PeacePlan
07-08-2011, 12:26 AM
5 Jul 2011
On Auditing the Treasury’s Gold
http://www.goldmoney.com/banners/gmy25.gif (http://www.goldmoney.com/?gmrefcode=goldnews)
Last week Congressmen Ron Paul held a hearing, which can be heard here (http://goldnews.com/?p=1467), to investigate whether or not the Treasury’s gold stock remains in tact and in US custody and ownership. The Treasury’s Inspector General Eric Thorson and the Government Accountability Office’s Gary Engel were called into be questioned by the House Financial Services Sub-Committee on Monetary Affairs regarding a bill Dr. Paul introduced called the Gold Reserve Transparency Act (HR1495)[1] (http://goldnews.com/2011/07/05/auditing-the-treasurys-gold/#footnote-1). In short the Gold Transparency Act calls for a full audit and assay of the US government’s gold stock.
To assess the necessity of continuing audit-efforts and pursuing new audit measures of greater scope, I will show a review and history of past audits and expose their apparent deficiencies:
History of Recent Audits In 1974, after the US closed the gold window, congressional support grew for inquiring into the US gold stock. The Mint and the GAO were sanctioned to audit a portion of the Treasury’s gold. Three out of thirteen compartments at Fort Knox were audited for inventory and samples were assayed and compared to records currently held by the Mint.
Following this partial audit the Treasury created the Committee for Continuing Audits of the United States Government-owned Gold in 1975 to annually inspect the accuracy and adequacy of the Mint’s records and internal procedures. These inspections involved auditing about 10% of the US Mint’s gold annually in an attempt to cycle through the whole gold stock. By 1986, the Treasury’s Inspector General managed to halt the audits under the notion that most of the Mint’s gold had already been audited, about 92%, and sealed and no significant issues were yet found. The costs of the procedures were also a stated concern in the halting of continuing audits.
Since then, starting in the 90′s under 31 U.S.C. §3515[2] (http://goldnews.com/2011/07/05/auditing-the-treasurys-gold/#footnote-2), the audits were mostly indirect efforts as the Mint’s financial statements and Custodial Schedule are annually audited by public accountants at KPMG. There still existed some audit-work that was partially direct up until 2008 by the Treasury OIG as their annual assessments of the mint’s Custodial Schedule statement included direct checks of statistical samples, using a 95% confidence criterion, to verify the number of gold bars in each melt, the melt number for each gold bar, and the fineness stamped on each gold bar.
The above mentioned audits, and in particular present audit-work, is not a review of of old audit methods or a new audit of previously reviewed gold, but rather a process of confirmation that joint seals placed on the vaults during their original audits were not compromised. The joint seals, assuming no external breach, can only be compromised by the presence of three individuals; a representative from the gold storage facility, a representative of the Director of the Mint, and a representative of the Treasury OIG. The only aspects of the gold stock that are newly audited, i.e. checked for inventory and fineness, are of gold that was not previously sealed or had a broken seal for whatever reason.
By 2008, the Treasury OIG proclaimed that all 42 of the Mint’s gold compartments, or 100% of the Mint’s gold, were audited and sealed. As a result, all audits since 2008 only involved checking that the joint seals are remain intact. None of the audits by KPMG, GAO or the Treasury OIG include an inventory or assay of any of the 5% of the Treasury’s total gold that is stored at the Federal Reserve Bank of New York, or the Treasury’s working stock of gold. The extent to which the US Treasury attempts to verify their gold holdings in the Federal Reserve Bank of New York involves annually requesting a confirmation from the Federal Reserve regarding the status of US gold reserves held by the FRBNY.
Furthermore none of the audits that occurred in the past fully assess the Treasury’s compliance with outstanding legislation with regard to their use of their gold. These cautionary statements are included in all audits by the Treasury and KPMG:
“We limited our tests of compliance to those provisions and we did not test compliance with all laws and regulations applicable to the Mint. We caution that noncompliance may occur and not be detected by those tests and that testing may not be sufficient for other purposes. Providing an opinion on compliance with laws and regulations was not an objective of our audit and, accordingly, we do not express such an opinion.”
