Report to Congressional Requester

United States General Accounting Office

GAO

December 2001 CHECK RELAY

Controls in Place

Comply With Federal

Reserve Guidelines

GAO-02-19
Why GAO Did This Study

Efficiently transporting checks to

the banks on which they are

drawn is a critical step in

maintaining the liquidity of the

nation’s financial system. The

Federal Reserve System is a

major provider of check

collection services, contracting

with air carriers to move checks

among Federal Reserve check

processing offices. In 1996, a

report by the Democratic staff of

the House Committee on Banking

and Financial Services concluded

that the Federal Reserve’s check

transportation operation was

subject to a variety of abuses,

including irregularities in

contract bidding and payment

procedures. In 1998, the Federal

Reserve transferred

responsibility for managing the

network from the Federal

Reserve Bank of Boston to the

Federal Reserve Bank of Atlanta,

along with other retail payment

functions. GAO was asked to

determine whether controls over

the Federal Reserve’s check

transportation operation are

sufficient.

December 2001

CHECK RELAY

Controls in Place Comply With Federal

Reserve Guidelines

This is a test for developing highlights for a GAO report. The full report, including GAO's objectives, scope, methodology, and analysis is available

at www.gao.gov/cgi-bin/getrpt?GAO-02-19. For additional information about the report, contact Thomas J. McCool on (202) 512-8678. To provide

comments on this test highlights, contact Keith Fultz (202-512-3200) or e-mail HighlightsTest@gao.gov.

Highlights of GAO-02-19, a report to the Ranking Minority Member, Subcommittee on Domestic

Monetary Policy, Technology and Economic Growth, Committee on Financial Services, House of

Representatives.

United States General Accounting Office

What GAO Found

GAO uncovered no evidence to suggest that the Federal Reserve does not

have sufficient controls in place to prevent the types of abuses described

in the House staff report. Check Relay, as the transportation network is

known, operates under an array of internal controls designed to ensure

compliance with Federal Reserve rules for awarding and administering

contracts as well as for tracking payments to its vendors. Since the

Federal Reserve Bank of Atlanta assumed responsibility for this network

in 1998, internal auditors have conducted two, full-scope internal audits

of the operation. The internal audits covered the areas in which the types

of abuse identified by the House staff report are most likely to occur.

These areas include contracting procedures, management of the fuel

used by vendors, and payments to vendors. The staff of the Board of

Governors of the Federal Reserve System has also audited Check Relay’s

management and operations. These internal audits have not identified

any major problems of the type described in the House staff report.

GAO reviewed selected aspects of the last major audit and conducted

independent tests of some transactions. GAO found nothing to question

the internal auditors’ conclusion that Check Relay is in compliance with

the procurement and contract management guidelines of either the

Federal Reserve System or the Atlanta Reserve Bank and that their

controls are adequate.

Legend

Color Zone Flight

Connector Zone Flight

Air Freight Forwarding

FRB Processing Site

CHICAGO

GREEN

PHILADELPHIA

BLUE

ATLANTA

YELLOW

DALLAS

ADOBE

PURPLE

CINCINNATI

RED

This map shows the areas covered by the Federal Reserve’s Check Relay

air transportation network.

G A O

Accountability Integrity Reliability

Highlights
Page i GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

Letter 1

Background 3

Controls Are Designed to Ensure Competitive Bidding and Reviews

by Senior Officials Before Contracts Are Awarded 6

FRB Atlanta, RPO, and the Board Each Have Oversight

Responsibility Over Check Relay 8

Our Review Supports Atlanta Audit’s Findings That Check Relay’s

Internal Controls Are Satisfactory 9

Agency Comments 11

Appendix I Objectives, Scope, and Methodology 12

Appendix II Comments From the Board of Governors of the

Federal Reserve System 14

Figure

Figure 1: Map of the Check Relay Air Transportation Network 4

Abbreviations

FBO fixed base operators

FRB Federal Reserve Bank

ITS Interdistrict Transportation System

RFP Request for Proposal

RPO Retail Payments Office

Contents
Page 1 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

December 12, 2001

The Honorable Carolyn B. Maloney

Ranking Minority Member

Subcommittee on Domestic Monetary Policy,

 Technology and Economic Growth

Committee on Financial Services

House of Representatives

Dear Ms. Maloney:

Efficiently transporting checks to the paying bank1

 is critical to ensuring

the prompt movement of funds throughout the United States and is a

crucial step in the nation’s payment system. This report discusses the

management of the air transportation network used by the Federal

Reserve System to transport checks from one Federal Reserve office to

another. The Federal Reserve System, a major provider of check collection

services2

 for banks, uses this network to provide check-clearing services.

