oversight

H.R. 2176, a Bill to Amend the Accounting and Auditing Act of 1950 to Provide for the Audit of the Federal Reserve Board and Banks, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency

Published by the Government Accountability Office on 1977-03-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DOCUMENT RESUME

00319 -   AOs891521]
[H.R. 2176, a Bill to Amend the Accounting and Auditing Act of
1950 to Provide for the Audit of the Federal Reserve Board and
Banks, the Federal Deposit Insurance Corporation, and the Office
of the Comptroller of the Currency]. March 2, 1977. 15 pp. + 1
enclosure.
Testiecny before the House Committee on Government operations:
commerce, Consumer and Monetary Affairs Subcommittee; by E. H.
Morse, Jr., Assistant Comptroller General.
Issue Area: Accounting and Financial Reportinq (2800).
Contact: Office of the Comptroller General.
Budget Function: iscellaneous: Financial Management and
    Information Systems (1002).
Organization Concerned: Federal Deposit Insurance Corp.; Federal
    Reserve System; Office of the Comptroller of the Currency.
Congressional Relevance: House Committae on Government
    Operations: Commerce, Consumer and onetary Affairs
    Subcommittee.
Authority: H.R. 2176 (95th Cong.); Accounting and Auditing Act
    of 1950. Banking Act of 1933. Congressional Budget and
    Impoundment Control Act of 1974. Federal Deposit Insurance
    Act of 1950. General Accounting Office Act of 1974. 12
    U.S.C. 1828c. 12 U.S.C. 1841-50. 12 U.S.C. 601-31. 15 U.S.C.
    1601. 18 U.S.C. 1906.

         H.R. 2:76 provides for GAO auditing of the three
independent banking institutions; an act long advocated by GAO.
Because of objections raised by the institutions concerning the
possibility of such an audit hampering their independence, GAO
has suggested several restrictions on its authority. It will not
object to being restricted from making recommendations on the
economic effects of open market and discount operations, or from
auditing foreign central banks. GAO also suggests that langauge
be included in the bill to exclude it from the Congressional
prerogative of discisoure of borrowers' names. H.R. 2176 would
provide for the uch needed authority to have access to FDIC's
bank examination records, previously unattainable. The bill is
well written in regard to the mechanics of the audit operations,
which are left to GAO's discretion. The rules set down in
Accounting and Auditing Act of 1950 would be followed. The hree
institutions do perform some auditing activities on their own,
but no complete audit is done. AO's audit includes (1)
examination of fnancial transactions, accounts, and reports,
including an evaluatior of compliance with applicable laws and
regulations; (2) review of efficiency and economy in the use of
resources; and (3) review to determine whether desired results
are effectively achieved. No additional authority is needed for
GAO to hire personnel to complete the audit functions. (SS)
               UN".IED STATES GENERAL ACCOUNTING OFFICE
O:>                     WASHINGTON, D.C. 20548

                                          FOR RELEASE ON DELIVERY
                                          Expected at 10:00 a.m. EST
                                          Wednesday, March 2, 1977


                            STATEMENT OF
                       ELLSWORTH H. MORSE, J.
         ASSISTANT COMPTROLLER GENERAL OF THE TRITED STATES
                             BEFORE THE
        COMMERCE, CONSUMER, AND  MONETARY AFFAIRS SUBCOMMITTEE
                                OF THE
                 COIVZTTEE ON GOVERNMENT OPERATIONS
                      HOUSE OF REPRESENTATIVES
                                  on

      H.R. 2176, A Bill to amend the Accounting and Auditing
      Act of 1950 to provide for the audit, by the Comptroller
      General, of the Federal Reserve Board, the Federal Reserve
      banks and their branches and check clearing, wire transfer,
      arLd security facilities, the Federal Deposit Insurance Corpo-
      ration, and the Office of the Comptroller of the Currency.


