only way to be assured that declared assets were physically in branches,
the key remit of the audit team was to visit branches to count cash and stock
(and other value items). The relationship between the branch audit team and
other parts of Post Office (e.g. Network Management, Security Team) was
either to obtain a range of management information (to inform audit activity) or
provide findings from audit activity (on assets physically held at branches as
well as any compliance or conformance issues) to those who were responsible
for making decisions in respect of contractual liability, debt recovery and
security or investigations.
32. Both now and at the time, I considered it important for the Branch Audit Team
to have organisational independence and why I was keen for the team to sit
within the National Audit Team (I believe, National Audit reported directly to the
Board). Given the subsequent organisational changes, independence was
positioned as being separated from the activities it audited i.e. having no
executive responsibilities and being separate from those taking decisions
(especially in respect of contractual and investigation matters).
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33.While I cannot recall any specific concerns raised about the independence of
the branch auditing activity, I did express misgivings about the decision to
merge audit activities with training activities within the same directorate of the
management of branches. With hindsight, it is evident that changes in reporting
line had the effect of influencing a focus on activity e.g. when audit teams
reported within Security, there was a decision to include security inspections in
the audit testing. When moving to the Compliance team, there was a greater
emphasis of testing regulatory compliance and, when the audit teams moved
to the Network Directorate, there was additional focus on testing against
conformance to “Branch Standards”.
Recruitment and training of auditors
34.1 have been asked to consider documents POL00032698, POL00086765,
POL00088453 and POLO00088557 in respect of questions regarding the
recruitment and training of auditors. However, I note that POL00086765,
POL00088453 and POL00088557 were all dated after I left Post Office in 2011.
My response to questions about the recruitment and training of auditors focuses
on the period when the branch auditors across the UK reported to a team led
by myself, as I feel unable to comment about such matters before or after this
period.
35.Branch auditors were recruited internally and generally had a background of
working in a crown office.
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36. There was no minimum level of qualification required to conduct branch audits,
with Post Office counter experience considered the essential requirement.
37.When the new Network Audit Team was created, all appointed auditors would
already have been experienced in auditing branches. There would have been
an initial workshop that would have been used to provide guidance of new or
revised processes. Subsequently, all branch auditors would have attended
team meetings and periodic in-house audit workshops, which were used for
exploring and sharing experiences, considering best practice as well as
providing any required refresher training.
38.In principle, any new recruits would have been provided with induction training
from their line manager and would shadow/be supported by more experienced
members of the team (most branch audits required working with at least one
other auditor). However, the series of business reorganisations or annual
“headcount reduction” programmes meant that there were very few vacant
positions that required filling. In addition, as business policy at the time was not
to have a compulsory redundancy programme, this meant that there were often
several surplus staff in the business (who did not want to take voluntary
redundancy) looking for a role. Business/HR policy was to place any surplus
staff into suitable vacant roles before they were filled through application and
this resulted in recruitment restrictions i.e. any vacant roles were either left
unfilled or had to be filled by surplus staff. Over a period of at least six years,
during the period of leading the national team of branch auditors, I can currently
only recall two new recruits (at least one of whom was surplus).
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39.1 cannot recall the dates, content, location or providers of Horizon training but
branch auditors would have received the same type of training as was afforded
to crown office staff as part of the Horizon roll out plan.
40.Branch auditors had a background of a counter clerk experience at a branch
office and many had performed roles with cash account responsibilities. In
addition, most had already worked in audit for many years prior to the creation
of the national team and the roll out of Horizon. As they had experience and
expertise in auditing, an environment that they were very familiar with (and with
more counter experience than many of those they audited), I would have felt at
the time that they had the necessary training and experience to carry out the
tasks required of them. My view now is slightly different in that, when Horizon
was rolled out, branch auditors no longer had this perceived advantage. They
were immediately no more familiar with the way products were transacted than
those who were using the system every day. With hindsight but set against the
background of recruitment restrictions at the time, it would have been desirable
to have had a more diverse skill set within the team. As most existing audit staff
had not used a computer before 1995, injecting the team with more IT
knowledge, experience and skills as well as enhanced skills in data analysis
would have been valuable.
The planning and scheduling of audits
41.1 have been asked to consider POL00084650 and POL00085286 in responding
to questions about the planning and scheduling of audits at branches.
