It has become a retail byword for affordable, functional furniture: plain, cheerful items with a certain Nordic wholesomeness about them that millions of consumers the world over can't seem to resist.

But on Friday Ikea became associated with something darker when it admitted that at least some of its cupboards, chairs and other household products were produced by East German prisoners incarcerated for their political beliefs.

A roomful of angry former GDR prisoners first watched – and then started to vent decades worth of anger – as a squirming Peter Betzel formally apologised for using prison labour in the 1970s and 1980s.

"We regret wholeheartedly that this happened," said Betzel, head of Ikea Germany, after an independent report by auditors Ernst and Young confirmed that Ikea managers knew of the practice.

"It is not and never was acceptable to Ikea that it should be selling products made by political prisoners and I would like to express my deepest regret for this to the victims and their families".

The company insists that nothing comparable goes on today. But already questions of compensation are being raised that could cost the company dear, not to mention the reputational damage of being seen to profit from people who were fighting for freedom.

Alexander Arnold was one such. He was sent to prison at 22 for "distributing anti-communist propaganda" – handing out flyers containing poems by Bertolt Brecht and Hermann Hesse. He says he still has nightmares about the isolation cell where he was sent if he failed to keep up with the heavy work load. Arnold made parts for office chairs.

"By the end of my 11-month sentence, I knew every part of the process," he said. "From the rollers on the feet to the spine of the chair". He was also well aware that he and his fellow prisoners were working for a major western European company, none other than the Swedish flat-pack furniture giant, Ikea. "It was no secret," he said. "Their name was on the boxes which the products were packed into and the prison guards didn't keep it a secret from us. Everyone knew. I am relieved that this is finally coming to light," said Arnold, 51. "I'm glad that Ikea is taking responsibility but I'm sorry it took someone other than Ikea to bring this to light".

Arnold recalled how he and fellow workers had been set productivity targets. "Each day we worked what amounted to two and a half working days of that of a normal worker on the outside," he said. "If we slipped to below 80% of the target set, that's when they'd throw you in the isolation cell, for 10 days at a time".

The Ernst and Young report said that while Ikea had had a policy of visiting production facilities to control working processes, access to East German suppliers had been restricted. Dieter Ott, 49, a former prisoner from Naunburg who worked on a punch press making parts for Ikea cupboards and doors, asked why Ikea had not questioned why it was not allowed to visit workers.

"Did you not suspect something? And after all, you were working with a country that was separated from Sweden by a hulking great wall. Surely that should have given you reason enough to ask if you should have been working with East German suppliers?"

Anita Gossler, 79, who was sent to Hoheneck prison for her resistance to the regime and who described how her three-month old baby was taken from her, asked Betzel if Ikea could offer assurances that it was no longer using political prisoners in other parts of the world, particularly in China, where considerable quantities of furniture products are made. "How can you guarantee that in a place like China you really know what's going on in the factories?"

Betzel said the company had had a strict system of checks and balances in place since 2000. "We now have a very well organised control system with well over 1,000 control checks being carried out every year." The company said it had received tipoffs that it had been using forced labour, but had taken insufficient action against the claims.

"We took steps to ensure that prisoners were not used in production, but it's now clear to us that these were not decisive enough," Betzel added. Gossler, who as a prisoner made sheets, aprons and table cloths for companies other than Ikea including leading west German clothing and household catalogues, welcomed the company's announcement that it planned to donate funds to research projects on forced labour in the former GDR.

"There were many companies involved in this practice," she said. "And finally they should all be named and shamed. Ikea has put its head above the parapet and admitted its guilt but there are plenty of others who should also be approached for compensation."