-- Posted Wednesday, 22 November 2006 | Digg This Article
Note: The following feedback written in reply to Douglas V. Gnazzo's Gold Reserve Audit 2005
In this commentary, Mr. Gnazzo argues that the gold and silver reserves held at the U.S. Mint, presumable mostly at Fort Knox, have not been audited since 1954 and that the "audits" performed by the U.S. government are not really audits because the gold and silver are not physically counted. I don't know what Mr. Gnazzo's background is, but mine involves over 8 years of audit experience. I am intimately familiar with the terms "Government Auditing Standards", "Generally Accepted Accounting Principles" ("GAAP") and the like. Therefore, I can unequivocally state that these standards and principles would require a physical examination of the gold and silver reserves under audit in order to permit the issuance of an unqualified opinion rendered on such reserves without an explanatory paragraph. Simply reviewing a paper schedule is not an "audit", it is at best an "examination" but even then a qualification or explanatory paragraph would be required if it did not involve physical examination.
A qualification is always required if audit procedures are limited as to scope in any manner, shape or form. An explanatory paragraph is always required if there is a departure from GAAP. The audit report on the gold and silver reserves contains no qualification or explanatory paragraph and therefore it must be true that a physical examination of the gold and silver reserves was performed covering the audit period. Note that a physical examination by the auditor does not necessarily include a physical count by the auditor under the auditing standards but simply sufficient procedures to conclude that a complete physical inventory has been performed (by the Mint in this case) and that such physical inventory was adequate and reasonably accurate. Perhaps this is where Mr. Gnazzo gets confused about "internal" vs. "external" audits.
True, KMPG LLP, the independent external auditor of the U.S. Mint's financial statements, did not physically examine the gold and silver held in custody by the U.S. Mint. But since these are not the Mint's assets, KPMG is not required to look at the gold and silver when auditing the Mint's financial statements. If KPMG were auditing the U.S. Treasury, it would need to look at the gold and silver. But the only auditing procedures required of KPMG when testing the custody function of the U.S. Mint is to examine internal controls and review operations. Examining the Mint's schedule of reserves and the process used to prepare it are sufficient.
The bigger question Mr. Gnazzo is really raising is why there is no external, independent, periodic audit of the U.S. Treasury's gold and silver reserves. Yet the simple, if unsatisfactory, answer is that there is no external, independent, periodic audit of most of the U.S. governments' assets, liabilities or operations. So why limit this question to the gold and silver reserves? The U.S. government has substantially more assets, liabilities and operations that are more significant, complex and subject to fudging or misappropriation than the gold and silver reserves.
Let me repeat what is important here. There can be no audit of physical inventory without the attendance by the auditor in person at the inventory count or alternatively a direct physical examination of the inventory on a test basis by the auditor. Failure to perform such procedures while claiming to have done so as evidenced by a "clean audit opinion" constitutes fraud. Only a qualification or explanatory paragraph in the audit opinion would allow anyone who is reasonably familiar with the meaning of the term "audit" to conclude that a physical inventory of the gold and silver reserves in the custody of the U.S. Mint may not have been performed.
The fact remains that a non-partisan branch of the U.S government (the U.S. Mint) has performed a physical examination of gold and silver reserves of another branch of the U.S. government (U.S. Treasury) and this physical examination was audited by the U.S. Treasury itself. Aside from the conflict-of-interest resulting from the U.S. Treasury essentially auditing its own assets in the custody of the U.S. Mint, one would need to have zero faith in the U.S. government and numerous public officials in order to legitimately claim that an external, independent, periodic audit is a better way. But to insist on this for only the U.S. Treasury's gold and silver reserves would be a telling display of self-interest.
Mr. Gnazzo also raises the question of the gold held by the Federal Reseve Banks and asks why that gold was not audited. The simple answer is that he is looking in the wrong place. You don't look for gold held by the Federal Reserve in the custodial accounts of the U.S. Mint. You look for the gold held by the Federal Reserve in the Federal Reserve's custodial accounts and financial statements. Has Mr. Gnazzo looked there before asking his question?
Unfortunately, Mr. Gnazzo's commentary is fatally flawed and he is wasting time with any "coming petition requesting a physical audit of the U.S. Gold Reserves". A physical audit is not the issue. Mr. Gnazzo should be asking for an external, independent, periodic audit of the "U.S. Gold Reserves" and even then his request seems incomplete without asking for the same audit of other assets, liabilities and operations of the U.S. government. Perhaps more important than a physical audit is a complete accounting and disclosure of all encumbrances, restrictions and financial transactions related to or involving the "U.S. Gold Reserves". Like I said, what Mr. Gnazzo is really asking for would require an independent examination of the entire U.S. government, not just a pile of gold and silver.
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-- Posted Wednesday, 22 November 2006 | Digg This Article
