Internal Auditing Can Be Strengthened in the Federal Reserve System

GGD-80-59: Published: Aug 8, 1980. Publicly Released: Aug 8, 1980.

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Although the Federal Reserve System's Board of Governors has recognized the need for independent evaluations of its operations, it has not established a permanent, independent internal audit group. An external auditor hired by the Board and the Board's Operations Review Program makes periodic reviews of Board activities. Each of the Board's current review efforts has limitations restricting either its independence or scope of activities. Components of the Office of the Controller make reviews designed primarily to carry out the Controller's responsibilities and enjoy no independent, direct reporting or operating relationship with the Board. Although the external auditor reports directly to the Board, its reviews are confined primarily to financial control areas.

The Operations Review Program has encountered problems. It is staffed entirely with part-time personnel detailed from other organizations who may be associated with the activities examined. Followup on report recommendations has been inconsistent and incomplete. The Board has rejected the idea of establishing a permanent, independent internal audit group primarily because of lack of funds and positions. A new permanent internal audit function has been recently established in the Office of the Controller, however it lacks the necessary organizational independence. The Reserve Bank General Auditors have concentrated nearly exclusively on financial and compliance audits. These General Auditors are all organizationally independent, aligned to report to the highest practicable level, and staffed with professionally qualified auditors. They have established a system-wide set of auditing standards which are generally consistent with professional internal auditing standards. Each General Auditor unit is examined periodically by a review team. Although they have debated their audit role in the bank supervision and regulation and economic research areas, no collective approach toward auditing these areas has been formally adopted. Uncertainty continues as to what their role should be regarding these activities. Recently, it was proposed that they be excluded from reviewing areas involving bank examiner's judgments.This is a position which is inconsistent with professional internal auditing standards which advocate an unrestricted scope of review.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Chairman of the Board of Governors of the Federal Reserve System should: (1) establish a permanent, independent internal audit group at the Board of Governors, consistent with professional internal auditing standards; (2) require that Reserve Bank General Auditors review the efficiency and effectiveness of bank supervision and regulation and economic research activities; and (3) instruct the Conference of General Auditors to amend their "Audit Standards and Levels of Audit Attention for Federal Reserve Banks" to include a system-wide approach toward reviewing bank supervision and regulation and economic research activities, and a specific operational policy statement requiring the General Auditors to follow up Board of Governor's reviews.

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