Federal Reserve Banks: Areas for Improvement in Information	 
Security Controls (16-JUN-08, GAO-08-836R).			 
                                                                 
In connection with fulfilling our requirement to audit the	 
financial statements of the U.S. government, we audited and	 
reported on the Schedules of Federal Debt Managed by the Bureau  
of the Public Debt (BPD) for the fiscal years ended September 30,
2007 and 2006. As part of these audits, we performed a review of 
the general and application information security controls over	 
key financial systems maintained and operated by the Federal	 
Reserve Banks (FRBs) on behalf of the Department of the 	 
Treasury's BPD relevant to the Schedule of Federal Debt. In our  
audit report on the Schedules of Federal Debt for the fiscal	 
years ended September 30, 2007 and 2006, we concluded that BPD	 
maintained, in all material respects, effective internal control 
relevant to the Schedule of Federal Debt related to financial	 
reporting and compliance with applicable laws and regulations as 
of September 30, 2007, that provided reasonable assurance that	 
misstatements, losses, or noncompliance material in relation to  
the Schedule of Federal Debt would be prevented or detected on a 
timely basis. However, we found matters involving information	 
security controls that we do not consider to be significant	 
deficiencies. As it relates to controls over financial reporting 
and compliance with applicable laws and regulations, the	 
potential effect of such control deficiencies was mitigated by	 
the FRBs and BPD. The FRBs mitigated the potential effect of such
control deficiencies with physical security measures and a	 
program of monitoring user and system activity, and BPD with	 
compensating management and reconciliation controls.		 
Nevertheless, the matters relating to key financial systems	 
maintained and operated by the FRBs on behalf of BPD warrant FRB 
management's attention and action. This report presents the	 
control deficiencies identified during our fiscal year 2007	 
testing of the general and application information security	 
controls over key financial systems maintained and operated by	 
the FRBs on behalf of the Department of theTreasury's BPD	 
relevant to the Schedule of Federal Debt. In a separately issued 
Limited Official Use Only report, we communicated detailed	 
information regarding our findings to FRB management.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-836R					        
    ACCNO:   A82364						        
  TITLE:     Federal Reserve Banks: Areas for Improvement in	      
Information Security Controls					 
     DATE:   06/16/2008 
  SUBJECT:   Access control					 
	     Accountability					 
	     Computer security					 
	     Federal debt					 
	     Federal regulations				 
	     Federal reserve banks				 
	     Financial management				 
	     Financial management systems			 
	     Financial records					 
	     Financial statement audits 			 
	     Financial statements				 
	     Information access 				 
	     Information management				 
	     Information security				 
	     Information security management			 
	     Information security regulations			 
	     Information systems				 
	     Internal controls					 
	     Physical security					 
	     Reporting requirements				 
	     Risk factors					 
	     Risk management					 
	     System software					 
	     Security standards 				 
	     Bureau of the Public Debt Schedule of		 
	     Federal Debt					 
                                                                 

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GAO-08-836R

   

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June 16, 2008: 

Louise L. Roseman, Director: 

Division of Reserve Bank Operations: 

and Payment Systems: 

Board of Governors of the Federal: 

Reserve System: 

Subject: Federal Reserve Banks: Areas for Improvement in Information 
Security Controls: 

Dear Ms. Roseman: 

In connection with fulfilling our requirement to audit the financial 
statements of the U.S. government,[Footnote 1] we audited and reported 
on the Schedules of Federal Debt Managed by the Bureau of the Public 
Debt (BPD) for the fiscal years ended September 30, 2007 and 
2006.[Footnote 2] As part of these audits, we performed a review of the 
general and application information security controls over key 
financial systems maintained and operated by the Federal Reserve Banks 
(FRBs) on behalf of the Department of the Treasury's BPD relevant to 
the Schedule of Federal Debt. 

In our audit report on the Schedules of Federal Debt for the fiscal 
years ended September 30, 2007 and 2006, we concluded that BPD 
maintained, in all material respects, effective internal control 
relevant to the Schedule of Federal Debt related to financial reporting 
and compliance with applicable laws and regulations as of September 30, 
2007, that provided reasonable assurance that misstatements, losses, or 
noncompliance material in relation to the Schedule of Federal Debt 
would be prevented or detected on a timely basis. However, we found 
matters involving information security controls that we do not consider 
to be significant deficiencies.[Footnote 3] As it relates to controls 
over financial reporting and compliance with applicable laws and 
regulations, the potential effect of such control deficiencies was 
mitigated by the FRBs and BPD. The FRBs mitigated the potential effect 
of such control deficiencies with physical security measures and a 
program of monitoring user and system activity, and BPD with 
compensating management and reconciliation controls. Nevertheless, the 
matters relating to key financial systems maintained and operated by 
the FRBs on behalf of BPD warrant FRB management's attention and 
action. 

