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entitled 'Federal Reserve Banks: Areas for Improvement in Information 
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GAO-10-640R: 

United States Government Accountability Office: 
Washington, DC 20548: 

April 21, 2010: 

Stephen R. Malphrus:
Staff Director for Management:
Board of Governors of the Federal Reserve System: 

Subject: Federal Reserve Banks: Areas for Improvement in Information 
Security Controls: 

Dear Mr. Malphrus: 

In connection with fulfilling our requirement to audit the financial 
statements of the U.S. government,[Footnote 1] we audited and reported 
on the Schedules of Federal Debt Managed by the Bureau of the Public 
Debt (BPD) for the fiscal years ended September 30, 2009 and 2008. 
[Footnote 2] As part of these audits, we performed a review of the 
general and application information security controls over key 
financial systems maintained and operated by the Federal Reserve Banks 
(FRB) on behalf of the Department of the Treasury's (Treasury) BPD 
relevant to the Schedule of Federal Debt. 

As we reported in connection with our audit of the Schedules of 
Federal Debt for the fiscal years ended September 30, 2009 and 2008, 
we concluded that BPD maintained, in all material respects, effective 
internal control over financial reporting relevant to the Schedule of 
Federal Debt as of September 30, 2009, that provided reasonable 
assurance that misstatements, losses, or noncompliance material in 
relation to the Schedule of Federal Debt would be prevented or 
detected and corrected on a timely basis. However, we identified 
information security deficiencies affecting internal control over 
financial reporting, which, while we do not consider them to be 
collectively either a material weakness or significant deficiency, 
nevertheless warrant FRB management's attention and action.[Footnote 3] 

This report presents the control deficiencies we identified during our 
fiscal year 2009 testing of the general and application information 
security controls over key financial systems maintained and operated 
by the FRBs relevant to BPD's Schedule of Federal Debt. This report 
also includes the results of our follow-up on the status of FRB's 
corrective actions to address information security control related 
recommendations contained in our prior years' audit reports and open 
as of September 30, 2008. In a separately issued Limited Official Use 
Only report, we communicated detailed information regarding our 
findings to FRB management. 

Results in Brief: 

Our fiscal year 2009 audit procedures identified four new general 
information security control deficiencies related to security 
management and access controls. We made five recommendations to 
address these control deficiencies. 

None of the control deficiencies we identified represented significant 
risks to the key financial systems maintained and operated by the FRBs 
on behalf of BPD. The potential effect of such control deficiencies on 
financial reporting relevant to the Schedule of Federal Debt was 
mitigated by FRB's physical security measures and a program of 
monitoring user and system activity, and BPD's compensating management 
and reconciliation controls designed to detect potential misstatements 
in the Schedule of Federal Debt. 

In addition, during our fiscal year 2009 follow-up on the status of 
FRB's corrective actions to address 11 open recommendations related to 
general information security control deficiencies identified in our 
prior years' audits, we determined that as of September 30, 2009, 
corrective action on 8 of the 11 recommendations was completed, while 
corrective action was in progress on the 3 remaining open 
recommendations, which related to security management. 

The Board of Governors of the Federal Reserve System provided comments 
on the detailed findings and recommendations in the separately issued 
Limited Official Use Only report. In those comments, the Director of 
Reserve Bank Operations and Payment Systems stated that the agency 
takes control deficiencies, and actions to address them, seriously. 
The Director further commented that three deficiencies have already 
been addressed or remediated, and that the remainder have corrective 
actions planned or in progress. 

Background: 

Many of the FRBs provide fiscal agent services on behalf of BPD, which 
primarily consist of issuing, servicing, and redeeming Treasury 
securities held by the public and handling the related transfers of 
funds. In fiscal year 2009, the FRBs issued about $8.9 trillion in 
federal debt securities to the public, redeemed about $7.1 trillion of 
debt held by the public, and processed about $166 billion in interest 
payments on debt held by the public. FRBs use a number of financial 
systems to process debt-related transactions. The Federal Reserve 
Information Technology Computing Centers maintain and operate key 
financial systems to process and reconcile moneys disbursed and 
collected on behalf of BPD. Detailed data initially processed at the 
FRBs are summarized and then forwarded electronically to BPD's data 
center for matching, verification, and posting to the general ledger. 

Section 3544(a)(1)(A) of Title 44, United States Code, delineates 
federal agency responsibilities for (1) information collected or 
maintained by or on behalf of an agency and (2) information systems 
used or operated by an agency or by a contractor of an agency or other 
organization on behalf of an agency. Further, section 3544(b) provides 
that each agency shall develop, document, and implement an agencywide 
information security program to provide information security for the 
information and information systems that support the operations and 
assets of the agency, including those provided or managed by another 
agency, contractor, or other source. Office of Management and Budget 
Memorandum M-07-19, FY 2007 Reporting Instructions for the Federal 
Information Security Management Act and Agency Privacy Management 
clarified that agency information security programs apply to all 
organizations which possess or use federal information--or which 
operate, use, or have access to federal information systems--on behalf 
of a federal agency. In addition, section 3544(a)(1)(B) of Title 44, 
United States Code, requires federal agencies to comply with 
information security standards developed by the National Institute of 
Standards and Technology. 

