On Auditing the Treasury's Gold

Last week Congressmen Ron Paul held a hearing,, 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). 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., 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, are not a review 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 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.