This report presents the control deficiencies identified during our 
fiscal year 2007 testing of the general and application information 
security controls over key financial systems maintained and operated by 
the FRBs on behalf of the Department of the Treasury's BPD relevant to 
the Schedule of Federal Debt. In a separately issued Limited Official 
Use Only report, we communicated detailed information regarding our 
findings to FRB management. 

Results in Brief: 

Our fiscal year 2007 audit procedures identified 12 information 
security control deficiencies, all of which relate to general controls. 
Specifically, the control deficiencies identified were in the areas of 
entitywide security program planning and management, access control, 
and system software. In the Limited Official Use Only report, we made 
14 detailed recommendations to address these control deficiencies. 

None of our findings pose significant risks to the FRB financial 
systems. As it relates to controls over financial reporting and 
compliance with applicable laws and regulations, the potential effect 
of such control deficiencies was mitigated by the FRBs and BPD. The 
FRBs mitigated the potential effect of such control deficiencies with 
physical security measures and a program of monitoring user and system 
activity, and BPD with compensating management and reconciliation 
controls that are designed to detect potential irregularities or 
improprieties in financial data or transactions. 

The Board of Governors of the Federal Reserve System provided comments 
on the detailed findings and recommendations in the separately issued 
Limited Official Use Only report. In those comments, the Director of 
Reserve Bank Operations and Payment Systems stated that the FRBs have 
already taken action on many of the recommendations and the Board of 
Governors will continue to work with the FRBs to determine appropriate 
information security controls and compensating measures to address the 
remaining recommendations. 

Background: 

Many of the FRBs provide fiscal agent services on behalf of BPD, which 
primarily consist of issuing, servicing, and redeeming Treasury 
securities held by the public and handling the related transfers of 
funds. In fiscal year 2007, the FRBs issued about $4.4 trillion in 
federal debt securities to the public, redeemed about $4.3 trillion of 
debt held by the public, and processed about $163 billion in interest 
payments on debt held by the public. FRBs use a number of financial 
systems to process debt-related transactions. Federal Reserve 
Information Technology Computing Centers (FRIT) maintain and operate 
key financial systems on behalf of BPD and an array of financial and 
information systems to process and reconcile monies disbursed and 
collected on behalf of BPD. Detailed data initially processed at the 
FRBs are summarized and then forwarded electronically to BPD's data 
center for matching, verification, and posting to the general ledger. 

Section 3544 (a)(1)(A) of Title 44, United States Code, delineates 
federal agency responsibilities for (1) information collected or 
maintained by or on behalf of an agency and (2) information systems 
used or operated by an agency or by a contractor of an agency or other 
organization on behalf of an agency. Further, section 3544 (b) states 
that each agency shall develop, document, and implement an agencywide 
information security program to provide information security for the 
information and information systems that support the operations and 
assets of the agency, including those provided or managed by another 
agency, contractor, or other source. Office of Management and Budget 
(OMB) Memorandum M-07-19, FY 2007 Reporting Instructions for the 
Federal Information Security Management Act and Agency Privacy 
Management clarified that agency information security programs apply to 
all organizations which possess or use federal information--or which 
operate, use, or have access to federal information systems--on behalf 
of a federal agency. In addition, according to section 3544 (a)(1)(B) 
of Title 44, United States Code, federal agencies shall comply with 
information security standards developed by the National Institute of 
Standards and Technology (NIST). 

Objectives, Scope, and Methodology: 

Our objectives were to evaluate the general and application information 
security controls over key financial management systems relevant to the 
Schedule of Federal Debt that are maintained and operated by the FRBs 
on behalf of BPD. We use a risk-based, rotation approach for testing 
general information security controls. Each general information 
security control area is subjected to a review, including testing, at 
least every 3 years. The general information security control areas we 
review are defined in the Federal Information System Controls Audit 
Manual.[Footnote 4] Areas considered to be of higher risk are subject 
to more frequent review. Each key application is subjected to a review 
every year. 

To evaluate general and application information security controls, we 
identified and reviewed information system general and application 
information security control policies and procedures, observed controls 
in operation, conducted tests of controls, and held discussions with 
officials at selected FRBs and FRIT to determine whether controls were 
adequately designed, implemented, and operating effectively. 

