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.The Board has also contracted with Coopers & Lybrand to conduct annual financial audits of the Board and the individual Federal Reserve Banks.
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
Exemptions to the Scope of GAO Audits(1) transactions for or with a foreign central bank, government of a
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):
(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.2In 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.2For 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).
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.
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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