|
Dr. Ron Paul, U.S. Representative from Texas, wants
to have an audit of the gold held at Ft. Knox that is under the supposed
control of the Federal Reserve. He even plans to introduce
legislation
next year to force the Fed to conduct an audit:
“If there was no question about the gold being
there, you think they would be anxious to prove gold is there,” he said
of the Federal Reserve.
This is not the first time the congressman has made
his pitch. “In the early 1980s when I was on the gold commission, I
asked them to recommend to the Congress that they audit the gold reserves
– we had 17 members of the commission and 15 voted no to the
audit,” said Paul. “I think there was only one decent audit done
50 years ago,” he said.
Paging Dr. Paul! Paging Dr. Paul! The U.S. gold
reserves held at Ft. Knox and elsewhere are actually under the control of the
U.S. Mint, a bureau of the U.S. Treasury Department, and these gold reserves
are ALREADY being audited by the independent accounting firm KPMG. In fact,
an annual audit has been ongoing for a number of years, first by inspectors
of the U.S. Treasury Department since the 1980s (Treasury inspectors are
sworn federal law enforcement personnel) with additional audits by
independent accounting firms starting in the 1990s.
When KPMG was appointed independent auditors for the
2005 fiscal year, the accounting firm insisted on a revised audit format that
involved a complete audit included accompanying Treasury inspectors on
the physical count of bullion in vault facilities at the Ft. Knox and West
Point bullion depositories. Prior to this and despite Dr. Paul’s claim
that the last audit was conducted in the 1950s, Treasury inspectors had
conducted rotating audits of bullion held at the Ft. Knox, West Point and
other depositories since the 1980s as part of a comprehensive overhaul of
governmental accountability by the Office of the Management and Budget. These
audits include test weighing and assays that have periodically revealed minor
discrepancies in bullion fineness and weight over the years. Not all the
bullion is counted each year, mind you, rather it is done on a rotating basis
with Treasury seals being placed on each audited vault. The inspectors check
at least on an annual basis that these seals have not been tampered with.
According to my reckoning, all vaults should have been initially rotated
through a few years ago, which means that the vaults now being inspected are
already on their second or third audit pass.
I have written on this subject extensively in the
past and will not rehash it. Instead, I will simply reprint below one of the
more comprehensive analyses that I have done on the subject matter. Some of
the stuff I wrote in this analysis was coincidental to the question of
“missing” Ft. Knox gold but it does help frame the developments
taking place in late 2006 and early 2007 that provided the most satisfactory
answers to date. To my knowledge this is still the only complete analysis of
the “Ft. Knox gold audit” based on actual research, reference to
documents and (attempted) interviews with appropriate persons. Unfortunately,
we never did get confirmation of KMPG’s physical presence at Ft. Knox
subsequent to the 2005 audit despite several queries to Treasury officials.
Perhaps this latest “audit the Fed”
activism by Dr. Ron Paul will finally result in some explanatory statements
being made by the Treasury. In the meantime, Dr. Paul can clearly use a
bit of education on this subject so if any readers are so inclined, you have
my permission to forward my analysis to him. And even if Dr. Paul decides
that an independent audit by KPMG is simply not enough given the importance
of the gold reserves, at least he’ll be aware of the presently-known
facts before drafting the legislation. For example, an audit of the Ft. Knox
gold should not focus on its physical presence in the vaults but rather on
encumbrances that might have been placed on it.
The issue of encumbrances is complicated by the fact
that the gold reserves are pledged to the Federal Reserve to back about $11
billion of Federal Reserve notes under a gold certificate account that still
values the gold at the formal statutory price of $42.22 per ounce. Come to
think of it, Dr. Paul might better serve his country by introducing
legislation to repeal the gold certificate account and thereby return direct
unencumbered ownership to the American people for the first time since 1933.
That is something everybody should be able to get behind.
