Story updated to include a comment from GE.

NEW YORK ( TheStreet) -- The Federal Reserve needs to take steps to control the conflict of interest involving Reserve Bank directors that also run some of the largest Wall Street banks and U.S. corporations, including Goldman Sachs ( GS) and General Electric ( GE), a government audit report on Wednesday said.

All 12 Reserve Banks should "clearly document the roles and responsibilities of the directors, including restrictions on their involvement in supervision and regulation activities, in their bylaws," the GAO (Government Accountability Office) recommended.

The audit found that Reserve Bank directors often serve on the board of financial firms that the Fed regulates, creating the "appearance of conflict" that posed a "reputational risk" to the central bank.

The report cites instances during the financial crisis that spurred allegations of conflicts of interest. One example was in September 2008, when the then- chairman of the New York Fed's board of directors, Stephen Friedman, was also a board member and shareholder of Goldman Sachs, which had applied to be converted into a bank-holding company in response to the crisis.

In October, the New York Fed requested waiver on behalf of Friedman, but was unaware that he had bought additional shares in Goldman through an automatic stock purchase program. The waiver was granted in January. Friedman later resigned in May.

Goldman and other large firms were recipients of billions of dollars of funding during the crisis. The GAO identified at least 8 former and current Reserve Bank directors who were affiliated with institutions that used the central bank's emergency program.

JPMorgan Chase ( JPM) CEO Jamie Dimon served on the board of the New York Fed when the bank received emergency loans from the Fed and served as clearing house for its emergency loan program.

GE CEO Jeffrey Immelt was a director at the New York Fed when GE was one of the companies consulted with when the Fed created an emergency program for commercial paper market.

"The GAO report finds no conflict and the Fed had in place rigorous procedures to insure full compliance. Any suggestion otherwise is misleading," a GE spokeswoman said.

The report also observed that the Fed lags other central banks when it comes to being transparent about potential conflicts of interest.

For instance, comparable central banks make information on their board committees and ethics policies available on their websites; most Fed Reserve banks do not.

To further enhance transparency of Reserve Bank governance, GAO recommended that the 12 Reserve Banks make public key governance documents, such as bylaws, ethics policies, and committee assignments, by posting them to their websites.

The Fed has agreed that the GAO report comments had merit and agreed to implement their recommendations, the audit report said.

--Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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