           We appear here today at your invitation to present

      our views on H.R. 2176 which authorizes and directs the

      Comptroller General to audit the Federal Reserve Board,

      the Federal Reserve banks, branches and facilities, the

      Federal Deposit Insurance Corporation, and the Office of

      the Comptroller of the Currency.

           The bill provides authority to make comprehiensive

      audits of the operations of the three named bank super-

      visory agencies.   Two restrictions are provided:
                              2 -


   1. The audits will not include transactions conducted

        on behalf of foreign central banks.

   2.   The audits will not include monetary policy delibera-

        tions and open market transactions conducted to promote

        maximum employment, production and purchasing power.

   Thus? three agencies carry out important functions in our
system of government and regulation and we share the view
that our Oftice, as a arm of the Congress, shoul   oe

empowered by law to audit their operations.

    As you know, the General Accounting Office recently

completed a very comprehensive study of Federal super-

vision of State and national banks and our report on it

was submitted by the Comptroller General to the Congress
on January 31, 1977.
     In transmitting the report, the Comptroller General

stated that

          "In the past we have supported proposals before
     the Congress to give this Office continuing legis-
     lative authority to review the operations of the bank
     regulatory agencies and report to the Congress. With
     such authority, we could be more helpful to the
     Congress in carrying out its legislative and over-
     sight responsibilities for bank insurance and regu-
     lation. In view of the very important part that the
     three agencies play in the Nation's system of money
     and credit, we feel that the Congress should provide
     for GAO audits of the agencies."
                              - 3-


    H.R. 2176 provides such authority.   However, we do have

several suggestions to offer which in our opinion would

strengthen the bill.

Federal Reserve System

     Until 1933, our Office audited the expenditure

vouchers of the Federal Reserve Board but not of the
Federal Reserve banks.   This very limited auditing had

to be discontinued with the enactment of the Banking Act

of 1933 which declared that the Board's funds were not

to be construed as Government funds or appropriated moneys.
Since that time, with one minor exception, we have not

had audit authority with respect to the operations of

the Federal Reserve System.   The exception is the respon-

sibility assigned by the act of May 20, 1966, to audit

the cancellation and destruction of United States currency
unfit for circulation.

     H.R. 2176 provides that our auditing would not
include open market transactions conducted by the Federal

Reserve System.   We strongly suggest that this restriction

be modified.

     The open market transactions are the largest category
of financial transactions carried olt by the System.   During
                              -4 ..


the calendar year 1976, for examiple, outright purchases of U.S.

Government securities and Federal agency obligations totalled

over $20 billion.    At December 31, 1976, the Federal ReseTrve

banks had   "n hand over $100 billion in such securities--an

increase during the year 1976 of nearly $10 billion.     These

securities represented about 80 percent of the combined assets

of the twelve Federal Reserve banks.

     In addition to the large volume of transactions in

Government securities, the Federal Reserve System also has

very sizable purchases and sales of foreign currencies.     These

transactions are also carried out through the System Open

Market Account under authorizations and directives of the

Federal Open Market Co~mittee.    For calendar year 1976, for

example, foreign currency purchases amounted to about $900

million.    At the end of the year, the System held $170 million

equivalent in such currencies.

     We do not see how we can satisfactorily audit the Federal

Reserve Sstem without authority to examine the largest single

category of financial transactions and assets that it has.

     It is our understanding that the restriction in the

bill that we would not audit monetary policy deliberations

and open market transactions grows out of concern that our
                             - 5 -


auditing would somehow undermine the independence of the

Federal Reserve System with respect to its moietary and credit

operations and damage the Nation's monetary policyaking

system.   Needless to say, as we have testified on previous
occasions, we do not concur in this view.

       Should the Congress wish to restrict our auditing to

take into account this concern, one restriction that could

be written into the law--and   he Comptroller General has gone

on record on this before--would be to specifically provide

that our audit reports to the Congress or its committees

shall not contain conclusions or recommendations with

respect to the economic effects (as oppose6 to   he effi-

ciency and economy) of open market and discount operations.
We would have no objection to a restriction of this kind
and we would be glad to work with the committee to draft

appropriate language to cover it.

