Objectives, Scope, and Methodology

The objectives of our review at the L.A. Bank were to determine the nature of the problems that may have occurred in reporting currency activity for Federal Reserve note receipts, payments, and amount on hand and review and comment on corrective actions planned or taken by the Federal Reserve to resolve those problems. However, our efforts to perform limited reviews of these 6 days were hindered because the L.A. Bank could not locate some of the requested data. Finally, the report preparer incorrectly included about $2 million in coin receipts on the currency report. The December 1995 through March 1996 currency activity reports were revised using the new procedures but have not yet been submitted to the Board of Governors. Balance Sheet and Currency Activity Report Ending Balances Share the Same Sources and Should Agree

The L.A. Bank prepares the monthly currency activity report primarily using its Cash Automation System files (its cash inventory system, which provides a perpetual inventory file that tracks currency by denomination); Integrated Accounting System (its general ledger); and manual records (for transactions recorded in the general ledger that are not recorded in the cash inventory system). Accounting Practices and Internal Controls Over Currency

We attempted to perform a comprehensive review of the L.A. Bank’s internal controls and accounting practices over the money flowing through the Bank. This is consistent with what we found. GAO Comments

1. 2. 3. 4. 5. In fact, the most troublesome aspect of how the reports were prepared was that Bank management directed staff to force the number for receipts from circulation to ensure that the currency activity report agreed with the daily balance sheet for the last day of the month.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed currency activity reports prepared by the Los Angeles Federal Reserve Bank, focusing on: (1) problems in reporting currency activity for Federal Reserve System (FRS) note receipts, payments, and amount on hand; and (2) corrective actions planned or taken by FRS to resolve those problems.

What GAO Found

GAO found that the Los Angeles Bank: (1) incorrectly prepared and filed monthly currency activity reports for October, November, and December 1995; (2) did not comply with FRS guidance to independently determine cash receipts, since it adjusted the amount reported on the currency activity reports to ensure that it agreed with the daily balance sheet for the end of the month; (3) has been forcing the amount of receipts reported, which has resulted in significant underreporting of receipts, for some time; (4) has attempted to revise the reports but has not sent them to the FRS Board of Governors; (5) uses a cash inventory system to prepare its monthly reports, but system limitations hinder the Bank's ability to track all detailed activities; and (6) could not timely provide all of the information needed to perform a comprehensive review of internal controls and accounting practices because of information storage and retrieval problems. GAO also found that: (1) a limited review of the Bank's currency accounts identified several internal control weaknesses that could affect general ledger entries and reconciliation attempts; and (2) other Federal Reserve Banks that use the same cash inventory system could also be affected.