These services entail collecting checks and returning dishonored checks.

This must be done promptly to minimize (1) banks’ exposure to losses

between the time that deposited funds must be made available for

withdrawal under the Expedited Funds Availability Act3

 and the time that

banks receive notice that a check is being returned unpaid and (2) the

amount of “float” in the system.4

A 1996 Democratic staff report by the House Committee on Banking and

Financial Services raised questions about managerial problems with this

network, then called the Interdistrict Transportation System (ITS) and run

 1

 A paying bank is the bank at which a check is payable and to which it is sent for payment

or collection.

2

 Check collection refers to the process of sorting checks according to the bank on which

they are written and presenting the checks to those banks for payment.

3

 Pub. L. No. 100-86, Title VI (1987). The Federal Reserve’s Regulation CC implements the

Expedited Funds Availability Act.

4

 Float occurs in the banking system when money appears simultaneously in the accounts

of two depository institutions during the time between the writing of the check and the

receipt of credit.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

by the Federal Reserve Bank of Boston (FRB Boston). 5 These questions

included the propriety of contract bidding, awarding, and monitoring

practices and the adequacy of controls to monitor fuel and other payments

to contracted vendors.6

 In September 1998, ITS was moved to the Federal

Reserve Bank of Atlanta (FRB Atlanta), along with other retail payment

functions, and renamed Check Relay.

You asked us to determine if the problems alleged in the 1996 staff report

exist today. As you requested, we (1) reviewed Check Relay’s internal

controls on the bidding and awarding of vendor contracts and payments to

vendors for fuel use and air transportation of checks, (2) examined how

FRB Atlanta and the Board of Governors of the Federal Reserve System

(Board) monitor the internal controls on Check Relay’s operations, and (3)

examined available evidence to determine whether Check Relay’s internal

controls are consistent with FRB Atlanta and Board policies.

We focused our review on Check Relay’s controls that are designed to

prevent the types of activities related to vendor contracts and payments

that were alleged to have occurred at ITS. These controls are based on

FRB Atlanta and Board policies and are implemented by FRB Atlanta and

the Board. We interviewed Check Relay and other FRB Atlanta staff,

including internal auditors, and reviewed a sample of workpapers from an

April 2001 full-scope internal audit of Check Relay’s operations. This was

the most recent of three reviews of Check Relay completed in the last 3

years. Appendix I more fully describes our scope and methodology.

We conducted our work in Washington, D.C., and Atlanta, GA, between

April and November 2001, in accordance with generally accepted

government auditing standards. We requested comments on a draft of this

report from the Board. The Board’s comments are discussed near the end

of this letter and are reprinted in appendix II. We incorporated the

Board’s technical comments where appropriate.

 5 Waste and Abuse in the Federal Reserve’s Payment System, Democratic staff of the

House Committee on Banking and Financial Services, January 5, 1996.

6

 The 1996 staff report also alleged that ITS’ accounting practices to recover costs

associated with check transportation were inconsistent with the Monetary Control Act of

1980 (Pub. L. No. 96-221, Title I, §107 (1980); 12 USC § 248a). We addressed this in our

report entitled Federal Reserve System: Mandated Report on Potential Conflicts of

Interest (GAO-01-160, Nov. 13, 2000).
Page 3 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

When a check is written, it is presented to the bank upon which it is

written—that is, the paying bank. Federal Reserve officials have said that

they contract with private air carriers to form a dedicated network to

provide air transportation of checks because it is the best way to ensure

that the air transportation required to meet their deadlines is available

when they need it. The Federal Reserve could use nondedicated, privatesector air carriers to transport their checks. However, Board officials

explained that such nondedicated carriers can decline to provide service

to any route on short notice if they deem the route to be unprofitable or

undesirable for some other reason, and such carriers have done so in the

past.

