Audit Committee Charter

Audit Committee Charter of the Board of Directors, Federal Reserve Bank of St. Louis

Effective as of December 2, 2021

Purpose

The purpose of this Charter is to define the role and responsibilities of the Audit Committee (the "Committee") of the Board of Directors of the Federal Reserve Bank of St. Louis (the "Bank"). The primary purpose of the Committee is to assist the Board of Directors in fulfilling its responsibility to ensure that management achieves organizational objectives while maintaining an effective system of internal control and risk management. The scope of this effort includes oversight of the audit process with a focus on: internal and external financial reporting; the effectiveness and efficiency of operations; compliance with applicable laws, regulations, policies and procedures; the safeguarding of assets; and the Bank's risk management processes. The duties of the Committee are more fully described below.

Organization

The Committee will consist of three or more members of the Board of Directors of the Bank, appointed as provided in the Bank's Bylaws. The Chairman of the Board of Directors is an ex-officio member and may also participate in all Committee meetings and deliberations. No member will have any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of his or her independent judgment as a member of the Committee. All members of the Committee will have a working familiarity with basic finance and accounting practices.

Meetings

The Committee will meet at least once per calendar quarter and will hold executive sessions with the General Auditor at each meeting without members of Bank management present. Meetings may be held more often at the discretion of the Committee Chairman. Following each meeting, the Committee Chairman shall report on the Committee’s activities, discussions, and decisions to the Board of Directors of the Bank.

Primary Responsibilities

1. Perform all duties and responsibilities required by Federal Reserve Administrative Manual (Sections 1-007 and 1-008). These responsibilities are incorporated by reference and are included as Appendix 1.

2. Review and approve a flexible, risk-based annual audit plan (including a summary audit work schedule, staffing plan, and budget). Ensure the General Auditor has considered the following while finalizing the annual audit plan for the purpose of providing optimal coverage:

1. The Bank’s enterprise risk management framework,
2. The Bank’s strategic plan and business objectives,
3. Scope of work of other parties relating to the Bank (Board of Governors, external auditors, other district audit departments and other oversight bodies),
4. Treasury Relations and Support Office (TRSO) specific obligations. [1],[2]
5. System audit coverage. [3]

3. Review reports from the General Auditor, the external auditor, and the Board of Governors, as appropriate, about audit results, losses, irregular occurrences, and significant risks or exposures, and assess the controls established by management to monitor such risks and exposures.

4. Review the Bank’s annual financial statements including any certification, report, opinion, or review rendered by the external auditor.

5. Review the adequacy of management's internal controls that contribute to appropriate financial reporting and management’s assertion, and the external auditor’s attestation as to the adequacy of controls over financial reporting.

6. Review the processes used by the Bank to identify, quantify and mitigate significant risks to the achievement of objectives, including:

1. Oversight of enterprise risk management efforts, and
2. Coordination with other Board committees.

7. Review with the Bank's ethics officer significant issues related to administration of the Bank's ethics program.

8. Obtain approval of the Audit Committee Charter, and any substantive changes to the Charter, from the Board of Directors, and review and update the Charter at least annually, or as conditions dictate

1. Conduct an annual assessment of the performance of the Committee's duties and report that assessment as well as the results of the Charter review to the Board of Directors.

10. Review and approve the Charter for the Audit Department.

11. Facilitate open communications between the directors, senior management, General Auditor, external auditors, and the Board of Governors.

12. Review and approve proposed contracts for non-audit services with the entity (including affiliated entities) that provides audit services to the Bank or renders an opinion on the financial statements of the Bank. In considering proposed contracts, the Committee will consider such factors as it deems relevant, including (to the extent such information is available to it) other Federal Reserve Bank or Board of Governors’ contracts with the entity. The Committee shall not be required to review or approve a System contract managed by or entered into on behalf of this Reserve Bank by another Reserve Bank, other System entity or the Board of Governors.

13. Perform, or direct performance of, any other activities consistent with this Charter, the Bank’s Bylaws, Board of Governors’ rules and regulations, and governing law, as the Committee or the Board of Directors deems necessary or appropriate.

Relationship with the External Auditor

1. Consult at least once per year with the external auditor regarding the fair presentation of the Bank’s financial statements, updates in developments affecting the Bank’s external financial reporting, the status of the Bank’s internal control environment, the effectiveness of management’s identification and management of risk, independence of the external auditor, and certain other matters required under generally accepted auditing standards.

2. Following completion of the external audit, review with management, the external auditor, and the General Auditor, any ` encountered during the course of the audit, including any restrictions on the scope of work or access to required information.

3. Review any significant disagreement among management and the external auditor or the General Auditor concerning the preparation of the financial statements.

4. Meet at least once per year with the external auditor, in executive session, without management or the General Auditor present.