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42. The Branch Audit Plan was devised as an annual audit plan (in terms of number
of branches expected to be covered across different audit types) with the
scheduling of named branches performed on a monthly/weekly basis, using a
range of scheduling criteria. Most routine audits were unannounced and
scheduled from the use of risk models (looking at financial risk data and
compliance risk data) or following a management concern (e.g. at the request
of the Investigations Team). Other audit activity (e.g. following a
robbery/burglary, transfer of sub-postmaster and some compliance audit
activity) was performed on an announced basis.
43.Once audits were scheduled to an allocated auditor, they were expected to be
completed on the day although there were occasions when an audit had to be
postponed e.g. audit staff reporting sick or being diverted to attend a robbery
or burglary incident. Any verbal reporting would be undertaken while the
auditors were still at the branch, with written reports generally performed away
from the branch. These would be submitted to Network Management by email
(with any hard copies requiring posting sent by a central admin team). I am not
certain but believe that written reports were expected to be completed within a
week of the audit.
44.While there was no investigation work by auditors prior to an audit, the lead
auditor would be expected to perform some planning activities as preparation.
This would have included reviewing previous audit findings and the reason for
the audit being scheduled. In addition, the profile of the branch would be
reviewed (e.g. branch type, location, opening hours, products transacted, if the
sub-postmaster lived on the premises etc). The lead auditor would be expected
to brief any other auditors attending, prior to the start of the audit.
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45.Prior to 1993, audits were scheduled on a cyclical basis. I believe that the
frequency ranged from 1 - 3 years, based upon the size of the branch and
previous audit findings. There were exceptions to this frequency e.g. where
management had expressed a concern, where there was a high level of errors
being reported (through error notices), a robbery or burglary had occurred or
within 3 and 12 months of a new sub-postmaster taking up post. During the
period of 1993 - 1995, a new database was developed that sought to profile the
risk of branches with the aim that its output would help inform audit scheduling
and make better use of limited resource. The database was called the Outlet
Target Risk Model (“OTRM”). The OTRM was developed by National Audit
(Post Office’s Internal Audit Team) and was rolled out to the seven regional
audit teams, to maintain and use. I believe that this frequency basis for auditing
was formally removed during the review of regional audit teams in 1999.
However, some branches continued to be scheduled for audit on a random
selection basis. This was in part to mitigate the risk of branches never being
audited and to also help test the effectiveness of the risk model.
46.1 cannot recall any specific variation between the scheduling of audits in respect
of crown office branches and other branches except that more resource would
be required to perform audits at crown offices so they would be more
challenging to schedule. As crown offices were managed by a Post Office
manager, who had responsibilities to perform random supervisory checks of
individual staff, they may have been perceived as lower in risk.
The auditing process
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47.1 have considered documents POL00083966, POL00084801, POL00087627,
POL00088745, POL00088204, POL00088252, POL00084003, POL00104821,
POL00084977, POL00085652, POL00086765, POL00086831, POL00086839,
POL00087716, POL00087614, POL00088628, POL00088830, POL00084979,
POL00084978 and POLO00088445 in answering questions about the audit
process but note that several of the documents were dated after 2011 (when I
was no longer employed by Post Office) and record processes that may have
changed over time.
48.The auditor would have been expected to access a range of reports from the
Horizon system as set out in the Audit Process Manual at the time. The Audit
Process Manual was written and maintained as a means to set out a process
to be consistently used by all Post Office branch auditors across the UK. The
type of information would have included the Last Cash Declaration and Branch
Trading Statement, Office Snapshot, Transaction Logs, Event Logs,
Remittances In and Out report, Transaction Correction Reports etc. Any
variations would depend on the branch profile e.g. if the branch operated
multiple stocks or sold foreign currency.
49.Where the audit revealed a discrepancy, the lead auditor would be expected to
double check their own figures first and then review various reports from
Horizon that might explain the discrepancy. The sub-postmaster/branch
manager would be advised of the outcome, confirming that all items of cash
and stock had been provided/seen. In the event of any large financial
discrepancy, other irregularity or admission of false accounting, an escalation
process would be triggered. This involved immediate reporting to Network
Management, who would decide what action to take. If there was any admission
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of false accounting or where the discrepancy was greater than an agreed
amount, this would also be reported to the Investigation team for their
information/action. The amount that triggered an escalation may have changed
from time to time but was in the region of £1,000. Branch auditors were required
to gather the facts in an objective way for others (management in Network or
Investigations) to make decisions. While auditors would probably ask the sub-
postmaster/branch staff if there was any known reason for any discrepancy,
they would not perform any interviews or investigation. Where a decision was
taken by Network management to temporarily suspend the sub-postmaster, the
auditors would perform a further, final audit as part of closing the branch.