Objectives, Scope, and Methodology: 

Our objectives were to evaluate the general and application 
information security controls over key financial management systems 
maintained and operated by the FRBs on behalf of BPD that are relevant 
to the Schedule of Federal Debt, and to determine the status of 
corrective actions taken in response to the recommendations in our 
prior years' reports for which actions were not complete as of 
September 30, 2008. Our evaluation of the general and application 
information security controls was conducted using the Federal 
Information System Controls Audit Manual.[Footnote 4] 

To evaluate general and application information security controls, we 
identified and reviewed FRB's information system general and 
application information security control policies and procedures, 
observed controls in operation, conducted tests of controls, and held 
discussions with officials at selected FRB data centers to determine 
whether controls were adequately designed, implemented, and operating 
effectively. 

The scope of our general information security controls work for fiscal 
year 2009 included following up on open recommendations from our prior 
years' reports and a risk-based approach to testing all five general 
control areas in the current year. Based on this approach, our testing 
focused primarily on access controls and configuration management and, 
to a lesser extent, on the other areas of security management, 
segregation of duties, and contingency planning. In addition, we 
performed security configuration reviews of key Federal Reserve 
technical infrastructure components. We also reviewed results of 
security testing performed by FRB Richmond General Audit. 

We performed application information security control reviews on four 
key FRB applications to determine whether the applications were 
designed to provide reasonable assurance that: 

* all transactions that occurred were input into the system, accepted 
for processing, processed once and only once by the system, and 
properly included in output; 

* transactions were properly recorded in the proper period, key data 
elements input for transactions were accurate, data elements were 
processed accurately by applications that produce reliable results, 
and output was accurate; 

* all recorded transactions actually occurred, related to the 
organization, and were properly approved in accordance with 
management's authorization, and output contained only valid data; 

* application data and reports and other output were protected against 
unauthorized access; and: 

* application data and reports and other relevant business information 
were readily available to users when needed. 

The evaluation and testing of certain information security controls, 
including the follow-up on the status of FRB's corrective actions to 
address open recommendations from our prior years' reports, were 
performed by the independent public accounting (IPA) firm of Cotton 
and Company LLP. We agreed on the scope of the audit work, monitored 
the IPA firm's progress, and reviewed the related audit documentation 
to determine that the findings were adequately supported. 

During the course of our work, we communicated our findings to the 
Board of Governors of the Federal Reserve System. We plan to follow up 
to determine the status of corrective actions taken for matters open 
as of September 30, 2009, during our audit of the fiscal year 2010 
Schedule of Federal Debt. 

We performed our work at the FRB locations where the operations of the 
systems we reviewed are supported. Our work was performed from 
February 2009 through October 2009 in accordance with U.S. generally 
accepted government auditing standards. Those standards require that 
we plan and perform the audit to obtain sufficient, appropriate 
evidence to provide a reasonable basis for our findings and 
conclusions based on our audit objectives. We believe that the 
evidence obtained provided a reasonable basis for our findings and 
conclusions based on our audit objectives. 

As noted above, we obtained agency comments on the detailed findings 
and recommendations in a draft of the separately issued Limited 
Official Use Only report. The Board of Governors of the Federal 
Reserve System's comments are summarized in the Agency Comments and 
Our Evaluation section of this report. 

Assessment of FRB's Information Security Controls: 

General information security controls are the structure, policies, and 
procedures that apply to an entity's overall computer operations. 
General information security controls establish the environment in 
which application systems and controls operate. They include security 
management, access controls, configuration management, segregation of 
duties, and contingency planning. An effective general information 
security control environment (1) provides a framework and continuing 
cycle of activity for managing risk, developing security policies, 
assigning responsibilities, and monitoring the adequacy of the 
entity's computer-related controls to ensure that an adequate security 
management program is in place; (2) limits or detects access to 
computer resources (data, programs, equipment, and facilities), 
thereby protecting them against unauthorized modification, loss, and 
disclosure; (3) prevents unauthorized changes to information system 
resources (for example, software programs and hardware configurations) 
and provides reasonable assurance that systems are configured and 
operating securely and as intended; (4) includes policies, procedures, 
and an organizational structure to manage who can control key aspects 
of computer-related operations; and (5) protects critical and 
sensitive data, and provides for critical operations to continue 
without disruption or be promptly resumed when unexpected events occur. 

Our fiscal year 2009 testing identified opportunities to strengthen 
certain information security controls that support key financial 
systems maintained and operated by the FRBs relevant to BPD's Schedule 
of Federal Debt. Specifically, our audit procedures identified four 
new general information security control deficiencies. This consisted 
of two control deficiencies related to security management and two 
control deficiencies related to access controls. 

An entitywide information security management program is important 
because it provides the foundation for an effective security control 
structure. The security management program establishes a framework and 
continuous cycle of activity for assessing risk, developing and 
implementing effective security procedures, and monitoring the 
effectiveness of these procedures. Overall policies and plans, 
including system and application-specific procedures and controls, 
implement the entitywide policy. 

