oversight

Financial Management: Sustained Effort Needed to Resolve Long-Standing Problems at U.S. Agency for International Development

Published by the Government Accountability Office on 2003-09-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                United States General Accounting Office

GAO                             Testimony
                                Before the Subcommittee on Government Efficiency and
                                Financial Management, Committee on Government
                                Reform, House of Representatives


For Release on Delivery
Expected at 2:00 p.m.
Wednesday, September 24, 2003
                                FINANCIAL
                                MANAGEMENT
                                Sustained Effort Needed to
                                Resolve Long-Standing
                                Problems at U.S. Agency
                                for International
                                Development
                                Statement of Gregory D. Kutz, Director
                                Financial Management and Assurance




GAO-03-1170T
                                A
                                                September 24, 2003


                                                FINANCIAL MANAGEMENT
                                                Sustained Effort Needed to Resolve
                                                Long-Standing Problems at U.S. Agency
Highlights of GAO-03-1170T, a testimony
before the Subcommittee on Government           for International Development
Efficiency and Financial Management,
Committee on Government Reform,
House of Representatives




GAO has long reported that the                  USAID has made some progress to improve financial management, primarily
U.S. Agency for International                   in achieving audit opinions on its financial statements. Through the rigors of
Development (USAID) faces a                     the financial statement audit process and the requirements of the Federal
number of performance and                       Financial Management Improvement Act of 1996 (FFMIA), USAID has
accountability challenges that                  gained a better understanding of its financial management weaknesses.
affect its ability to implement its
foreign economic and humanitarian
                                                However, pervasive internal control weaknesses continue to prevent USAID
assistance programs. These major                management from achieving the objective of the CFO Act, which is to have
challenges include human capital,               timely, accurate financial information for day-to-day decision making.
performance measurement,
information technology, and                     USAID’s inadequate accounting systems make it difficult for the agency to
financial management. Effective                 accurately account for activity costs and measure its program results.
financial management as                         Compounding USAID’s systems difficulties has been the lack of adequate
envisioned by the Chief Financial               financial management personnel. Since the early 1990s, we have reported
Officers Act of 1990 (CFO Act) and              that USAID has made limited progress in addressing its human capital
other financial management reform               management issues.
laws is an important factor to the
achievement of USAID’s mission.
USAID is one of the federal
                                                While some improvements have been made over the past several years,
agencies subject to the CFO Act.                significant challenges remain. Transforming USAID’s financial and business
                                                environment into an efficient and effective operation that is capable of
In light of these circumstances, the            providing timely and accurate information will require a sustained effort.
Subcommittee asked GAO to testify               USAID has acknowledged the challenges it faces to reform its financial
on the financial management                     management problems and has initiatives underway to improve its systems,
challenges facing USAID, as well as             processes, and internal controls. USAID has also recognized the need for a
the keys to reforming USAID’s                   specific human capital action plan that addresses financial management
financial management and business               personnel shortfalls.
practices and the status of ongoing
improvement efforts.




www.gao.gov/cgi-bin/getrpt?GAO-03-1170T.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Gregory D.
Kutz at (202) 512-9505 or kutzg@gao.gov.
Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to appear before you today to testify on the
U.S. Agency for International Development (USAID). USAID’s financial
management challenges have been the subject of prior oversight hearings
by this Subcommittee’s predecessor. GAO has long reported1 that USAID
faces a number of performance and accountability challenges that affect its
ability to implement its foreign economic and humanitarian assistance
programs. These major challenges include human capital, performance
measurement, information technology, and financial management. Today
our testimony will focus on the financial management challenges at USAID.

USAID serves a critical role by providing nonmilitary international aid to
further U.S. interests abroad. For fiscal year 2003, USAID received about
$12 billion in total program funding that is spent in six principle areas:
economic growth and development, population health and nutrition,
environment, democracy and governance, education and training, and
humanitarian assistance. USAID carries out its assistance role primarily
through grants, contracts, and loan guarantees to foreign governments and
to humanitarian organizations. With current rebuilding efforts in Iraq and
Afghanistan and increased efforts towards HIV/AIDS relief, the amounts of
funds flowing through USAID have increased significantly. USAID’s role is
critical to the success of these rebuilding efforts.

