B.—l [Pt. ll].

and the payments another, the result has been to render the accounts incorrect by overstating the receipts of one account and correspondingly overstating the expenditure of another account. Since the 20th January, 1933, the exchange New Zealand - Australia has returned to approximately par, and the method of treatment has become relatively unimportant. As regards exchange New Zealand to London, the increase of the rate from £110 to £125 on 20th January last has rendered the proper treatment of exchange in the accounts of even greater importance than it was previous to that date. In the case of transactions in which the Government acted as agent for private individuals, or for bodies or accounts outside the Public Account, the correct principle has been gradually adopted of allowing or charging exchange in favour of or against such individuals, bodies, or accounts at the ruling rate, even though it was not necessary to make an actual remittance of moneys in connection with the particular transaction. With this principle the Audit Office is in full agreement, but these transactions comprise only a comparatively small portion of the London transactions. The majority of the London transactions, however, relate to the services of the Public Account. In the case of these transactions where there has been an actual remittance the exchange in many cases, although taken into account, has not been allocated to the particular account or service in respect of which it was incurred, while in cases where there has been no actual remittance usually no allowance whatever has been made for exchange, but the receipts and payments have been entered in the New Zealand accounts at their sterling amount without conversion into New Zealand currency. As a result, the true cost of the various services, and the true value of the receipts and payments, is not shown in the separate accounts comprising the Public Account nor in the various votes, and, further, the balance-sheets and revenue accounts of the various undertakings which are published annually in 8.-l [Part IV] are in many cases rendered misleading. With a ruling rate of £125 the understatement of the cost of London payments, and the corresponding understatement of the amount of London receipts, is in the opinion of the Audit Office a serious matter from an accountancy point of view. The following examples are quoted as indicating the undesirable effects arising from the methods followed :— During the year 1932-33 expenditure was made in London to the amount of about £62,000 for the services of the Electric Supply Account, and a further £460,000 was expended as interest on loans raised for the purposes of this account. Allowing exchange at the rate of £110 New Zealand to £100 United Kingdom, and ignoring for the purposes of this example the increase to £125 which took place during the year, the cost of exchange on these payments was £6,200 and £46,000 respectively. The whole of this exchange was paid from and charged to the Ordinary Revenue Account of the Consolidated Fund, and no portion was charged to or recovered from the Electric Supply Account for the purposes of which the payments were made. The result is that the vote " Development of Water-supply " was undercharged to the amount of £6,200 (representing exchange on the services of this vote), while the separate Electric Supply Account was undercharged by an amount of £52,200. Further, section 5 (1) of the State Supply of Electrical Energy Act, 1917, requires that full and faithful accounts shall be kept'in respect of each electric-supply scheme, showing all moneys received and expended in connection therewith, and showing also the capital expenditure in connection with the scheme and the profit or loss arising from the operations of the scheme. It is clear that the accounts presented under this section are incorrect and misleading, for exchange costs to the amount of £52,200 relating to the various schemes have been omitted from such accounts, and have been charged to and paid out of the Consolidated Fund. In another case sums amounting to approximately £534,000 have been paid in London in respect of interest on loans of the State Advances Account, and the exchange on this, amounting to about £53,400, has been paid by the Consolidated Fund despite the fact that section 20 of the State Advances Act, 1913, requires that all sums payable in respect of interest on the loans raised under the authority of this Act shall be charged to and paid out of the State Advances Account. The effect is that the Consolidated Fund has been overcharged to the amount of £53,400 and the State Advances Account has been similarly undercharged, with the result that the State Advances revenue has been overstated, or the losses have been understated, by approximately £53,400. Many other accounts, such as the Discharged Soldiers Settlement Account, Land for Settlements Account, Main Highways Account, Native Land Settlement Account, State Coal-mines Account, State Forests Account, and Working Railways Account, are similarly affected, with the result that the balancesheets and profit and loss accounts relating to these accounts disclose a position more favourable than would be the case if the true cost of carrying on the various services were brought into the relative accounts. In view of the provisions of section 55 of the Finance Act, 1932, the Audit Office appears to have no authority to refuse to pass the entries in the Public Accounts which have been authorized by the Minister pursuant to that section, and the vouchers for the transactions referred to above have been passed accordingly. Cost of Exchange, New Zealand-New York. An actual instance of the great increase in cost to the New Zealand Government arising from exchange in the case of payments overseas is afforded in the case of a half-yearly payment of interest which was payable in New York on Ist February, 1933, on a s|-per-cent. loan of £1,000,000. The nominal amount payable was £27,500. The amount actually paid in sterling in London to produce the requisite value in dollars in New York was £39,372 17s. Id. Taking the rate of exchange as £125 New Zealand to £100 sterling, which was the ruling rate at the date of the payment, the total cost to the Dominion works out at £49,216 Is. 4d.—that is to say, the cost of paying interest in New York of a nominal amount of £27,500 was £49,216 Is. 4d., the additional amount of £21,716 Is. 4d. representing the cost of exchange between Wellington, London, and New York.

iii—B. 1 [Pt. ll].

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