Much has been written about the Post Office scandal especially in the wake of the ITV drama series Mr Bates vs The Post Office. The reaction has been extraordinary, especially since the story had already been widely publicised and the subject of a Parliamentary Enquiry. But as we listen to calls for those responsible to be held accountable and watch the government reaction, it is also important to take a calm and dispassionate look at the role of various stakeholders, and in particular the internal audit function.
Internal audit has been a pivotal player in the whole sorry tale. What was their role and what lessons can we learn? What can internal auditors do in future to prevent, detect, and mitigate such crises.
For anyone who is still unfamiliar with the case, the Post Office scandal unfolded as a catastrophic failure of financial controls, resulting in severe consequences for both individuals and businesses. Subpostmasters were wrongly accused of financial irregularities due to flaws in the Horizon accounting system, leading to legal battles, financial ruin, and a significant loss of public trust.
Internal auditors are tasked with identifying and assessing risks within an organization's financial systems. As we now know, the Horizon system was far from perfect, so we can conclude that there was risk. Why did the internal auditors not spot it? The answer to that may come out as enquiries continue, but a look at the most common reasons for failure in this area give us some pretty plausible explanations:
- Inadequate understanding of technology
- Limited expertise in forensic accounting
- Over-reliance on automated controls
- Insufficient resources and staffing
- Lack of independence
- Incomplete risk assessments
- Inadequate training
- Poor communication channels
- Lack of data analytics capabilities
- Complacency and routine auditing
There is little in the public domain about whether the risk assessments were adequate, although the outcome would suggest not, but I would lay money on all of the rest of the points here having at least some part to play.
I had one final, minor reaction, to the drama series. Surely every auditor knows that it is best to gain the trust of the people you are auditing. If you take a ‘them and us’ approach, they are unlikely to open up and you will not get a full picture of what they believe has happened. So it may well have been artistic licence on the part of the TV producers, but I for one was mortified to see the auditors turning up at a series of tiny sub-post offices in little villages in a fleet of big shiny Mercedes.
There are all sorts of villains in this story, and the internal auditors may not have actually caused the problem, but they should have been more proactive in identifying risks, and in being sceptical about the integrity of the financial system. Add in a case of group think and a fair amount of confirmation bias and they really are not doing their job.
We should all reflect on what lessons we can learn from this scandal. Those involved in or responsible for internal audit functions should re-evaluate their internal audit processes and embrace a culture of accountability and transparency.
Alan Nelson is an author for accountingcpd. To see his courses, click here.
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