KPMG further notes that they simply trust numbers they are given, rather than independently verify quantities relating to gold ownership:
“We did not audit the amounts included in the financial statements related to the gold and silver reserves of the U.S. Government, stated at $10.9 billion as of September 30, 2005 and 2004.” “The gold and silver reserves of the U.S. Government and the financial statements of the IRS as of and for the years ended September 30, 2005 and 2004, were audited by other auditors whose reports have been provided to us and our opinion, insofar as it relates to the amounts included for the gold and silver reserves of the U.S. Government and the IRS’ financial statements, is based solely on the reports of the other auditors.”
Here is an up-to-date version of the same effective statement by the only independent auditing party, KPMG:
“We did not audit the amounts included in the financial statements related to the gold and silver reserves of the U.S. Government or the financial statements of the Internal Revenue Service (IRS), a component entity of the Department. The gold and silver reserves of the U.S. Government and the financial statements of the IRS were audited by other auditors whose reports have been provided to us. Our opinion, insofar as it relates to the amounts included for the gold and silver reserves of the U.S. Government and the IRS’ financial statements, is based solely on the reports of the other auditors.“
Outstanding Reported Gold Discrepancies There are at least a couple mismatches between financial statements of the Treasury and the reported finances of the Federal Reserve that are worth noting. An obvious example found is in 2004 and 2005, Federal Reserve owned gold certificates are stated at a level that is greater than a necessarily equivalent liability from the Treasury. The Treasury only adds a liability of $10,924 million for issuance to the Fed while the Fed reports a gold certificate holding of over $11,036 million for the same period.
See the Fed’s gold certificate account (left) against the Treasury’s consolidated balance sheet (right) for the 2004-2005 time period:
*Click images for full size*
http://goldnews.com/wp-content/uploads/2011/07/treasury-balance-sheet-2004-2005.png (http://goldnews.com/wp-content/uploads/2011/07/fedgoldcertaccount1.jpg) http://goldnews.com/wp-content/uploads/2011/07/treasury-balance-sheet-2004-20053.jpg (http://goldnews.com/wp-content/uploads/2011/07/treasury-balance-sheet-2004-20053.jpg) From 2006 up until today the statements match up but the inconsistency for the years 2004 and 2005 remains unexplained.
Compliance Issues with Gold Reserve Act The Gold Reserve Act Section 14.(4)(c) outlines:
“The Secretary of the Treasury is authorized to issue gold certificates in such form and in such denominations as he may determine, against any gold held by the Treasurer of the Unites States, except the gold fund held as a reserve for any United States notes and Treasury notes of 1890. The amount of gold certificates issued and outstanding shall at no time exceed the value, at the legal standard, of the gold so held against gold certificates.“
In showing the discrepancy between the 2004 and 2005 financial statements of the Federal Reserve and of the Treasury, we appear to see a breach of the above section of the Gold Reserve Act. The Treasury claims to hold $10,933 million dollars in gold and silver reserves in both 2004 and 2005 but the Federal Reserve simultaneously claims to have as much as $11,039 and $11,037 million dollars in gold certificates during ’04 and ’05 respectively. Since the number of outstanding gold certificates, should the Federal Reserve’s finances be trusted, exceeds the quantity of gold held by the Treasury, the Gold Reserve Act is violated. The consequences of this violation are unclear, and worth discovering as problems still remain to date.
Currently the quantity of gold reserved for gold certificates still does not keep par with the amount of gold certificates issued to the Federal Reserve Banks. The Treasury as of June 30, 2011 states their gold holdings at $10,923,545,206 and the Federal Reserve as of the same date reports gold certificate holdings at $11,037 million. The only way for the Treasury to square the gold reserves and the Federal Reserve’s gold certificate holdings is to include their working stock of gold, valued at $117,513,614 on June 30-2011, as a gold reserve.
The conflict in including the working stock as a gold reserve regards the possibility the Treasury’s gold is required to fill more orders than they can satisfy while remaining in compliance with the law. The working stock is separately designated by the Treasury specifically to carry out minting outflows by the Treasury for Congressionally authorized coins. Whether or not the working stock of gold can be simultaneously used to furnish the working stock and be kept as an idle reserve for gold certificates while remaining in compliance with the Gold Reserve Act is unchecked.