The scope of our work for fiscal year 2007 as it relates to general 
information security controls included conducting a review of the 
general controls, which includes a review of the entitywide security 
program planning and management, access control, application software 
development and change control, system software, segregation of duties, 
and service continuity. This effort included security configuration 
reviews of key Federal Reserve technical infrastructure components. We 
also reviewed results of security testing performed by staff within 
FRIT and FRB general audit functions. 

Application information security control reviews were performed on six 
key FRB applications to determine whether the applications are designed 
to provide reasonable assurance that: 

access privileges (1) establish individual accountability and proper 
segregation of duties, (2) limit the processing privileges of 
individuals, and (3) prevent and detect inappropriate or unauthorized 
activities; 

data are authorized, converted to an automated form, and entered into 
the application accurately, completely, and promptly; 

data are properly processed by the computer and files are updated 
correctly; 

erroneous data are captured, reported, investigated, and corrected; 
and: 

files and reports generated by the application represent transactions 
that actually occur and accurately reflect the results of processing, 
and reports are controlled and distributed only to authorized users. 

The evaluation and testing of certain information security controls 
were performed by the independent public accounting (IPA) firm of 
Cotton and Company, LLP. We agreed on the scope of the audit work, 
monitored the IPA firm's progress, and reviewed the related audit 
documentation to determine that the findings were adequately supported. 

During our audit, we communicated our findings to the Board of 
Governors of the Federal Reserve System, who informed us that the FRBs 
have taken or plan to take corrective action to address the control 
deficiencies identified. We plan to follow up on these matters during 
our audit of the fiscal year 2008 Schedule of Federal Debt. 

We performed our work at the FRB locations where the operations of the 
systems we reviewed are supported. Our work was performed from March 
2007 through October 2007 in accordance with U.S. generally accepted 
government auditing standards. As noted above, we obtained agency 
comments on the detailed findings and recommendations in a draft of the 
separately issued Limited Official Use Only report. The Board of 
Governors of the Federal Reserve System's comments are summarized in 
the Agency Comments section of this report. 

Assessment of FRBs' Information Security Controls: 

General information security controls are the structure, policies, and 
procedures that apply to an entity's overall computer operations. 
General information security controls establish the environment in 
which application systems and controls operate. They include an 
entitywide security management program, access controls, system 
software controls, application software development and change 
controls, segregation of duties, and service continuity. An effective 
general information security control environment helps (1) ensure that 
an adequate entitywide security management program is in place; (2) 
protect data, files, and programs from unauthorized access, 
modification, disclosure, and destruction; (3) limit and monitor access 
to programs and files that control computer hardware and secure 
applications; (4) prevent the introduction of unauthorized changes to 
systems and applications software; (5) prevent any one individual from 
controlling key aspects of computer-related operations; and (6) ensure 
the recovery of computer processing operations in the event of a 
disaster or other unexpected interruption. 

Our fiscal year 2007 testing identified opportunities to strengthen 
certain information security controls that support key financial 
systems maintained and operated by the FRBs on behalf of BPD relevant 
to the Schedule of Federal Debt. Specifically, our audit procedures 
identified 12 general information security control deficiencies. This 
included six control deficiencies related to entitywide security 
program planning and management, five control deficiencies related to 
access control, and one control deficiency related to system software. 

An entitywide program for security planning and management is the 
foundation of an entity's security control structure and a reflection 
of senior management's commitment to addressing security risks. The 
program should establish a framework and continuing cycle of activity 
for assessing risk, developing and implementing effective security 
procedures, and monitoring the effectiveness of these procedures. 
Without a well-designed program, security controls may be inadequate; 
responsibilities may be unclear, misunderstood, and improperly 
implemented; and controls may be inconsistently applied. Such 
conditions may lead to insufficient protection of sensitive or critical 
resources and disproportionately high expenditures for controls over 
low-risk resources. 

Access controls are designed to limit or detect access to computer 
programs, data, equipment, and facilities to protect these resources 
from unauthorized modification, disclosure, loss, or impairment. Such 
controls include logical access controls and physical access controls. 
The general information security control deficiencies that we 
identified relate to logical access controls. Logical access controls 
involve the use of computer hardware and software to prevent or detect 
unauthorized access by requiring users to input unique user 
identifications (ID), passwords, or other identifiers that are linked 
to predetermined access privileges. Logical access controls restrict 
the access of legitimate users to the specific systems, programs, and 
files they need to conduct their work and prevent unauthorized users 
from gaining access to computer resources. 

System software coordinates and helps control the input, processing, 
output, and data storage associated with all of the applications that 
run on a system. System software includes operating system software, 
system utilities, file maintenance software, security software, data 
communications systems, and data management systems. Controls over 
access to and modifications of system software are essential to protect 
the overall integrity and reliability of information systems. 