My statement today will provide an overview of USAID’s progress in
addressing its financial management challenges. Effective financial
management as envisioned by the Chief Financial Officers Act of 19902
(CFO Act) is an important factor to the achievement of USAID’s mission.
USAID has made some progress, primarily in achieving audit opinions on
its financial statements. However, pervasive internal control weaknesses
continue to prevent USAID management from achieving the primary
objective of the CFO Act—which is to have relevant, timely, and accurate
financial information for day-to-day decision making. As a result, much of
the progress USAID achieved in getting improved opinions has been based
on heroic efforts rather than systems that routinely generate timely and
reliable financial information. USAID has a number of initiatives underway


1
 U.S. General Accounting Office, Major Management Challenges and Program Risks: U.S.
Agency for International Development, GAO-03-111 (Washington, D.C.: January 2003).
2
Pub. L. No. 101-576, 104 Stat. 2838 (1990).




Page 1                                        GAO-03-1170T USAID Financial Management
intended to improve its financial management, including the
implementation of a new financial management system. Our analysis is
based on USAID Inspector General (IG) reports and limited meetings with
USAID management and the IG.

USAID is one of the federal agencies subject to the CFO Act as expanded
by the Government Management Reform Act of 19943 and the Federal
Financial Management Improvement Act of 19964 (FFMIA). The CFO Act
envisions that agencies have financial management leadership, systems,
and practices in place to provide complete, consistent, reliable, and timely
information to agency management and other decision makers. Through
the rigors of the financial statement audit process and the requirements of
FFMIA, agencies such as USAID have gained a better understanding of
their financial management weaknesses and the impetus to resolve
problems caused by those weaknesses. At the same time, agencies are
slowly making progress in addressing their problems. However, while most
agencies are receiving “clean” audit opinions on their financial statements,
remaining weaknesses in internal controls and the continued widespread
noncompliance with FFMIA show that there is still a long way to go to
reach the end game—that is, having systems, processes, and controls that
routinely generate reliable, useful, and timely information for managers
and other decision makers. In addition, reaching this “end game” should
provide management, the Congress, and taxpayers with reasonable
assurance that fraud, waste, and abuse are minimized.

In the federal government, many of the clean opinions in fiscal year 2002
were achieved as a result of time-consuming, ad hoc programming and
analysis of data produced by inadequate systems that are not integrated
and often require significant audit adjustments. Such time-consuming
procedures, which often represent “heroic efforts,” prevent financial
management staff from doing other financial-related work such as financial
analyses, which could directly support strategic decision making and
ultimately improve overall business performance. In contrast, for most
private sector corporations, the clean opinion confirms the fact that
management has timely, reliable information to manage daily operations in




3
Pub. L. No. 103-356, title IV, 108 Stat. 3412 (1994).
4
Pub. L. No. 104-208, div. A, sec. 101(f), title VIII, 110 Stat. 3009-389 (1996).




Page 2                                            GAO-03-1170T USAID Financial Management
                       a competitive environment. In our Executive Guide: Creating Value
                       Through World-class Financial Management,5 we identified the success
                       factors, practices, and outcomes associated with world-class financial
                       management efforts. We found that many leading finance organizations
                       have a goal to reduce the time spent on routine accounting activities, such
                       as financial statement preparation, so that financial management staff can
                       spend more time on activities such as business performance analysis or
                       cost analysis. These organizations also had clear, strong executive
                       leadership, that when combined with factors such as effective
                       organizational alignment, strategic human capital management, and end-to-
                       end business process improvement, were critical for ensuring their
                       financial management staff delivered the kind of analysis and forward-
                       looking information needed to effectively manage their programs. As
                       discussed in the executive guide, to reap the full benefit of a modern,
                       integrated financial management system, USAID must go beyond obtaining
                       an unqualified audit opinion toward (1) routinely generating reliable cost
                       and performance information and analysis, (2) undertaking other value-
                       added activities that support strategic decision making and mission
                       performance, and (3) building a finance team that supports the agency’s
                       mission and goals.



Progress Towards       In May 2001, the Subcommittee’s predecessor held a hearing6 on USAID
                       financial management. Using that hearing as a baseline, we evaluated,
Financial Management   using primarily USAID IG reports, the progress made to improve USAID’s
Reform                 financial management systems, processes, and human capital (people) in
                       the past 2 years. At the time of the May 2001 hearing, USAID was one of
                       three federal agencies subject to the CFO Act that had such significant
                       problems that they were unable to produce financial statements that
                       auditors could express an opinion on. The hearing focused on actions
                       needed to resolve USAID’s financial management issues. At that time, the
                       Acting Assistant Administrator for the Bureau of Management told the
                       Subcommittee that actions to correct reported material weaknesses in



                       5
                        U.S. General Accounting Office, Executive Guide: Creating Value Through World-class
                       Financial Management, GAO/AIMD-00-134 (Washington, D.C.: April 2000).
                       6
                        House Committee on Government Reform, Subcommittee on Government Efficiency,
                       Financial Management and Intergovernmental Relations, The U.S. Agency for International
                       Development: What Must Be Done to Resolve USAID’s Longstanding Financial
                       Management Problems? 107th Cong., 1st Sess., May 8, 2001.