*******************
Independent Audit of U.S. Gold And Silver Reserves
Confirmed
April 20, 2007
Tom Szabo
www.silveraxis.com
A few months ago, I got into a verbal shoving match
with one Mr. Douglas Gnazzo regarding the audit of the U.S. Government-Owned
Gold and Silver Bullion Reserves, or simply gold reserves, most of which are
in the custody of the U.S. Mint (custodial gold and silver). After the debate
spilled and spread all over the Internet, I decided to let Mr. Gnazzo have
the last word because I could find no easy way to untangle the mess that he
and I had made in the course of our disagreement. Well, I am happy to report
today that I have found the solution and it turns out to be rather simple. A
private third party audit firm has in fact conducted an independent audit of
the gold reserves since 2005. More astonishingly, history will be made in
2007 as the audit firm, KPMG, is set to participate in the physical inventory
of gold stored at Fort Knox.
The Background
Mr. Gnazzo made a claim last December that has
turned out to be very important in retrospect. He said something to the
effect that the U.S. Department of the Treasury’s Office of Inspector
General (OIG) may have conducted an audit of the gold reserves in 2005, but
the U.S. Mint’s own independent auditors, KPMG LLP, took no
responsibility for auditing such gold reserves at all. And at the time, Mr.
Gnazzo was absolutely correct. My own research had shown that KPMG issued an
opinion on the Mint’s 2005 financial statements (or “audit
report”) that read, in part:
“These financial statements are the
responsibility of the Mint’s management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
did not audit the United States’ gold and silver reserves
(Custodial Gold and Silver Reserves) for which this Mint serves as custodian.
These reserves were audited by to United States Department of the
Treasury, Office of Inspector General (OIG) whose report has been -
furnished to us, and our opinion, Insofar as It relates to these reserves, Is
based solely on the report of the OIG.” [Original KPMG audit opinion on U.S. Mint's 2005
financial statements; emphasis mine]
I copied the above quote directly from the original
2005 audit report as it appeared on the Mint’s website
on January 13, 2007. Unfortunately the report has since been deleted and is
nowhere to be found. Perhaps somebody with a bit of foresight saved a copy on
his or her hard drive and is willing to share? In any case, those who are
curious about what the lost 2005 KPMG audit report looked like should examine
the 2004 audit report prepared by a predecessor audit firm. My recollection is that the
format and content of the 2004 and 2005 audit reports were very similar,
which should come as no surprise since the first instinct of auditors is to
follow a concept known as SALY, same as last year. I would note, however,
that the 2004 audit opinion was worded differently compared to the above
quote taken directly from the lost 2005 audit report.
In any case, the Mint had a valid reason for pulling
the 2005 audit report from its website. You see, sometime between this past
January and today, two new audit reports have been quietly posted at the
OIG’s website. One is for the Mint’s 2005 fiscal year and
replaces the audit report that has mysteriously disappeared from the
Mint’s website. The other is for the year 2006 with comparative numbers
for 2005.
The Confirmation
To my utter surprise, both the revised 2005 and the
just-released 2006 audit reports include a clean audit opinion pursuant to
which KPMG, not the OIG, has taken full responsibility for the audit of the
gold reserves. Now you understand why the above background was important. But
wait, it gets even more shocking. The gold reserves are now listed as assets
of the Mint, comprising more than 90% of the balance sheet.
Clearly, 90% is a very material number and means
that KPMG must have performed significant, unprecedented audit procedures
related to the gold reserves, which now constitute a critical focus of the
independent audit. Unfortunately, KPMG’s audit procedures have fallen
short thus far of the holy grail of gold reserve audits: observing the
physical inventory of gold bullion stored at Fort Knox. But according to a
Treasury Dept. source, KPMG did observe the 2006 physical inventory at West
Point, where more than 50 million ounces of gold (approximately 20% of the
gold reserves) are said to be stored. And there is every reason to expect
that 2007 will be the year when that most-troubling of questions for many
gold bugs may finally be put to rest: does Fort Knox actually hold any gold?
