GOLD RESERVE AUDIT
PART 2
by Douglas V. Gnazzo
January 12, 2007

“Have I become your enemy because I tell you the truth?” 

Introduction

Recently I wrote an article titled: Gold Reserve Audit 2005. As fate and fortune would have it, my article caught the eye of one Mr. Thomas Szabo – a forthright individual who loves to tell it like it is. 

As he honestly and intrepidly admonishes:

“A word of warning. We are brutal in our honesty and we will not hold back in fear of making anybody, including company management, angry at us.” [1] 

Cool. I’m not sure who the we is, but hey – the more the merrier.

Mr. Szabo does an excellent job of critiquing my article, clearly indicating his experience, background, and general knowledge of economics, finance, and accounting. I am pleased to make his acquaintance, as I have many unanswered questions in these interrelated fields of endeavor; questions that have proven to be most difficult to fully grasp and understand. 

I look forward to whatever factual accuracy and truth he can provide to uncover those nuggets of wisdom buried deep beneath the quagmire of the usual, irrelevant, wrong, and repetitive disinformation that he states is so often offered by others less in the know.

History

First, a little background information for the reader to better acquaint themselves with the issues that will be under discussion. We offer a quote:

“I don't know what Mr. Gnazzo's background is, but mine involves over 8 years of audit experience.” [2]

Just what I’ve been hoping to find: someone that knows what they are talking about, as my background is such that I have little experience, whatsoever, in accounting, finance, or economics. I have never taken one course in any of these fields, much less am I in possession of any similarly related degrees of higher education, let alone 8 years of audit experience.

I have owned and run a couple of businesses at the same time for the past thirty years, as well as being the caretaker of my own, and other family related trusts. Other than that my professional experience in such fields is pretty much non-existent. 

Experience

Mr. Szabo, on the other hand, appears to be highly experienced and qualified in the intimacy of all things falling under the rubrics of government auditing standards, and generally accepted accounting principles, as his statement below clearly contends. 

I am a firm believer that nothing happens by chance or accident, including the recent crossing of our paths, when Mr. Szabo first made the decision to respond to my article Gold Reserve Audit 2005. He hastened to add:

“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.” [3]

Divine music of the muses to my ears, as I’ve been looking for someone that could answer the many questions I have on the gold audit conundrum, hopefully able to distill my confusion in understanding the labyrinthine maze that goes forth by the name of audit. 

Clarification

Further opinion and clarification on these, which to say the least, are abstruse topics for the common uninitiated mortal, is gratuitously offered:

“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.” [4]

Indeed, now I can see the folly of my ways, as I was trying to wade through a slimy, genetically mutated and infested quagmire of accounting legalese - that even Sir Alan would be hard pressed to offer up a more effective ruse of mumble jumble: Greenspeak I think they called it – in honor of the maestro.  

Beginnings

There are so many questions I hardly know where to begin – so I guess we’ll just start at the beginning of his missive and see where it leads.

“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.” [5]

The other day, while surfing my way across the ethers of the internet, I ran across an apropos piece of reading material in the CreditRiskMonitor Glossary – anothar fortuitous encounter. Lo and behold, staring me right in the face was a section titled:

Auditor Opinions (click on links for details)

I felt like I had found the Holy Grail – the Da Vinci code still remained a twisted sister of fate - destiny’s child, but I knew I was getting closer. I opened the tome and there it was, in all its full-bloomed glory.

Now, this is where I could use a little helping hand from Mr. Szabo, a self-proclaimed experienced translator and diviner extraordinaire. I was struck by the unequivocal opinion of his that attempted to assure 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.” [6]

I interpret this to mean that without an explanatory paragraph there could be no question as to the virginal purity of the audit, which, as he expressed, undoubtedly required a physical examination of the gold and silver reserves. 

Then why is the following statement in the above quoted CreditRiskMonitor Glossary?

Unqualified with Explanation - Is an Unqualified opinion but includes comments by the auditors on matters they feel are important to the understanding of the financial statements or their audit. May cover one of the following explanatory issues:

• Uncertainty as to Going Concern - where the auditor concludes that substantial doubt exists about the entity's ability to continue for a reasonable period of time
• Part of audit was performed by another auditor - where the principal auditor does not accept full responsibility for the opinion on the consolidated financial statements, the opening paragraph is modified to explain the division of responsibility, and the scope and opinion paragraphs contain references to the other auditor
• Inconsistent application of GAAP - a change to an acceptable accounting principle that has a material effect on comparability
• Uncertainties exist - such uncertainties or contingencies (e.g., litigation valuation or realization of assets) may require an explanatory paragraph depending on the probability of loss and the ability to make a reasonable estimate 
• The inability to perform an audit in accordance with GAAS or a material departure from GAAP precludes the auditor from issuing an unqualified opinion. [7] 

Question

Doesn’t the following paragraph sound like the above second explanation? 