50.Referring to POL00042966, I am not aware that branch auditors were ever
instructed not to consider the cause of discrepancies or shortfalls at branches
but were simply expected to follow a documented audit process.
5
=
.I was asked to consider the email at POL00088823 in respect of a practice to
ask sub-postmasters to make good any discrepancies found at audit and would
comment that this email was dated 9 years after I left the Post Office. However,
my recollection, going back to when I joined Audit in 1989/90, is that it was
common practice to ask the sub-postmaster to make good a discrepancy found
at audit. However, when a large discrepancy had been revealed or where there
had been an admission of wrongdoing (that would require escalation on the
day), the process was clear that the sub-postmaster should not be asked to
make good the. In the event that the sub-postmaster voluntarily offered to do
so, it would be accepted without prejudice to any investigation or decision that
would be taken and a receipt to this effect provided.
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52.1 am unaware of an instruction being given to auditors on taking payment from
sub-postmasters other than that set out in the Audit Process Manual (outlining
how to deal with amounts that were offered).
53.At the end of the audit, the sub-postmaster would be advised of the
result/findings and advised of any discrepancy discovered. They would be
encouraged to provide any information that would help understand any reason
for the discrepancy. While I do not believe that there was ever a formal process
to invite the sub-postmaster to perform their own investigation, in the event of
any precautionary suspension, they would no longer have access to the
Horizon system.
54.At the outset of the audit, the lead auditor would introduce themselves (and any
colleagues) to the sub-postmaster (or whoever was in charge) and outline the
audit process, providing an estimated time of when the branch could open. The
lead auditor would look to gain access to the Horizon system and also ensure
that they had access to all cash and stock etc, asking the sub-postmaster/staff
to be with them while they counted/agreed the cash figure (against the latest
declaration). The lead auditor would look to keep the sub-postmaster up to date
with the progress of the audit and arrange a close of audit meeting.
55. During the close of audit meeting with the lead auditor, the sub-postmaster was
able to raise issues or concerns. The lead auditor would be expected to capture
these and include them in the written report.
56.As a financial branch audit involved verifying assets physically on hand to
reports generated by Horizon, I do not think it would be possible to perform an
audit in circumstances in which it was not possible to access the
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Horizon system. In events such as a fire or flood at the branch, there was an
emergency process in place to count the cash, stock and other assets (agreeing
figures with the sub-postmaster) and to secure the items off site.
57.For crown offices, it was considered impractical to audit every individual stock
unit. Therefore, there was a process where a percentage of stocks would be
audited focusing on those containing high values of cash/stock. The risk of not
auditing every stock was mitigated by the fact that the branch manager would
have responsibility for randomly checking stocks held by counter staff as well.
When auditing a sub-post office, there would usually be an audit of all the value
assets. At some point in time, a financial assurance audit was introduced at
sub-post offices. This would involve checking cash and high value stock items
only. However, in the event that a large discrepancy was revealed, the audit
would be extended to a full cash and stock audit.
58.1 have considered POL00002841 and FUJ00001894 in responding to questions
about Global User Accounts.
59.1 am not aware of any involvement that Fujitsu had in the branch audit process
but recall sight of documents from Fujitsu that helped outline how branch
auditors could access the system, in branches.
60. My understanding is that the branch auditor would not have access to anything
on the system that the sub-postmaster (or any Horizon User with a manager
access level) did not.
61.My understanding is that the Global User Account enabled a branch auditor to
access the Horizon system, using a one-time password, for occasions when
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the sub-postmaster was not present (and the branch auditor could not be added
to the system) or where the branch auditor needed to close a branch.
62.From memory, there would have been a process to formally request a new
Global User Account (or delete a user) but cannot recall what controls were in
place to monitor these accounts.
Reporting and oversight
63.1 have considered POL00047544, POL00021419, POL00021420,
POL00021421 and POL00033398, POL00085619 POLO00085431_ in
responding to questions about reporting and oversight, noting that
POL00088887 was written over 10 years after I left Post Office.