Check Relay provides most of the air transportation services needed to

deliver checks, tapes of images of government checks, and miscellaneous

noncheck mail among Federal Reserve offices across the country. As seen

in figure 1, the network connects 45 endpoints in a hub-and-spoke

configuration. Five hubs—in Philadelphia, Cincinnati, Chicago, Atlanta,

and Dallas—link the remaining Federal Reserve check-processing site

locations throughout the country.7

 7

 Because FRB San Francisco uses common carriers to connect with the various zone

centers in the network, it does not participate in the network to the same extent as the

remaining 11 districts.

Background
Page 4 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

Figure 1: Map of the Check Relay Air Transportation Network

Checks may be routed through several banks before reaching their final

destination. In many cases, banks of first deposit present checks to paying

banks through an intermediary, such as the Federal Reserve. To transport

checks deposited at a Federal Reserve office located in one district and

drawn on paying banks located in another Federal Reserve district, Check

Relay contracts with private air carriers to form a dedicated network that

links the System’s check-processing locations. They also contract for

ground services at airports, which include fueling and other support

services, with providers of these services called fixed base operators

(FBO). These carriers and providers form the Check Relay network.

Check Relay staff manage the day-to-day operations of the network, in

part by administering (1) contracts with private vendors that provide air

and ground transportation and support services, (2) vendor payments, and

Legend

Color Zone Flight

Connector Zone Flight

Air Freight Forwarding

FRB Processing Site

CHICAGO

GREEN

PHILADELPHIA

BLUE

ATLANTA

YELLOW

DALLAS

ADOBE

PURPLE

CINCINNATI

RED Utica Boston

Windsor

Locks

East Rutherford

Baltimore

Philadelphia

Pittsburgh

Richmond

Charlotte

Columbia

Atlanta

Jacksonville

Miami

Tampa

New

Orleans

Houston

San

Antonio

Dallas

Little

Rock

Oklahoma

City

St. Louis

Kansas City

Chicago

Milwaukee

Des Moines

Minneapolis

Omaha Denver Salt Lake

City

Helena

Seattle

Portland

San

Francisco

Los

Angeles

El Paso

Birmingham

Nashville

Memphis

Louisville

Cincinnati

Columbus

Cleveland Detroit

Indianapolis

Charleston
Page 5 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

(3) fuel inventory and purchasing. Check Relay’s management function

also involves establishing flight schedules and routes, transferring cargo

from plane to plane at the hubs, tracking the cargo, and performing

periodic reviews. Four nights a week, Monday through Thursday,

contracted vendors provide 192 flights to these 45 endpoints as well as

ground transportation between the airport and the local Federal Reserve

offices in spoke cities. On an average weeknight, the network transports

about 23 tons of checks with a face value of about $13 billion.8

 Check

Relay officials estimate that 20 percent of the checks that the Federal

Reserve handles require Federal Reserve air transportation.

As previously mentioned, the staff of FRB Boston managed the Federal

Reserve’s check transportation network, then called ITS, until the late

1990s. In 1996, the Democratic staff of the House Committee on Banking

and Financial Services, released its report that described a number of

managerial problems with ITS, including improper accounting,

contracting, and payment practices and insufficient controls on fuel

provided to contracted air carriers. These problems were further explored

in hearings9

 held in 1997 before that same committee’s Subcommittee on

Domestic and International Monetary Policy.

In September 1998, the Federal Reserve Banks’ retail payments

management function, which included ITS, was moved to FRB Atlanta,

and ITS was renamed Check Relay. This function is run by the Retail

Payments Office (RPO), which is responsible for overseeing the Federal

Reserve System’s retail payments services nationwide and for working

with the financial services industry to improve the long-run efficiency and

effectiveness of the retail payments system. Board officials explained that

such transfers occur periodically.

 8

 During the weekend, a scaled down version of the nightly operations is handled by less

expensive airfreight forwarding, which involves using common carriers and long-distance

ground transport.

