The majority of the assets pledged as collateral are each FRB’s Treasury securities. Scope and Methodology

To conduct our work, we (1) gained an understanding of relevant accounting and reporting policies and procedures by reviewing and analyzing documentation and interviewing key FRB and Board personnel, (2) reviewed documentation supporting selected significant balance sheet amounts originating at the Dallas FRB, and (3) tested the effectiveness of certain internal controls in place at the Dallas FRB and the Federal Reserve Automation Services (FRAS) in Richmond, Virginia, and Dallas, Texas. For example, (1) reconciliations of general ledger accounts and activity were not always based on independent records, (2) the automated systems did not prohibit access by all terminated employees, (3) accounting adjustments related to check processing activity were not appropriately reviewed, and (4) inventory counts of Federal Reserve notes at some branches were not always properly conducted and documented. These weaknesses involved controls over access to sensitive information and the computer center, changes to system software, testing the disaster recovery plan, and the use of special privileges on automated tasks. These annual audits enhance the credibility of reported information and conforms to the practices of the central banks of many other major industrialized nations. Conclusions

We commend the Board for taking the step to contract for external, independent financial statement audits over the next 5 years. Recommendations

To bring about consistency and improve the efficiency of Federal Reserve note accounting and reporting procedures, we recommend that in conjunction with planning and implementing future changes to the automated systems used to account for and report notes, the Board of Governors of the Federal Reserve System consider incorporating changes in the function of these systems to allow FRBs to account for and report notes without regard to the identifiers printed on the notes; directing the FRBs to discontinue using specific FRB identifiers printed on notes as the basis for recording each FRB’s liability for Federal Reserve notes; stopping the tracking of shipments by FRB identifiers; directing each FRB to record its note liability based on the Federal Reserve notes it actually receives and holds without regard to FRB identifiers; and apportioning note destructions among FRBs on an appropriate basis without regard to FRB identifiers. U.S. General Accounting Office P.O.
Why GAO Did This Study

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.

What GAO Found

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.