The BBC is under fire over its editorial policy
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The way BBC management handled Andrew Gilligan's story on the Iraq dossier was heavily criticised by Lord Hutton.
The chairman of the governors, Gavyn Davies, has tendered his resignation in the wake of the report.
Director General Greg Dyke accepted "certain key allegations" in Mr Gilligan's report were wrong and has apologised.
Lord Hutton said the BBC governors should also have made "more detailed investigations" of Mr Gilligan's notes.
If they had, they would have found the notes did not support key allegations.
He said the BBC's editorial system was "defective" as Mr Gilligan was allowed to broadcast allegations without his script being approved.
Mr Gilligan reported on the Today programme that the government had inserted intelligence into its dossier on Iraq's weapons of mass destruction probably knowing it to be wrong or
questionable, and had ordered the dossier to be "sexed up".
Lord Hutton said both claims were "unfounded".
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THE HUTTON REPORT
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He said a system was required among broadcasters and newspapers that gave "careful consideration" to stories which would impugn people.
"The editorial system which the BBC permitted was defective in that Mr Gilligan was allowed to broadcast his report at 6.07am without editors having seen a script of what he was going to say and having considered whether it should be approved."
Lord Hutton said the BBC had failed to properly investigate the government's complaints about the allegation.
He said BBC head of news Richard Sambrook should have examined Mr Gilligan's notes on his personal organiser, before responding to complaints from Tony Blair's director of communications, Alastair Campbell.
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False accusations of fact impugning the integrity of others, including politicians, should not be made by the media
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He said it should have been quickly identified that the most serious of the allegations in the report was not fully supported by the notes, with this being drawn to the attention of the governors.
Lord Hutton also referred to an e-mail by Today editor Kevin Marsh referring to Mr Gilligan's "loose use of language and lack of judgment in some of his phraseology". He said this should have been brought to the attention of Mr Sambrook.
"The lack of knowledge on the part of Mr Sambrook, the Director of News, and the governors of this critical e-mail shows a defect in the operation of the BBC's management system for the consideration of complaints in respect of broadcasts."
There has been no word yet of Mr Sambrook's fate but Mr Davies has fallen on his sword.
BBC review
In the Commons debate after the release of the report, conservative leader Michael Howard said the case for independent regulation of the BBC "has never been stronger".
The BBC has already announced it is strengthening its complaints process and its editorial procedures, with the appointment of a deputy director general in charge of complaints.
It has also banned BBC journalists from writing contentious newspaper columns.
Mr Gilligan, writing in the Mail on Sunday newspaper on 1 June 2003, said his source had claimed Alastair Campbell was responsible for adding the 45-minute claim to the Iraq dossier.