64.A variety of different stakeholders in Post Office were provided with branch
audit findings and these stakeholders changed over the years of different
organisational structures. Aside of the verbal escalation process on the day of
the audit (to network management and investigation managers), written reports
were submitted to network management after each individual audit and
(monthly/quarterly) summarised findings were provided to senior managers in
a range of relevant functions, enabling any key trends or concerns to be raised.
65.The Risk and Compliance Committee (“R&CC”) was a subcommittee of the
Post Office Executive Team, meeting on a quarterly basis. There were regular
attendees as well as invited members on a meeting-by-meeting basis. The role
of the R&CC was to provide oversight and scrutiny to a range of risks being
managed in the business and this would often prompt further activity. My
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memory is that, by the late 2000s, each directorate had a risk champion and
controlled a risk register for their own directorate. This was amalgamated into
a Post Office risk register and reviewed by the R&CC. The Annual Audit Plan
was also presented to the Committee for endorsement.
66.Since the audit process was designed on creation of the national team of
branch auditors, it was subject to ongoing review. Reviews focused on input
from users of the process, changing product ranges and internal processes and
other feedback. While individual aspects of the audit process would be
proposed by managerial team members, I would have been involved in the
assurance/authorisation process of any changes.
67.Accepting now that the audit process at branches was reliant on the integrity
and accuracy of Horizon data, at the time, I considered that the audit process
was fit for purpose. At some point in the early 2000s, Network Audit was subject
to a review by Royal Mail Internal Audit and Risk Management, which provided
another level of assurance. Now, and with hindsight, there were probably
aspects of the audit process that could have been better. These include more
detailed planning activity, more controls to post audit activity, enhanced data
analysis and improved summary reporting. It does also occur that the
management information that informed the risk model (and helped to target the
scheduling of audit activity) could possibly have identified issues or action
without waiting for audit activity.
The debt recovery process and the policies/practices in place
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68.1 have reviewed POL00083939, POL00088904, NFSP00000169,
NFSP00000043, POL00085794, POL00030562, POL00083951,
POL00083952, POL00030566, POL00105417, POL00003060, POL00084012,
POL00088897, POL00113670, POLO0086868, POL00088579, POL00090357,
POL00088312, POL00001642 prior to answering questions regarding the
Compliance Team's role in relation to error
notices, transaction corrections, transaction acknowledgements, branch
discrepancies and a sub-postmaster’s/assistant’s response to these.
69.1 cannot recall what an open item managed account was.
70.Prior to Branch Trading, an error notice effectively was a paper-based means
to correct an error in the cash account, issued to the branch by post.
71. Transaction corrections replaced the paper-based error notice system after the
introduction of Branch Trading. I do not recall the term transaction
acknowledgement.
72.Error notices/transaction corrections were issued to correct a mistake/error
made in the branch. This was generally after an error had been identified by the
client (e.g. NS&l), or as part of the process for Product & Branch Accounting
settling with clients or from other services (e.g. a cash remittance discrepancy).
73.Error notices were issued by the local audit teams (during the period of district
and regional audit teams) up to the disbanding of regional audit teams (circa
1999). My recollection is that the issuing process transferred to the Agents Debt
Team in Product & Branch Accounting (perhaps known then as Client Account
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and Cash Management) at that point. Transaction corrections would have been
issued by Product & Branch Accounting, through Horizon.
74.On receipt of an error notice, the sub-postmaster would be expected to bring it
to account but could seek more evidence (if insufficient evidence was supplied)
or dispute it (with reasons for doing so).
75.On receipt of a transaction correction, I believe that the sub-postmaster had the
option to accept it, settling centrally or locally, or seek more evidence.
76.1 cannot recall what guidance or check list (on suggested steps to follow) was
provided to sub-postmasters, when they discovered a deficiency in their
accounts, but would expect that this would include recounting cash and stock
and reviewing transaction logs. As sub-postmasters were contractually liable
for losses (e.g. through negligence, carelessness, innocent errors or for any
losses incurred by staff working for them), they would be expected to rectify any
resultant discrepancy at the end of the trading period (or cash account week,
prior to Branch Trading). The options were to make good locally (or withdraw a
surplus) or settle centrally.