Appendix 1
AUDITS--Audit Committee Duties and Responsibilities (1-007)

Policy on Audit Committee Duties and Responsibilities

The audit committee of each Reserve Bank's board of directors, acting on behalf of the board of directors, is responsible for assessing the effectiveness and independence of the Reserve Bank's internal-audit function. This function, directed by a general auditor, is responsible for assessing the adequacy and effectiveness of the controls over (1) financial reporting, (2) efficiency and effectiveness of operations, and (3) compliance with laws and regulations.¹ To promote independent and objective assessments, the general auditor reports directly to the board of directors through its audit committee. The general auditor must not be dependent on any Reserve Bank executive or operating officer for the security of his or her position. The audit committee must take care to ensure that the general auditor has access to the board of directors, on a confidential basis, and that the audit function is independent of Reserve Bank management, both by intent and in actual practice.

The Board expects the chairman of the board of directors to appoint a minimum of three directors to the audit committee; these individuals should be independent² and financially literate (e.g., understand financial statements and general finance concepts) and at least one member should have banking, accounting, or other relevant financial proficiency.³ The members should be particularly suited to fulfill the following responsibilities.

1. To the extent the audit committee's responsibilities are not set forth in the Bank's bylaws, to adopt a formal written charter that is approved by the full board of directors and that specifies the scope of the committee's responsibilities and how it carries out those responsibilities, and to review annually the performance by the audit committee of its responsibilities, as set forth in the bylaws or charter.
2. To hold regular meetings to permit adequate and timely discussions of audit results, losses and irregular occurrences, and other matters of concern to the auditors and directors, and to hold an executive session with the general auditor whenever other officers of the Bank attend audit committee meetings.
3. To obtain from the general auditor an independent and objective assessment of the adequacy and effectiveness of the controls over (1) financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with laws and regulations at such regular meetings and at other times as necessary.
4. To recommend to the board of directors the appointment and termination (including separation payments) of the general auditor, and to concur with any reassignment of the general auditor to another position in the Reserve Bank. FRAM 1-005, Appointment, Termination, and Reassignment of General Auditors, provides guidance on communications that should occur between the chair of a Reserve Bank's board of directors and the chair of the Board's Committee on Federal Reserve Bank Affairs about changes in the general auditor position.
5. To formally evaluate the performance of the general auditor, following guidelines set forth by the Reserve Bank for evaluating the performance of other officers.
6. To recommend to the board of directors, or a designated subset of the board, all actions affecting the salary or classification of the general auditor.
7. To review and approve an annual internal audit program that provides for audits for which the scope and frequency are reasonably expected to ensure an appropriate level of audit attention and to coordinate with any external audit conducted at the direction of the Board of Governors.
8. To review and approve an annual internal audit budget that is sufficient to carry out an effective audit program, to review performance against budget, and to determine whether any significant variances from existing System and Reserve Bank guidelines are justified.
9. To meet with the external auditors to discuss the Reserve Bank's financial statements and issues arising from the annual external audit. Audit committee members should be prepared to answer inquiries from the external auditors, especially concerning fraud and the mitigation of fraud risk.⁴
10. To bring before the board of directors any matters reported by the Board of Governors, general auditor or external auditors that warrant the board's attention, and to ensure that audit recommendations and concerns receive proper attention by Bank management.
11. To establish procedures for (1) the confidential, anonymous submission by employees of complaints and concerns regarding questionable accounting, internal accounting control, or auditing matters; and (2) the receipt, retention, and treatment of such complaints and concerns.
12. To engage independent counsel and other advisors as it determines necessary to carry out its duties. (In the case of an external auditor engaged by the Board, S-2612 {FRAM 1-008}, sets out additional conditions that must be observed by the Reserve Bank and requires Board approval before engaging the external auditor to perform services. FRAM 1-083 provides procedures for Banks to follow when engaging outside legal counsel for fees of more than a specified threshold).

S-2622; December 20, 2004

This letter supersedes S-2601 of May 16, 2001.

1. The internal-audit function should consult legal counsel in all matters involving legal issues and should not render legal advice or substitute its legal judgment on legal matters for those of the general counsel.

2. Members of the audit committee are considered to be independent if they have no relationship to the Reserve Bank that might interfere with the exercise of their independence from management and the Bank. Examples of relationships include (i) a director being employed by that Reserve Bank within the past five years; (ii) a director accepting compensation from that Reserve Bank other than compensation for board services; (iii) a director being a member of the immediate family of an individual who has been employed by that Reserve Bank as an officer within the past five years; and (iv) a director being a partner in, or controlling shareholder or an executive officer of, any for-profit business organization to which that Reserve Bank made, or from which that Reserve Bank received, payments that have been significant to the Reserve Bank within the past five years. For the purpose of this policy, a director who is an officer or director of a depository institution or its holding company is not considered to have a relationship that interferes with his or her independence solely because the depository institution makes payments to the Reserve Bank for financial services or an extension of credit.

