C&AG's Report on Accounts
Background
- As noted in the Foreword to the 1997-98 financial statements
the Exchange Equalisation Account holds the UK’s official reserves
of gold, foreign currencies and International Monetary Fund (IMF)
Special Drawing Rights. The Account was established by section 24
of the Finance Act 1932 to provide a fund which could be used for
"checking undue fluctuations in the exchange value of sterling".
Any official government intervention in the foreign currency
markets would be conducted through the Account.
- Uses of the fund have been extended by subsequent legislation.
The consolidating Exchange Equalisation Account Act 1979 provides
additionally for use of the fund to facilitate payments abroad by
the public sector and for certain purposes arising from the UK’s
membership of the IMF. Under the Act, the funds in the Account may
be invested in the currency of any country, in the purchase of
gold, or in the acquisition of SDRs.
- The Bank of England ("the Bank") manages the Account on a day
to day basis on behalf of the Treasury, who establish a strategy
for the Bank to follow and monitor the Bank’s operations on the
Account. The financial statements are prepared by the Treasury from
information supplied by the Bank of England.
Preparation of Financial Statements
- Under the provisions of the Exchange Equalisation Account Act
1979 the scope of my audit is limited to providing an opinion on
the regularity of operations and transactions in connection with
the Account. In providing such an opinion I utilise information
held by the Treasury, and papers made available to me by the Bank
of England’s Internal Auditors.
- In their 8th Report of Session 1989-90, the Committee of Public
Accounts recommended that the Treasury should explore, in
conjunction with the National Audit Office, the feasibility of
producing a more informative annual account for the operations of
the Exchange Equalisation Account in a form that could be audited
by me. In response, the Treasury developed a receipts and payments
(cash) account. It was agreed that the scope of my audit should be
extended to enable me to provide an audit opinion which would be
more consistent with that given in respect of other cash accounts
prepared by the Government, including the Consolidated Fund and the
National Loans Fund, and the Appropriation Accounts of Government
Departments.
- In giving such an opinion, I certify that the receipts and
payments are properly presented, have been applied for the purposes
intended by Parliament and conform to the authorities which govern
them. For this purpose I need direct access to underlying data for
transactions on the Account held by the Bank of England.
Accordingly in May 1996 I sought the Treasury's agreement to such
access.
- Following discussions between the Treasury and the Bank of
England, my staff were given access to the Bank’s records for the
Exchange Equalisation Account at the end of January 1998. Meanwhile
the Chancellor of the Exchequer had decided that, from the 1997-98
year of account (the first under the current Administration) the
financial statements of the Exchange Equalisation Account would be
published for the first time. It was therefore agreed that the
planned extension to the scope of my audit opinion, to include the
financial statements as well as the statutory opinion on the
regularity of transactions on the Account, should take effect from
that year.
- During the course of their work my staff identified a number of
issues relating to the basis on which the financial statements are
prepared, and the trail between individual transactions undertaken
on the Account and the accounting returns from which the Treasury
prepares the financial statements ("the audit trail"). My staff
drew these matters to the attention of the Treasury and the Bank
who agreed to take action to enable me to complete my work. I
comment further below.
Audit Trail
- Information used by the Treasury to prepare the financial
statements is taken from the Bank of England’s Exchange
Equalisation Account System (EEAS). As part of their audit my staff
attempted to trace individual transactions undertaken on the
Exchange Equalisation Account through to the daily trial balance
which summarises the day’s transactions by currency, and which is
used by the Treasury to prepare the financial statements. However,
my staff noted that the EEAS system had been designed to provide
detailed information on underlying transactions for one day, at the
time the daily trial balance was produced. Detailed data was
archived electronically and the Bank had to undertake additional
programming in order to obtain information on individual
transactions making up the figures disclosed in the financial
statements. From 1998-99 onwards the Bank are retaining records of
this information on a daily basis to ensure a complete and readily
accessible audit trail.
- Investment balances held by the Exchange Equalisation Account
are accounted for at their average historic cost. My staff noted
that whilst the nominal cost of individual investments was readily
available, there was no supporting information to verify the
average historic cost by investment, and hence enabling the amounts
included in the financial statements to be reconciled back to the
certificates and confirmations of holdings on the Account. In
response the Bank re-programmed their systems to provide the
necessary data, starting with that as at 31 March 1996.
Basis of Accounting
- The financial statements for the Exchange Equalisation Account
have been prepared on a cash basis of accounting, which is intended
to show the receipts and payments for the year. Thus the financial
statements should reflect the cash flows only. However, my staff
noted that profits and losses on disposals of investments were
included in the draft financial statements prepared by the Treasury
from the information supplied by the Bank. Whilst the inclusion of
profits and losses would be proper to financial statements prepared
under more commercial accruals style accounting, they are not
appropriate to financial statements prepared on a cash basis. In
order to reconcile to the underlying cash movement the EEAS system
includes such profits and losses within sales as well as within
interest received or paid.
- The system of cash based accounting has also meant, for
example, that the EEAS system shows the interest earned on foreign
currency placed on interest bearing deposits twice in purchases,
once in sales and once in interest received. Adjustments have,
however, been made to the financial statements for 1997-98 to
eliminate from the statement of receipts and payments non-cash
items and interest included twice.
- The financial statements for 1997-98, set out on pages 15 to
23, include an Assets and Liabilities Statement as at 31 March
1998. This represents cash balances held at the year end, and
investment holdings valued at average historic cost and gold,
together with liabilities in respect of SDRs and the accumulated
surplus on the Account. As currently drawn up, the financial
statements for the Exchange Equalisation Account include elements
based on cash accounting and elements based on accruals accounting.
This is reflected in the Treasury’s stated accounting policies for
the Account.
- The Treasury and the Bank of England intend to move from the
current basis of accounting for the Exchange Equalisation Account
in order to report on an accruals basis in accordance with
generally accepted accounting principles. Financial statements
drawn up in a revised form are likely to be implemented with effect
from 2000-2001. The Bank is developing new systems of accounting to
support a revised form of account.
Form of my Opinions
- As required by statute, for 1995-96 and 1996-97 my opinion on
page 35 confirms the regularity of transactions and operations on
the Exchange Equalisation Account for each of those years. The
financial statements for those years are not published.
- Following the Chancellor of the Exchequer’s decision to publish
the 1997-98 financial statements, I have provided an audit opinion
on the financial statements for the Exchange Equalisation Account
for 1997-98, which is consistent with the form of my opinions on
other Government accounts prepared on a cash basis.
John Bourn: Comptroller and Auditor General
National Audit Office
Date 26 January 2000