The Post Office scandal shows the limits of nationalisation

More fun from the Bing image creator. Post Office management about to conduct a branch audit. Actually I told Bing to portray gangsters…

The big British political news of 2024 so far has been the scandal of the Post Office’s persecution of sub-postmasters from the late 1990s on, based on erroneous reports from its Horizon system. The scandal itself wasn’t news; it had been making a number of people’s blood boil for years (including mine), but no politician in government felt the need to deal with it with any urgency, and all tried to manage it through the organisation’s dysfunctional management. An inquiry had been set up – the classic British method for kicking institutional problems into the long grass. But a television drama over the Christmas holiday caught the public imagination, and at last pushed it to the level of public attention it has deserved for years.

I personally still don’t understand what went wrong. As an accountant who has had quite a bit of experience unravelling knotty problems, I have not been able to get any sort of clarity. The drama did help a bit here – as the previous press reporting was extremely uninformative as to what the problem with the system actually was. Just what were the deficits that the sub-postmasters were being asked to fund? Usually these should fall into one of three categories: missing sales, false expenses, or missing assets. This doesn’t seem to be any of these – but just muddle. The Horizon system doesn’t seem to have been properly integrated with the accounting systems, and appears to have lacked basic accounting controls. This is not so uncommon with systems designed by computer programmers rather than accountants. But the system does not appear to have been adequately managed or audited by the Post Office’s accountants. The suggestion made by one of the characters in the drama was that the differences were parked in a suspense account, which was then not properly interrogated or investigated. That may not make much sense to my readers, but it does to me. As an auditor most of the big errors I have found arise from pulling apart suspense accounts.

Meanwhile responsibility for managing the problem seems to have been split between senior managers unable to grasp the detail, and junior auditors not given a wide enough scope to explore what the problems actually were – they were just hired bullies. There was a missing middle. But the senior managers should have asked questions as problems started to emerge; as should the investigators. Instead they swept the problems under the carpet, assuming that people raising concerns were just trouble-makers. People have a natural tendency to compartmentalise their lives, and set boundaries to the sort of things they worry about. This is one of the leading causes of organisational dysfunction as those boundaries always leave gaps (as well as overlaps). Still, senior managers should be alive to those sorts of risks and much of the Post Office managers’ behaviour was clearly unethical. Injustice to individuals should not be sacrificed to maintaining an organisation’s reputation. The propagation of untruths is not quite the black and white issue we might like to think – but the Post Office managers clearly went into the black zone far too often.

But such a lack of ethics in senior management is extremely common. This transcends time (think of the Dreyfus scandal in the 19th Century), and culture (problems are at least as bad in China and India, for example; would you believe what an Iranian government spokesman said?). It affects all types of organisation: government, commercial and religious (think of child abuse scandals in various churches). Having said that, I haven’t seen it, or not in extreme, in any of the commercial, public or political organisations I have worked with. There is always a defensive first reaction to bad news; but what happens next is more telling, and here things were better. But those organisations have almost all been relatively small; I have worked in two multinational groups, however, although in one of there were ethical questions haunting senior executives, they didn’t last long. That’s not to say these organisations were perfect – it’s just to say that I didn’t witness the extremes evident in the Post Office, and often witnessed its opposite – the owning up to problems and mistakes.

But what tilts an organisation towards ethical conduct? Prevailing culture in society clearly helps. Most developed countries have a bit of a head start there. I don’t think there is anything special about Western culture here, even though it generally prevails there. All cultures know what strong ethical standards are (think of Confucianism in China, for example). The more ethical conduct becomes the expected norm in a society, the better. Accountability is clearly critical. If it is easy to sweep things under the carpet, and if you are confident that you will never be scrutinised aggressively, then the temptation to do so is often irresistible. It is easy to persuade yourself that you are protecting something more important, and that it is all for the greater good. But accountability comes with a certain precariousness amongst senior leadership; the more entrenched, the less accountable. That precariousness was visible in all the organisations I have worked for. But in the Post Office it seems to have been lacking. It was a publicly owned organisation, accountable to, in theory, everybody but in fact nobody. It had extraordinary control over the information required to make judgements. The politicians to whom they were nominally accountable are good at some types of scrutiny, but not the oversight of large, complex organisations, and still less the operation of their IT and accounting systems.

