The Fed’s Annual Audit Is a Long Way from Real Transparency

By: Robert Aro

The notion of “Auditing the Fed” has been around for awhile. Technically, the Federal Reserve is audited. On Tuesday, with little to no fanfare nor media coverage, there was a press release announcing the completion of the 2020 Audited Financial Statements. Digging deeper, each of the 12 Reserve Banks received their own independent audit. But the most important one is the “Combined Federal Reserve Banks” financial statement; a consolidated statement of the entire Federal Reserve System.

The Federal Reserve’s audit is held to the same standard as a publicly traded company. Per the American Institute of Certified Public Accountants (AICPA):

The audit is the highest level of assurance service that a CPA performs and is intended to provide a user comfort on the accuracy of financial statements. The CPA performs procedures in order to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement.

This does not mean the statements are free of errors, nor every single transaction was checked for 100% accuracy. Rather, “the audit” is the standard in which the biggest companies in the world rely, giving a high degree of assurance.

The Certified Public Accountant (CPA) in this case would be KPMG LLP, one of the largest accounting firms in the world. Per the standards:

The CPA will issue a formal report that expresses an opinion on whether the financial statements are presented fairly, in all material aspects, in accordance with the applicable financial reporting framework.

So how did the Fed do this year? As the Independent Auditor Report says, (page 1):

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Reserve Banks as of December 31, 2020…

Seems fine. Of course, this is the Federal Reserve. It never is quite easy.

The auditor report also states, as described in Note 3, that the combined financial statements were prepared:

in conformity with the accounting principles established by the Board of Governors of the Federal Reserve System, as set forth in the Financial Accounting Manual for Federal Reserve Banks, which is a basis of accounting other than U.S. generally accepted accounting principles.

It’s called the “Financial Accounting Manual for Federal Reserve Banks.” The 227-page manual describes the Fed’s very own special accounting methods, as established by the Board of Governors of the Fed…

This is not to say the statements are inherently wrong, or misleading. But it claims the statements appear to be “okay,” based on the standards established by the very entity being audited. This is definitely different from normal audit practices. But, to be fair, there is no other entity which can legally create trillions of dollars and buy assets either.

The press release also notes:

The public accounting firm also conducts audits of internal controls over financial reporting for the 12 individual Federal Reserve Banks and the Board of Governors.

If the idea is to “Audit the Fed,” it must be explained that the Fed is actually audited.

However, the “Audit the Fed” movement aims to achieve more than just an audit. Those pushing for it strive for transparency, specifically, the list of banks/entities who comprise its list of stockholders. Additional concerns include those who have dealings with the Fed in other matters. And finally, they wish to have all of the Fed’s coveted “data” used to best plan their policy, released for the public to review.

Unfortunately, none of this is disclosed in the financial statements.

Instead of looking for new ways to audit the Fed, with one simple act of congress, they could remove any protections against the Fed’s privacy or even ensure the Fed cannot refuse requests for information from the public. This would effectively put an end to all clandestine workings of one of the most opaque organizations in the country. In this regard, congress could make the Fed completely transparent, and the people, aided by the court of public opinion could conduct the audit, saving both money and time, while finding the answers we so desperately deserve.

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