07 June 2009

Canadian Mint missing gold- what is really going on?

In the past week it has been reported that the Royal Canadian Mint (RCM) has “lost gold”. The reports contain statements that to the lay reader may seem unremarkable, but which to me give an indication of what is really going on.

It is also a story of particular interest to me not just because I work in a Mint, but because one job (of the many) I held at the Perth Mint was that of Metal Accountant. The Mint is so obsessive about metal control that it developed four parallel metal general ledgers (au, ag, pt, & pd) and employs a Metal Account full time on ensuring debits equal credits down to one thousandth of an ounce.

My experience in this area is also why I get annoyed at the Jason Hommels who make unsubstantiated claims that the Perth Mint is short gold and/or runs a fractional Depository – for many years it was my job to make sure metal liabilities were backed by metal assets. Anyway, enough of my gripes. For those who haven't seen the reports, below are the key “facts”, with each number hyperlinked backed to the source of the quote.

1. a significant quantity of gold, silver and other precious metals is unaccounted for.
2. The Royal Canadian Mint is withholding employee bonus pay as special auditors enter a fourth month hunting for unaccounted gold insiders say could be worth as much as several million dollars.
3. In recent years, the mint has become a rich source of cash for the government, generating net income of $21.6 million in 2007 on record revenue of $632 million.
4. external auditors have been working since early March to reconcile the precious metals discrepancy, apparently without success. Even retired mint staff have been quietly brought into the Sussex Drive plant on weekends to try solve the discrepancy, according to a source.
5. external auditors are investigating a discrepancy between the mint's 2008 financial accounting of its precious metals holdings and the physical stockpile.
6. possibilities from sloppy bookkeeping to a gold heist.
7. “An unprecedented demand in gold in 2008 has led to an unreconciled difference between the mint's financial statements and the physical count of precious metals. There's a difference there that we're looking into."
8. Officials will only say the discrepancy may be related to an unprecedented demand for gold in 2008, including a 352-per-cent surge in production of its popular Gold Maple Leaf coins.
9. She said an unprecedented demand for gold in 2008 put pressure on the mint's internal control systems, which led to the "unreconciled difference" between the gold on hand and the value recorded in the mint's books.
10. “includes the analysis of precious metal by-products and financial data"
11. "We're looking at many different angles right now,"
12. would not say whether the gold and other metals in question were part of the refinery and bullion operation or one of the mint's three other business lines.
13. It's not known when or what triggered the audit review or what external auditor is conducting the review.
14. The corporation's fiscal 2008 runs from Jan. 1 to Dec. 31 and its normal external auditor is the Auditor General of Canada, who is required to audit the mint's year-end consolidated financial statements.
15. “Doing business with the mint is still safe and this review will likely give us some suggestions on how to improve our processes.”
16. Notably absent, however, is any expression of optimism the affair will turn out to be a case of sloppy bookkeeping or another accounting mix-up. Asked this week to acknowledge the mint is fairly confident the unaccounted for gold has not been stolen, Aquino replied: "We really want to wait for the review before we make any conclusions. We don't want to come to any conclusion until then."
17. police have not been called into what mint officials considered an internal matter.

Firstly, exactly how many millions is “significant”? External auditors have a lot of things to check when reviewing accounting records, so they focus on those that will have a material effect. Accounting standards say that if an item will affect profit by 10% then it is clearly material, with 5% a sort of bottom cut off. If RCM made $21m in 2007, and had a 352% increase in Maple sales, then I think conservatively we could assume they will make $40m this year. This means that the “discrepancy” must be at least $2m, if not $4m. That's a fair amount of gold, or silver.

The second thing of interest is that the external auditors have been working on the problem since early March. What is interesting about this statement is that if the RCM had process problems (#15) and pressure on their internal controls (#9) as a result of increases in volumes (#8), then discrepancies would have starting being evident during 2008. I find it hard to believe they would just have found out about it at the 31 Dec stocktake.

The Perth Mint, for example, performs quarterly physical stocktakes and metal reconciliations. If there were process/control problems, abnormal variations would show up well before year end, prompting investigations. That is the point of doing it quarterly, so there are no surprises come year end.

I suspect that they only started reconciling book records to the stocktake result mid Jan (holidays etc), I can that taking a month or so. Come late Feb they realise they have a problem, do some more work on it but the external auditors are around then doing their usual stuff and they can't resolve it so mid-Mar the auditors become aware of the problem. It would also not surprise me that considering the size of the problem, one response would be to question the stocktake result, leading to another stocktake at the end of March.

Why one could question a stocktake (if your inventory records say 10 widgets in stock then you either have 10 or not, don't you?), how one would not know for certain if gold had been stolen, how one could have a “discrepancy”, why the need for retired workers and what would they have to offer, and why it would take so long to solve the problem requires us to delve into the esoteric world of precious metal manufacture, by-products, and giveaway. In short, stocktaking precious metals is not a straightforward counting of gold widgets – it involves estimations, hence the potential for accounting process stuffups. This I will discuss in my next blog.

2 comments:

gunter mertens said...

Hi Bron,

Am I correct in assuming that you think the "missing gold" is't missing at all, just that they've counted wrong?

Bron said...

If they counted wrong, it would show up in the next stocktake. As I would assume that they have been through successive stocktakes since realising they had a problem, this means the loss is "persisting", which means gold is missing. This does not necessarily mean it has been stolen. I'll explain that last statement in my next blog.