Each of the 37 banks (12 district and 25 branches) in the Federal Reserve System prepares monthly currency activity reports, known as the FR 160 reports. The monthly currency activity reports are transmitted to the Board of Governors to document movement of currency through the banks and to summarize the total currency on hand in the respective banks’ vaults. These reports and the underlying systems that they are generated from constitute the Federal Reserve’s only detailed records of currency transactions throughout the Federal Reserve System and the respective ending balances by denomination. Thus, information on monthly currency movement in and out of Federal Reserve Banks provided to Federal Reserve management (including the Board of Governors), the Congress, and other external users of this information would be based on data from the monthly currency activity reports. According to the Board of Governors, the uses of this report are four-fold: “to provide an inventory of collateralized Federal Reserve notes, to monitor payout patterns, to assess the currency stock needs of the various districts, and to generate a variety of ongoing and ad hoc reports for the Board, Reserve Banks, other government entities, and the public.” In addition, each Federal Reserve Bank (FRB) prepares a daily balance sheet (the FR 34 report) that shows all of the assets, liabilities, and equity for the bank. In particular, the daily balance sheet shows the balance of currency in the respective bank’s vault at the end of each day. At the end of each month, to ensure agreement, the reported vault cash balance in the last daily balance sheet of the month is compared to the ending balance reported in the month-end currency activity reports. The L.A. Bank manages over $80 billion a year in currency, second only to the New York FRB. The L.A. Bank uses an electronic cash inventory system to manage this currency, but not every FRB uses the same system or even an electronic one. A Board of Governors official stated that the Philadelphia and Atlanta Federal Reserve District Banks, including their respective branch banks, also use the same cash inventory system as the San Francisco District Bank and its branches, including the L.A. Bank. The official stated that the New York and Dallas District Banks have other electronic information systems to account for their detailed cash transactions. Board officials also said that systems in the Kansas City, Minneapolis, Chicago, Cleveland, and Richmond District Banks are housed in a personal computer-based local area network. The two remaining district banks, Boston and St. Louis, manually account for these transactions and inventory of cash on hand. The objectives of our review at the L.A. Bank were to determine the nature of the problems that may have occurred in reporting currency activity for Federal Reserve note receipts, payments, and amount on hand and review and comment on corrective actions planned or taken by the Federal Reserve to resolve those problems. We conducted our review in three parts. First, we examined the use and preparation of the monthly currency activity report. To accomplish this, we (1) reviewed the L.A. Branch and San Francisco District Bank’s policies and procedures for preparing this report, (2) met with officials at the Board of Governors and examined official policies to determine the uses of the report, and (3) interviewed analysts and managers at the L.A. Bank to determine how staff were told to prepare the currency activity report and what controls were in place to ensure that the numbers reported were accurate. In the second part of our review—determining the nature of the reporting problems—we attempted to perform a comprehensive assessment of the L.A. Bank’s accounting practices and internal controls over currency. However, our efforts were restricted by the lack of readily available historical data maintained by the L.A. Bank. For example, L.A. Bank officials stated that they could not readily provide the detailed general ledger transactions that had been recorded for the currency in their account. L.A. Bank officials stated that the information was not stored in a format that would allow for detailed analysis of transactions and that conversion to such a format would take a significant amount of time. For 6 judgmentally selected days in the October through December 1995 period, we attempted to perform limited reviews of the L.A. Bank’s reconciliations. These reconciliations compare the Bank’s general ledger balances (which are used to prepare the daily balance sheet) to its cash inventory system (which contains the physical inventory file). However, our efforts to perform limited reviews of these 6 days were hindered because the L.A. Bank could not locate some of the requested data. For instance, the L.A. Bank could not locate the report containing the ending balance of the amount of currency in the vault as reported in its cash inventory system for one of the days selected in our review. To enhance our understanding of the Bank’s reconciliation process, we also did a walkthrough of 1-day’s reconciliation efforts with bank employees in June 1996. In addition, for October through December 1995, we examined transactions in general ledger accounts that were used to account for reconciling