9

 Hearings before the Subcommittee on Domestic and International Monetary Policy,

Committee on Banking and Financial Services, September 16, 1997.
Page 6 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

Check Relay’s internal controls are designed to ensure that each step of

the contract evaluation and approval process conforms to FRB Atlanta

and Federal Reserve System policies, and that the appropriate senior

officials review and approve contract terms. Check Relay also has controls

on payments to vendors for services that are designed to ensure that all

payments conform to contract terms. An additional set of controls is

designed to verify that the amount of fuel used by Check Relay’s vendors

is consistent with expected levels, and that fuel is provided only to the

appropriate recipients.

In accordance with Federal Reserve System and FRB Atlanta policies,

Check Relay initiates most contracts with vendors through a competitive

bidding process. Check Relay solicits bids for contracts with air carriers

and fuel providers by issuing Requests for Proposals. Federal Reserve

Banks’ and FRB Atlanta’s procurement guidelines generally call for

contracts of 3 years, with the option to extend. However, Check Relay

generally awards 4-year contracts. Check Relay officials explained that 4-

year contracts are necessary to attract bids from vendors capable of

satisfying Check Relay’s needs, and the decision to initiate 4-year

contracts was approved by senior FRB Atlanta officials as being in the best

interests of the Reserve Bank.

Check Relay officials noted that although a primary goal of the contracting

process is to obtain as many contract bids as possible, the network’s strict

delivery deadlines often limit the number of vendors that submit bids for

contracts. When only one vendor is available to provide a particular

service, FRB Atlanta guidance generally permits authorized officials to

procure services through an alternative method called “sole source”

acquisitions.10 Check Relay officials stated that there are currently

contracts with seven vendors acquired through competitive bidding and

three sole source contracts.

FRB Atlanta policies generally require that contract awards receive

approvals from the appropriate senior officials. Check Relay, RPO, and

other FRB Atlanta officials review each contract bid before Check Relay

 10 According to Federal Reserve System guidance, a sole source acquisition involves no

competition, and therefore no Request for Proposal, and should be used only when justified

and necessary to serve the needs of the Reserve Bank.

Controls Are

Designed to Ensure

Competitive Bidding

and Reviews by

Senior Officials

Before Contracts Are

Awarded

Federal Reserve System

and FRB Atlanta Policies

Establish Controls on

Check Relay’s Contracting

Practices
Page 7 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

awards the contract. Check Relay officials review all contract bids using a

detailed “checklist,” that is based on Federal Reserve System and FRB

Atlanta guidance. The checklist is designed to ensure that the appropriate

senior officials review and approve contract bids before making any

contract awards. FRB Atlanta’s Management Committee11 also reviews all

contract bids from the perspective of maintaining effective internal

controls over the bank’s financial reporting and assets. Officials from FRB

Atlanta’s Legal Department review the bids and any changes made to them

before Check Relay makes any contract awards.

Check Relay policies have established internal controls designed to verify

that invoice amounts sent in by vendors are appropriate. Air carriers,

FBOs, and fuel providers regularly invoice Check Relay for services

rendered. Check Relay staff track this information in an internal database,

in part to monitor vendor performance. According to Check Relay

officials, tracking this information helps them analyze how often invoice

amounts differ from expected amounts established in vendor contracts

and the reasons for these differences. Check Relay staff also enter invoice

information into FRB Atlanta’s payment system to initiate the payment

process.

Check Relay staff verify that invoice amounts match the expected amounts

and enter that information into the bank’s payment system. When there is

no discrepancy between the amounts, Check Relay staff obtain approval

for the payment request and forward the relevant documentation to the

accounting department. A senior Check Relay official indicated that he or

more senior officials approve all requests for payments to vendors before

they are given to the appropriate FRB Atlanta staff for subsequent review

and processing.

Check Relay officials indicated, however, that invoice amounts sometimes

differ from the expected amounts. For example, they noted that air

carriers sometimes use more fuel than usual to fly around unusually bad

weather. When these amounts differ, Check Relay officials first verify with

hub staff and other relevant parties that the discrepancy is justified. The

officials then provide documentation supporting the differing payment

amount to staff in a separate office of FRB Atlanta who are authorized to

 11 Consisting of officials from other areas of the bank, including the auditing department,

RPO, and the Financial Services Division.