Regardless, nobody will be able to proclaim henceforth that an independent
audit of U.S. gold reserves is not being performed. In fact, such whining is
already two years past its “best used by” date. Any whining now
will have to be limited to the quality of KPMG’s audit, whether or not
the audit firm is truly independent, the competence of the audit staff and
other alleged problems that no doubt will continue to pester the conscience
of a paranoid few.
The independent audit reports can be found here:
2005 Audit Report:
http://www.ustreas.gov/inspector-general/audit-reports/2007/oig07006.pdf
2006 Audit Report: http://www.ustreas.gov/inspector-general/audit-reports/2007/oig07022.pdf
Three Bonuses
As if the discovery of the independent audit reports
weren’t enough, a careful reading of the fine print results in at least
three additional revelations that I consider to be very enlightening.
FIRST, the definition of “Deep Storage”
is now officially sanctioned by a major accounting firm. Basically, Deep
Storage means gold and silver stored in sealed vaults as contrasted to gold
and silver that is working stock for the Mint’s coin programs.
Personally, I am very appreciative of KPMG’s endorsement of this
definition of Deep Storage because now I won’t have to waste so much
time attempting to refute wild speculation from the gold conspiracy camp. I
can simply refer them to KPMG.
SECOND, we find out that the U.S. Mint started a
silver hedging program in 2006 whereby a “trading partner”
acquires an interest in that portion of the Mint’s silver held as raw
material for the production of American Eagles and other coins. The hedged
silver is automatically repurchased from the trading partner at prevailing
spot prices as minted coins are sold, protecting the Mint from losses due to
falling silver prices. Since title and custody remain with the Mint at all
times, however, the only possible use the Mint’s trading partner would
have for this silver is to hedge a derivative short position, likely in COMEX
futures.
The disclosure of the Mint’s hedging program
provides a rare purview into a realm that has long been the subject of
conjecture. For my own part, I have claimed in the past that the practice of
lending by silver users and forward selling by mining companies has supplied
the commercials with the hedging ammunition to maintain a significant short
position in COMEX silver. On the other hand, Mr. Ted Butler has alleged that
the commercial shorts are naked; that is, there is no silver backing their
positions at all. Based on how the Mint’s hedging program is described
and without the benefit of reading the actual contract, I have to admit that
Mr. Butler is partially right. You see, the Mint has already earmarked the
hedged silver to be sold in future apportionments to authorized coin distributors.
So unless the trading partner/COMEX short was given superior rights under the
hedging contract, there is neither a contractual nor external means for it to
take possession of any physical silver. Put another way, a commercial short
would never be able to use this type of a hedge contract to make delivery of
silver, even when a futures contract could be rolled to a later date. This is
unlike a forward purchase from a mining company where the commercial short is
entitled to physical silver. In fact, the sole purpose of the Mint’s
hedge is price protection, meaning that it would not protect a trapped COMEX
short against a delivery default. To Mr. Butler’s point, there is no
physical backing to this type of silver and therefore its use to obtain a
commercial trader designation on the COMEX, assuming that is possible, would
create a short position that is naked against forced delivery.
At the same time, we need to realize that these
almost naked shorts have nothing to worry about unless and until a supply squeeze
in the spot market is accompanied by a lack of buying interest in futures
(preventing the shorts from rolling their contracts to future months).
According to Prof. Antal Fekete, such a situation might only occur during a
melt-up of gold and silver prices to universally-recognized monetary status.
As an aside (i.e., shameless plug), my own work on the basis in gold and
silver futures is meant to provide an early warning sign of just such an
event. In every other instance, however, the commercial shorts can be secure
in the knowledge that their paper silver will protect them from taking a
beating, regardless of how high silver prices may reach. In fact, the shorts
probably welcome increasing prices since the accompanying volatility will add
to their potential profits. After all, they are long on paper and thus never
fully naked. So it turns out Mr. Butler isn’t entirely right, just in
the event of a delivery default. In the meantime, the only thing that really
matters is that commercial shorts will continue to rake in the profits.