The total Treasury gold reserves, including the working stock, is only ~$4 million dollars in excess of the Federal Reserve’s gold certificate account. If we assume the Treasury may use the working stock against gold certificates, the excess ~$4 million dollars leaves little room for the Treasury to operate, and there is no assurance that the Gold Reserve Act is not breached between reporting stages.
Furthermore, despite the fact the Treasury OIG claims that 100% of the US government’s deep storage gold is inventoried and audited, there still remains ~5% of total Treasury gold held at the Federal Reserve bank of New York and ~1% in the working stock that is not audited at all. The amount of gold that remains without any audits is within the margin necessary to confirm the reserves of the Treasury relative to outstanding gold certificates and ensure no breach with the Gold Reserve Act.
Encumbrances The extent to which any encumbrances have occurred on the Treasury’s gold reserves remains unsettled as no measures have been taken to fully assess the risk. The only evidence we have on this issue is effectively hearsay, as the Treasury OIG, when questioned before Ron Paul’s committee in Congress, said he’d asked the necessary officials and he’d “been assured that none of it [the Treasury's gold] is encumbered.” Inventory and assay work does not deal with the possibility of encumbrances so a more thorough audit of Treasury and Federal Reserve records and dealings is likely necessary to help resolve this issue. The potential consequences of any encumbrance is great as not only will laws have been broken, but also Treasury assets will be compromised.
Why is Some of the Gold Stored at the Fed at All? The Federal Reserve Bank of New York holds a reported ~13.4 million fine troy ounces of gold owned by the Treasury, but why the Mint needed to entrust the Federal Reserve with this portion of the gold stock is unclear. Adding to the mystery, this portion of gold is the only part of reserves that has managed to avoid any even remotely intrusive audits. The need for the Treasury to store any gold outside of their own Mint facilities should be investigated and certainly the lack of oversight should be questioned.
Why Are Gold Certificate Transactions Still Occurring? Over the last several decades, the Federal Reserve’s gold certificate account has fluctuated very mildly up and down in relative terms, but for what purpose is unclear. Changes in the Treasury’s gold stock, when falling or rising, might be responsible, but this is not entirely obvious and reasons for the changes should be outlined. Currently the Treasury does not offer historical values of their gold reserve by frequency smaller than annually prior to January 31, 2009 and specific breakdowns of the reserves prior to this date are not obviously available either. Confirming why these gold certificate transactions are still occurring is a worthwhile task to investigate, regardless of the seemingly small quantities being dealt with.
http://goldnews.com/wp-content/uploads/2011/07/fedgoldcertaccount2002-2008-1024x575.jpg (http://goldnews.com/wp-content/uploads/2011/07/fedgoldcertaccount2002-2008.jpg)
Conclusion There appear to be many gaps in audit work that was already done. The remaining issues that stand are that past audit work was not thorough or of a strict enough standard to ensure against possible misstatement. In short, independent auditors are often not directly involved in the physical audits, and are rather admittedly working off of numbers provided to them by a potentially biased party. Furthermore, there have been no thorough and complete checks on whether or not the Treasury’s use of their gold stock complies with current legislation, in particular the Gold Reserve Act. In addition, a lack of matching between Federal Reserve and Treasury financial statements calls into question some possibly obvious and odd errors. Moreover, there still lacks any audit on the Treasury’s gold held at the Federal Reserve Bank of New York or the working stock. Lastly, the issue of encumbrances remains as a major possibility of abuse of the Treasury’s gold stock and will be difficult to settle without an extensive audit of all historical government financial dealings.
