Federal Reserve Banks
Areas for Improvement in Information Security Controls Gao ID: GAO-08-836R June 16, 2008In 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.
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.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-08-836R, Federal Reserve Banks: Areas for Improvement in Information Security Controls
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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 engelg@gao.gov. 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. § 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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