3. Banking, accounting, or other relevant financial proficiency means significant employment experience in finance, accounting, auditing, or banking functions, professional certification in accounting, or other comparable experience or background which results in the individual’s financial sophistication, including being or having been a Chief Executive Officer or other senior officer with financial oversight responsibilities.

4. SAS 99, Consideration of Fraud in a Financial Statement Audit, requires the external auditors to obtain information to identify the risks of material misstatement due to fraud, including making specific inquiries of management, the general auditor, and the audit committee. Members of the audit committee should be prepared to answer the auditors’ questions about the risks of fraud in the Bank and whether the committee members have knowledge of fraud or suspected fraud affecting the Bank. Audit committee members should also be prepared to discuss how the audit committee exercises oversight of the assessment of the risk of fraud, and activities that mitigate those risks.

 

AUDITS--External Auditor Independence and Selection; Management Certifications (1-008)

The Board contracts for external audits of the Reserve Banks to carry out its responsibilities under section 11B of the Federal Reserve Act to order an annual independent audit of the financial statements of each Federal Reserve Bank, and in furtherance of its responsibility under sections 11(a) and 21(7) of the Federal Reserve Act to examine each Federal Reserve Bank. These external-audit services, typically provided by a single accounting firm, are intended to meet the common objective of the Board, the Reserve Banks, and their boards of directors to have independent, high-quality, and cost-effective external audits of the Reserve Banks' financial statements. In addition, the Board believes it is important for users of the Reserve Bank financial statements to understand that Reserve Bank management recognizes and accepts its responsibility for the financial statements, internal controls, and a code of ethics.

The Board wants to ensure that the external auditor it selects pursuant to this policy is independent and acts in a manner free of any conflicting or inappropriate interests or relationships. Accordingly, the Board has adopted this policy to safeguard the independence of the external auditor that the Board engages to audit the Reserve Banks' financial statements. This policy places certain responsibilities on the Reserve Banks and the Office of Employee Benefits (collectively "Reserve Banks") to ensure that the independence of the external auditor is not diminished in fact or appearance.

The Board also wants to ensure that services provided by the external auditor enable the Reserve Banks' boards of directors to fulfill their independent fiduciary responsibilities. Accordingly, the Board's contract with the external auditor is structured so that the external auditor provides audit services to the Board, as required by law, and also to each Reserve Bank, thus enabling the Reserve Banks' boards of directors to carry out their fiduciary responsibilities.¹

In addition, this policy calls for coordination between the Board and the Reserve Banks with regard to the selection and evaluation of auditor services.

Auditor Independence

To ensure the independence of the external auditor, the Board requires that the external auditor remain independent of Reserve Bank and Board management, and that it provide a written statement to the Board setting forth all relationships it has with the Reserve Banks and the Board and confirming that it is independent. The external auditor must not perform or agree to perform any non-audit services that might impair, or appear to impair, the external auditor's independence. The Board will send the Reserve Banks a copy of the external auditor's annual statement of independence.

Although the external auditor has the primary responsibility to avoid any arrangement that might impair, or might appear to, impair its independence, each Reserve Bank also is expected to avoid any arrangement that might impair, or might appear to, impair the independence of the external auditor. Specifically, each Reserve Bank should take the following steps to safeguard the independence of the external auditor:²

1. To ensure that a Reserve Bank does not inadvertently create an arrangement that would impair the independence of the external auditor, the contracting Reserve Bank must obtain the approval of its board of directors and the Board before engaging the external auditor to perform services.³ The external auditor should not be engaged to perform non-audit services that involve performing bookkeeping and services related to the accounting records or financial statements, the design and implementation of financial information systems, appraisal or valuation services, actuarial services, internal auditing services, management functions, human resources services related to employee recruitment, benefit plan administration legal services and expert services unrelated to the audit that would place the auditor in the position of advocating the Reserve Bank’s interests in litigation or in regulatory or administrative proceeding or investigations, or other non-audit services that may put the auditor in the position of auditing its own work.
2. A Reserve Bank may not employ in a management position any individual who provided external-audit services to the Reserve Bank as part of the Board's engagement within the past year. This restriction may be waived if the Reserve Bank board of directors and the Board determine that the independence of the external auditor would not be impaired. The Board generally would not approve a waiver of this restriction for an individual who would be appointed as president, first vice president, chief financial officer, chief accounting officer, controller, or an equivalent position at a Reserve Bank. In addition, the Board would not approve a waiver of this restriction for an individual who would be appointed to any another position, such as general auditor, if the independence of the external auditor might be impaired.
3. Each Reserve Bank should disclose in its annual report the nature and amount of its contractual arrangements with the external auditor that require the approval of the board of directors and the Board. This disclosure, modeled after the System-wide disclosure in the Board's annual report, should summarize the type of services provided, state the effect the work has on auditor independence, and indicate whether the services provided are incompatible with the external audit. To ensure the accuracy of the annual report disclosures, each Reserve Bank should provide the Board each January with a list of all contractual arrangements with the external auditor that required the approval of the Board and the Reserve Bank board of directors. That list should summarize the services provided, the total contract amount, and the amount paid during the prior year.