Footnotes (↵ returns to text)
1. See full text (http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.1495.IH:).↵ (http://goldnews.com/2011/07/05/auditing-the-treasurys-gold/#refmark-1)
2. See full text (http://uscode.house.gov/download/pls/31C35.txt)↵ (http://goldnews.com/2011/07/05/auditing-the-treasurys-gold/#refmark-2)
http://goldnews.com/2011/07/05/auditing-the-treasurys-gold/
On Auditing the Treasury’s Gold
http://www.goldmoney.com/banners/gmy25.gif (http://www.goldmoney.com/?gmrefcode=goldnews)
Last week Congressmen Ron Paul held a hearing, which can be heard here (http://goldnews.com/?p=1467), to investigate whether or not the Treasury’s gold stock remains in tact and in US custody and ownership. The Treasury’s Inspector General Eric Thorson and the Government Accountability Office’s Gary Engel were called into be questioned by the House Financial Services Sub-Committee on Monetary Affairs regarding a bill Dr. Paul introduced called the Gold Reserve Transparency Act (HR1495)[1] (http://goldnews.com/2011/07/05/auditing-the-treasurys-gold/#footnote-1). In short the Gold Transparency Act calls for a full audit and assay of the US government’s gold stock.
To assess the necessity of continuing audit-efforts and pursuing new audit measures of greater scope, I will show a review and history of past audits and expose their apparent deficiencies:
History of Recent Audits In 1974, after the US closed the gold window, congressional support grew for inquiring into the US gold stock. The Mint and the GAO were sanctioned to audit a portion of the Treasury’s gold. Three out of thirteen compartments at Fort Knox were audited for inventory and samples were assayed and compared to records currently held by the Mint.
Following this partial audit the Treasury created the Committee for Continuing Audits of the United States Government-owned Gold in 1975 to annually inspect the accuracy and adequacy of the Mint’s records and internal procedures. These inspections involved auditing about 10% of the US Mint’s gold annually in an attempt to cycle through the whole gold stock. By 1986, the Treasury’s Inspector General managed to halt the audits under the notion that most of the Mint’s gold had already been audited, about 92%, and sealed and no significant issues were yet found. The costs of the procedures were also a stated concern in the halting of continuing audits.
Since then, starting in the 90′s under 31 U.S.C. §3515[2] (http://goldnews.com/2011/07/05/auditing-the-treasurys-gold/#footnote-2), the audits were mostly indirect efforts as the Mint’s financial statements and Custodial Schedule are annually audited by public accountants at KPMG. There still existed some audit-work that was partially direct up until 2008 by the Treasury OIG as their annual assessments of the mint’s Custodial Schedule statement included direct checks of statistical samples, using a 95% confidence criterion, to verify the number of gold bars in each melt, the melt number for each gold bar, and the fineness stamped on each gold bar.
The above mentioned audits, and in particular present audit-work, is not a review of of old audit methods or a new audit of previously reviewed gold, but rather a process of confirmation that joint seals placed on the vaults during their original audits were not compromised. The joint seals, assuming no external breach, can only be compromised by the presence of three individuals; a representative from the gold storage facility, a representative of the Director of the Mint, and a representative of the Treasury OIG. The only aspects of the gold stock that are newly audited, i.e. checked for inventory and fineness, are of gold that was not previously sealed or had a broken seal for whatever reason.
By 2008, the Treasury OIG proclaimed that all 42 of the Mint’s gold compartments, or 100% of the Mint’s gold, were audited and sealed. As a result, all audits since 2008 only involved checking that the joint seals are remain intact. None of the audits by KPMG, GAO or the Treasury OIG include an inventory or assay of any of the 5% of the Treasury’s total gold that is stored at the Federal Reserve Bank of New York, or the Treasury’s working stock of gold. The extent to which the US Treasury attempts to verify their gold holdings in the Federal Reserve Bank of New York involves annually requesting a confirmation from the Federal Reserve regarding the status of US gold reserves held by the FRBNY.
Furthermore none of the audits that occurred in the past fully assess the Treasury’s compliance with outstanding legislation with regard to their use of their gold. These cautionary statements are included in all audits by the Treasury and KPMG:
“We limited our tests of compliance to those provisions and we did not test compliance with all laws and regulations applicable to the Mint. We caution that noncompliance may occur and not be detected by those tests and that testing may not be sufficient for other purposes. Providing an opinion on compliance with laws and regulations was not an objective of our audit and, accordingly, we do not express such an opinion.”
