1. 1 Audits of Public Debt & Public Assets Jose Oyola, Ph.D., CPA US Government Accountability Office INTOSAI Public Debt Working Group Republic of the Fiji Islands Meeting July 2008

2. 2 Topics in Presentation INCOSAI 2007 Recommendations Recent Trends in Public Debt & Public Assets Benefits & Challenges of Conducting Audits of Assets Linked to Public Debt Management Conducting an Audit of Short-Term Investments: Case of United States Next Steps by Working Group on Public Debt

3. 3 INCOSAI 2007 Recommendations on Public Debt Within their legal framework, SAIs should perform their audits to encourage: FULL DISCLOSURE Ensure full disclosure of public debt and public assets Preparation of regular reports on –the financial status of the public sector that compares public assets with public debt –trends of indebtedness and public assets SOUND ACCOUNTING & AUDITING STANDARDS Development of standards for recording & evaluating public assets and public debt

4. 4 Recent Trends in Public Debt & Public Assets Debt trends are diverging across countries Countries with Trade Surpluses Total debt is leveling or down Domestic debt is substituting foreign-held debt Countries with Trade Deficits Total debt is growing Foreign debt share is increasing

5. 5 Recent Trends in Public Assets Official Foreign Reserves

6. 6 Recent Trends in Public Assets Investments in Long-term Debt & Equity Securities Source  / Purpose Oil exportsBudget surplusesForeign reserves Stabilize revenue Russia Reserve Fund Mexico Oil Stabilization Fund Benefit future generations / public pensions Norway Government Pension Fund Australia Future Fund Management of government assets Saudi Arabia Public Investment Fund SingaporeTemasek Malaysia Khazanah China Investment Corporation Wealth / yield maximization Abu Dhabi Investment Authority Qatar Investment Authority Singapore Government Investment Corp Korea Investment Corp

7. 7 Benefits of Conducting Audits of Public Debt & Public Assets Better assess the financial position of government Enhance the SAI capacity to examine the sustainability and risks of public debt / assets Enhance the effectiveness of the Offices that manage public debt & public assets

8. 8 Benefits of Including Public Assets Australia’s Net Debt = Gross Debt – Financial Assets

9. 9 Challenges Faced by SAIs in Audits of Debt and Assets Legal authority to conduct audit SAI team’s expertise & access to information Which assets / offices should be audited? AssetsManaging units/offices Cash-equivalent assetsDebt Management Offices, Treasury, Ministry of Finance Foreign exchange reserves Central Bank, Treasury, Ministry of Finance Financial assets – debt and equity Sovereign Wealth Fund Board or Corporation, Central Banks, Treasury, Ministry of Finance

10. 10 Audit Case: Short-term Investments of United States Government US Treasury Debt & Cash Management Goals –Finance the government’s borrowing needs at the lowest cost over time –Treasury must always have cash on hand to pay bills.

11. 11 Information for a Cash Management Study US Treasury’s Daily Cash Balance & Investments

12. 12 US Treasury – Short-term Investment Options 1.Treasury General Account (TGA) – $5 billion target balance in its general account at the Federal Reserve. 2.Treasury Tax & Loan Program (TT&L) – banks collect taxes and receive additional cash deposits from the Treasury. These funds are subject to withdrawal on short-notice. 3.Term Investment Options (TIO) – banks place bids in auctions for additional cash investments for a fixed term. 4.Repurchase agreement (repo) – Treasury began a pilot program to engage in reverse repos in March 2006, with banks only.

13. 13 GAO Findings & Recommendations Findings –Treasury faces significant capacity and concentration risks in current cash management program –Treasury earns better rates on its investments in repos and TIOs than TTL. –Treasury obtains an implicit rate on its investments in the general account at the Fed Recommendations –Congress should consider an expansion of Treasury’s legal authority to invest in repos using broker-dealers, not only banks –Better align large cash inflows and outflows to reduce volatility of cash balance

14. 14 Ongoing GAO Audits: Sub-prime Mortgage Credit Crisis Audit approaches  Identify basic principles of oversight for regulated financial entities  Assess effectiveness of market discipline  Identify best management practices related to complex financial products  Evaluate the effectiveness of accounting for off-balance- sheet instruments  Evaluate the effectiveness of liquidity management

15. 15 Other Evaluations of Public Management of Cash Balances, Foreign Exchanges 2006 Report of Auditor General of Fiji – Chapter on Reconciliation of Cash Balances 2006 KPMG Report to Finance Canada on Receiver General Cash Management Program 2005 Report of the Auditor General of Australia on Foreign Exchange Risk Management

16. 16 Next Steps of Public Debt Working Group Potential projects & activities –Publish Guidance on Accounting / Audits of Public Debt / Assets by asset/debt categories: short-term investments, foreign exchange reserves, long-term investments –Conduct Surveys of Audit / Accounting Practices –Use PDWG Website resources http://www.intosaipdc.org.mx/Public%20Debt%20Committee.html http://www.intosaipdc.org.mx/Public%20Debt%20Committee.html Disseminate reports Establish an open, widely available communication that SAI can use to ask questions, post comments, find audit reports and studies of other SAI and public debt / public asset experts