THIRD, the disclosure of hedging activity involving
a few million ounces of silver creates a strong precedent for KPMG to seek
out and report other hedging, leasing or derivative transactions that might
involve or impact the Mint’s balance sheet, now consisting
predominantly of the gold reserves. While not a guarantee that the gold
reserves are free of all encumbrances, the oversight by KPMG should help
ensure that accountability for the gold reserves is moving in the right direction.
The Pesky Details
This is probably the point where I should end this
commentary on account of it being a bit too much to absorb in one sitting. In
the interest, however, of discouraging the hatching of new conspiracy
theories, I’m now going to address the seven most likely questions
still bugging the inquisitive, suspicious and skeptical. Everyone else can
probably stop here without risking sleepless nights.
NUMBER ONE. Why was there a change in the audit
approach with respect to the Mint’s financial statements after KPMG had
already issued an audit report for 2005? The answer is actually quite simple.
The Mint’s original financial statements for 2005 (and prior years)
were prepared and audited under a set of accounting standards applicable to private-sector
enterprises. One could speculate why this might have been the case but a
reasonable guess would be that the Mint’s activities are more
consistent with a for-profit, private enterprise than a government agency. In
any case, sometime after KPMG had issued its original audit report for 2005
on a private-enterprise basis, somebody high up on the decision chain (a
“decider”) must have had an epiphany: the U.S. Mint may function
in some ways like a private company but it is, in fact, a government entity.
More than likely, this decider was some managing partner at KPMG responsible
for firmwide accounting policy. In any case, what’s important is the
Mint’s financial statements had to be revised to comply with its
charter as a government agency. Among other things such as budgetary
disclosures, this meant that custodial gold and silver would now become the
primary assets (and offsetting liabilities) in the financial statements
instead of just disclosure items. As a result, KPMG could no longer simply
defer to OIG’s audit given that the gold reserves now represented over
90% of the Mint’s balance sheet. To do so would break the world record
for auditor recklessness.
An alternate explanation is that KPMG never actually
issued the 2005 audit report previously listed on the Mint’s website;
instead, the report might have been a draft that somehow was mistaken as a
final product and posted by Mint personnel. This theory is supported by the
possibility that the OIG website never had a copy of this original 2005 audit
report. Furthermore, there are obvious formatting and grammatical mistakes
(see quote above), which is quite uncharacteristic of the work of a Big 4 CPA
firm such as KPMG.
NUMBER TWO. Assuming it was not just a draft
mistaken for the final, what happened to the original KPMG audit report for
2005? Well, the auditing standards state that as long as an audit report has
not been issued for a subsequent year, all copies of a superceded audit
report for the current year should be returned to the auditor so that two
competing versions of the same report are not in circulation. In the present
case, one should expect vigorous efforts to stamp out any and all instances
of KPMG’s original 2005 audit report. Unfortunately, this occurred
before I could save a copy to my hard drive, but several exchanges with Mr.
Gnazzo imply that my arguments were constructed based on the now-missing 2005
audit report. For example, consider the following two statements:
“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.” [from Reply to Gold Reserve Audit 2005]
and
“The custodial reserves are in fact disclosed
on the face of the Mint’s financial statements. Not as assets but
rather what is called parenthetical disclosures. Still, the gold does
technically fall under KPMG’s audit responsibility. As a result, KPMG
is unlikely to have issued any type of opinion other than a disclaimer
(’we are unable to express an opinion…’) without some
assurance about these gold and silver reserves that are in the Mint’s
custody. It sure looks like the only solution is the audit by the Treasury
Dept.” [Excerpt
from e-mail to Douglas Gnazzo on January 13, 2007].
With respect to these examples, I was obviously
talking about a set of financial statements that did not include gold
reserves as Mint assets but rather as disclosures for which KPMG had not
taken any audit responsibility.