Tracking of Invoice

Information and

Separation of Duties Are

Designed to Ensure That

Payments to Vendors Are

Correct
Page 8 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

amend this information in the bank’s payment system. Once the invoice

amount and expected amount in the bank’s system reconcile, Check Relay

officials approve the payment request and forward it to the accounting

department. FRB Atlanta accounting staff said that their reviews of

payment requests, done for the purpose of entering payments into FRB

Atlanta’s accounting system and preparing electronic payment

instructions, constitute additional checks for accuracy before disbursing

the funds to vendors.

Check Relay also has staff whose primary duties involve performing

internal management reviews of specific transactions with vendors. Check

Relay officials indicated that in response to FRB Atlanta’s audit findings

noting that Check Relay lacked staff with accounting expertise, Check

Relay added qualified staff who conduct internal reviews for management

purposes, including reviews of payments to air carriers, FBOs, and other

vendors.

Check Relay’s controls are designed to track air carriers’ fuel use and

investigate deviations from expected usage levels. Check Relay staff

monitor vendors’ fuel usage at hub and spoke locations where Check

Relay has contracts with FBOs. Because most contracts with air carriers

stipulate that Check Relay will provide the necessary fuel, Check Relay

purchases fuel from FBOs or reimburses vendors in locations where fuel

purchase and storage agreements could not be made. To determine the

appropriateness of air carriers’ fuel usage, Check Relay staff conduct a

fuel burn analysis of each carrier’s reported fuel usage in relation to its

route and plane specifications. Check Relay staff also review detailed fuel

distribution information from FBOs, including aircraft identification, date

of fuel pumped, and pump meter readings. To monitor fuel levels at FBOs,

Check Relay conducts a monthly analysis of fuel inventories.

Various units of the Federal Reserve System have oversight responsibility

over Check Relay. Check Relay is managed as a unit of RPO, which is

managed out of FRB Atlanta. A Check Relay official explained that

because Check Relay is a key component of the Federal Reserve’s checkprocessing efforts, it must be managed as an integrated part of RPO so that

its efforts are consistent with RPO initiatives, which can, in turn, greatly

affect Check Relay.

As previously discussed, FRB Atlanta’s Management Committee reviews

Check Relay’s business decisions, including contract awards and decisions

Controls on Fuel Usage

and Inventory Are

Designed to Prevent

Overcharges and

Inappropriate Fuel Use

FRB Atlanta, RPO,

and the Board Each

Have Oversight

Responsibility Over

Check Relay
Page 9 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

on contract extensions and the use of sole source contracts. FRB Atlanta’s

Management Committee includes senior FRB Atlanta and RPO

management officials. In addition, FRB Atlanta’s Auditing Department

(Atlanta Audit) regularly conducts internal audits of Check Relay and

submits reports of internal audit findings to FRB Atlanta management.

Atlanta Audit officials stated that Check Relay’s operations pose a

“moderate risk” to FRB Atlanta, on the basis of Federal Reserve System

risk methodology, and thus perform internal audits of Check Relay every 2

to 3 years. Atlanta Audit has conducted two, full-scope internal audits of

Check Relay since its move to Atlanta in 1998. Atlanta Audit conducted its

most recent audit of Check Relay in 2001.12 Atlanta Audit also conducts

follow-up reviews that are based on findings from reviews performed by

the Board.

FRB Atlanta’s Legal Department also reviews Check Relay’s decisions.

Contract awards and extensions, along with most other major business

decisions, are reviewed by FRB Atlanta’s Legal Department. According to

a Check Relay official, these reviews represent another control on Check

Relay.

The Board’s Division of Reserve Bank Operations and Payment Systems

(the Division) also has oversight responsibility over Check Relay,

consistent with the Board’s oversight authority with regard to Federal

Reserve Banks. In 1999, the Board conducted a financial examination of

RPO that included Check Relay. The Division also reviews Check Relay

directly. In 1999, the Division conducted a review of Check Relay’s

operations.

Our review of Atlanta Audit’s audit findings for Check Relay indicated no

evidence to question their conclusions that Check Relay’s internal controls

are effectively designed and implemented, with fewer problems noted in

successive audits. Since 1998, Check Relay has undergone two internal

audits by Atlanta Audit and one review by the Board. Each of these

reviews generally covered the areas that were alleged to have problems in

ITS.