       We also understand that there is concern about our

auditing transactions conducted by Federal Reserve banks

on behalf of foreign central banks because of their

sensitivity from an international standpoint.    We have no

objection to the restriction on auditing these transactions

as proposed in the bill, if the Congress wishes to prescribe
one.
                           - 6-


Federal Deposit Insurance Corporation

     The General Accounting Office has been authorized for

many years to audit the financial transactions of the Federal

Deposit Insurance Corporation.    This authority is in the

Federal Deposit Insurance Act which became law in 1950.

     We have had a long-standing disagreement with the FDIC.

on the scope of the auditing authorized by this law.    Over

the years the Corporation took the position that it does not

authorize us to review its bank examination activities and

records, whereas we have taken the view that we cannot

satisfactorily audit the accounts, financial transactions

and financial statements of the Corporation without having

access to such records.

     One result of this disagreement has been that in reporting

to the Congress on our audits under the Federal Deposit Insu:ance

Act, we have had to describe them as limited co such an extent

 that we could not say that the Corporation's financial state-

meats presented fairly its financial position and results of

 operations.   Our reports also recommended each year that the

 Congress clarify the law but this has never been done.

      In our recently concluded special examination of Federal

 supervision of commercial banks by the Federal Reserve Board,

 the Comptroller of the Currency, and the FDIC--made at the
                              - 7 -


request of several congressioral committees including this

one--we worked out special arrangements with the three agencies

for access to their'bank examination records with agreed upon

safeguards to preserve their confidentiality.     The experience

with this arrangement was such that the Chairman of the FDIC
wrote to us recently proposing a 3-year trial period under

which their bank examination records would be made available

to us in connection with our annual audit of the Corporation's

accounts and financial statements in accordance with terms

consistent with those agreed upon for the special study

last year.
        We were very pleased to receive this proposal and

we are now trying to work out the details with the Corpora-

tion.    One problem to be resolved is   he fact that we

will also need access to examination reports prepared
by examiners of :he Federal Reserve System and the Office

of the Comptroller of the Currency which are in FDIC's custody.

        The arrangement suggested by the FDIC is only temporary

and despite how it works out     the Corporation could terminate

it after three years.     We would much prefer that the issue

be settled by law and the access to records provisions

of H.R. 2176 would do this.
Office of the Comptroller of the Currency
     GAO has never had authority by law to audit the

Office of the Comptroller of the Currency which is located

in the Treasury Department.

     The operations of this agency are financed by assess-

ments levied on the National banks.   These funds are not

considered Federal funds   nd therefore GAO's general audit

authority over Federal agencies does not extend to this

agency.

     H.R. 2176 as drafted contains no restrictions on the

proposed audit of this ageacy and we therefore have no
further comments.
Access to Records

     H.R. 2176 includes a clear statement of authority for

GAO representatives to have access to the records of the

three agencies for the purposes of the audits.   The provision

extends to "reports of examination of banks or bank holding

companies from whatever source".   This provision is desirable

so as to remove any questions as to the audit authority

proposed to be granted by the Congress.
     In this connection, we do have an amendment to suggest.

Section 1906 of Title 18 of the United States Code prohibits
bank examiners from disclosing the name    o borrowers or
the collateral for loans of banks examined by them, without

having first obtained express permission of the appropriate

bank supervisory agency or the board of directors of the

bank. An exception to this criminal provision is made

where disclo3ure is ordered by a court or the Congress. In

order to avoid a conflict between   O's proposed right of
access to records that might disclose names of     Sonrowers
or the collateral for loans and the criminal provision

prohibiting examiners from disclosing such information

without express written consent, we suggest that section

1906 be amended to exclude disclosure to GAO from the

scope of the provision.