Access controls are important because they limit or detect 
inappropriate access to computer resources (data, equipment, and 
facilities), thereby protecting them from unauthorized modification, 
loss, and disclosure. Such controls include logical access controls 
and physical access controls. The new access control deficiencies we 
identified related to logical access controls. Logical access controls 
require users to authenticate themselves through the use of secret 
passwords or other identifiers, and limit the files and other 
resources that authenticated users can access and the actions that 
they can execute. 

In a separately issued Limited Official Use Only report, we 
communicated detailed information regarding our new findings to FRB 
management and made five detailed recommendations. 

In addition, during our fiscal year 2009 follow-up on the status of 
FRB's corrective actions to address 11 open recommendations related to 
information security control deficiencies we identified in our prior 
years' audits, we determined that as of September 30, 2009, corrective 
action on 8 of the 11 recommendations was completed, while corrective 
action was in progress on the 3 remaining open recommendations, which 
related to security management. Although FRB management has made 
progress in addressing the remaining 3 general information security 
control deficiencies, additional actions are still needed. 

None of the control deficiencies we identified represented significant 
risks to the financial systems maintained and operated by the FRBs on 
behalf of BPD. The potential effect of such control deficiencies on 
financial reporting relevant to the Schedule of Federal Debt was 
mitigated by FRB's physical security measures and a program of 
monitoring user and system activity, and BPD's compensating management 
and reconciliation controls designed to detect potential misstatements 
in the Schedule of Federal Debt. Nevertheless, these deficiencies 
warrant management's attention and action to limit the risk of 
unauthorized access, loss, or disclosure; modification of sensitive 
data and programs; and disruption of critical operations. 

Conclusion: 

FRB has made significant progress in addressing the open information 
security control recommendations from our prior years' audits, and 
while actions are still needed in three control areas, it has 
corrective actions underway or planned. Our fiscal year 2009 audit 
also identified four new general information security control 
deficiencies related to security management and access controls. 

Recommendations for Executive Action: 

We recommend that the Director of the Division of Reserve Bank 
Operations and Payment Systems direct the appropriate FRB officials to 
implement the five new detailed recommendations presented in the 
separately issued Limited Official Use Only report. 

Agency Comments and Our Evaluation: 

The Board of Governors of the Federal Reserve System provided comments 
on the detailed findings and recommendations in the separately issued 
Limited Official Use Only report. In those comments, the Director of 
Reserve Bank Operations and Payment Systems stated that the agency 
takes control deficiencies, and actions to address them, seriously. 
Specifically, it commented that of the eight recommendations open as 
of September 30, 2009, three have been completely resolved and 
corrective actions for the remaining five are planned or in progress. 
The Director also stated that the FRBs intend to implement corrective 
action for four of the five remaining findings by September 2010, and 
actions to address the other finding over the next several years as 
part of a transition to a new information security program. We plan to 
follow up to determine the status of corrective actions taken for 
these matters during our audit of the fiscal year 2010 Schedule of 
Federal Debt. 

In the separately issued Limited Official Use Only report, we 
requested a written statement on actions taken to address our 
recommendations not later than 60 days after the date of that report. 

We are sending copies of this report to interested congressional 
committees, the Chairman of the Board of Governors of the Federal 
Reserve System, the Fiscal Assistant Secretary of the Treasury, and 
the Director of the Office of Management and Budget. In addition, this 
report will be available at no charge on GAO's Web site at [hyperlink, 
http://www.gao.gov]. 

If you have any questions regarding this report, please contact me at 
(202) 512-3406 or engelg@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff who made major contributions to this 
report include Jeffrey L. Knott and Dawn B. Simpson, Assistant 
Directors; Dean D. Carpenter; and Nicole N. Jarvis. 

Sincerely yours, 

Signed by: 

Gary T. Engel:
Director:
Financial Management and Assurance: 

[End of section] 

Footnotes: 

[1] 31 U.S.C.  331(e). 

[2] GAO, Financial Audit: Bureau of the Public Debt's Fiscal Years 
2009 and 2008 Schedules of Federal Debt, [hyperlink, 
http://www.gao.gov/products/GAO-10-88] (Washington, D.C.: Nov. 10, 
2009). 

[3] A significant deficiency is a deficiency, or combination of 
deficiencies, in internal control that is less severe than a material 
weakness, yet important enough to merit attention by those charged 
with governance. A material weakness is a deficiency, or a combination 
of deficiencies, in internal control such that there is a reasonable 
possibility that a material misstatement of the entity's financial 
statements will not be prevented, or detected and corrected on a 
timely basis. A deficiency in internal control exists when the design 
or operation of a control does not allow management or employees, in 
the normal course of performing their assigned functions, to prevent, 
or detect and correct misstatements on a timely basis. 

[4] GAO, Federal Information System Controls Audit Manual, [hyperlink, 
http://www.gao.gov/products/GAO-09-232G] (Washington, D.C.: February 
2009). 

[End of section] 

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