Is There Gold in Fort Knox?

February 21, 2000 - At last I have received a reply from the US Treasury Department in response to my questions about auditing the US Gold Reserves stored in Fort Knox. The letter was written to my Congressman, The Honorable John Sununu, by Mr. Jeffrey Rush, Inspector General of the Department of the Treasury. Here's what Mr. Rush said:

Dear Congressman Sununu:

Your letter to the Department of the Treasury dated December 1, 1999 was referred to my office. Your letter enclosed a copy of a letter from your constituent, Mr. James Turk of North Conway, New Hampshire (letters enclosed). Mr. Turk expressed concern that a proper audit of the United States Gold Reserve at Fort Knox has not been completed since the Eisenhower administration. If such an audit is performed, Mr. Turk requested that he be provided a copy of the auditor's report.

In response, I have enclosed the Department of the Treasury, Office of Inspector General's report on the United States Mint's Statements of Custodial Gold and Silver Reserves as of September 30, 1998 and 1997. Our report includes an unqualified audit opinion, no reportable conditions and no instances of reportable noncompliance with laws and regulations. If you have any questions regarding this report, please contact me at...

Sincerely, Jeffrey Rush, Jr., Inspector General

Case closed? Before you jump to a quick conclusion about whether or not the US Gold Reserves supposedly stored in Fort Knox are actually safe and securely sitting in the vault there, here is what I have learned by reading the eleven pages of material accompanying Mr. Rush's letter.

The 261.7 million ounces of the US Gold Reserves are under the custodial responsibility of the US Mint. This responsibility covers all of the US Gold Reserves, except the relatively small portion (5.1% of the total US Gold Reserve) stored in the New York City vault of the Federal Reserve Bank of New York. Therefore, that portion of the US Gold Reserves stored at the vault in Fort Knox (147.3 million ounces) is under the custodial responsibility of the US Mint.

The US Mint is audited annually by a recognized accounting firm, Urbach Kahn & Werlin PC (UKW), which is to be expected given the volume of precious metal handled by the US Mint each year in its coin programs and the revenue generated from these coin sales. UKW also checks, as part of its auditing process, the US Mint's custodial responsibilities and the precious metal under its care and safekeeping. But here is where things start to get a little bit fuzzy.

The documents which I have received that discuss and review this process are less than clear. It appears that UKW does audit the US Mint's premises and major vaults in active use. These are referred to as the US Mint's "manufacturing operations", which are reported as a distinct component of the US Mint's consolidated financial statements. However, as we all know, the Fort Knox vault is not actively used, and very rarely is any metal moved into or out of the Fort Knox vault. So it would appear that Fort Knox, and therefore the Gold supposedly stored within its vault, is not part of the US Mint's manufacturing operation. This last point is important.

It would appear that UKW does not actually audit the physical metal in Fort Knox. This conclusion is confirmed in a memorandum addressed to the Director of the US Mint. In this memorandum the Assistant Inspector General for Audit, Mr. Dennis Schindel, refers to the Treasury Department's report on the US Mint's Statements of Custodial Gold and Silver Reserves, and he states that: "The results of our [i.e., the Treasury Department] audits will be relied upon by Urbach Kahn & Werlin, PC, an independent public accountant, who performed the audits of the Mint's Fiscal Year 1998 and 1997 financial statements."

Of related interest is a footnote to the Treasury Department's report referred to by Mr. Schindel, entitled Statements of Custodial Gold and Silver Reserves as of September 30, 1998 and 1997: "These custodial statements have been prepared to report the gold and silver reserves custodial position of the U.S. Mint. The books and records of the U.S. Mint have served as the source of the information contained herein." (emphasis added)

In other words, the Treasury Department auditors did not go to Fort Knox in order to count the bars, nor apparently were any of the bars chosen at random for assaying in order to sample whether they actually contained the Gold they supposedly contain, which is a normal and prudent precaution. Instead, the Treasury officials just merely checked the ledger statements that record the weight of Gold reportedly stored in Fort Knox, and then these officials signed off on these ledgers and gave an unqualified opinion without really verifying whether or not the Gold is actually stored in Fort Knox.

So let me get this straight. The US Mint is audited annually by UKW, and they express an unqualified opinion of the US Mint, including its custodial responsibilities. But UKW is relying in part upon the audit of the Inspector General of the Department of Treasury in order to give its unqualified opinion. The Inspector General performs an audit of the custodial responsibilities of the US Mint, and gives an unqualified opinion. But the Inspector General's 'audit' is based upon the "books and records" of the US Mint, apparently without visiting Fort Knox to count and randomly assay any Gold bars.

Thus, we know no more now than when we started. The all important questions are still unanswered in my mind. Has a proper audit of the US Gold reserve in Fort Knox been completed, and is the Gold supposed to be stored in Fort Knox really there?

In my original August 30th letter to Treasury Secretary Lawrence Summers, I specifically referred to a "proper audit" and defined it to mean: "The proper audit of bullion reserves is one undertaken by independent third parties, and includes among other safeguards, a review of security procedures and assays of Gold bars selected at random." As near as I can tell, a proper audit of the US Gold Reserves has not been undertaken.

Also alarming to me are the important points not included in this audit by the Inspector General. His "unqualified opinion" actually is qualified in important and meaningful ways.

For example, the report states that: "Because of limitations inherent in any internal control, errors or fraud may occur and not be detected." But Mr. William Pugh, Deputy Assistant Inspector General for Audit states that the objective of their report was "not to provide assurance on the internal control  over financial reporting...Consequently, we do not provide an opinion on such [internal]controls." He also states that: "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". These are important limitations on the scope of the report.

Clearly, Messrs. Schindel, Pugh and their colleagues are professionals who understand the significance of an audit, and the liability that could be attributed to them in their personal capacity from any material misstatement. Thus, by making these statements that limit the scope of the report, they are drawing a line in the sand. In this way they cannot be criticized for material errors in these areas. In other words, even if there is no Gold in Fort Knox, officials in the Inspector General's office cannot be held personally responsible. Ironically, their report entitled Statements of Custodial Gold and Silver Reserves as of September 30, 1998 and 1997 cannot be considered misleading because it was based on the information available to them and covers only a limited scope, which points are clearly stated as limitations within the report. Therefore, read this report and accept its conclusions at your own risk.

In summary, I still don't have the answer to my questions about whether there really is Gold in Fort Knox, but we are getting closer. I am investigating this matter further, and will keep you advised.

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