As previously discussed, Atlanta Audit staff use a risk-based methodology

to determine the frequency with which they audit Check Relay and the

scope of the audits. Atlanta Audit officials stated that because Check Relay

 12 The April 2001 audit concluded in May 2001.

Our Review Supports

Atlanta Audit’s

Findings That Check

Relay’s Internal

Controls Are

Satisfactory
Page 10 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

is rated as a “moderate business risk,” they generally audit Check Relay

every 2 to 3 years. Since 1998, Atlanta Audit has conducted two, full-scope

internal audits of Check Relay covering all phases of Check Relay’s

network, such as the procurement and monitoring of services and

financial transactions, including payments to vendors, among other areas.

The scope of the internal audit also depends on an assessment of the risk

posed by different activities. Atlanta Audit officials said that they have an

established audit program for Check Relay that they tailor for specific

audits. They indicated that when tailoring the audit program, Atlanta Audit

staff assess changes in Check Relay’s business activities since their last

internal audit and generally focus audits on those areas. These officials

also said that they based their strategy for sampling transactions to test

during the internal audit on the risk posed by different types of

transactions, focusing their attention on those transactions that are most

likely to pose problems. They also consider past internal audit findings,

paying particular attention to areas in which problems have been found.

A 1999 Division review of Check Relay did not disclose any significant

exceptions. Although Check Relay’s controls were determined to be

generally adequate, the review recommended that Check Relay better

document some of their processes and that they more effectively use fuel

usage data they routinely collected. Similarly, Atlanta Audit’s 1999 internal

audit of Check Relay did not disclose issues that would warrant the

immediate attention of FRB Atlanta management. Internal audit results

indicated that Check Relay’s controls over the contract bidding process, as

well as fuel-related and other payments to vendors, were adequate.

Exceptions to the overall internal audit conclusion in part dealt with the

need to improve contract-to-payment reconciliations. FRB Atlanta internal

auditors expressed concern with these issues but indicated that these

issues were mitigated, in part, by the overall strength of Check Relay’s

management team.

At the conclusion of its April 2001 internal audit of Check Relay, FRB

Atlanta’s internal auditors noted specifically that controls over general

ledger accounts, contract administration, vendor payments, and fuel usage

monitoring had been strengthened. The exceptions noted were minor and

involved, among other things, the continued access of a former employee

to an information system.

The frequency of internal audits and the increasingly minor nature of the

problems they identified indicate that Check Relay’s controls are

satisfactory. Our review of workpapers from Atlanta Audit’s April 2001
Page 11 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

audit of Check Relay resulted in conclusions similar to those of Atlanta

Audit staff. We determined that the internal audit provides a reasonable

basis for its conclusion that Check Relay is in compliance with Federal

Reserve and FRB Atlanta procurement and contract management

guidelines.

We received written comments on a draft of this report from the Board of

Governors of the Federal Reserve System. In these comments, the Director

of the Division of Reserve Bank Operations and Payment Systems agreed

with the information presented in this report; these comments are

reprinted in appendix II. Board staff also provided technical comments

and corrections that we incorporated as appropriate.

As agreed with your office, unless you publicly release its contents earlier,

we plan no further distribution of this report until 7 days from its date. We

are sending copies of this report to the Chairman and Ranking Minority

Member of the House Committee on Financial Services, the Chairman of

the House Subcommittee on Domestic Monetary Policy, Technology and

Economic Growth; the Chairman of the Board of Governors of the Federal

Reserve System; and the President of the Federal Reserve Bank of Atlanta.

We will make copies available to others on request.

Please contact me or James McDermott, Assistant Director, at

(202) 512-8678 if you or your staff have any questions concerning this

report. Other key contributors to this report are Gary Chupka, Thomas

Conahan, and Tonita W. Gillich.