77.1 had a vague recollection that a minimum amount was introduced for settling
branch trading discrepancies centrally but could not recall the amount (although
POL00085794 outlines that this was £150). The sub-postmaster would be
expected to make good amounts under this limit in cash or cheque although I
recall that, for larger amounts, there was also an option for the sub-postmaster
to put forward a hardship case for consideration.
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78.1 have reviewed the witness statement WITN0398010 and POL00088904,
POL00086845, POL00088867, and NFSP00000169 in answering questions
about the local suspense account. From memory, the suspense account was
originally used to account for payments and receipts that could not be
accounted for at the end of the balancing day e.g. transactions accepted after
a cut off time. It was also used to hold an amount (with authority) for a pending
error notice e.g. where the branch was aware of a known and identifiable error
but an error notice had not yet been processed/received. It may also have been
used to account for any remittance discrepancies or a deficiency in the account
due to a robbery or burglary at the branch (which was awaiting clearance).
79.In considering the document POL00085794, I cannot recall the detail of the
process so I am not sure if by 2005, the only option open to a sub-postmaster
who received a transaction correction which they did not understand or wished
to challenge was to call NBSC.
80.1 do not know what NBSC’s processes were in respect of dealing with disputed
transactions corrections but I would expect that the onus would have been on
the branch to have explained why any transaction correction was being
disputed.
81.Similar to my response in paragraphs 79 and 80 above, I do not know if the
only option available to a sub-postmaster who considered that a discrepancy
was caused by a system error, was to contact NBSC and seek agreement with
Product & Branch Accounting (settling centrally while the matter was
investigated).
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82.My personal view would have been that settling centrally was an accounting
procedure and separate from the acceptance of liability (especially where a
transaction correction was under dispute). The document POL00001404
appears to be notes taken from a meeting where legal guidance was that
“settling centrally’ did indicate acceptance of debt liability. I was neither at that
meeting nor was this a position that I was aware of.
83.1 do not know what records were held by NBSC or Product & Branch Accounting
to know if it was possible to distinguish the difference between a disputed debt
from an undisputed debt.
84.My understanding at the time was that transactions corrections were provided
with sufficient evidence so I would have felt that it was satisfactory to expect a
timely settlement. As indicated in paragraph 82 above, I do not now think it was
satisfactory to expect a sub-postmaster to settle centrally for a transaction
correction that was not supplied with clear evidence (especially if this implied
accepting liability).
85.1 have been asked if I agree that the process for challenging transaction
corrections/discrepancies meant that any deficiency/loss was assumed to be
caused by an error (or wrongdoing) on the part of the sub-postmaster unless
they proved otherwise. I do not agree that the process of challenge in itself
should lead to that view but I would agree that any resultant deficiency or loss
from an unsuccessful challenge would have been considered to be due to a
further or compensating error and that the onus would be on the sub-
postmaster to identify or prove such an error.
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Cases against Sub-postmasters
86.1 have been referred to POL00061010. My memory of this case is quite vague
in that I have a recollection of a case of this nature and recall being informed of
the situation by phone but cannot recall by whom or at what point. While the
case would have prompted an urgent review (of the audit process and
application of that part of the audit process), to identify any gaps and prompt
any remedial action, I have no recollection of the outcome.
87.In considering both the documents POL00044497 and POL00066040, I do not
recall any involvement in either case. Both audits were prompted by
management (Investigation) concerns and these would have been coordinated
with the manager responsible for scheduling audits and/or the lead auditor.
Where a discrepancy revealed at any audit was greater than £25,000, I was
routinely advised in order that I could inform senior management. In addition,
large discrepancies revealed at audit would trigger me to review risk model data
to understand if/how the risk model was capturing this or if any other branches
showed a similar profile.
Knowledge of bugs, errors and defects in the Horizon system
88.1 have considered documents POL00088935, POL00088209, POL00042966,
and POL00087879 to answer questions about knowledge of Horizon system
issues.
89.The trend data in POL00088209 relates to the period between 2013/14 and
2016/17. This period is after I left the business in 2011. Prior to leaving Post
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Office, I would have been aware of any trend change in the average loss
discovered at audits but would also have been wary of any headline figures
where a few large individual losses skewed the average discrepancy found at
audit. I also suspect that, if the trend was rising, it may have been considered
(at the time) that this was partly a measure that confirmed the risk model used
in the selection of branches to be audited was working. In my view, the results
of randomly selected branches for audit would probably have been a better
basis for measuring any broader trend but I do not recall what that trend was.
