Control Review of the Reserve Bank Operating Assessment Process

Section 10 of the Federal Reserve Act allows the Board to levy a semiannual operating assessment on the Federal Reserve Banks. The assessment should be sufficient to pay the Board's estimated operating expenses and capital expenditures for the half-year following the levying of such assessment, together with any deficit carried forward from the preceding half-year. The assessment is one of the largest line items on the Board's annual financial statements. For calendar year 2006, the assessment was approximately $301 million and for 2007 it was about $296 million.

We completed a review to evaluate the effectiveness of the Board's controls over the process for levying the operating assessment on the Reserve Banks. Specifically, we assessed whether the Board's controls are designed and operated effectively to provide reasonable assurance that (1) records and transactions are maintained in sufficient and accurate detail to permit the preparation of the Board's financial statement information in accordance with generally accepted accounting principles, (2) transactions are processed in compliance with applicable laws and regulations and management's authorization, and (3) unauthorized or fraudulent transactions are prevented or can be detected in a timely manner. To accomplish our objective, we reviewed supporting documentation, interviewed Board and Reserve Bank management and staff, developed process flowcharts and narratives, identified and tested key process controls, and prepared a risk control matrix.

Overall, we found that the controls over the process for levying the operating assessment were generally effective. The documentation  we reviewed was sufficient to permit the proper preparation of the Board's financial statements, and nothing came to our attention to indicate any instances of fraud, unauthorized transactions, or noncompliance with applicable laws and regulations. Although we found that controls are generally effective, our fieldwork also identified several opportunities to enhance controls related to documenting procedures, better aligning roles and responsibilities, recording journal entries in a more timely manner, and strengthening certain supporting documentation. We shared our observations with management, who proactively implemented changes that addressed these observations. As a result, we did not issue any formal recommendations. However, we issued a management letter that included one suggestion for establishing greater consistency in the operating assessment process.