Sincerely yours,

Thomas J. McCool

Managing Director, Financial Markets and

 Community Investment

Agency Comments
Appendix I: Objectives, Scope, and

Methodology

Page 12 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

To see if the problems alleged in the Federal Reserve System’s check

transportation system in 1996 exist today, we (1) reviewed Check Relay’s

internal controls on the bidding and awarding of vendor contracts and on

payments to vendors for fuel use and air transportation of checks, (2)

examined how the Federal Reserve Bank of Atlanta (FRB Atlanta) and the

Board of Governors of the Federal Reserve System (Board) monitor the

internal controls on Check Relay’s operations, and (3) examined available

evidence to determine whether Check Relay’s internal controls are

consistent with FRB Atlanta and Board policies.

To review the controls over bidding for and awarding vendor contracts,

we interviewed Check Relay and FRB Atlanta’s Legal Department staff to

determine the levels of review contracts undergo before they are finalized.

We reviewed documentation showing the approvals that are required and

files on completed contract awards. We also reviewed a copy of Check

Relay’s most recent Request for Proposals (RFP), which Check Relay staff

said was written in the same format as virtually all of the RFPs they have

issued.

To review the process of paying vendors for fuel and air transportation of

checks, we reviewed the documentation from six payments to air carriers

or fuel providers. We also (1) walked through the payment process for one

invoice from the time Check Relay received it until the time that it was

sent out as part of an automated clearinghouse payment and (2)

interviewed Check Relay and the accounting staff who handled the

invoice. In addition, we reviewed Check Relay’s records for fuel payments,

which included spreadsheets and other tools that serve as controls for

ensuring that the payments are accurate and that fuel is provided only to

appropriate vendor aircraft.

To examine the methods that FRB Atlanta and the Board use to monitor

Check Relay’s internal controls, we interviewed staff from the Board,

Check Relay, and FRB Atlanta’s Auditing (Atlanta Audit) and Legal

Departments as well as Retail Payments Office staff. We relied on our

recent work done in response to the Gramm-Leach-Bliley Act as

background for this work.13 We also reviewed audit reports prepared by

FRB Atlanta and Board staff that reviewed Check Relay’s controls.

 13 Federal Reserve System: Mandated Report on Potential Conflicts of Interest

(GAO-01-160, Nov. 13, 2000).

Appendix I: Objectives, Scope, and

Methodology
Appendix I: Objectives, Scope, and

Methodology

Page 13 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

To determine whether Check Relay’s procedures are consistent with

internal controls that are based on FRB Atlanta and Board policies, and

are working as intended, we reviewed audit reports on Check Relay

prepared by Atlanta Audit and the Board since 1998. We reviewed random

samples of the transactions and records reviewed during FRB Atlanta’s

most recent audit of Check Relay, dated April 2001. These included a RFP,

contract awards, payments to vendors, and fuel-tracking procedures. The

results from our samples are representative of all transactions tested by

Atlanta Audit during the April 2001 audit. However, Atlanta Audit staff

explained that they drew the samples for the April 2001 audit judgmentally

to target payments and other items that would be more likely to present

problems. Although such an approach is not based on random probability

sampling that would allow projection to all Check Relay transactions, it

seems reasonable.

We identified the sections of the audit for review by targeting areas in

which problems might occur similar to those alleged to have occurred at

the Interdistrict Transportation System in the 1996 report prepared by the

Democratic staff of the House Committee on Banking and Financial

Services. We looked at the following:

• two samples of contracts, one to test the RFP process and the other to test

the accuracy of vendor payments and adherence to contract terms;

• fuel prepayments;

• vendor payments that were not covered by contracts;

• federal tax payments associated with fuel deliveries; and

• verification procedures for aircraft fueling.

For each sample, we recreated the audit steps Atlanta Audit had

performed by following their description in the audit workpapers. We

recorded our conclusions on data collection instruments that we

developed for this purpose.

We requested comments on a draft of this report from the Board. The

Board’s comments are discussed near the end of the letter and are

reprinted in appendix II, and its technical comments are incorporated

where appropriate. We conducted our work in Washington, D.C., and

Atlanta, GA, between April and November 2001 in accordance with

generally accepted government auditing standards.
Appendix II: Comments From the Board of

Governors of the Federal Reserve System

Page 14 GAO-02-19 Controls in Place Comply With Federal Reserve Guidelines

Appendix II: Comments From the Board of

Governors of the Federal Reserve System

(250030)
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