NUMBER THREE. If the new audit report for 2005 was
issued on November 11, 2006, why did it take until now for it to show up? One
possible explanation is that the OIG takes its sweet time to get audit
reports released. Another one is that some administrative procedure created
the delay. In any case, this phenomenon is not restricted to the audit of the
Mint. For example, the Office of the Comptroller of the Currency’s 2006
audit report dated December 12, 2006 was released just before the
Mint’s 2006 audit report dated December 21, 2006. On the other hand,
the Mint’s website is still missing both the 2005 and 2006 audit
reports as of today. It seems that some bureaucrats are slow to update
websites, just like the rest of us.
NUMBER FOUR. How was KPMG able to audit the
custodial gold and silver as of the fiscal year ended September 30, 2005 when
clearly nobody at the time had anticipated that the gold reserves would have
to be reported and audited as Mint assets? The only sensible answer I come up
with is that KPMG did not actually observe any physical inventories during
2005. Rather, the audit firm apparently examined the OIG seals on the gold
vaults at some later date, probably on or about September 30, 2006. This begs
the question, what kind of audit did KPMG perform with respect to the gold
reserves in 2005? Well, it would be quite difficult, but technically not
impossible, to design a set of audit procedures as a substitute for being
present during a physical inventory. I suppose the trick might be accomplished
using an alternate audit program that includes procedures such as interviews
with Mint police and OIG personnel, a thorough examination of all existing
records including inventory documents and security logs, a direct
confirmation of gold assays with the U.S. Assay Office (responsible for
annual re-assays of a portion of gold reserves), conversations with auditors
of the U.S. General Accounting Office (GAO) and who-knows-what-else.
Of particular note is the fact that the GAO reports
directly to Congress and has an independent mandate, although seldom
exercised, to oversee the audit of gold reserves. So if somebody wants to
write a letter to Congress about gold reserve audits, he or she should start
by asking Senators or Congressmen like Ron Paul to help make sure the GAO is
exercising its authority in full. This is very important because the GAO
apparently obtained a full list of the bullion bars held in the gold reserves
during a co-audit with OIG in 1975. At a minimum, such list can and should be
compared by the GAO to the bar list prepared during KPMG’s audit of the
gold reserves. That would provide an additional layer of assurance, one that
I suspect has not escaped KPMG itself.
After having performed the above audit procedures
and then some, KPMG must still have stretched the auditing standards almost
to the breaking point in order to issue a clean audit opinion on the gold
reserves for 2005. Recall that KPMG never directly observed a physical
inventory during that year and typically that would necessitate a disclaimer
of opinion. That, however, is clearly not what KPMG issued for 2005 the
second time around. I’m only speculating here, but what probably helped
convince KPMG to issue a clean opinion is the robustness of the Treasury
seals placed by the OIG on the gold vaults to prevent tampering. You’re
probably thinking, those sure must be some very special tamper-proof seals!
And you’re probably right. You might also be thinking that the OIG
inspectors came across to KPMG as incorruptible, irreproachable officers of
the law. Yet it was most likely KPMG’s presence during the 2006
physical inventory of gold held at West Point that would have provided the
audit firm with the required level of confidence to issue a clean audit
opinion on both 2005 and 2006. Obviously, KPMG must have been very impressed
with the thoroughness and precision of the OIG and Mint staff’s
physical inventory procedures. Last but not least, it is inconceivable that
KPMG did not request and receive assurances from the Mint and the OIG that
the audit firm will be able to take part in the physical inventory at Fort
Knox in 2007.
The bottom line is that KPMG has indeed conducted an
independent audit of the gold reserves, but such audit has so far not
included direct observation of the physical inventory of the gold held at
Fort Knox, the primary gold depository where more than 50% of the reserves
are held. But don’t fret, that will have to happen in 2007 since
otherwise the KPMG audits of 2005 and 2006 are frauds. Now you might still be
left wondering why KPMG didn’t attend the physical inventory at Fort
Knox in 2006. My guess, one that is as good as any other, is that the change
in reporting that required KPMG to take primary responsibility for auditing
the gold reserves likely occurred after the Fort Knox physical inventory for
2006 had already taken place, but before the one at West Point.