Selection and Evaluation

The Board will request the views of representatives of Reserve Bank management and internal auditors in connection with the selection of the external auditor, including on such matters as contract scope, development of a request for proposal, proposal evaluation, and the recommendation of the audit firm to be selected. The Board will request such views in the manner and at the times indicated below.

1. Before soliciting bids from external audit firms, the Board will request input from the chair of each Reserve Bank's board of directors regarding the proposed scope of the external-audit contract. The Board will also provide each chair with a list of the potential bidders and request the chairs’ input regarding experiences they have had with the audit firms listed that may be relevant to the Board's evaluation, in accordance with the established evaluation criteria, of the proposals.
2. A workgroup comprising Board and Reserve Bank representatives will evaluate the proposals received in accordance with the established evaluation criteria, and the Board will share with the chair of each Reserve Bank's board of directors the workgroup's analysis of the proposals and the group's recommendation on the firm to be selected, and will ask the boards of directors for their views on the recommendation.
3. The Board will consider, in accordance with the established evaluation criteria, the input received from the boards of directors in its selection of the external auditor.
4. The Board's contract will require the external auditor to discuss the scope of upcoming audits with the board of directors of each Reserve Bank and to report to each board the results of the audit, subject to the power of each Reserve Bank to opt out of this arrangement (as described in footnote 1, above) without affecting the contractor's obligation to audit on behalf of the Board. Each Reserve Bank's board of directors and its audit committee will receive essentially the same external-audit services as they would have received had they contracted directly for these services.
5. If a Reserve Bank board of directors has a material concern regarding the independence of the external auditor or the quality of the external audit, then the chair of that Reserve Bank's board of directors should inform the Board immediately, so that the Board can address the matter on a timely basis with the external auditor. The Board will promptly notify the Reserve Bank's board of directors of actions taken to address the matter.
6. After completion of each year's external audit commissioned by the Board, the Board will request feedback from the chair of each Reserve Bank's board of directors regarding the quality of the audit and suggestions to further strengthen the external-audit process in future years.

Management Responsibility for Financial Reports, Internal Controls, and Code of Ethics

To assure users of Reserve Bank financial statements that Reserve Bank management understands and accepts its responsibility for ensuring the integrity of its operations and financial reports, each Reserve Bank should include along with its annual audited financial statements a certification by the Bank's president, first vice president, and principal financial officer. This certification should assert management's opinion on the fair presentation of the financial statements, acknowledge management's responsibility for the Reserve Bank's internal controls over financial reporting, and indicate management's adoption of a code of ethics.⁴

Supporting attestations by the external auditor should also be included with these certifications.

Administration

The Board delegates to the director of the Division of Reserve Bank Operations and Payment Systems all of its approval, notification, and information-gathering authorities identified in this policy. A Reserve Bank's board of directors may delegate some or all of its approval authority identified in this policy to its audit committee; correspondence to the chairs of the Reserve Bank board of directors under this policy also should be sent to the chairs of the boards' audit committees.

S-2657; Jan. 10, 2013.

This letter supersedes S-2612 of Dec. 6, 2002, and S-2607 of June 4, 2002.

1. This policy, however, does not limit the authority of a Reserve Bank's board of directors to retain a separate external audit firm if necessary to carry out the directors' fiduciary responsibility to manage the affairs of the Bank prudently, except in so far as is necessary to prevent conflicts that would hinder the Board-ordered audit. In the event a Reserve Bank cannot meet its fiduciary responsibilities by relying on the services provided by the external auditor, taking into account its fiscal responsibilities, it may, following consultation with the Board, engage its own external audit firm.

2. The Board will also take steps to ensure that any other relationship it may have with the external auditor or with an individual who recently worked for the external auditor as part of the Board's engagement will not impair the external auditor's independence.

3. A Reserve Bank must also obtain the approval of its board of directors and the Board before engaging a vendor that has indicated its intent to subcontract a portion of its responsibilities under the Reserve Bank's contract to the external auditor. This policy does not require board of directors or Board approval of the purchase of research or educational materials from or attendance at seminars sponsored by the external auditor, provided the material is obtained at a rate that is available to the general public.

4. The content and format of these certifications will be coordinated among the Reserve Banks and Board staff as part of the annual financial statement preparation process.