Check Relay: Controls in Place Comply With Federal Reserve	 
Guidelines (12-DEC-01, GAO-02-19).				 
								 
This report discusses the management of the air transportation	 
network used to move checks from one Federal Reserve office to	 
another. GAO studied the propriety of practices for bidding,	 
awarding, and monitoring contracts and the adequacy of controls  
to monitor fuel and other payments to vendors. In September 1998,
the network was moved to the Federal Reserve Bank of Atlanta (FRB
Atlanta), and renamed Check Relay. 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	 
ensures that all payments to vendors conform to contract terms.  
Another set of controls verifies 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. Check  
Relay is managed as a unit of the Retail Payments Office, which  
is managed out of FRB Atlanta. The Board's Division of Reserve	 
Bank Operations and Payment Systems also has oversight		 
responsibility over Check Relay. GAO's review of FRB Atlanta'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.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-19						        
    ACCNO:   A02546						        
  TITLE:     Check Relay: Controls in Place Comply With Federal       
Reserve Guidelines						 
     DATE:   12/12/2001 
  SUBJECT:   Air transportation operations			 
	     Check disbursement or control			 
	     Federal reserve banks				 
	     Internal controls					 
	     Monitoring 					 
	     Federal Reserve Check Relay			 
	     Federal Reserve Interdistrict			 
	     Transportation System				 
								 

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GAO-02-19
     
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 bank 1 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
services 2 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 Act 3 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, sect.107 (1980); 12
USC sect. 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 Boston Utica

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 hearings 9
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 Committee 11 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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