In a separately issued Limited Official Use Only report, we 
communicated detailed information regarding our findings to FRB 
management and made 14 detailed recommendations. 

None of our findings pose significant risks to the FRB financial 
systems. As it relates to controls over financial reporting and 
compliance with applicable laws and regulations, the potential effect 
of such control deficiencies was mitigated by the FRBs and BPD. The 
FRBs mitigated the potential effect of such control deficiencies with 
physical security measures and a program of monitoring user and system 
activity, and BPD with compensating management and reconciliation 
controls that are designed to detect potential irregularities or 
improprieties in financial data or transactions. Nevertheless, these 
findings warrant management's attention and action to limit the risk of 
unauthorized access, disclosure, loss, or impairment; modification of 
sensitive data and programs; and disruption of critical operations. 

Conclusion: 

Our fiscal year 2007 audit identified 12 information security control 
deficiencies, all of which relate to general controls. For these 
identified control deficiencies, we are making 14 detailed 
recommendations. The Board of Governors of the Federal Reserve System 
informed us that the FRBs have taken or plan to take corrective action 
to address all of the control deficiencies we identified. We plan to 
follow up on the status of the FRBs' actions to address the identified 
control deficiencies as part of our fiscal year 2008 Schedule of 
Federal Debt audit. 

Recommendation for Executive Action: 

We recommend that the Director of the Division of Reserve Bank 
Operations and Payment Systems direct the appropriate FRB officials to 
implement the 14 detailed recommendations set forth in the separately 
issued Limited Official Use Only version of this report. 

Agency Comments: 

The Board of Governors of the Federal Reserve System provided comments 
on the detailed findings and recommendations in the separately issued 
Limited Official Use Only report. In those comments, the Director of 
Reserve Bank Operations and Payment Systems stated that the FRBs have 
already taken action on many of the recommendations and the Board of 
Governors will continue to work with the FRBs to determine appropriate 
information security controls and compensating measures to address the 
remaining recommendations. We plan to follow up on these matters during 
our audit of the fiscal year 2008 Schedule of Federal Debt. 

- - - --: 

In the separately issued Limited Official Use Only report, we requested 
a written statement on actions taken to address our recommendations not 
later than 60 days after the date of that report. 

We are sending copies of this report to the Chairmen and Ranking 
Members of the Senate Committee on Homeland Security and Governmental 
Affairs; the Subcommittee on Financial Services and General Government, 
Senate Committee on Appropriations; the Subcommittee on Federal 
Financial Management, Government Information, Federal Services, and 
International Security, Senate Committee on Homeland Security and 
Governmental Affairs; the House Committee on Oversight and Government 
Reform; the Subcommittee on Financial Services and General Government, 
House Committee on Appropriations; and the Subcommittee on Government 
Management, Organization, and Procurement, House Committee on Oversight 
and Government Reform. We are also sending copies of this report to the 
Chairman of the Board of Governors of the Federal Reserve System, the 
Fiscal Assistant Secretary of the Treasury, and the Director of the 
Office of Management and Budget. Copies will also be made available to 
others upon request. In addition, the report will be available at no 
charge on GAO's Web site at [hyperlink, http://www.gao.gov]. 

If you have any questions regarding this report, please contact me at 
(202) 512-3406 or [email protected]. Other key contributors to this 
assignment were Jeffrey L. Knott and Dawn B. Simpson, Assistant 
Directors; Dean D. Carpenter; Mary T. Marshall; and Zsaroq R. Powe. 

Sincerely yours, 

Gary T. Engel: 

Director: 

Financial Management and Assurance: 

[End of section] 

Footnotes: 

[1] 31 U.S.C. ï¿½ 331(e). 

[2] GAO, Financial Audit: Bureau of the Public Debt's Fiscal Years 2007 
and 2006 Schedules of Federal Debt, GAO-08-168 (Washington, D.C.: Nov. 
7, 2007). 

[3] A significant deficiency is a control deficiency, or combination of 
control deficiencies, that adversely affects the entity's ability to 
initiate, authorize, record, process, or report financial data reliably 
in accordance with U.S. generally accepted accounting principles such 
that there is more than a remote likelihood that a misstatement of the 
entity's financial statements that is more than inconsequential will 
not be prevented or detected. A control deficiency exists when the 
design or operation of a control does not allow management or employees 
in the normal course of performing their assigned functions to prevent 
or detect misstatements on a timely basis. 

[4] GAO, Federal Information System Controls Audit Manual, GAO/AIMD- 
12.19.6 (Washington, D.C.: Jan. 1999).

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