XI Meeting of Central
Bank Internal Auditors
Federal Reserve Update:
Structure and
Responsibilities of
Reserve Bank
Audit Committees
Marybeth Traverso, Manager
Division of Reserve Bank Operations
and Payment Systems
Board of Governors of the
Federal Reserve System
Washington, D.C.
Agenda
• Federal Reserve Administrative Manual
(FRAM) 1-007
• Recent Survey of Federal Reserve Banks
• Development of “Model” Charter
• Audit Committee Structure
• Audit Committee Responsibilities
• Questions
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FRAM 1-007
• Policy in place since 1945 to document
required duties and responsibilities of Reserve
Bank audit committees
• Audit committee responsible for assessing the
effectiveness and independence of its Federal
Reserve Bank’s internal audit function
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Recent Survey of Federal Reserve Banks
• The Federal Reserve Board of Governors (Board)
conducted a survey about Reserve Bank audit
committee charters.
• Results:
– The core substance of the charters was generally
consistent among the Reserve Banks.
– All charters conform to Board policy.
– Outside the core elements, there were some notable
differences.
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Recent Survey of Federal Reserve Banks
• The notable differences among the charters include the following:
– Three audit committees are explicitly prohibited from overseeing or
considering issues related to the local bank supervision and regulation
function.
– Two audit committees must explicitly approve the release or sharing
of internal audit reports with parties outside of their Banks.
– Six charters specifically reference the IIA standards when discussing
oversight responsibilities for the internal audit function.
– Ten charters specifically reference responsibility for overseeing or
monitoring their Reserve Bank’s risk-management program or
processes either directly or through the internal audit function.
– Two audit committees are explicitly responsible for overseeing System
responsibilities or System audits for which their Reserve Banks have
responsibility.
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Development of “Model” Charter
• As part of our analysis of the survey results,
we developed a “model” charter, which we
shared with all Reserve Bank audit committee
chairs and general auditors.
• The model charter is advisory in nature and
includes provisions that audit committees may
wish to consider including in their charters.
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Audit Committee Structure
• Comprises at least three members of the Reserve
Bank's board of directors
– All must be independent and financially literate.
– At least one should have banking, accounting, or other
relevant financial proficiency.
• Acts on behalf of the Reserve Bank's board of directors
• Adopts a formal written charter (typically reviewed
annually), which is approved by the full board of
directors and which specifies the scope of the Audit
Committee's responsibilities
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Audit Committee Functions
• Assess and ensure the effectiveness and independence of the
Reserve Bank's internal audit function in conformance with the
Institute of Internal Auditors' Standards for the Professional Practice
of Internal Auditing, focusing on three key areas:
– financial reporting
– efficiency and effectiveness of operations
– compliance with laws and regulations
• Review and approve the annual internal audit program and ensure
that the proposed coverage is reasonably expected to result in an
appropriate level of audit attention
• Review and approve an annual internal audit budget that is
sufficient to carry out an effective audit program
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Audit Committee Functions (cont.)
• Ensure that audit recommendations and concerns reported by the
Board of Governors, the general auditor, or external auditors
receive proper attention by Reserve Bank management
• Ensure that the general auditor has access to the board of directors
(on a confidential basis) and to the documents and individuals
needed to accomplish his/her assigned responsibilities and that the
audit function is independent of Reserve Bank management
• Formally evaluate the performance of the general auditor and
review all actions affecting his/her salary or classification
• Recommend to the board of directors the appointment and
termination of the general auditor and concur with any
reassignment of the general auditor to another position in the
Reserve Bank
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Audit Committee Functions (cont.)
• Be prepared to answer inquiries from the Board of Governors, external
auditors, or other governmental entities, especially concerning fraud and
the mitigation of fraud risk
• Meet with the external auditors to discuss the Reserve Bank's financial
statements and issues arising from the annual external audit
• Ensure that audit recommendations and concerns receive proper
attention by Bank management
• Establish procedures for the confidential, anonymous submission of
accounting and auditing complaints and concerns or concerns regarding
compliance with laws and regulations more generally (whistle-blower
procedures)
• Review the performance of the audit committee annually
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Questions?
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