KPMG further notes that they simply trust numbers they are given, rather than independently verify quantities relating to gold ownership:
“We did not audit the amounts included in the financial statements related to the gold and silver reserves of the U.S. Government, stated at $10.9 billion as of September 30, 2005 and 2004.” “The gold and silver reserves of the U.S. Government and the financial statements of the IRS as of and for the years ended September 30, 2005 and 2004, were audited by other auditors whose reports have been provided to us and our opinion, insofar as it relates to the amounts included for the gold and silver reserves of the U.S. Government and the IRS’ financial statements, is based solely on the reports of the other auditors.”
Here is an up-to-date version of the same effective statement by the only independent auditing party, KPMG:
“We did not audit the amounts included in the financial statements related to the gold and silver reserves of the U.S. Government or the financial statements of the Internal Revenue Service (IRS), a component entity of the Department. The gold and silver reserves of the U.S. Government and the financial statements of the IRS were audited by other auditors whose reports have been provided to us. Our opinion, insofar as it relates to the amounts included for the gold and silver reserves of the U.S. Government and the IRS’ financial statements, is based solely on the reports of the other auditors.“
Outstanding Reported Gold Discrepancies There are at least a couple mismatches between financial statements of the Treasury and the reported finances of the Federal Reserve that are worth noting. An obvious example found is in 2004 and 2005, Federal Reserve owned gold certificates are stated at a level that is greater than a necessarily equivalent liability from the Treasury. The Treasury only adds a liability of $10,924 million for issuance to the Fed while the Fed reports a gold certificate holding of over $11,036 million for the same period.
See the Fed’s gold certificate account (left) against the Treasury’s consolidated balance sheet (right) for the 2004-2005 time period:
*Click images for full size*
http://goldnews.com/wp-content/uploads/2011/07/treasury-balance-sheet-2004-2005.png (http://goldnews.com/wp-content/uploads/2011/07/fedgoldcertaccount1.jpg) http://goldnews.com/wp-content/uploads/2011/07/treasury-balance-sheet-2004-20053.jpg (http://goldnews.com/wp-content/uploads/2011/07/treasury-balance-sheet-2004-20053.jpg) From 2006 up until today the statements match up but the inconsistency for the years 2004 and 2005 remains unexplained.
Compliance Issues with Gold Reserve Act The Gold Reserve Act Section 14.(4)(c) outlines:
“The Secretary of the Treasury is authorized to issue gold certificates in such form and in such denominations as he may determine, against any gold held by the Treasurer of the Unites States, except the gold fund held as a reserve for any United States notes and Treasury notes of 1890. The amount of gold certificates issued and outstanding shall at no time exceed the value, at the legal standard, of the gold so held against gold certificates.“
In showing the discrepancy between the 2004 and 2005 financial statements of the Federal Reserve and of the Treasury, we appear to see a breach of the above section of the Gold Reserve Act. The Treasury claims to hold $10,933 million dollars in gold and silver reserves in both 2004 and 2005 but the Federal Reserve simultaneously claims to have as much as $11,039 and $11,037 million dollars in gold certificates during ’04 and ’05 respectively. Since the number of outstanding gold certificates, should the Federal Reserve’s finances be trusted, exceeds the quantity of gold held by the Treasury, the Gold Reserve Act is violated. The consequences of this violation are unclear, and worth discovering as problems still remain to date.
Currently the quantity of gold reserved for gold certificates still does not keep par with the amount of gold certificates issued to the Federal Reserve Banks. The Treasury as of June 30, 2011 states their gold holdings at $10,923,545,206 and the Federal Reserve as of the same date reports gold certificate holdings at $11,037 million. The only way for the Treasury to square the gold reserves and the Federal Reserve’s gold certificate holdings is to include their working stock of gold, valued at $117,513,614 on June 30-2011, as a gold reserve.
The conflict in including the working stock as a gold reserve regards the possibility the Treasury’s gold is required to fill more orders than they can satisfy while remaining in compliance with the law. The working stock is separately designated by the Treasury specifically to carry out minting outflows by the Treasury for Congressionally authorized coins. Whether or not the working stock of gold can be simultaneously used to furnish the working stock and be kept as an idle reserve for gold certificates while remaining in compliance with the Gold Reserve Act is unchecked.
