Mid Staffordshire Foundation Trust’s 2008 request for £1.35m to fund more nurses at a time when it was predicting a £1.6m surplus was “morally wrong”, the public inquiry into failures at the organisation was told.

Members of NHS South Staffordshire’s executive team said the incident was the climax of two years of wrangling between the organisations.

Tensions between the trust, the Healthcare Commission and primary care trust were sparked in June 2008 when the regulator ordered immediate improvements after discovering the trust’s accident and emergency was operating with only one full time consultant.

PCT locality director Geraint Griffiths wrote to his chief executive Stuart Poyner at the end of that month expressing concern that, despite assurances from the trust, promised locums “never actually appear”.

Mr Griffiths’ letter revealed Mid Staffs chief executive Martin Yeates had “already had one row” with the commissioner after claiming “a locum had started when they hadn’t arrived”.

Inquiry counsel Ben Fitzgerald said the comments revealed “a serious loss of trust” between Mr Yeates and the commission and was an “indication that Martin Yeates… had not been frank”.

The inquiry was told that the lack of consultants in A&E had first been identified in a 2006 report but Mr Poyner said the information appeared to have been lost in the “deficient handover” which saw the three PCTs in the area merged to become South Staffordshire.

In 2007, the PCT had backed the trust’s bid for foundation trust status despite not having looked at the business plan and the trust’s “refusal” to share its financial plans on commercial grounds.

The following year, after Mid Staffs achieved foundation status, the PCT refused a request for £1.35m to fund extra nurses as the trust was projecting a £1.6m surplus. In a letter to Mr Yeates, Mr Poyner said the request was “morally wrong”.

Mr Poyner told the inquiry it was at this point he realised there was a conflict between quality of care and the financial regime.

The PCT began to watch the trust more closely, ignoring a letter from Monitor urging it to take a “step back”.

Mr Poyner said: “[The letter] was asserting that it wasn’t our business [to scrutinise the trust in this way] and in normal times I’d agree that it wouldn’t be… but in the environment that we were looking at, we’d just received a [Healthcare Commission] report which described awful outcomes and awful outputs, and therefore it was a breakdown in governance.”

The inquiry continues.