“In planning and conducting our audit of the Mint’s Custodial Schedule, we considered internal control over financial reporting. Specifically, we obtained an understanding of the design of the Mint’s internal control related to the Custodial Schedule, determined whether these internal controls had been placed in operation, assessed control risk, and performed tests of controls in order to determine our auditing procedures for the purpose of expressing our opinion on the Custodial Schedule and not to provide assurance on the internal control over financial reporting. Consequently, we do not provide an opinion on such control.” [8]

And surely, even if it is not considered to be an explanatory note, it is without doubt, what CreditRiskMonitor Glossary defines as:

“Disclaimer of Opinion (no opinion) - When a material uncertainty exists and the auditor believes that it so pervasive as to not be adequately communicable by the use of an explanatory emphasis paragraph, the auditor will issue a Disclaimer, stating that they are unable to form an opinion on the financial statements. They will also issue a disclaimer if there is a significant restriction on their audit scope, whether or not client-imposed.” [9]

Scary stuff, as it sounds like a disclaimer of opinion (no opinion), questions the virginal purity of the audit more seriously than does an explanatory paragraph or note: as the auditor believes that a material uncertainty exists so pervasive that a DISCLAIMER is required.

Question

Maybe that’s what the following paragraph from the audit under review is all about, however, we are not the expert – so we’ll leave it open for Mr. Szabo to give his rendition of:

“As part of obtaining reasonable assurance about whether the Custodial Schedule is free of material misstatement, we performed tests of the Mint’s compliance with certain provisions of laws and regulations, noncompliance with which could have a direct and material effect on the determination of Custodial Schedule amounts. We limited our tests of compliance to these 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 these 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.” [10]

Further Clarification

Also, some clarification on Mr. Szabo’s statement that on the one hand, 

“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”, and yet in

the very next sentence he says, “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.” [11]

I still can’t determine whether an independent, full, and complete physical audit was clearly done or not – can you? Not only is the above confusing, it also seems to go against what was said in the beginning of the opening salvo:

“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”. [12]

So once again, one minute it’s a pure audit that includes a physical examine which seems to validate the auditing process according to expert testimony, but then it is noted that a physical examination doesn’t necessarily mean a physical count, but that a physical inventory is reasonably accurate. 

Troglodytes

As I said, Sir Alan would feel right at home trudging through the quagmire along with the other three troglodytes running amuck (no pun intended):

• Physical examine
• Physical count
• Physical inventory

I think that at the least, we need a clarification from the audit goddess; and she should have to sign off on it in her own blood, scripted into granite, just to make sure it is adamantine enough to stand for all time – like that forever stuff they write into treaties and love poems and such – in perpetuity or something like that.

Re-Entry

Returning from the twilight zone with my feet firmly planted on sacred ground, I next encounter the truth – yes the truth – I know it’s hard to believe, but let’s see. It is written that:

“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.” [13]

Now, I’m so confused I don’t know if that’s Mr. Szabo talking or myself. I faintly remember writing something along those very same lines:

“Notice what the above says: an audit of the financial statements. It doesn’t say an audit of the physical gold. Is there a difference? 

According to what follows, KPMG LLP never saw any physical gold. They never went to Fort Knox. Then what did they audit? 

Apparently they audited the reports that the Treasury Department and the Mint gave them via the Deputy Assistant Inspector General for Financial Management and Information Technology Audits Report. 

In other words they audited statements and reports from William H. Pugh Deputy Assistant Inspector General for Financial Management and Information Technology Audits that he supplied to the Treasury and the Mint.

The report also contains a disclaimer by the Treasury Department that the audit did not include Treasury gold held by the Federal Reserve. 

Now why is that? Is it the Treasury’s Gold, or the Federal Reserve’s Gold, or We The People’s Gold? And why is the Federal Reserve holding it? More unanswered questions.” [14]

After recalling the above, it seems that Mr. Szabo and I see eye to eye more then he cares to admit. But labyrinths are like that, some even come with there own Minotaur straight from Crete, autographed by Daedalus to Asterius – so not only do you get lost, you get chased around so bad, you think you are in hell, let alone some stinky old quagmire. 

Now that we are finished with the truth, let’s visit the facts. Mr. Szabo states:

“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.” [15]

Interesting, but that’s not what I garnered from “the audit report”. I don’t remember the mint examining or even saying that they examined anything, let alone the gold and silver reserves of another branch of the government: the U.S. Treasury nonetheless. 

Right here in black and white it clearly delineates who did what – or not.

