The Federal Reserve is being criticized by its own investigators for conducting shoddy audits of itself.
I'm jumping into a dispute that has been going on privately for some months. But the gist of the argument is that the Fed has apparently been auditing the books of its own banks - i.e., the New York Federal Reserve Bank - by a set of standards unique to itself.
The Fed isn't playing by the same rules as General Motors or Citicorp or, for that matter, any company that is required to use an accountant.
Here is some of the language used in a letter to Fed Gov. Wayne Angell, who is in charge of the Fed's bank activities committee, from Brent Bowen, the Fed's own inspector general. Bowen said the Fed's methods of auditing "raise significant issues related to the financial examination independence and (Federal Reserve) Board compliance with generally accepted auditing standards."
Bowen said "the Board should carefully consider whether it wishes to represent to the public and others that the Reserve Bank examinations are conducted in accordance with its own standards, as is suggested in the director's response, rather than auditing standards that are accepted and recognized by the auditing profession and the public."
As a result of the complaint by the inspector general, the government's General Accounting Office - which is not under the jurisdiction of the Fed - is likely to conduct its own audit of one of the Fed's banks.
The bank to be audited isn't yet known. But if the audit reveals any improprieties, then other Fed banks are likely to come under scrutiny.
The request for an independent audit came from the office of Henry Gonzalez, the chairman of the House Banking Committee, who has been in a running feud with the Fed. Gonzalez wants the Fed to be more open on its policy moves; the Fed likes secrecy.
The bitterness increased a few months ago when Gonzalez's committee found out that the Fed had been taping deliberations at its policy-making meetings. Fed officials had never before owned up to the existence of such tapes.
When Gonzalez got wind of the criticism of the Fed's auditing procedures - coming from inside the Federal Reserve, no less - he sent a letter to Charles Bowsher, comptroller general of the United States, requesting that one of the Fed's 12 regional banks be audited.
Meanwhile, Gonzalez says that the Fed has already started an audit of two of its banks using an outside agency. So he wants the General Accounting Office to review the way those audits are being conducted.
The inspector general's report, which goes on for more than 40 pages, says that "to achieve full compliance with audit standards, the Board will need to implement a number of significant changes to the financial examination program, including a major realignment of the program's organizational structure. …