Federal Reserve Banks:

Internal Control, Accounting, and Auditing Issues

AIMD-96-5: Published: Feb 9, 1996. Publicly Released: Mar 11, 1996.

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Pursuant to a congressional request, GAO reviewed several internal control issues at the Federal Reserve Bank (FRB) of Dallas and the Federal Reserve Automation Services' (FRAS) accounting procedures, focusing on: (1) Dallas FRB financial accounting and reporting and electronic data processing (EDP) control weaknesses; (2) the efficiency and consistency of Federal Reserve note accounting; and (3) auditing issues that need the attention of the Federal Reserve System's Board of Governors and its auditor.

GAO found that: (1) at the Dallas FRB, its 3 branches, and FRAS, weaknesses exist in accounting records, asset accountability, and the use of automated systems; (2) Dallas FRB control weaknesses include failure to use independent records to verify and reconcile general ledger accounts and activity, limit access to FRB automated systems, review accounting adjustments related to check processing activity, and properly conduct and document Federal Reserve note inventories; (3) FRAS and Dallas FRB general EDP weaknesses include inadequate control over access to sensitive information, system software changes, disaster recovery plan testing, and the use of special privileges on automated tasks; (4) the Federal Reserve could improve the consistency and efficiency of its note accounting procedures by eliminating the use of the FRB identifier on each note for recording liabilities for notes in circulation; (5) the Board of Governors has contracted for annual independent external audits of the combined FRB asset accounts and financial statements over the next 5 years and one audit of each FRB during the same period to enhance the credibility of reported information; and (6) the auditor will face challenges identifying the ownership and original cost of U.S. Treasury securities, confirming amounts held by note holders, and the notes' unique characteristics of nonmaturity and destructibility.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The audit reports and audited financial statements produced by the independent audits of the 12 banks will be published in the annual report of the Federal Reserve.

    Recommendation: To enhance the combined financial statements as a vehicle for informing Federal Reserve management, Congress, and the public about the operations of Federal Reserve Banks, the Board of Governors should make the audited combined financial statements of the FRB and the independent auditor's report publicly available upon issuance. For example, these documents could be included in the Federal Reserve System's annual report.

    Agency Affected: Federal Reserve System: Board of Governors

  2. Status: Closed - Implemented

    Comments: The Federal Reserve has entered into a 5-year contract that provides for audits of the consolidated financial statements of the 12 Federal Reserve Banks each year and audits of the financial statements of each bank once during that period. The resulting audit reports will include enhanced disclosures, and be published in the annual report of the Federal Reserve.

    Recommendation: To enhance the combined financial statements as a vehicle for informing Federal Reserve management, Congress, and the public about the operations of Federal Reserve Banks, the Board of Governors should adopt a policy to institutionalize annual, external independent audits of the combined financial statements of the FRB as a routine operating procedure. These audits should be performed in accordance with generally accepted government auditing standards.

    Agency Affected: Federal Reserve System: Board of Governors

  3. Status: Closed - Implemented

    Comments: Federal Reserve Board management views this as a long-term issue. Management has agreed to consider modifications to the automated Federal Reserve Note accounting process based on the recommendations the next time alterations or enhancements to these systems for other reasons are planned. In the interim, management does not consider the potential benefits to be sufficient to justify dedicated enhancements for this purpose alone.

    Recommendation: To bring about consistency and improve the efficiency of Federal Reserve note accounting and reporting procedures, the Board of Governors, in conjunction with planning and implementing future changes to the automated systems used to account for and report notes, should consider apportioning note destructions among FRB on an appropriate basis without regard to FRB identifiers.

    Agency Affected: Federal Reserve System: Board of Governors

  4. Status: Closed - Implemented

    Comments: Federal Reserve Board management views this as a long-term issue. Management has agreed to consider modifications to the automated Federal Reserve Note accounting process based on the recommendations the next time alterations or enhancements to these systems for other reasons are planned. In the interim, management does not consider the potential benefits to be sufficient to justify dedicated enhancements for this purpose alone.

    Recommendation: To bring about consistency and improve the efficiency of Federal Reserve note accounting and reporting procedures, the Board of Governors, in conjunction with planning and implementing future changes to the automated systems used to account for and report notes, should consider directing each FRB to record its note liability based on the Federal Reserve notes it actually receives and holds without regard to FRB identifiers.

    Agency Affected: Federal Reserve System: Board of Governors

  5. Status: Closed - Implemented

    Comments: Federal Reserve Board management views this as a long-term issue. Management has agreed to consider modifications to the automated Federal Reserve Note accounting process based on the recommendations the next time alterations or enhancements to these systems for other reasons are planned. In the interim, management does not consider the potential benefits to be sufficient to justify dedicated enhancements for this purpose alone.

    Recommendation: To bring about consistency and improve the efficiency of Federal Reserve note accounting and reporting procedures, the Board of Governors, in conjunction with planning and implementing future changes to the automated systems used to account for and report notes, should consider stopping the tracking of shipments by FRB identifiers.

    Agency Affected: Federal Reserve System: Board of Governors

  6. Status: Closed - Implemented

    Comments: Federal Reserve Board management views this as a long-term issue. Management has agreed to consider modifications to the automated Federal Reserve Note accounting process based on the recommendations the next time alterations or enhancements to these systems for other reasons are planned. In the interim, management does not consider the potential benefits to be sufficient to justify dedicated enhancements for this purpose alone.

    Recommendation: To bring about consistency and improve the efficiency of Federal Reserve note accounting and reporting procedures, the Board of Governors, in conjunction with planning and implementing future changes to the automated systems used to account for and report notes, should consider directing FRB to discontinue using specific FRB identifiers printed on notes as the basis for recording liabilities of each FRB for Federal Reserve notes.

    Agency Affected: Federal Reserve System: Board of Governors

  7. Status: Closed - Implemented

    Comments: Federal Reserve Board management views this as a long-term issue. Management has agreed to consider modifications to the automated Federal Reserve Note accounting process based on the recommendations the next time alterations or enhancements to these systems for other reasons are planned. In the interim, management does not consider the potential benefits to be sufficient to justify dedicated enhancements for this purpose alone.

    Recommendation: To bring about consistency and improve the efficiency of Federal Reserve note accounting and reporting procedures, the Board of Governors, in conjunction with planning and implementing future changes to the automated systems used to account for and report notes, should consider incorporating changes in the function of these systems to allow FRB to account for and report notes without regard to the identifiers printed on the notes.

    Agency Affected: Federal Reserve System: Board of Governors

  8. Status: Closed - Implemented

    Comments: The audited financial statements produced by the annual consolidated audits of the banks will include disclosure of how Federal Reserve Notes held in the vault are factored into the reported Federal Reserve Note balance. The Federal Reserve did not disclose the basis for the Federal Reserve Note liability in its first audited consolidated financial statements of the banks, but will consider the appropriateness of expanded disclosures in future audit reports. Federal Reserve management and its auditors consider the disclosures included in the report issued at the conclusion of the first audit of the consolidated financial statements of the banks to be appropriate for the Federal Reserve.

    Recommendation: To enhance the combined financial statements as a vehicle for informing Federal Reserve management, Congress, and the public about the operations of Federal Reserve Banks, the Board of Governors should include disclosures in the financial statements that: (1) appropriately describe the significant accounting policies followed, such as the basis for the reported note liability and the treatment of the notes held in the vault; and (2) provide the information typically included in financial statements of other central banks and private sector financial institutions.

    Agency Affected: Federal Reserve System: Board of Governors

 

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