Fed Says Audit of L.A. Branch Contradicts GAO

The Federal Reserve said Tuesday that an outside audit shows it does not have sloppy cash practices at its Los Angeles bank vault, despite a General Accounting Office investigation last month that questioned the integrity of the branch’s accounting system.

Coopers & Lybrand conducted an audit of the Los Angeles bank’s accounting system and found that it maintains “an effective internal control structure” for financial reporting of cash, the Fed announced.

The conclusion sharply contradicts the findings of a report issued last month by the GAO, which asserted that the Los Angeles bank’s financial statements contained errors and that its accounting system is riddled with defects.

The GAO audit came after reports last year that the bank’s cash statements had discrepancies of $178 million over a three-month period in 1995 and that the bank’s management had arbitrarily altered the books to make them balance.

Federal Reserve officials have acknowledged that its cash reports contained errors, but insisted that those reports were separate from its so-called general ledger that represents the bank’s main financial accounting system.

The Fed also said it conducted an actual count of the vault cash last month, which confirmed that “the branch’s balance sheet accurately reflected its currency and coin holdings.”

The Fed’s Los Angeles bank handles $80 billion in its high-security underground vaults, second in cash volume only to the New York Fed. It’s the Fed’s job to tell the Treasury Department how much cash to print every month and then put that cash into circulation. Since the Fed operates with autonomy uncommon in the federal government, congressional critics are concerned that if the Fed were to lose a few million dollars, nobody would know.

The GAO audits were requested by Rep. Henry Gonzales (D-Texas), the ranking Democrat on the House Banking Committee. A committee investigator said Tuesday that he was standing by the GAO audit and added, “I very seriously doubt that Coopers & Lybrand has found everything is all right.”

The accounting firm sent the results of its audit to the Federal Reserve Board of Governors in a letter dated Sept. 27, which the bank released late Tuesday. The Fed did not indicate why the results of the Coopers & Lybrand audit were withheld for three weeks.

A draft of the GAO audit was released in early September and the final GAO report was not issued until several weeks later. So it is not clear whether the Coopers & Lybrand audit came before or after the final GAO audit was issued.