“MEMORANDUM FOR DAVID A. LYBRIK, ACTING DIRECTOR UNITED STATES MINT 

FROM: William H. Pugh Deputy Assistant Inspector General for Financial Management and Information Technology Audits. 

SUBJECT: Audit of the United States Mint’s Schedule of Custodial Gold and Silver Reserves as of September 30, 2005 and 2004. 

The attached report presents the results of our audits of the United States Mint’s (Mint) Schedule of Custodial Gold and Silver Reserves (Custodial Schedule) as of September 30, 2005 and 2004. The Custodial Schedule is the responsibility of the Mint. We conducted our audits in accordance with Government Auditing Standards, issued by the Comptroller General of the United States.” [16]

So perhaps Mr. Szabo can clear this one up for us as well. Doesn’t the above say it’s a memo to the Mint – not from the Mint? And is it not from, William H. Pugh Deputy Assistant Inspector General for Financial Management and Information Technology Audits. 

I’m not sure, and I could very well be mistaken, but I think that the Office of Inspector General (click on link) is under the auspices of the Commerce Department – not the Treasury Department. 

Also, the above says that the subject is the “audit of the United States Mint’s Schedule of Custodial Gold and Silver Reserves”. It doesn’t sound to me like the Mint is auditing the Treasury Department. What do you think? Doesn’t it sound like the Mint is the one being audited? 

Mr. Szabo may actually be incorrect when he says the Mint is doing the auditing of the Treasury, which they are not; and he also doesn’t seem to realize that the auditor is the entity that wrote:

“The attached report presents the results of our audits of the United States Mint’s (Mint) Schedule of Custodial Gold and Silver Reserves”. [17]

Now, who wrote that? – why, William H. Pugh Deputy Assistant Inspector General for Financial Management and Information Technology Audits wrote it – at least that is was it says. 

So here are the players in this little charade:

• U.S. Mint whose Schedule of Custodial Gold and Silver Reserves is “audited” by the
• Inspector General’s Office who “audits” the Custodial Schedule and whose results of their audit will be used by
• KPMG LLP – an independent private non-governmental auditing firm in performing the audit of the Mint’s Fiscal Year 2005 financial statements
• Which was then submitted to: The Department of the Treasury, Secretary of the Treasury, and the Treasurer of the United States, amongst others.
• The Mint is under the auspices of the Department of the Treasury

Next Mr. Szabo makes the statement that:

“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.” [18]

Geez, he makes it sound almost like a conspiracy – conflicts-on-interest from essentially auditing its own assets – I didn’t even get that brutal, which is perhaps due to the fact that they weren’t auditing there own assets, or I would have mentioned it. 

I must admit in all honesty, however, I am a bit short on faith in regards to the U.S. government’s ability to handle any monetary affairs properly. Now, why would I say that? Let me count the ways. 

• The Constitution specifically states that nothing but gold & silver coin are legal tender
• The Constitution specifically states that Congress only has the power to borrow money – not to issue or create it – let alone monetize the government debt with/as it
• Just think – why if you can create money would you have the need to borrow it?
• 1933-34 President Roosevelt confiscated all private gold holdings, which at that time was still acknowledged by the government as real money (it still is – they just won’t fess up)
• Why did the President do that? – cause since 1913 the Fed in 20 short years had bankrupted the country
• So the President made it a CRIME for We The People to own gold – nice huh?
• In 1971 another President – Nixon, reneged on our contractual obligations to pay foreign debts to other nations in gold bullion – that’s the second time they declared bankruptcy
• The first time they stole the gold from We The People
• The second time they stole the gold from the rest of the world

Would you let them run your company for you? – hell, they can create money and we’re still the largest debtor nation in the world – bar none. 

Hard to believe isn’t it? You can read all about it in the Open Letter to Congress at Honest Money Gold & Silver Report (click on links for in depth detail). There are over 100 articles on the hard money system of the Constitution of Gold and Silver Coin, which disallows bills of credit (paper money).

And if the above is not enough evidence to provide the feeling of beyond a reasonable doubt, then this should do the trick. It is from the Comptroller General of the U.S. regarding his assessment of the United States Financial Statement for 2006:

GOVERNMENT ACCOUNTABILITY OFFICE REPORT 
150

A significant number of material weaknesses related to financial systems, fundamental record keeping and financial reporting, and incomplete documentation continued to (1) hamper the federal government’s ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; (2) affect the federal government’s ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities; (3) impair the federal government’s ability to adequately safeguard significant assets and properly record various transactions; and (4) hinder the federal government from having reliable financial information to operate in an economical, efficient, and effective manner. We found the following:

• Certain material weaknesses in financial reporting and other limitations on the scope of our work resulted in conditions that continued to prevent us from expressing an opinion on the accompanying consolidated financial statements for the fiscal years ended September 30, 2006 and 2005
• The federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2006.
• Our work to test compliance with selected provisions of significant laws and regulations in fiscal year 2006 was limited by the material weaknesses and scope limitations discussed in this report. [19] 

DISCLAIMER OF OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS 

Because of the federal government’s inability to demonstrate the reliability of significant portions of the U.S. government’s accompanying consolidated financial statements for fiscal years 2006 and 2005, principally resulting from certain material weaknesses, and other limitations on the scope of our work, described in this report, we are unable to, and we do not, express an opinion on such financial statements. [20]

If that doesn’t convince one that there is good reason to question the government on its financial affairs, far beyond a reasonable doubt – then I have a bridge in the Gobi Desert for sale with beach front property. Superb irrigation system included at no extra cost. 

Finally, Mr. Szabo almost reaches the end of his diatribe when he blurts out:

“Mr. Gnazzo also raises the question of the gold held by the Federal Reserve

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?” [21]

Now, here is a word for word quote of what I wrote regarding gold and the Federal Reserve:

“The report also contains a disclaimer by the Treasury Department that the audit did not include Treasury gold held by the Federal Reserve. 

Now why is that? Is it the Treasury’s Gold, or the Federal Reserve’s Gold, or We The People’s Gold? And why is the Federal Reserve holding it? More unanswered questions.” [22]

Perhaps I’m missing it, but does it say anywhere in the above quote where I’m asking why the gold held by the Federal Reserve was not audited? No it doesn’t. 

I stated a FACT: the report contained a DISCLAIMER by the Treasury Department that the audit DID NOT include Treasury gold held by the Federal Reserve. I then asked the question – why is that? 

It is referred to as the Treasury’s gold, then why is the Fed holding it and not the Treasury? Which definitely begs the question – just whose gold is it? And where did the Treasury get the gold from in the first place? Perhaps it’s left over from the 1933 feeding frenzy.

The Coinage Act, 1792 (The Mint Act) does not grant Congress or the Mint, nor any branch of the government, the power to create silver and gold coin. The Act stipulates what is called free mintage. The People could and did bring their gold and silver to the mint, which would then coin their PRIVATE PROPERTY into the then current silver and gold coins. 

The People owned and held title to the gold and silver – not the government. 

The government has no authority vested in it by the Constitution to hold title to our money. That’s a little scheme the international elite bankers fostered upon We The People by: 

• CENTRAL BANKING

• FRACTIONAL RESERVE LOAN POLICIES 

• THE MONETIZATION OF THE GOVERNMENT DEBT AS THE CIRCULATING CURRENCY 

• COMMONLY KNOWN AS PAPER FIAT OR DEBT-MONEY

Lovely little scheme isn’t it? The perfect wealth transference mechanism to siphon wealth away from the majority of the hard working people over to the elite bankers who control the unconstitutional monetary and central bank system known as the Federal Reserve. 

Listen to what the former Chairman of the Federal Reserve, Sir Alan Greenspan has to say on the subject, he under whose watch more debt was created then in all other administrations put together – the second coming of John Law:

"Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold
stands in the way of this insidious process. It stands as a protector of property rights." [23]

I couldn’t say it any better than that – and Lord knows I’ve tried. The next installment will explain what all of this “audit” stuff has to do with the exchange stabilization fund, the BIS, the IMF, and swap meets that fund the Gold Wars. 

Sources
[1] Thomas Szabo on his website
[2] Reply to "Gold Reserve Audit 2005" (link)
[3] Same
[4] Same
[5] Same
[6] Same
[7] CreditRiskMonitor Glossary (link)
[8] Audit of US Mint 2005 10/31/2005 (link)
[9] CreditRiskMonitor Glossary (link)
[10] Reply to "Gold Reserve Audit 2005" (link)
[11] Same
[12] Same
[13] Same
[14] Same
[15] Same
[16] Same
[17] Audit of US Mint 2005 10/31/2005 (link)
[18] Reply to "Gold Reserve Audit 2005" (link)
[19] David Walker, Comptroller of the US accompanying statement to the 2006 Financial Report of the United States Government
[20] Samea
[21] Reply to "Gold Reserve Audit 2005" (link)
[22] Same
[23] Alan Greenspan – 1966 Paper

CONTACT INFORMATION
Douglas V. Gnazzo
Honest Money Gold & Silver Report, LLC
Canton Center, CT USA
Email  |  Website

About the author: Douglas V. Gnazzo is CEO of New England Renovation LLC, a historical restoration contractor that specializes in restoring older buildings that are vintage historic landmarks. He writes for numerous websites and his work appears both here and abroad. Just recently he was honored by being chosen as a Foundation Scholar for the Foundation for the Advancement of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.