An often repeated Federal Reserve conspiracy theory is that the Fed
has never been audited.  “Every year Congress introduces legislation to
audit the FED,” wrote Thomas Schauf, “and every year it is defeated.”7  Why?  Conspiracy
theorists such as Schauf, Gary Kah (1991), and Pat Robertson (1994) say the
reason is that the Fed is involved in an international plot to subvert U.S.
sovereignty and create a one-world government.  Naturally, the Fed will
not permit Congress to audit its activities, lest it discover this treasonous
plan and shut it down.

How much truth is there to this claim?  Has the Fed ever been audited
by Congress or anyone else?  The Fed controls U.S. monetary policy and
can act with a great deal of independence from Congress and the executive
branch.  Clearly, such awesome power requires some sort of regular public
oversight at the very least to insure that the Fed is doing its job efficiently
and effectively, and to detect any abuses of power or fraud. This essay explores
the claim that the Fed has never been audited and finds that it is completely
false.

A Brief History of Federal Reserve Audits

Since its inception in 1913 the Federal Reserve System has been subjected
to a variety of financial and performance audits by Congress, the executive
branch, and private accounting firms, although responsibility for this task
has shifted from time to time. From 1913 to 1921 the Board of Governors,
then known as the Federal Reserve Board which sets monetary policy and regulates
the activities of the Federal Reserve Banks, was audited annually by the
U.S. Treasury Department.  In 1921 Congress created the Government Accounting
Office (GAO) and assigned it to audit the Board until 1933.  In the
Banking Act of 1933, Congress voted specifically to remove the Board from
the GAO’s jurisdiction.  From 1933 to 1952 audit teams from the twelve
Federal Reserve Banks performed the annual examination of the BOG’s books.  From
1952 to 1978, the Board, under authorization from Congress, decided to employ
nationally recognize accounting firms to conduct the audits of itself to
insure independent oversight.  This provided an external evaluation
of the adequacy and effectiveness of the examination procedures.1

In 1978 Congress passed the Federal Banking Agency Audit Act (31
USCA §714
).  It placed the Federal Reserve System back under
the auditing authority of the GAO.  The Act significantly increased
the access of the GAO to the Federal Reserve Banks, the Board, and the
Federal Open Market Committee (the FOMC). Since then, the GAO has conducted
over 100 financial audits and performance audits of the three Federal Reserve
bodies.3

Scope of GAO Audits

Some of the more important GAO performance audits of the Fed have been in
the areas of bank supervision, payment systems activities, and government
securities activities.  In the first area, the GAO examined how well
the Fed was enforcing its regulatory powers over its member banks.  In
1992 it drew attention to the Fed’s sluggish compliance with regulatory reforms
mandated by the Foreign Bank Supervision Act of 1991.  In examining
the Fed’s payment system activities, the GAO made the Fed aware of how its
pricing policies for such services as check-clearing affected private suppliers
of check-clearing services, and also suggested ways to speed up the process
of check collections.  Security markets for government debt is a crucial
market, and GAO performance audits of the Fed have lead to more openness
in the primary dealer system, particularly concerning the disclosure of price
information.  The GAO is also involved in several ongoing performance
audits of the Fed such as analysis of risks and benefits of interstate banking,
regulation of derivatives, and the budget of the Federal Reserve system.2

Audits By Private Accounting Firms

Financial audits of the Fed are also conducted regularly. Each Reserve Bank
is audited every year by independent General Auditors who report directly
to the Board of Governors.  These examinations involve financial statement
audits and reviews on the effectiveness of financial controls.  Each
Reserve Bank also has its own internal audit mechanisms.  The Board
contracts each year with an outside accounting firm to evaluate the audit
program’s effectiveness.  Price Waterhouse conducted an audit of the
Board’s 1994, 1995, 1996, 1997, and 1998 financial statements and filed this
report in the Board’s 1996
Annual Report
(nearly identical ones appear in other Annual Reports):

We have audited the accompanying balance sheets of the Board of
Governors of the Federal Reserve System (the Board) as of December  31,
1995 and 1994, and the related statements of revenues and  expenses
for the years then ended.  These financial statements are  the
responsibility of the Board’s management.  Our responsibility is  to
express an opinion on these financial statements based on our  audits.

We conducted our audits in accordance with generally accepted accounting
standards and Government Accounting Standards issued by the Comptroller
General of the United States.  Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estmates made by management,
as well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.

In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of the Board as of December
31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with   generally accepted
accounting principles.

As discussed in Notes 1 and 3 to the financial statements, the Board implemented
Statement of Financial Accounting Standards No. 112,  Employers’ Accounting
for Postemployment Benefits, effective January 1, 1994.  In accordance
with Government Accounting Standards, we have also issued a report dated
March 25, 1996 on our consideration of the Board’s internal control structure
and a report dated March 25, 1996 on its compliance with laws and regulations.4

The Board has also contracted with Coopers & Lybrand to conduct annual
financial audits of the Board and the individual Federal Reserve Banks.

