B.—l [Pt. ll].

(e) Section 5 of the Finance Act, 1932 (No. 2), requires that the interest payable in respect of the capital liability of any special fund or account within the Public Account or in respect of so much thereof as is represented by loan-moneys shall constitute a liability of such fund or account to the Consolidated Fund, and provides that amounts may from time to time be transferred from such special fund or account to satisfy such liability. Normally the amount of interest payable on each security varies according to the date the loan-moneys were received. It frequently happens that there is also a variation in the amount of interest payable on each security, caused by repayment being made at different dates. Unless it is known to which account each particular security relates, it will be impossible to give effect to the requirements of this section. (/) Brokerage payable in respect of the raising of loans or the renewing of securities under the New Zealand Loans Act, 1932, arises in the case of particular securities, and not in the case of other securities, depending on whether application for the loan or renewal is made through a bank or registered broker, or through an agent of the Government not entitled to brokerage. If it is not possible to identify particular securities as issued for the purpose of a particular account, it will be impossible to transfer the correct amounts of brokerage to the Consolidated Fund from the special fund or account to which a loan transaction relates, as provided for in section 61 (3) of the New Zealand Loans Act, 1932. (g) Where particular securities are paid off, converted to a different rate of interest, or dealt with in any manner which will terminate or vary the loan contract, unless it is possible to identify such securities as issued for the purpose of a particular account it will be impossible to determine which is the account actually affected by the redemption or alteration of the particular securities, and this will necessarily affect the reliability of the departmental balance-sheets. In my reports to Parliament I have mentioned the necessity, when consolidating Government loans, for preserving and maintaining the distinction between the loans raised for the purposes of different accounts. The examples given above show conclusively the evil effects, both from a legal and accountancy point of view, which must follow any failure to maintain such distinction. It is sought to justify the failure to record the connection between securities and the accounts for the purposes of which they were issued on the plea that the consolidation and simplification of the public debt accounts is facilitated thereby. In the opinion of the Audit Office the consolidation of the debt may be as readily effected without such failure, while the simplification which is claimed amounts to the omission of accounting data which are essential if true and proper accounts are to continue to be kept. Audit has for some years pressed for a consolidation of the public debt, but cannot agree that such consolidation involves destroying the relation between loans and the accounts for which they were raised. The method it is now proposed to follow would be suitable only if all loans were identical in their terms and conditions, and in the opinion of Audit is not suitable where loans are subject to various conditions as is at present the case with New Zealand loans. Transfer of Interest from Separate Accounts to the Consolidated Fund. By section 5 of the Finance Act, 1932 (No. 2), the law has been altered in connection with the transfer of interest from separate accounts to the Consolidated Fund. Section 139 of the Public Revenues Act, 1926, which has been repealed by this section, authorized the transfer of the amount actually paid from the Consolidated Fund on behalf of a separate account for interest charges, but section 5 authorizes the transfer of the amount of interest payable, even though it has not been paid. The result will be to credit to the Consolidated Fund cash belonging to the separate accounts, and thus to inflate the balance shown in the Consolidated Fund. This will have some effect on the Budget position, but whether the amount will be large enough to distort the true position to any material degree will depend on circumstances. Another point in connection with the transfer of interest from separate accounts to the Consolidated Fund which calls for comment is the fact that in some cases the separate accounts have insufficient revenue to meet the amount of interest transferred. The result is that the interest is paid from loanmoneys. Such a practice is most unsound from an accountancy point of view, and has the effect of making the Budget position appear better than it really is. In effect, the Consolidated Fund —that is, the general revenue account of the Dominion—is funded partly from loan-moneys without this fact being apparent in the accounts. In the case of the Native Land Settlement Account, for example, the Revenue Account for the year ended 31st March, 1932, discloses an accumulated loss of £1,320,727 ss. Bd. (see 8.-l [Part IV] Sup. to 1932, page 71), yet in the year 1932-33 interest to the amount of £38,037 Ms. 6d. was recouped from this account to the Consolidated Fund (see 8.-l [Part I], 1933, page 35). It is clear that this interest must have been paid entirely from loanmoneys, and this also applies to portion of the amounts transferred in previous years. Interest on Public Account Cash Balance Investments. In previous reports I have drawn the attention of Parliament to the system adopted by the Treasury of allocating the interest derived from investments of moneys belonging to certain accounts to all the accounts within the Public Account instead of to those accounts only which provide the money for the investments. I append a statement showing the amounts so allocated to each account during the year 1932-33. The allocation is made on an arbitrary basis, which, in my opinion, is ifot a correct one, as it has the effect of crediting the interest in many cases to accounts other than those which have earned it. I may explain that these investments are made out of the accumulations of the balances of cash in the various accounts within the Public Account.

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