Fed Agrees to Outside Audit of L.A. Branch

The Federal Reserve Board has agreed to an outside audit of cash operations at the Los Angeles branch of the San Francisco Federal Reserve Bank.

A preliminary General Accounting Office review found evidence that staff members at the Los Angeles branch altered currency reports to make them agree with the bank’s cash on hand. The GAO is the investigative arm of Congress.

The GAO also says in its report that there were accounting problems at the Los Angeles branch that could also arise at branches of the Philadelphia and Atlanta Federal Reserve banks, which use the same cash inventory system as the San Francisco Fed.

The draft report recommends an immediate examination of that system by outside auditors.

The Fed said it is confident that “proper safeguards and controls exist” but that it will nevertheless direct its “external auditors to examine and provide an opinion regarding the effectiveness” of those controls if the recommendation stands in the final GAO report, the Fed said in a statement issued Monday.

GAO officials said the recommendation will be included in the final report, which should be released in early October.

Each Fed branch completes monthly reports that describe the amount of currency going in and out of regional banks’ vaults. The Fed uses the report to monitor the amount of cash in circulation, although not in the Fed’s compilation of the money supply.

The Los Angeles bank’s practice of “forcing” agreement between the cash report and the bank’s general ledger “raises serious questions about the integrity of its accounting practices and internal controls,” the draft GAO report says.

According to the report, the Los Angeles bank covered up discrepancies of $5.8 million in October 1995, $61.8 million in November and $111.1 million in December of that year.

A spokeswoman for the San Francisco Fed disputed the GAO’s assessment, noting the draft report does not suggest any cash was missing or mishandled. “We have absolute faith in the integrity of the accounting at the branch, as well as at all our bank branches,” said Sandra Conlan, manager of media information.

Fed officials in Washington said the errors had been caught in every case. The board’s own internal audit of the Los Angeles branch, conducted in July and August, found “accounting for the cash handled by the Branch was accurate,” according to its statement.

In addition, the Fed said its examiners concluded “there is no direct linkage” between the branch’s accounting system and the currency reports, and that therefore the errors the GAO found in the statistical reports “do not suggest the existence of any problems with the accounting data.”

The Fed’s regional banks monitor banks in their areas of the country, provide access to emergency funds, operate money-transfer systems and oversee a network of Fed branch offices.