B. —1 [Pt. ll].

Treatment of Investments in the Public Accounts. The discrepancies between the Treasury books and the published accounts to which I have called attention in previous reports still continue. Negotiations have taken place between this office and the Treasury on the matter, but an agreement acceptable to the Audit Office has not been reached, though the Treasury has made an alteration in the summary following the abstract of the Public Account, 8.-l [Pt. I], which is a step in the right direction. If the Treasury can see its way to carry the matter a step further and sever the investments from the Receipts and Payments accounts, the objections raised by the Audit Office would to a large extent be removed. In some cases the abstract of the Public Account shows amounts as balances at the end of the year under the heading " Securities held," though in fact no securities are held representing such amounts. Treatment of Exchange in the Public Accounts. The position to which I drew attention in previous reports—see B;-l [Pt. ll], 1933, p. xvi, and B-1 [Pt. ll], 1934, page ix—still continues. Generally speaking, the method of treating exchange is to charge the cost to the Ordinary Revenue Account of the Consolidated Fund and to credit any premiums received from exchange to the same account, irrespective of whether or not the transactions in respect of which the exchange arose were transactions of this account. The effect is to place a heavier burden than necessary on the Consolidated Fund and to relieve other accounts of their due proportion of the cost. The authority quoted for this procedure is section 55 of the Finance Act, 1932, which provides that the Minister of Finance may exercise discretionary power in the matter of charging the exchange. It is therefore possible for the Minister in compliance with that section to allocate the exchange to the appropriate accounts if so desired: As an. example of the effect on an Appropriation Account I would quote a case in which expenditure amounting to £414 18s. 9d. was made in New Zealand out of vote, " Scientific and Industrial Research," the whole of such expenditure being recoverable in London. The equivalent of the £414 18s. 9d. was duly recovered in London, the amount being £333 ss. Bd. sterling. As the amount recovered in London was equal in value to the amount expended in New Zealand it is clear that the net amount chargeable against the vote was nil. Owing to the failure to make proper allowance for the difference in exchange, however, the vote, after being debited with £414 18s. 9d., was credited with £333 ss. Bd. only, and therefore showed a net debit of £81 13s. Id. in respect of this transaction, and was clearly overcharged to this extent. The above comments refer to the cash accounts only. As regards the departmental Income and Expenditure Accounts and Balance-sheets published in 8.-l [Pt. IV] the exchange charges are entirely omitted, and this .renders these accounts, which are required to be drawn up on a commercial basis, incapable of fulfilling their purpose. The net cost of exchange for the year amounted to £1,450,000 and was paid from and charged to Ordinary Revenue Account. A very substantial portion of this amount should, in the opinion of Audit, have been charged to the various appropriate accounts. Interest on Public Account Cash-balance Investments. I have on previous occasions drawn attention to the practice adopted by the Treasury of allocating interest derived from investments of moneys belonging to certain of the accounts within the Public Account to all of those accounts instead of to those only which have provided the money for the investments. . . . ■ . It will be recognized that by this method certain accounts receive credit for interest which they did not earn while others are deprived of part of the interest which they did earn. In so far as the Ordinary Revenue Account is thus affected the Budget balance is also affected. Conversion of Securities. Investment securities of a nominal value of £442,110 held as an investment of the Post Office Savings-bank funds bearing interest at 3| per cent., 3f per cent,, and 4 per cent, were converted into Government stock bearing interest at 3 per cent. An annual loss of interest to the Post Office amounting to £2,927 19s. was the result, although such conversion meant a corresponding saving of interest to the Consolidated Fund. As the entries were legally in order they were duly passed by the Audit Office after the attention of the Director-General of the Post and Telegraph Department had been called to the matter. Reserve Fund Investments in London. During the year the Treasury decided to dispose of India stocks, which had been held in London for many years as investments of the Reserve Fund and of the Post Office, and to purchase with the proceeds Imperial Treasury bonds, which it was considered would be more readily realizable should an urgent necessity arise. India stocks of a face value of £576,495 and bearing interest at 3J per cent., 3 per cent., and 2| per cent, were sold, the net proceeds being £452,755. Of these proceeds a sum of £452,737 was invested in British Treasury bonds of a face value of £448,300 and bearing interest at 2 per cent. The transaction involved an annual loss of income to the Government amounting to £8,767.

VII