101ST CONGRESS 1ST SESSION H.R.3066 To strengthen the political responsibility and accountability of the Federal Reserve System. IN THE HOUSE OF REPRESENTATIVES AUGUST 1, 1989 Mr. EVANS introduced the following bill; which was referred to the Committee on Banking, Finance and Urban Affairs I A BILL To strengthen the political responsibility and accountability of the Federal Reserve System. 1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 SECTION 1. SHORT TITLE. 4 This Act may be cited as the "Federal Reserve System 5 Accountability Act of 1989". 6 SEC. 2. EXPANSION OF NUMBER AND REPRESENTATION OF MEMBERS OF BOARDS OF DIRECTORS OF THE FEDERAL RESERVE BANKS. 7 8 9 (a) INCREASE IN NUMBER OF DIRECTORS.-The 9th 10 paragraph of section 4 of the Federal Reserve Act (12 2 1 U.S.C. 302) is amended by striking out "nine" and inserting 2 in lieu thereof "12". 3 (b) INCREASE IN NUMBER OF CLASS C DIRECTORS.4 The 1st sentence of the 12th paragraph of section 4 of the 5 Federal Reserve Act (12 U.S.C. 302) is amended by striking 6 out "three" and inserting in lieu thereof “6”. 7 (c) STAGGERED TERMS FOR NEW CLASS C MEMBER8 SHIPS.-Notwithstanding the 9th paragraph of section 4 of 9 the Federal Reserve Act, of the members 1st appointed to 10 the board of directors of each Federal Reserve bank by 11 reason of the amendments made by subsections (a) and (b) of 12 this section, 1 shall be appointed for a term of 3 years, 1 13 shall be appointed for a term of 2 years, and 1 shall be ap14 pointed for a term of 1 year, as designated by the Board of 15 Governors of the Federal Reserve System at the time of such 16 appointment. 17 (d) REPRESENTATION OF AGRICULTURE, SMALL 18 BUSINESS, AND CONSUMERS.-The 12th paragraph of sec19 tion 4 of the Federal Reserve Act (12 U.S.C. 302) is amend20 ed by adding at the end thereof the following new sentence: 21 "1 member of the class C directors shall have a background 22 in agriculture and represent agricultural interests, 1 such 23 member shall have a background in small business and repre24 sent the interests of small businesses, and 1 such member HR 3066 IH 3 1 shall represent labor, and 1 such member shall represent the 2 interests of consumers.". 3 (e) CONFORMING AMENDMENT.-The 20th paragraph 4 of section 4 of the Federal Reserve Act (12 U.S.C. 305) is 5 amended by striking out "the third class C director" and in6 serting in lieu thereof "a class C director designated by the 7 chairman". Staff Memo SUBCOMMITTEE ON DOMESTIC MONETARY POLICY September 1989 AUDITING THE FEDERAL RESERVE SYSTEM The overwhelming bulk of the financial transactions and operations of the Federal Reserve System are conducted by the twelve Federal Reserve Banks. The Board of Governors of the Federal Reserve System oversees the System, sets System-wide policy, and exercises ultimate authority over the operations of the Banks. The financial transactions of the Board itself, however, encompassing primarily its own administrative budget, are relatively minor, by comparison with those of the Banks. Monetary policy decisions are set by a hybrid organization, the Federal Open Market Committee (FOMC), composed of the Board of Governors and of the Presidents of the Federal Reserve Banks. Policy set by the FOMC is implemented primarily through the financial transactions of the System Open Market Account at the Federal Reserve Bank of New York. This survey accordingly divides audits of the Federal Reserve System into audits of the Reserve Banks, of the Board, and of the System Open Market Account. It concludes with a summary of the role of outside auditors, and an argument against a GAO "audit" of monetary policy. I. AUDITS OF FEDERAL RESERVE BANKS Each Federal Reserve Bank has a General Auditor, responsible for conducting an internal audit program for the Bank that assesses the soundness of its practices and their conformity with existing regulations in compliance with professional auditing standards. The scope of this internal audit encompasses all areas of the Bank. The General Auditor is independent of the Bank's management. He is appointed by the Bank's Board of Directors (not the Bank's President or other management), with the concurrence of the Federal Reserve Board of Governors. His salary is set by the Bank's Board of Directors. The General Auditor reports directly to the Bank's Board of Directors, through its Audit Committee. The Directors are explicitly responsible for ensuring the effectiveness of these audits. The Board of Governors of the Federal Reserve System is required, by the Federal Reserve Act, to examine the accounts, books and affairs of each Federal Reserve Bank. The field examining staff of its Division of Federal Reserve Bank Operations conducts annual financial examinations of each Reserve Bank. A detailed report of the financial examination is directed