Exemptions to the Scope of GAO Audits

The Government Accounting Office does not have complete access to all
aspects of the Federal Reserve System.  The law excludes the following
areas from GAO inspections (31
USCA §714
):

                               
(1)
transactions for or with a foreign central bank, government of a                                  foreign
country, or nonprivate international financing organization;

                                 (2)
deliberations, decisions, or actions on monetary policy matters,                                  including
discount window operations, reserves of member banks,                                  securities
credit, interest on deposits, open market operations;

                                 (3)
transactions made under the direction of the Federal Open                                  Market
Committee; or

                                 (4)
a part of a discussion or communication among or between                                  members
of the Board of Governors and officers and employees of                                  the
Federal Reserve System related to items.  

In 1993 Wayne D. Angell, then a member of the Board of Governors,
submitted testimony before a House subcommittee on the reasons for the restrictions
on GAO access.  He commented,

By excluding these areas, the Act attempts to balance the need
for public accountability of the Federal Reserve through GAO audits against
the need to insulate the central bank’s monetary policy functions from
short-term political pressures and to ensure that foreign central banks
and governmental entities can transact business in the U.S. financial markets
through the Federal Reserve on a confidential basis.2

In reference to a bill that would lift the constraints placed on the GAO’s
audit authority over the Federal Reserve, Angell stated,

The benefits, if any, of broadening the GAO’s authority into
the areas of monetary policy and transactions with foreign official entities
would be small.  With regard to purely financial audits, the Federal
Reserve Act already requires that the Board conduct an annual financial
examination of each Reserve Bank…The process of conducting financial
audits is reviewed by a public accounting firm to confirm that the methods
and techniques being employed are effective and that the program follows
generally accepted auditing standards…Further, a private accounting firm
audits the Board’s balance sheet…Finally, and more broadly, the Congress
has, in effect, mandated its own review of monetary policy by requiring
semiannual reports to Congress on monetary policy under the Full Employment
and Balanced Growth Act of 1978…In addition, there is a vast and continuously
updated body of literature and expert evaluation of U.S. monetary policy.  In
this environment, the contribution that a GAO audit would make to the active
public discussion of the conduct of monetary policy is not likely to outweigh
the disadvantages of expanding GAO audit authority in this area.2

For more on GAO restrictions, you can search the Government
Printing Office
website for GAO report T-GGD-94-44, entitled “Federal
Reserve System Audits: Restrictions on GAO’s Access.”

The Budget of the Federal Reserve and Other Oversight 

The budget of the Federal Reserve system is determined by each Bank
and the Board of Governors.  Stephen L. Neal, the Chair of the House Subcommittee
on Domestic Monetary Policy in 1991, stated that “Congress plays no direct
role in setting or authorizing the Fed’s budget.  Control of its own budget
is an essential component of the independence the Fed must enjoy.”1  Additional
oversight of the Federal Reserve System derives from the ability of Congress
to expand or to contract the Fed’s powers.  On numerous occasions Congress
has seen fit to change the Fed’s structure, alter its mission, and grant it
new or different powers.  In 1935 Congress changed the composition of
the Board of Governors to give it more independence, and it allowed the Board
to determine the discount rate for all Federal Reserve Banks rather than allow
each Bank to set its own rate.  In1978 Congress mandated the Fed’s new
goal to be full employment and price stability.  In 1980 Congress granted
the Fed new regulatory powers over non-member banks.

Many other government reports on the audits of the Federal Reserve system
are available on-line through the Government Printing Office website.  Three
interesting GAO reports on Federal Reserve finances and performance are:

Federal Reserve Banks: Innaccurate Reporting of Currency at the
Los Angeles Branch, (9/30/96, GAO report AMID-96-146).

Federal Reserve Banks: Internal Control, Accounting, and Auditing Issues,
(2/9/96, GAO report AMID-96-5).

Federal Reserve System: Current and Future Challenges Require Systemwide
Attention, (6/17/96, GGD-96-128).

Conclusion

It is obvious that the Federal Reserve System is and has always been audited.  It
is difficult to imagine how Kah, Schauf, and other conspiracy theorists
could not have come across this evidence in the course of their research.  Perhaps
they are merely poor researchers.  Or maybe they are reluctant to
acknowledge facts which contradict their basic thesis.  Either way,
their credibility among skeptical readers takes a sharp hit by making such
obvious factual errors.

For more on how the Federal Reserve system is audited, see the New York
Federal Reserve’s FedPoints.

References

1. “The Budget of the Federal Reserve System,” Hearing
before the Subcommittee on Domestic Monetary Policy…[House], July 18,
1991, U.S. Government Printing Office, Serial no. 102-59.

2.  H.R. 28: “Federal Reserve Accountability Act
of 1993,” Hearing before the Subcommittee on Domestic Monetary Policy…[House],
October 27, 1993, U.S. Government Printing Office, Serial no. 103-86.

3.  Public Law 95-320, “Federal Banking Agency Audit
Act,” July 21, 1978.

4. Annual
Report, 1996
, Board of Governors of the Federal Reserve System.

5.  Kah, Gary (1991), En Route to Global Occupation.  Layfayette,
La.: Huntington House.

6.  Robertson, Pat (1994). The Turning Tide. Dallas:
Word Publishing.

7. Schauf, Thomas (1992). The Federal Reserve. Streamwood,
IL: FED-UP, Inc.

8.  United
States Code Annotated,
  U.S. Government Printing Office.

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