The Financial Reporting Council (FRC), the UK’s regulator for auditing, financial disclosures and governance, is “monitoring developments” at the inquiry into the Post Office scandal, Board Agenda understands.

The inquiry is looking at how more than 900 sub-postmasters were convicted of false accounting and theft between 1999 and 2017, based on evidence from a Fujitsu accounting system, Horizon, that a judge ruled in 2019 suffered “bugs, errors and defects”.

News of the FRC’s observation comes a week after the inquiry’s chair, Sir Wyn Williams, announced the appointment of experts to compile reports on governance at the Post Office during the years in which sub-postmasters were accused.

The inquiry says it will look at a number of governance issues including “monitoring of Horizon, contractual arrangements, internal and external audit, technical competence, stakeholder engagement, oversight and whistleblowing”. Hearings are currently scheduled for the spring and summer.

A matter of public interest

The scandal has dominated news in the UK since broadcaster ITV aired a dramatised version of events, Mr Bates vs the Post Office, on 1 January.

Some witnesses to the inquiry have already raised questions about the Post Office’s compliance with the UK’s Corporate Governance Code, including Nick Gould, a lawyer at Aria Grace Law, who has acted for three of the sub-postmasters involved.

The FRC has no power to enforce use of the code (only the Financial Conduct Authority has such powers, and only in relation to listed companies).

Officers of the watchdog will follow developments at the inquiry as it looks at audit work conducted for the Post Office. Although the company, owned by the government, does not fall directly within scope of the FRC, the regulator could theoretically use discretion to examine the company’s audits.

However, an investigation could face major problems because auditors are required to hold audit files for only a six-year period. Horizon’s issues go back more than 20 years.

There is a possibility, too, that the FRC could look at Post Office financial reporting through what is known as the Company Reporting Review (CRR) Team, although this only has limited powers: it can “request” information or restatements from and by a company. No announcements are made in advance of CRR probes.

The last time the CRR team looked at Post Office reporting , in 2021, its focus was on the impairment of plant and equipment, as well as provisions.

Called to account

Lastly, it is possible, under a process known as the Accountancy Scheme, for the FRC to investigate company employers for misconduct in relation to financial matters. But it can only examine the behaviour of people who are members of the professional bodies—mostly accountancy bodies—signed up to the scheme. The scheme also uses a “high misconduct threshold”, which may preclude some behaviour from investigation.

The FRC was hoping for stronger powers had the government pushed ahead with an audit reform bill that would have created a new regulator, ARGA (the Audit, Reporting and Governance Authority), from the FRC.

ARGA was expected to gain statutory powers to demand information from companies, compel them to restate accounts, and allow investigation of all company directors, not just members of bodies signed up to the scheme. There has been discussion of ARGA having powers to sanction company directors, in particular audit committee members, if they fail to uphold minimum standards recently developed by the FRC.

However, the reform bill was left out of the King’s Speech, the document detailing the government’s legislative programme. It is unlikely further reform will happen before a UK general election.

The two governance experts appointed by the Post Office Horizon IT Inquiry are Dame Sandra Dawson, a professor of management studies at Judge Business School, University of Cambridge, and Katy Steward, a visiting fellow at Judge.

Sir Wyn said of their appointment: “Their work will support Phase 5 and 6 and of the Inquiry’s hearings which will include evidence addressing the corporate responses to the scandal and what arrangements were in place within the Post Office and government to ensure appropriate governance, management and oversight.”