Audit Procedures

    H.R. 2176 provides that our audits would be made
under such rules and regulations as we would prescribe.

The frequency and nature of specific audit work is not

specified but is left to our judgment.    This is a highly
desirable way to write the law.

    Under the laws which assign audit authority and
responsibility to the General Accounting Office, for most

Federal agencies we have the flexibility to determine the
                             -   10   -


frequency as well as the scope of the auditing performed.
These judgments are made in the light of congressional

interests in specific activities and specific questions or

problems as they become known to us and, as the Accounting

anc Auditing Act of 1950 already requires, after giving
"due regard to generally accepted principles of auditing,

including the effectiveness of accounting organizations

and systems, internal audit and control, and related
administrative practices."

     In accordance with our regu.lar policy, any rules

or regulations that we would prescribe for auditing these

agencies would specifically require our auditors to review

and evaluate the nature and effectiveness of the organizations

and systems of internal management control of the several

entities of the Federal Reserve System,     the Office of

the Comptroller of the Currency and the FDIC in determining

the nature and extent of GAO audit work to be performed.

In particular, we would make a comprehensive review of
the internal and external auditing already being done.

This step is in conformity with generally accepted

principles of auditing and is also essential in avoiding
unnecessary duplication and expenditure of effort.
    The reason for wentioning this point is to recognize

that some auditing is now being done within these agencies.

In the Federal Reserve System, it is our unoerstanding
that--

     *   A firm of independent certified public accounmtants
         makes an annual audit of the accounts of the Board
         of Governors and submits an opinion on the Board's
         financial statements which is included in the
         Board's annual report to the Congress. This audit
         does not embrace the Federal Reserve banks and
         their branches.

     *   The Board's staff c:- field examiners examines
         each Federal Reserve bank and brezvch once each
         year--this is a requirement of section 21 of the
         Federal Reserve Act.
     *   The annual examination of Lhe Federal Reserve
         Bank of New York includes an audit of the accounts
         and holdings relating to the System Open Market
         Account and the foreign currency operations con-
         ducted by the New York bank under policy directives
         of the Federal Open Market CoiLr,' tee.

    *    Representatives of a firm of independent certi-
         fied public accountants accompany the Board's
         examiners on their examination of one Reserve
         bank each year, to evaluate the adequacy of the
         examination procedures.

    *    Each Reserve bank has internal auditors who work
         on a year-round basis. Their work programs are
         reviewed by the Board's examiners.

    *    Several tee'ms of operational analysts review the
         efficiency of operations and controls of each
         Reserve bank and branch about once every three
         years.
                             - 12 -


    Except for the opinion of the CPA firm on the finan-

cial statement   .)f the Board of Governors which is included

in the Board's annual report, no reports on the auditing

being performed within the Federal Reserve System are

submitted to the Congress, to our knowledge.

     The FDIC and the Office of the Comptroller of the

Currency each have internal review systems that would

also be reviewed and evaluated in determining the nature

and scope of our auditing.

     Under our standards for audit of governmental

activities, the f.ll scope of an audit should include:

     1. An examination o financial transactions, accounts,
         and reports, including an evaluation of compliance

         with applicable laws ad regulations.

     2. A review of efficiency and ecol:omy in the use of

         resources.

     3. A review to determine whether desired results are
          effectively achieved.

     Examinations of financial transactions, accounts, and

reports and compliance with applicable laws and regulations

include performing enough analysis and verification work

to arrive at opinions as to whether financial transactions
                            - 13 -


are carried out in accordance with applicable legal require-

ments and are properly accounted for and set forth in

financial reports.

     In xiJviewing matters of efficiency and economy, our
objective is to find out whether the entities being audited

give due consideration to conservation of resources and mini-

mum expenditure of effort in carrying out their operations.

