Fed's local branch reportedly vulnerable to theft.

A team of 30 to 40 Federal Reserve Board examiners spent the weekend of Sept. 7 in the Los Angeles branch of the Federal Reserve, counting bills and perusing records to determine whether cash could be missing from the branch's gigantic vault.

More than $80 billion a year in greenbacks flows through the branch, which the U.S. General Accounting Office identified in a confidential draft report as having systemic weaknesses in its cash control systems.

On any given day, about $6 billion to $8 billion in cash is piled up in the branch's vault, making Los Angeles the second busiest cash-receiving Federal Reserve branch or bank. Only New York is bigger.

The GAO finished a review of the branch this summer, and sent a draft report to the House Banking Committee on Aug. 28.

U.S. Rep. Henry Gonzalez, D-Texas, ranking minority member and a long-time Fed critic, had asked the GAO to investigate the L.A. branch.

The report comes at a time when increased scrutiny is being paid to the Federal Reserve's operations, especially its network of 25 branches. Critics suggest that there are too many banks in the wrong places and that oversight is minimal.

None of which is likely to affect the Federal Reserve's chief mission: governing the nation's money supply by buying or selling U.S. government bonds, or by raising or lowering interest rates.

But the concern is that loose controls could result in the pilfering of millions of dollars, and that it could go undetected, due to flawed record-keeping.

The GAO review suggests that the L.A. branch had lost control of its hoard of cash, and that low-level employees could independently, and without supervision, alter computer and financial records on cash deposits.

"Certain L.A. bank staff have the ability to cause an original transaction posted to the general ledger (record of deposits) to subsequently be deleted. ... Certain staff could make unauthorized adjustments that go undetected," according to the GAO report.

Moreover, when there were huge discrepancies between the physical counts of cash and the entries in the "general ledger" - the official balance sheet - then records were merely altered on a monthly basis to bring the two numbers into balance, the report stated.

A banking committee investigator said it is conceivable that cash could have been spirited out of the L.A. vault. In fact, Fed employees in Boston and New Orleans had absconded with cash.

Meanwhile, the Fed has hired the accounting firm Coopers & Lybrand to conduct an independent audit of the Los Angeles branch, according to an internal memorandum that Mark Mullinix, senior vice president at Los Angeles branch, sent to staffers.

In the Aug. 20 memo, Mullinix stated, "While Coopers & Lybrand did not do a full-scope audit, they did report that they did not identify any factors that would indicate a potential for inaccuracies or misstatements of the Branch's cash position..."

Fed officials have maintained that the handling and posting of cash at the L.A. branch is above reproach, and that recent audits and surprise examinations have only confirmed that view.

"The (Federal Reserve) Board did send out a group of examiners to do a count of cash in the vault," Federal Reserve spokeswoman Sandra Conlan said last week.

"It was an unannounced visit to the cash vault (at the L.A. branch), and the results indicate that the physical inventory (of cash on hand) balances with the stated financial position, and that our financial reporting processes are sound," she said.

When banks have excess hard cash, they usually deposit it at the local bank or branch of the Federal Reserve, which in Southern California is the L.A. branch in downtown Los Angeles. (Due to insurance needs and the potential for robbery, banks minimize cash deposits).

The L.A. branch only accepts hard cash deposits, according to Conlan.

Banks in Southern California have experienced swelling excess cash deposits in the billions of dollars each year, thought by most experts to be partially a result of the regional trade in illegal drugs, and the region's proximity to Mexico.

However, even in light of possible weaknesses at the L.A. branch of the Fed, there is little concern that overall control of the nation's money supply - or the economic impact of Federal Reserve Board decision-making - could be compromised by thefts of cash from Fed banks and branches.