to the President and General Auditor of the Reserve Bank. A summary of the report (with the Bank's responses) is discussed with the Bank's Board of Directors and with the Board of Governors. A statement summarizing the financial examinations of all the Reserve Banks is included in the Annual Report of the Board of Governors. The Board of Governors also maintains operations review groups to conduct periodic reviews of Reserve Bank operations in specific, functional areas. These reviews evaluate the adequacy of operating procedures and controls, assess compliance with System and District policies, and attempt to improve efficiency. One review group is specifically responsible for evaluating and promoting the effectiveness of the Reserve Banks' internal audit program. These reviews of the Banks' internal audits are performed at least once every two years. As with the financial examinations, reports of these operations reviews are directed to the President and General Auditor of the Reserve Bank, while summaries are discussed with the Bank's Board of Directors and with the Board of Governors. 2 II. AUDIT OF THE BOARD OF GOVERNORS The Inspector General of the Board of Governors is responsible for the internal auditing and reviewing the Board's operations. The Board retains private outside accounting firms to examine its financial statements. (The Board's financial statements for 1986 and 1987 were examined by Price Waterhouse, for 1988 by Cooper Lybrand.) These outside accountants issue an annual report on the Board's financial statements. This Report of Independent Accountants, with the Board's accompanying financial statements, is published in the Annual Report of the Board of Governors of the Federal Reserve System. III. AUDIT OF THE SYSTEM OPEN MARKET ACCOUNT The System Open Market Account is audited by the General Auditor of the Federal Reserve Bank of New York, and by the Board's Division of Federal Reserve Bank Operations. Audits of the Open Market Account assess its compliance with the policies of the Federal Open Market Committee. Reports of these audits are directed to the Federal Open Market Committee. IV. OUTSIDE AUDITORS Outside auditors perform several functions in the auditing of the Federal Reserve System. As noted above, a private auditing firm, under contract with the Inspector General, conducts an annual financial audit of the Board of Governors. In addition, this outside firm is responsible for reviewing the examination procedures used by the Board in its audits of the Reserve Banks and the System Open Market Account. It issues annual certifications, available to the Congress, that these procedures meet general auditing standards. The General Accounting Office (GAO) also has some authority to audit the Federal Reserve System. Prior to 1978 the GAO had the authority to audit the "fiscal agent" functions the Federal Reserve performs for the Treasury Department. Under the "Federal Banking Agency Audit Act" of 1978 (Public Law 95-320, revised by P.L. 97-258)) the GAO was authorized to "audit" the Federal Reserve Board and Federal Reserve Banks. GAO "audits" may encompass two very different types of reports. The first would be a traditional "financial" audit, an examination of financial accounts and records to ascertain whether or not an entity's financial statements fairly present the financial condition of the entity, according to generally accepted accounting principles. The second would be a report evaluating some specific topic, issue or program, generally in terms of management efficiency and effectiveness, or compliance with policy or regulations. This second type of "audit" may have little or nothing to do with financial statements or accounts. Pursuant to its authority, the GAO has undertaken a large number of "audits" of this second type -- about 90 over the past decade -- designed to evaluate the effectiveness or efficiency of some program or operation, or address some other policy concern, related to the Federal Reserve System. These GAO reports are public documents, available directly from the GAO. A listing of these reports is provided in "Appendix E: Federal Reserve System Audits" of the Board of Governors Annual Report: Budget Review. (A recent example of this type of GAO "audit" would be a report issued in May 1989 on "Check Collection," which discusses private banks' ability to compete with Federal Reserve banks in providing check collection services.) The 1978 Act authorizing the GAO to audit the Federal Reserve explicitly prohibited GAO audits covering: (1) transactions with foreign central banks, foreign governments and official international financial organizations; (2) monetary policy decisions, including discount window and open market operations; (3) transactions made under the direction of the Federal Open Market Committee; |