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Board Report:  September 30, 2008

Report on the Control Review of the Board's Currency Expenditures and Assessments


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The Federal Reserve Act (Act) establishes broad authorities and responsibilities related to the production, distribution, and destruction of Federal Reserve notes. For example, the Act authorizes the Board to issue notes at its discretion and provides that such notes are obligations of the United States. The Act also authorizes the Board to levy an assessment on the Federal Reserve Banks to pay for all expenses related to producing, issuing, and retiring Federal Reserve notes. The Board prepares and submits to the BEP an annual order for new currency production, and contracts with commercial armored carriers to deliver the new currency to the Federal Reserve Banks and branches, and within the Federal Reserve System. Ensuring that sufficient currency is in circulation to meet public demand is an important responsibility of the Federal Reserve System, and the expenses associated with this function are the largest line item on the Board's annual financial statements, totaling approximately $576 million in 2007.

Our objective was to evaluate the effectiveness of the Board's controls over processes to record currency expenses and to levy assessments on the Reserve Banks for these expenses. More specifically, we assessed whether the controls over these transactions are designed and operate effectively to provide reasonable assurance that records and transactions are maintained in sufficient and accurate detail; financial transactions are processed in compliance with applicable laws, regulations, and management's authorization; and unauthorized or fraudulent transactions are prevented or can be detected in a timely manner. As part of our review, we developed detailed flowcharts and narratives of the Board's expenditure and assessment processes for each currency expense, including the Board's interaction with BEP for currency production and billing. We used the flowcharts to identify controls, and tested certain controls by tracing currency-related transactions through the Board's expenditure and assessment processes.

Overall, we found that the Board has controls over the processes to record currency expenses and to levy assessments on the Reserve Banks for these expenses, and that the majority of the controls were operating effectively. We did not detect any instances of fraud or other improprieties. Although our testing did not identify any significant discrepancies, we did find opportunities to strengthen the Board's controls for paying currency invoices, preparing and processing assessments, monitoring vendor performance, and reporting the currency expenses in the Board's financial statements. In addition, fully implementing certain automated controls in the Board's financial management system would improve controls and reduce manual processing. Finally, while we found that the Board has a good working relationship with BEP and has established compensating controls and processes related to printing expenses, we believe that the Board should strengthen the current inter-agency agreement with BEP by formalizing existing operational reviews and enhancing inventory controls. Our report contains six recommendations designed to address these issues and help maintain an effective system of internal controls.

We provided a copy of our report to the Directors of the Management Division and the Division of Reserve Bank Operations for review and comment. In their joint response, the directors agreed with the report recommendations and discussed actions already underway or that will be taken to implement the recommendations.