This is a huge problem with all nationalised industries. Being accountable is to a large extent a choice made by the people running those organisations. I have witnessed this at first hand as a school governor. Fortunately all the headteachers I have worked with thought accountability was a good thing, and accepted scrutiny, even when it got annoying. But I have seen cases of schools where this is not the case, and where the governors were bypassed and flanneled – and looked woefully ineffective. This is less of problem with commercial entities, because they are judged on commercial success, which is hard to fake, or not for long. Public organisations seem to have a degree of political protection that most commercial organisations do not.

This is a problem for the sort of left-wing narrative that suggests that capitalism has failed, and that the solution to any given market failure, especially in public utilities, is nationalisation. They are often right to point out the failures of commercial organisations, such as Britain’s water or rail companies. They are wrong if they think that nationalised organisations will be any better. They are often worse. Water companies are accused of milking their assets to pay fat dividends to investors instead of investing in infrastructure. And yet tight public Treasury management has a similar practical effect, with holders of public debt being the beneficiaries. Perhaps the division of the spoils would be fairer, but it won’t stop the under-investment. The nationalisation of the water companies was undertaken in the first place to increase the level of investment – which it did.

There is no easy answer. Public services are usually natural monopolies, which often bring out the worst in capitalism. But there is no fool-proof way to make public organisations properly accountable.The answer is surely some sort of messy mix private contracts, regulation and intelligent structure.

Meanwhile, Post Office culture looks so rotten that it surely needs to be wound up and replaced by something with better organisational design and stronger governance.

7 thoughts on “The Post Office scandal shows the limits of nationalisation”

  1. Totally agree! Likewise as a former accountant, I’ve been trying to understand it – the double-entry logic requires something real, and a suspense account is only there until you find it. So yes, Horizon presumably was not really an accounting system. Also I was surprised the courts didn’t seem to require evidence of where the ‘stolen’ money supposedly went – flash cars, expensive holidays, personal bank statements showing surprising entries; instead convicting on the say-so of an organisation and its system.

    I suspect the outsourcing to Fujitsu is a part of it, or rather the relationship and accountabilities, where the contractor has greater knowledge and expertise than the client – although there’s more than a hint the contractor was lying. And did the board not monitor a scorecard of KPIs, with one being contracted-out sub post offices in default?

    But ultimately you are right – things go wrong in all organisations, so the culture needs to kick in and self-correct before long. Here it monumentally and tragically didn’t, indeed doubled-down.

  2. I have two further suspects in the case. First the legal system; why was it possible for it to be proved in court that a sub-postmaster was guilty of fraud beyond all reasonable doubt, when computer systems are known to contain bugs, this one in particular had had bugs, and when an implausible number of sub-postmasters were being convicted? The rule that computer generated data is to be presumed to be correct unless the defendant can prove the contrary needs to be re-examined, as does the powers of bodies like the post office to bring private prosecutions not involving the DPP.

    The second is that of whether there could be some half-way house between publicly owned producers answerable to Ministers and privately owned producers, which preserves the threat of bankruptcy as a private sector type control, , while removing the productive unit from the peculiarly Anglo-Saxon definition of the duties of a board focussed strongly on share-holder advantage. Examples of middle ways are Housing Associations, private schools with Charitable status, and the public interest board set up to manage network rail when full privatisation hit problems in the early 2000’s. How do other Countries in Northwest Europe do it? But I don’t know enough of the detail to venture a solution.

