Fed OKs outside audit of Los Angeles branch GAO found evidence currency reports had been altered


WASHINGTON -- 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 at the Los Angeles branch altered currency reports to make them agree with the bank's cash on hand.

The GAO report also found accounting problems at the Los Angeles branch that might 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.

Although the Federal Reserve is confident "proper safeguards and controls exist," it "will 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 yesterday in a statement.

GAO officials said the recommendation would be included in the final report, which should be released early next month.

Each branch of the Fed completes monthly reports which describe the amount of currency going into and out of regional banks' vaults. The report is used by the Fed 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 said.

According to the GAO 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 that the draft report did not suggest that any cash was missing or mishandled. "We have absolute faith in the bTC integrity of the accounting at the branch, as well as at all our bank branches," said Sandra Conlan, manager of media information.

According to Conlan, the Fed's Board of Governors performed an unannounced vault count last weekend and "our physical inventory balances with stated financial position."

"That confirms our financial reporting practices are sound," Conlan said.

Conlan acknowledged the earlier discrepancies in the cash reports, but said the San Francisco Fed had taken steps to fix the problem as long ago as January.

The GAO investigation, however, conducted in June, found the Los Angeles branch was continuing to force agreement between the cash reports and the bank's daily balance sheets.

Although the amounts involved were far smaller, in the hundreds of thousands of dollars, the fact that the practice continued raises concerns that the bank's procedures "are still inaccurate or that there are more fundamental problems that need to be addressed," the GAO said.

As part of its review, the GAO found "other potential data integrity and procedural problems" in the Los Angeles bank's efforts to account for and report the money it manages.

The Los Angeles Fed branch is the second largest in the Federal Reserve system, handling $80 billion in cash a year. Only the New York Fed bank is larger.

On one occasion, according to the draft GAO report, a commercial bank was given credit for an $8.6 million deposit at the Los Angeles Fed, when it had actually deposited just $432,000. Although the error was eventually caught, "bank officials had no explanation for why this occurred."

GAO examiners also found instances where a clerk failed to note a $96 million cash shipment to the Fed bank branch in Seattle, and another in which a bank official entered a $3 million withdrawal as $300,000.

Federal Reserve Board officials in Washington, however, noted that the errors were 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.

Pub Date: 9/10/96

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