90. With the exception of issues encountered during a communication failure/power
outage at a branch, for which there were fall back processes, I did not have nor
was I aware of any concerns regarding the robustness of the Horizon system
during my time working for Post Office. Any issues I had heard about seemed
to be considered as related to in branch/user error.
91.As I did not have any concerns, there was no communication decision to make.
92.1 was not aware of any instruction given to auditors to disregard possible
problems with Horizon as a possible cause for discrepancies, noting that I did
not have direct contact with branch auditors after those roles moved
(organisationally) into the Network directorate.
Other matters
93.1 have been asked whether there are any further matters I consider the Chair
of the Inquiry should be aware of. I can confirm that there are no further matters
I can think of for his consideration.
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Statement of Truth
I believe the content of this statement to be true.
Signed:
Dated: 14 May 2023
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Index to First Witness Statement of Martin Charles George Ferlinc
No. I URN Document Description Control No.
1 POL00085682 Review of Post Office Ltd Audit
Processes and Tools (Dated October
2011)
2 POL00085769 Business Loss Programme Board ONCH
— Cash Loss deficiencies: POL Analysis
Report (Version 0.1 28 October 2011)
3 POL00086765 Network auditing approach, methods and
assurance (Dated 2013)
4 POL00086831 POL Executive Committee: Internal Audit
Options (Dated October 2013)
5 POL00088445 Process document — Agent Debt
(Undated)
6 POL00083966 I Audit Charter (Version 4.0 undated)
7 POL00033398 Post Office Training Presentation on
Assurance Review: Quality of Auditing
(Draft version 0.5, undated)
8 POL00032698 ‘I Assurance Review — Recruitment (Vetting
& Training) — (Version 1.0, 27 October
2009)
9 POL00086765 Network auditing approach, methods and
assurance (Dated 2013)
10 POL00088453 I Training & Audit Advisor
(Undated)
11 POL00088557 =I Audit Advisor (Undated)
12 POL000852864 I Audit Plan & Scheduling, Chapter 1 of the
i?) Audit Process Manual (Version 9)
(POL00085286)
13 POL00083966 I Audit Charter (Version 4.0 Undated)
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14
POL00084801
Performing a Branch Audit, Chapter 3 of
the Audit Process Manual (Version 5.1,
2010)
15
POL00087627
Follow Up Audit Process, Chapter 3b of
the Audit Process Manual (Version 3.0,
May 2015)
16
POL00088745
Closure Audit, Chapter 5 of the Audit
Process Manual (Version 8.0, 19
September
2019)
17
POL00088204
Robbery & Burglary Audits, Chapter 6 of
the Audit Process Manual (Version 6.0,
2017)
18
POL00088252
Performing a Cash Centre Audit, Chapter
7 of the Audit Process Manual (Version
5.0,
2016)
19
POL00084003
Post Incident Auditing without Horizon,
Chapter 14 of the Audit Process Manual
(Version 1.0, 1 November 2006)
20
POL00104821
Condensed Guide for Audit Attendance
(Version 2, October 2008)
21
POL00084977
Former Sub-postmaster End To End Debt
Review (Version 0.5, December 2009)
22
POL00085652
Requirement of Network Field Support
Advisors at audit, following discovery of
discrepancy (Version 1.0, October 2011)
23
POL00086765
Network auditing approach, methods and
assurance (Dated 2013)
24
POL00086831
POL Executive Committee: Internal Audit
Options (Dated October 2013)
25
POL00086839
Training Guide: Compliance Audit Tool
(Dated 2013)
26
POL00087716
Training-Aide for Branch Asset Checking
(Version 1.7, November 2014)
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27 POL00087614 I Terms of Reference Audits (Dated April
2015)
28 POL00088628 I Closure Process when Horizon is not
operational (Version 3.2, December
2018)
29 I POL00088830 I Checklist for Audits (Dated 4 July 2019)
30 POL00084979 Network Field Support Team Business
Process Documentation (Undated)
31 POL00084978 I Network Field Support Team flowchart
(Undated)
32 POL00088445 Process document - Agent Debt
(undated)
33 POL00042966 Post Office's Response to Claimants'
Information Requests Made on 4 March