    1. I think the legal system is always going to struggle in the use of evidence of general issues as opposed to specific cases. In a sense it is one of its strengths that it focuses on the particular. Clearly the courts’ assessment of computer evidence was a problem here. There was also a lack of control over the Post Office’s use of private prosecutions – but I can understand a wariness of letting the state monopolise prosecution – and a lot of the trouble was in civil cases. But the biggest problem was that the Post Office had all the information – only it could know the full accounting picture – and it sought to use this information monopoly to prevent any damage to its reputation as it saw it.

      Doubtless there are better structural solutions – and I’m sure it didn’t help that the PO was such a long-established institution. Alas I don’t place much weight on supervisory boards, etc. These only work if the management wants to cooperate openly. They are very easily side-tracked or flanneled – and anyway the people who are put on them usually aren’t probing enough. A stronger internal audit process may be more effective, though in the Anglo-Saxon world they tend to be staffed by second-raters (in France, on the other hand…). I’m not sure that other countries do things any better. In Scandinavia it helps that the countries are much smaller, so the clout of community figures like sub=postmasters would probably be much greater.

  3. Take a closer look. The senior management and board at the PO were pretty much all brought in from the private sector. They were set up as an arms length organisation, expected to make profits, and potentially be fully privatised as had Royal Mail. The profits of course determined bonuses and amongst other things, we’ve found how they manipulated the accounts to maximise their bonuses. Operationally they were supposed to be left alone.
    At the same time Fujitsu were behaving both unprofessionally and dishonestly. They are equally culpable. So you have two organisations, both effectively private sector, exhibiting the worst characteristics of the sector. I offer you the City as a case study as the total of fines paid confirms – and Ive worked there a lot.
    That is not to suggest that it’s typical private sector – I’m not an anti-capitalist. But to suggest that it is somehow typical of a state organisation is just political posturing. Just what we expect from the Tories. It’s certainly reflective of the behaviour of a number monopolistic organisations that are products of questionable privatisations.
    And Ive managed and reviewed many large projects, originally with ICL (became Fujitsu), know the investigators personally and have read pretty much all there is to find on the subject. Ive never come across a situation where a customer and supplier have conspired together like this and the accountability runs right to the top.

    1. Thank you Robin. It does seem that attempts to bring in private sector expertise into public businesses often brought out the worst of both worlds. Perhaps an older public service ethos would have been a brake on the prosecutions. But I think the accountability issue remains, and politicking and bullying is often a feature of public agencies (look at the NHS and police). What is needed is a new public sector ethos and better accountability. The private sector may not be as bad in many ways, but it doesn’t follow that private sector managers are more ethical – they aren’t.

  4. I would also say the fault lies primarily in our legal system. The ownership of the Post Office makes no difference to the functioning, or malfunctioning, of that.

    An adversarial contest is probably the worst way of establishing the strength of any case when evidence of a highly specialised nature is involved. On the one side we have expert witnesses who are essentially the clients of police forces and the CPS. On the other we have whatever defendants and our legal aid system can be afforded by their defence teams.

    It was obviously nothing like enough to balance the supposed scales of justice we see on held by the lady on the Old Bailey. Mistake followed mistake as hundreds of innocent postmasters and mistresses were falsely convicted. However, the problem isn’t confined to just the scandal of the Post Office trials.

    Theoretically the necessary expertise is always available to the courts to assess the strength of the evidence. There’s no shortage of experts in universities. It’s not always such a difficult task. Sally Clark was wrongly convicted of the murder of her children on statistical evidence presented by the prosecution which was so flawed that any competent mathematician should have been able to debunk it at trial.

    Yet it wasn’t challenged at all until much later and after a guilty verdict had been delivered.

    We should consider moving towards a more inquisitorial system where experts are paid by the courts to give their honest opinions rather than what they are paid to say by (usually) the prosecution.

    1. Interestingly, in Scotland it was the Procurators Fiscal that pursued the prosecutions, not the Post Office itself – with the same result. But it is clear that expert evidence is misused – and clearly was in this case.

Comments are closed.