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Auditing the Fed? Good Luck with That

in_greed_we_trust.jpgEditor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.

I have often been accused of taking the term “audit” in “Audit the Fed” a tad too literally. Thinking as an auditor might stem from spending far too many hours in Audit class (I’m not a CPA, I just play one on teevee). Nevertheless, I cannot help but wonder what proponents of a Fed audit think they’ll find once they crack open the books.

My primary concern is that Fed accountants do not use GAAP but rather a bizarre hybrid of GAAP, governmental, and WTF accounting. In fact, they write their own 325 page manual on accounting for Federal Reserve Banks and if you’re really really bored you can find that document here. What auditor is qualified to audit those statements? In no other situation would the client hand you their accounting manual and say, “Do us a favor and make sure we prepared our statements in accordance with our own special rules, would you? Thanks!” except in this case. And maybe that’s where I’m hung up on the word “audit.”

Some have argued that the “audit” in “Audit the Fed” actually means “crack open the books and figure out where the bailout bodies are buried.” Okay, that’s all well and good but even if that’s the case, how would an independent, outside source identify these bodies? It goes back to the client-provided handbook and we’re back at square one: defining the Fed balance sheet as a freak of nature.

It’s right there in the footnotes – pulling out the closest Fed annual report I’ve got (Richmond Fed 2007), both Deloitte and PwC agree that the Fed is a special case in Note 3: Significant Accounting Policies:

Accounting principles for entities with unique powers and responsibilities of the nation’s central bank have not been formulated by accounting standard-setting bodies.

The note goes on to explain why government securities held by the Fed are presented at amortized cost instead of GAAP’s fair value presentation because “amortized cost more appropriately reflects the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy.” Right there, you can see why auditing this thing might be a problem.

Proponents of HR 1207 and now newer proposed legislation to storm the Fed’s financials say that we need transparency from our central bank but I have argued time and time again that we’ll never get there poking around their statements trying to find the bloody glove. We’re
going to have to do better than an audit. Hell, Citigroup can pass an audit.

For more on Fed audits from yours truly, check out Fed Economic Rocket Scientists on Auditing the Fed, Liquidity Crises, They’re Comin for Dat Ass, Bernanke: Defining “Federal Reserve Accountability”, Auditing the Fed: Redux, and You Want to Audit the Fed. But Why?