Statement by Brent L. Bowen, Inspector General, Board of Governors of the Federal Reserve System.

Statement by Brent L. Bowen, Inspector General, Board of Governors of the Federal Reserve System, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, July 18, 1991

I am pleased to respond to your request to provide a brief review of the points made in our June 7, 1991, assessment of Governor Angell's report to the subcommittee entitled "System and Procedures for Financial Supervision and Control," and to outline our plans for examining the Board's systems of oversight and supervision of Federal Reserve Banks.

SUMMARY ASSESSMENT OF THE BOARD'S FINANCIAL CONTROL SYSTEM REPORT

The subcommittee asked that the Board's Office of Inspector General evaluate Governor Angell's report to the subcommittee by assessing the policies and procedures it describes and identifying any particular weaknesses or strengths in the System's design for auditing and controlling its own financial operations. Our assessment, which I request be made a part of this hearing record, noted the extensive internal controls present in the Federal Reserve's processes but identified two major points of possible concern. First, we noted that the interactive participation of the Board in program management of Reserve Bank financial activities may be beneficial from a day-to-day management perspective but may also present a potential conflict of interest from an oversight perspective: That is, participation by Board staff members in the management of Federal Reserve Bank financial operations could hinder their objective oversight or evaluation of those operations.

Second, we concluded that while the Board has an extensive internal control structure designed to prevent and detect fraud and abuse in Reserve Bank valuables handling, it does not have a specific program to prevent, detect, and investigate specific cases of suspected or actual fraud or abuse in other areas. Indeed, having such a program in the same oversight office would, in our opinion, cause some of the same concerns about the potential conflict of interest expressed in our first point.

The Inspector General Act gives my office the authority to audit and investigate all aspects of the Board's activities, which, by definition, include the Board's oversight of the Federal Reserve Banks. We can, therefore, review and report on those areas of Board and Bank activity that I have characterized as interactive participation by Board and Bank personnel to determine if the potential conflict of interest previously cited actually exists and can investigate allegations of wrongdoing and the appropriateness of investigations conducted by Board and Bank personnel.

PLANS FOR EXAMINING THE BOARD'S SYSTEMS OF OVERSIGHT

Our assessment of Governor Angell's report to the subcommittee includes an outline of the various mission areas of the Federal Reserve-monetary and economic policy, supervision and regulation of financial institutions, system policy direction and oversight (the area primarily addressed by Governor Angell's report), and administration-and the resources associated with those mission areas. In developing our five-year strategic plan, we identified topics of interest within each of these areas for specific audit attention, leaving investigations to be more reactive to allegations of specific wrongdoing that could come directly or through our nationwide hotline, from managers and staff, and from audit findings. Although a risk analysis that we are developing could lead us to amend our priorities, we expect to devote about 25 percent of our resources to the area largely defined by Governor Angell's report over the next few years, with about 40 percent of our audit resources to be devoted to the mission area of supervision and regulation of financial institutions and the remainder of our resources to be about equally divided between the mission areas of monetary policy and administration.

We began our program to evaluate the effectiveness of the oversight of the Federal Reserve Banks with reviews of the operations of the Board's Division of Federal Reserve Bank Operations and Payment Systems and the Board's Office of Federal Reserve Bank Activities. We submitted those reports to the subcommittee last year. We have just begun an audit of the process used to examine the Federal Reserve Banks' financial operations, and our 1991 audit plan provides for an audit of the Board's oversight of the Reserve Bank budget process and an audit of Federal Reserve Bank branch building construction costs. We expect to then address the oversight of automation planning, communication planning, payment system risk, securities and fiscal services, cash review, check payments, electronic payments, financial accounting, building planning, protection and contingency planning, General Auditor functions, and other areas outlined in Governor Angell's report.

As for the other areas, we are currently conducting a nationwide audit of the Federal Reserve's commercial bank examiners' adherence to conflicts of interest policies and procedures; will release this week our report on the Federal Reserve's development of a national information center that contains a database of financial, organizational structure, and supervisory information on the nation's financial institutions; have completed operations reviews of the Board's monetary policy divisions; have completed the audits of the Board's new compensation system; and are proceeding with other audits identified in our strategic and annual plans.

This concludes my formal comments. I would be pleased to address any questions you may have.