The total Treasury gold reserves, including the working stock, is only ~$4 million dollars in excess of the Federal Reserve’s gold certificate account. If we assume the Treasury may use the working stock against gold certificates, the excess ~$4 million dollars leaves little room for the Treasury to operate, and there is no assurance that the Gold Reserve Act is not breached between reporting stages.
Furthermore, despite the fact the Treasury OIG claims that 100% of the US government’s deep storage gold is inventoried and audited, there still remains ~5% of total Treasury gold held at the Federal Reserve bank of New York and ~1% in the working stock that is not audited at all. The amount of gold that remains without any audits is within the margin necessary to confirm the reserves of the Treasury relative to outstanding gold certificates and ensure no breach with the Gold Reserve Act.
Encumbrances The extent to which any encumbrances have occurred on the Treasury’s gold reserves remains unsettled as no measures have been taken to fully assess the risk. The only evidence we have on this issue is effectively hearsay, as the Treasury OIG, when questioned before Ron Paul’s committee in Congress, said he’d asked the necessary officials and he’d “been assured that none of it [the Treasury's gold] is encumbered.” Inventory and assay work does not deal with the possibility of encumbrances so a more thorough audit of Treasury and Federal Reserve records and dealings is likely necessary to help resolve this issue. The potential consequences of any encumbrance is great as not only will laws have been broken, but also Treasury assets will be compromised.
Why is Some of the Gold Stored at the Fed at All? The Federal Reserve Bank of New York holds a reported ~13.4 million fine troy ounces of gold owned by the Treasury, but why the Mint needed to entrust the Federal Reserve with this portion of the gold stock is unclear. Adding to the mystery, this portion of gold is the only part of reserves that has managed to avoid any even remotely intrusive audits. The need for the Treasury to store any gold outside of their own Mint facilities should be investigated and certainly the lack of oversight should be questioned.
Why Are Gold Certificate Transactions Still Occurring? Over the last several decades, the Federal Reserve’s gold certificate account has fluctuated very mildly up and down in relative terms, but for what purpose is unclear. Changes in the Treasury’s gold stock, when falling or rising, might be responsible, but this is not entirely obvious and reasons for the changes should be outlined. Currently the Treasury does not offer historical values of their gold reserve by frequency smaller than annually prior to January 31, 2009 and specific breakdowns of the reserves prior to this date are not obviously available either. Confirming why these gold certificate transactions are still occurring is a worthwhile task to investigate, regardless of the seemingly small quantities being dealt with.
http://goldnews.com/wp-content/uploads/2011/07/fedgoldcertaccount2002-2008-1024x575.jpg (http://goldnews.com/wp-content/uploads/2011/07/fedgoldcertaccount2002-2008.jpg)
Conclusion There appear to be many gaps in audit work that was already done. The remaining issues that stand are that past audit work was not thorough or of a strict enough standard to ensure against possible misstatement. In short, independent auditors are often not directly involved in the physical audits, and are rather admittedly working off of numbers provided to them by a potentially biased party. Furthermore, there have been no thorough and complete checks on whether or not the Treasury’s use of their gold stock complies with current legislation, in particular the Gold Reserve Act. In addition, a lack of matching between Federal Reserve and Treasury financial statements calls into question some possibly obvious and odd errors. Moreover, there still lacks any audit on the Treasury’s gold held at the Federal Reserve Bank of New York or the working stock. Lastly, the issue of encumbrances remains as a major possibility of abuse of the Treasury’s gold stock and will be difficult to settle without an extensive audit of all historical government financial dealings.
Footnotes (↵ returns to text)
1. See full text (http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.1495.IH:).↵ (http://goldnews.com/2011/07/05/auditing-the-treasurys-gold/#refmark-1)
2. See full text (http://uscode.house.gov/download/pls/31C35.txt)↵ (http://goldnews.com/2011/07/05/auditing-the-treasurys-gold/#refmark-2)
http://goldnews.com/2011/07/05/auditing-the-treasurys-gold/