We are interested in finding out whether there are unneces-

sary or inefficient or unjustifiably costly procedures,

whether there is unnecessary duplication of effort, whether

work is being performed which serves little or no useful

purpose, whether equipment is being inefficiently used,

whether there is overstaffing, and whether there are faulty

buying practices which result in paying unnecessarily

high prices or just buying too much.

     In carrying out this kind of work, we do not try to
arrive at overall opinions as to whether an organization is

operating efficiently and economically; but we do try to

identify problem areas and propose recommendations for greater
                                - 14 -


efficiency and economy.      This kind of audit work also includes
analyzing the causes of any inefficient or uneconomical

practices which we find as a.basis for proposing recommenda-

tions for improvement.

     In reviewing the results of authorized programs or

activities, our primary purpose is to find out whether

the objectives contemplated by the authorizing body or bodies

are being achieved.      In other agencies of the Federal Govern-
ment, we have gained a great deal of experience in making

such reviews.    The Congress has expressed a growing interest
in obtaining reports from us on the results of this kind

of audit work.   The most recent general expression by the
Congress on GAO auditing is in the Congressional Budget and

Impoundment Control Act of 1974.     This act provides that we
shall review and evaluate the results of Government programs

and activities carried on under existing law.      These reviews
may be made on our initiative, when ordered by either House

of Congress, or when requested by any congressional committee

having jurisdiction over the programs or activities.

     As stated earlier, we would be agreeable to having a

restriction included in this bill that we      ouldJ not include
in our audit reports conclusions or recommendations with
respect to the economic effects (as opposed to efficiency and

economy) of the open market and discount operations of the

Federal Reserve System.   However, there are numerous other
functions and activities of the Federal Reserve     System on
which evaluations of results achieved or effectiveness of

operations could be made as a part of our audits.    Some examples
of these  unctions are listed in Attachment I to this statement.
Personnel Employment Authorization
     H.R. 2176 proposes to give us additional authority to
hire people either permanently or temporarily to enable us to

carry out the required audits.   We have considered this pvision
and concluded that, particularly in the light of the speci.al

hiring authority contained in the General Accounting Office

Act of 1974, no additional authorization is needed in this bill.



     This concludes our statement, Mr. Chairman.    We will be
pleased to respond to the committee's questions.
                                            Attachment I



EXAMPLES OF FUNCTIONS AND ACTIVITIES OF THE FEDF'/   RESERVE
 SYSTEM SUBJECT TO EVALUATION OF EFFECTIVENESS O   S6SULTS
     ACHIEVED AS PART OF INDEPENDENT AUDIT BY THE GAO

Board of Governors supervision of Federal Reserve Banks.

Supervision of member banks of the Federal Reserve System.

Reserve bank advances to member banks and others.

Issuaince and retirement of Federal Reserve notes.

Redemption of food stamps.

Clearinghouse operations.

Acting as despositaries and fiscal agents of the United States.

Acting as fiscal agents of Government departments and agencies
  in guaranteeing lo:nxs made by banks and other private financ-
  ing institutions to finance procurement of materials and
  services for national defense.

Involvement in issue and redemption of U.S. Government
  securities.

Regulating and supervising the foreign operations of U.S.
  commercial banks.
  (12 US.C. 601-631)

Administration of the Bank Holding Act which is designed to
  control bank holding company expansion and prevent the
  expansion of bank holding companies into businesses not
  related to banking. (12 U.S.C. 1841-1850)

Approval of bank mergers. The Board shares this responsibility
  with the FDIC and the Comptroller of the Currency. The
  Board is required to approve mergers in which the acquiring,
  as3uming, or resulting bank is a State member bank.
  (12 U.S.C. 1828c)

Establishing rules and regulation_ for carrying out the
  provisions of the Truth in Lending Act whose purpose is
  to assure meaningful disclosure of credit terms to consumers.
  Enforcement i shared with the other bank regulatory agencies
  and the Federal Trade Commission.  (15 U.S.C. 1601)