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The Certificate and Report of the Comptroller and Auditor
General to the House of Commons
I certify that I have examined transactions on the Exchange Equalisation
Account ("the Account") for 1997-98 in accordance with the Exchange
Equalisation Account Act 1979. On 22 September 1997 the Chancellor
of the Exchequer announced an intention to publish the financial statements
for the Account, starting with the year ending 31 March 1998.
I have accordingly examined the financial statements for 1997-98,
which are set out on pages 9-14.
Respective Responsibilities of the Treasury and the Auditor
The Treasury is responsible for control of the Account, and for the
regularity and propriety of the operation of the Account and of the
transactions undertaken on it. Under the Exchange Equalisation Account
Act 1979 it is my responsibility to form an independent opinion, based
on my examination, as to whether or not the operations and transactions
have been in accordance with the provisions of the Act, and to report
my opinion to you. By agreement with the Treasury it is also my responsibility
to form an independent opinion, based on my examination, as to whether
the financial statements properly present the receipts and payments
of the Account and the balances held at the year end, and to report
my opinion to you.
Basis of Opinion
I conducted my audit in accordance with Auditing Standards issued
by the Auditing Practices Board. An audit includes an examination,
on a test basis, of evidence relevant to the amounts, disclosures
and regularity of transactions included in the financial statements.
It also includes an assessment of the judgements made by the Accounting
Officer in the preparation of the financial statements.
I planned and performed my audit so as to obtain all the evidence
and explanations which I considered necessary in order to provide
me with sufficient evidence to give reasonable assurance that the
financial statements are free from material misstatement, whether
caused by error or fraud or other irregularity and that, in all material
respects, the payments and receipts have been applied to the purposes
intended by Parliament and conform to the authorities which govern
them. In forming my opinion I also evaluated the overall adequacy
of the presentation of information in the financial statements. I
have commented on the form of the financial statements in paragraph 13
of my report below.
Opinion
In my opinion:-
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the financial statements set out on pages 9-14, properly
present the payments and receipts of the Exchange Equalisation
Account for the year ended 31 March 1998 and the balances
as at that date, and have been properly prepared in the form,
and applying accounting policies, determined by the Treasury;
and
See also my report set out on pages 19-21.
John Bourn National Audit Office
Comptroller and Auditor-General 157-197 Buckingham Palace Road
Victoria
17 December 1999 London SW1W 9SP
Report of the Comptroller and Auditor General to the House
of Commons
Background
1. 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.
2. 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.
3. 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
4. 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.
5. 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.
6. 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.
7. 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.
8. 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
9. 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.
10. 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 system to provide the necessary data, starting with that as
at 31 March 1996.
Basis of Accounting
11. 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 disposal 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.
12. 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.
13. The financial statements for 1997-98, set out on pages 9-14,
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.
14. 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
15. As required by statute, for 1995-96 and 1996-97 my opinion on
page 23
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.
16. 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 National Audit Office
Comptroller and Auditor-General 157-197 Buckingham Palace Road
Victoria
17 December 1999 London SW1W 9SP
Accounts Direction given by HM Treasury
1. The Treasury shall prepare accounts for the Exchange Equalisation
Account ("the Account") for the financial year ended
31 March 1998 and subsequent financial years comprising:
(a) a foreword, which inter alia, incorporates a statement of the
Accounting Officer's responsibilities and provides information on
the origins and purpose of the Account, the audit and publication
requirements, administration and control, links to the National Loans
Fund, investment policy, credit risk, an evaluation of the Bank of
England's management of the Account and a review of activities during
the financial year;
(b) a receipts and payments account;
(c) a statement of assets and liabilities; and
(d) notes which set out the accounting policies for the Account
and provide details of transfers between the Account and the National
Loans Fund; returns on surpluses; unrealised valuation of gains/losses
during the year resulting from movements in sterling against the associated
foreign currencies in which the bulk of the Account's assets and liabilities
are denominated; uncompleted contracts; the Exchange Cover Scheme
(ECS); administrative costs; Special Drawing Rights (SDRs) and any
other details as may be necessary.
2. The accounts shall properly present the receipts and payments
for the
period and the assets and liabilities of the Account as at the end
of the financial year.
3. The foreword, the Account and the assets and liabilities statement
shall be
signed by the Accounting Officer and dated.
4. The accounts direction shall be reproduced as
an annex to the account.
Jamie Mortimer 24 March 1999
Treasury Officer of Accounts
The Certificate and Report of the Comptroller and Auditor
General to the House of Commons
I certify that I have examined transactions on the Exchange
Equalisation Account ("the Account") for 1995-96 and 1996-97 in accordance
with the Exchange Equalisation Account Act 1979. Financial statements
for the years ended 31 March 1996 and 31 March 1997 are
not published, following the practice of preceding years when the
financial statements were treated as confidential.
Respective Responsibilities of the Treasury and the Auditor
The Treasury is responsible for control of the Account and for the
regularity and propriety of the operation of the Account and of the
transactions undertaken on it. Under the Exchange Equalisation Account
Act 1979 it is my responsibility to form an independent opinion, based
on my examination, as to whether or not the operation and transactions
have been in accordance with the provisions of the Act, and to report
my opinion to you.
Basis of Opinion
I conducted my audit in accordance with Auditing Standards issued
by the Auditing Practices Board. My audit included an examination,
on a test basis, of evidence relevant to the regularity of financial
transactions on the Exchange Equalisation Account.
Opinion
In my opinion the operations on and transactions in connection with
the Exchange Equalisation Account in the years ended 31 March
1996 and 31 March 1997 have been in accordance with the Exchange
Equalisation Account act 1979.
See also my report on pages 19-21.
John Bourn National Audit Office
Comptroller and Auditor-General 157-197 Buckingham Palace Road
Victoria
17 December 1999 London SW1W 9SP
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