NUMBER FIVE. Why did the OIG discontinue issuing
audit reports on custodial gold and silver after 2005 (see 2005 report here)?
This question has already been answered for the most part: KPMG is now
officially in charge of the custodial gold and silver audit. Yet if KPMG was
also responsible for 2005 as its revised audit opinion now states, why did
the OIG issue a separate 2005 audit report that was no longer necessary? This
brings us back to the point that KPMG became responsible for the gold reserve
audit only after the OIG had already issued its 2005 audit report. Another
way to state this is that KPMG did not actually participate in the 2005
physical inventory conducted by the OIG but rather performed a combination of
substitute audit procedures at a later date. The inescapable implication is
that KPMG continues to place a certain degree of reliance on audits
previously performed by the OIG. This should become less of an issue with the
passage of time as it would be unimaginable for KPMG not to materially
participate in future physical inventories, particularly at Fort Knox.
NUMBER SIX. Why did KPMG’s 2005 audit report
not include comparative numbers for 2004 in contrast to the 2006 audit report
that includes comparative numbers for 2005? The reason provided in
KPMG’s revised audit opinion for 2005 seems genuine but insufficient:
“As a result of the lack of comparability, the
fiscal year 2004 financial statements have not been presented with the fiscal
year 2005 financial statements.”
The missing piece of the equation seems to be that
in 2004 the predecessor audit firm did not audit the gold reserves, which now
comprise more than 90% of the balance sheet due to the retroactive adoption
of different reporting standards. It was probably too much of a stretch for
KPMG to go all the way back to 2004 using substitute audit procedures since
many of the records to be examined and personnel to be interviewed would have
been much more difficult to locate. Following this somewhat convoluted logic,
the exclusion of comparative 2004 gold reserves from the 2005 audit report
tends to indicate that whatever audit procedures KPMG did conduct with
respect to 2005, they represented a substantial improvement over the audit
procedures, if any, that may have been performed by the predecessor auditor
in 2004 and years prior.
Bottom line, KPMG’s independent audits have
not been ideal up to this point but they are leaps and bounds ahead of
anything that has been done before. More importantly, everything is now in
place for 2007 to mark the start of a new era in which the gold reserves of
the U.S. are independently audited on an annual basis by an external audit
firm that will for the first time in history observe the physical inventory
of the bullion stored at Fort Knox. The time is short, enjoy your conspiracy
theories while they last!
NUMBER SEVEN. Can we really expect that KPMG will be
present for the physical inventory at Fort Knox in 2007 and beyond? Well, I
must admit that we won’t know the answer with absolute certainty for a
few more months, but based on the fact that KPMG has already been granted
historic access to the fabled Gold Vaults in 2006, possibly by presidential order,
in order to examine the OIG seals at fiscal year end, the precedent has been
set. In fact, it would be shocking if KPMG was willing to accept such a major
limitation on its audit scope. After all, gold reserves now represent the
lion’s share of the Mint’s balance sheet and KPMG could be held
accountable for damages reaching into the many billions of dollars should the
gold prove not to be there. Facing such unimaginable risk, do you think KPMG
is going to settle for anything less than full access or full disclosure?
I’m thinking KPMG must have brought a lot of firepower and pressure to
bear on the Mint and the OIG so that a proper independent audit can be
performed, something that the predecessor audit firm was unable to do.
THANK YOU KPMG! THE END.
Tom Szabo
Silveraxis.com
Tom Szabo introduces
The Metal Augmentor, which will be the detailed coverage of mining equities from junior
explorers to major mining companies.
Subscription is US$ 87 per year, and you will
receive in addition the Mining Equities Report: Cash is King?" which includes the
following :
- Coverage of over 30 exploration and mining
companies trading near or below cash value
- Technical analysis charting on 25 of these
companies
- A robust, interactive Excel file
- Over 60 pages of material
- Free access to future, updated editions
Please click here
to subscribe or for more information about the Metal Augmentor.
Copyright
© SILVERAXIS.COM 2006
|
