Comprehensive Audit of National Debt: Insights from the UK National Audit Office

1. AUDITING THE NATIONAL DEBT A PAPER BY THE UNITED KINGDOM NATIONALAUDIT OFFICEMexico City, June 15, 2010

2. Introduction • Auditing national debt increasing complexity and importance • Size of the national debt political interest • Failure to accurately auditing the true level of national debt  crisis • Significant impact on governmental services

3. OVERVIEW • National Audit Office (NAO) four part approach: • Defining what the national debt includes • Auditing debt issuance/raising activities • Audit of outstanding debt • Other assurance activities

4. Defining what the national debt includes • Definition  sets the remit for a national debt audit function. • No appropriate definition  risk that audit does not cover all relevant areas • Knowledge of omission of significant area of activity  • Less willing investors • Higher premium to fund states activities in the future

5. Defining what the national debt includes • UK major issuer of sovereign debt • National debt financial instruments quoted in an active market • Nationaldebt included loans from other states • Asset/liability position with the International Monetary Fund • Matter of political debate

6. Auditing Debt Issuance Activities • All central government debt UK Debt Management Office (DMO) • Various classes of debt with maturities of three months to fifty years • Types and timing of debt issued and individual operations discussed and agreed in advance with main purchasers of UK Government Debt

7. Auditing Debt Issuance Activities • Audit approach • Confirm that DMO acts within remit set by Parliament • Revise auction process each year designed to accurately record debt issued and prices paid • Auction process designed effectively  test controls in operation over the year of account • Effective operation throughout the year

8. Auditing Debt Issuance Activities • Assessment and testing of controls over public information debt issuance activities • Incorrect information put out loss of investor confidence and higher prices to raise debt

9. Auditing Debt Issuance Activities • Testing results of each auction to confirm correct amount/type of debt issued and cash received recorded in the accounts • Review register of interests no-one involved in issuing UK Government debt has contacts or interests  avoid insider trading

10. Auditing debt outstanding • Auditing the DMO focus issue of UK sovereign debt held by the markets • Gilts and Treasury Bills • Continuous auditing historic assurance over opening balances • Rather than starting from scratch each year

11. Auditing debt outstanding • Record management • Who holds what debt • Paying interest to holders of UK government debt • Outsourced by DMO private company (Gilt Registrar) • NAO  audit access rights to Gilt Registrar • Periodic visits effective control framework • DMO monitoring of the gilt registrar performance and contingency plans poor performance

12. Auditing debt outstanding • NAO  substantive testing of the UK Gilt liability • UK national debt too large to test every item • Statistics team select a representative sample • Substantive assurance over the value of the overall debt • Confirmation of correct disclosure of national debt value • Accounts following International Financial Reporting Standards

13. Other Assurance Activities • Sensitivity of the national debt  NAO performs other related work • Requested by Parliament • Public interest to do so • This work includes: • Briefing Members of Parliament  issue and management of national debt • Auditing future debt assumptions • Piece studies on topical issues • UK government’s response to the banking crisis