2019 (Dated 27 September 2019)
34 POL00088823 Email (Dated 26 March 2020)
35 POL00002841 Global User Account (Dated September
2016)
36 FUJ00001894 Audit Trail Functional Specification
(Version 8.0, 18 October 2004)
37 POL00047544 Post Office branch auditing — Period 6
report (2004/05) — (Dated 29 October
2004)
38 POL00021419 Minutes of the Risk and Compliance
Committee (Dated 8 November 2005)
39 POL00021420 Minutes of the Risk and Compliance
Committee (Dated 22 March 2006)
40 POL00021421 Minutes of the Risk and Compliance
Committee
(Dated 8 September 2006)
41 POL00033398 I Assurance Review: Quality of Auditing
(Draft version 0.5, February 2011)
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42
POL00085619
CAT Reporting Tool Changes (Dated May
2011)
43
POL00085431
Guide to sending reports/documents post
audit (Dated 2020)
44
POL00088887
A short guide to the Audit Reporting Tool
(ART) — (Dated 13 May 2021)
45
POL00083939
Losses at SPSO's: Guidelines on
responsibilities and recovery
arrangements — (Understood to be issued
in 1988)
46
POL00088904
Losses and gains policy within the POCL
agency network (Version 1, 20 November
1998)
47
NFSP00000169
Debt recovery — Horizon related errors
(Dated 18 November 2004)
48
NFSP00000043
Debt recovery — Horizon related errors
(Dated 18 November 2004)
49
POL00085794
Debt Recovery Processes under Branch
Trading” — (Dated October 2005)
50
POL00030562
Post Office Ltd Losses policy —
overarching (branches) — (Version 9,
effective date April
2006)
51
POL00083951
Process for awaiting TC (Transaction
Correction) — Multiples (Dated 15
December 2005)
52
POL00083952
Process for awaiting TC (Transaction
Correction) — Singletons — (Dated 15
December 2005)
53
POL00030566
Dealing with discrepancies revealed at
audit (Version 1 undated)
54
POL00105417
Summary of Discussion on Compliance,
Conformance, Losses and Debt (Dated
2008)
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55
POL00003060
Post Office Limited — Process
documentation — Branch Correction
Process (TCs) - Version 2.0, undated
56
POL00084012
Transaction Correction / Debt Recovery
Process (Undated)
57
POL00088897
Working agreement — Finance Service
Centre and Network (Version 2.12,
undated)
58
POL00113670
Policy document - Operators’ in service
debt — (Version 1.0, 18 September 2013)
59
POL00086868
Policy document - Operators’ in service
debt (Version 1.1 22 October 2013)
60
POL00088579
Policy document - Operators’ in service
debt (Draft Version 1.2 8 February 2019
61
POL00090357
Policy document - Operators’ in service
debt (Version 2.0 4 December
2014)
62
POL00088312
Policy document - Operators’ in service
debt (Version 3 April 2017)
63
POL00001642
Review of the Creation and Management
of Transaction Corrections in POLFS to
Correct Accounting Errors in Horizon
(Version 1.0, 10 February 2010)
64
WITNO0398010
WITNO0398010 - 2023
65
POL00088904
Losses and gains policy within the POCL
agency network (Version 1, 20 November
1998)
66
POL00086845
Post Office Ltd — Security Policy:
Accounting losses policy for agency
branches
67
POL00088867
Post Office Ltd —- Security Policy: Liability
for losses policy (for agency branches)
68
NFSP00000169
Letter
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69
POL00085794
Debt Recovery Processes under Branch
Trading
70
POL00001404
TC/Debt Recovery Review
71
POL00061010
Post Office Ltd Offender Report on David
Yates and Lindsey Smale
72
POL00044497
Letter from Alan Stuart to Nigel Allen re:
Audit of Post Office South Warnborough
branch
73
POL00066040
Letter from Alison Edwards to Sue
Muddeman re: Audit of Post Office Ten
Acre Street branch
74
POL00088935
Report from Rod Ismay, Head of Product
& Branch Accounting to Dave Smith, Mike
Moores and Mike Young regarding
Horizon - Response to Challenges
Regarding Systems Integrity
75
POL00088209
Post Office Agent Branch Losses -
Mitigation Proposal
76
POL00042966
Post Office's Response to Claimants'
Information Requests Made on 4 March
2019 in Alan Bates & Others and POL
77
POL00087879
Approach to Business Risk, Branch Audit
and Accountancy Support for Operators
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