differences found that were either written off or were temporarily held aside for further research and disposition. We gathered information on Bank procedures for resolving out-of-balance situations and differences between amounts reported and actually received from banks. Because the L.A. Bank could not provide the general ledger transaction history for its cash accounts, we could not determine whether the accounts and activity provided to us by the Bank represented the universe of cash activity. Thus, we only tested the transactions provided to us. Further, we did not perform a review of (1) the L.A. Bank’s computer security controls for preventing unauthorized access to its general ledger and cash inventory system or (2) its physical access controls for ensuring that the money it manages is protected from theft and misappropriation. In the third part of our review, we interviewed Bank officials and reviewed the new procedures for preparing the currency activity reports and the revised reports to determine if their efforts to comply with their policy for preparing these reports were effective in resolving the problems identified. We conducted our work at the Federal Reserve Bank in San Francisco and its branch bank in Los Angeles between June 1996 and August 1996 in accordance with generally accepted government auditing standards. The monthly currency activity reports are required to be prepared in accordance with guidance in the Board of Governors’ Technical Memorandum No. 91 “Processing Procedures for the CASH Series.” This guidance states that the calculated ending balance in the monthly currency activity report should be compared to the reported end-of-the-month balance for cash in the vault on the Bank’s daily balance sheet and that corrective actions should be taken to resolve any substantial differences. This guidance also underscores that, if requested, explanations must be provided for any differences (other than rounding) between the month-end balance sheet amount and the ending balance on the currency activity report for cash in the vault. This guidance does not state how the amounts reported in the currency activity report are to be determined. However, to complete the report in a meaningful way, each reported amount, except the ending balance for cash in the vault, which is calculated as noted above, would need to be independently determined. Table 1 shows excerpts from the L.A. Bank’s spreadsheet used to prepare the monthly currency activity report for December 1995. Table 2 provides excerpts from the revised spreadsheet on currency activity for December 1995—the revision was not transmitted to the Board of Governors. As noted on page 9, inaccuracies in amounts reported on the monthly currency activity reports for the fourth quarter of 1995 were discovered during a compliance review. As a result of this review, the revised spreadsheet was developed by the L.A. Bank. As can be seen from comparing the L.A. Bank’s spreadsheet for the filed currency activity report for December 1995 (table 1) to the revised spreadsheet (table 2), the forced amounts for receipts from circulation changed after the L.A. Bank conducted a compliance review and identified inaccuracies. The practice of forcing the receipts from circulation amount in the monthly currency activity report, as opposed to independently determining the amount, is not consistent with the Board of Governors’ guidance for validating the accuracy of the currency activity report. Federal Reserve officials stated that it is a common practice for FRBs to adjust the receipts from circulation line to balance the monthly currency activity report ending total to the balance sheet if it is within the plus or minus $3 million tolerance established by the Board of Governors. However, at least for October through December 1995, the L.A. Bank did not determine that the forced amount was within the $3 million tolerance. Forcing receipts from circulation allowed errors to occur that were neither reported nor explained. In fact, this practice obscures any other differences that might exist between the two reports. Had these amounts been determined using appropriate procedures, the ending balance of cash on hand, which is intended to be the calculated amount in the monthly currency activity report, would have been at variance with the daily balance sheet. Consequently, the differences would have been researched and corrected or explained. L.A. Bank internal correspondence confirmed that the Bank’s problems preparing and reporting the monthly currency activity report were initially found by an analyst who was responsible for preparing the report. The analyst stated that queries made from the cash inventory system to identify receipts from circulation for the report showed substantial differences from the amount that was forced in the report. Bank management officials in the L.A. Bank and its San Francisco district bank confirmed that analysts were instructed to force the amount in the report for receipts from circulation and that this practice had been in place for several years. L.A. Bank officials stated that the discrepancies reported in the monthly currency activity reports for the fourth quarter of 1995 were brought to their attention as a result of a planned compliance review.