                       Page 3                                      GAO-03-1170T USAID Financial Management
financial management were completed or in process and that all reported
weaknesses would be resolved by 2002.

While USAID has made progress in its financial management since that
hearing, it has not achieved the success that it had expected. Rather, its
progress relates primarily to improved opinions on USAID’s financial
statements. Table 1 below shows that USAID has been able to achieve
improved opinions on its financial statements over the past 3 years.



Table 1: Audit Opinions on USAID’s Financial Statements in Fiscal Years 2000
Through 2002

                                                                     Type of opinion
                                                    Fiscal year       Fiscal year       Fiscal year
Financial statements                                2000              2001              2002
Balance sheet                                       Disclaimera       Qualifiedb        Unqualifiedc
Statement of net costs                              Disclaimer        Disclaimer        Qualified
Statement of changes in net position                Disclaimer        Qualified         Unqualified
Statement of budgetary resources                    Disclaimer        Qualified         Unqualified
Statement of financing                              Disclaimer        Disclaimer        Unqualified
Source: USAID Inspector General reports.
a
 A disclaimer of opinion means that the auditor does not express an opinion on the financial
statements. A disclaimer is appropriate when the audit scope is not sufficient enough to enable the
auditor to express an opinion or when there are material uncertainties involving scope limitations.
b
 A qualified opinion means that, except for the effects of the matter to which the qualification relates,
the auditor concludes that the financial statements are presented fairly, in all material respects, in
accordance with generally accepted accounting principles.
c
  An unqualified, or clean, opinion means that the auditor concludes that the financial statements are
presented fairly, in all material respects, in accordance with generally accepted accounting principles.


Fiscal year 2001 marked the first time that the USAID IG was able to
express an opinion on three of USAID’s financial statements—the Balance
Sheet, Statement of Changes in Net Position, and Statement of Budgetary
Resources. However, as noted above, the opinions were qualified and
achieved through extensive efforts to overcome material internal control
weaknesses. Further, the IG remained unable to express an opinion on
USAID’s Statement of Net Cost and Statement of Financing.

Fiscal year 2002 marked additional improvements in the opinions on
USAID’s financial statements. All but one of USAID’s financial statements
received unqualified opinions. The Statement of Net Cost received a
qualified opinion. The IG reported that “…on the Statement of Net Cost, the



Page 4                                                 GAO-03-1170T USAID Financial Management
opinion was achieved only through extensive effort to overcome material
weaknesses in internal control” and “[a]lthough these efforts resulted in
auditable information, [they] did not provide timely information to USAID
management to make cost and budgetary decisions throughout the year.”7

Compounding USAID’s systems difficulties has been the lack of adequate
financial management personnel. Since the early 1990s, we have reported
that USAID has made limited progress in addressing its human capital
management issues. A major concern is that USAID has not established a
comprehensive workforce plan that is integrated with the agency’s
strategic objectives and ensures that the agency has skills and
competencies necessary to meet its emerging foreign assistance
challenges. While a viable financial management system is needed, and
offers the capacity to achieve reliable data, it is not the entire answer for
improving USAID’s financial management information. Qualified personnel
must be in place to implement and operate these systems.

In addition to the improved opinions for fiscal year 2002, the IG reported
that while USAID had made improvements in its processes and procedures,
a substantial number of material weaknesses,8 reportable conditions,9 and
noncompliance with laws and regulations10 remain. The report also noted
that USAID’s financial management systems do not meet federal financial
system requirements. Table 2 shows that while USAID’s opinions on its
financial statements improved, reported material weaknesses, reportable
conditions, and noncompliance increased.




7
 USAID Office of Inspector General, Report on USAID’s Consolidated Financial
Statements, Internal Controls, and Compliance for the Fiscal Year 2002, Audit Report No.
0-000-03-001-C (Washington, D.C.: Jan. 24, 2003).
8
 A material weakness is a condition that precludes the entity’s internal control from
providing reasonable assurance that misstatements, losses, or noncompliance material in
relation to the financial statements or to stewardship information would be prevented or
detected on a timely basis.
9
 Reportable conditions are matters coming to the auditor’s attention that, in the auditor’s
judgment, should be communicated because they could adversely affect the entity’s ability
to record, process, summarize, and report financial data consistent with the assertions by
management in the financial statements.
10
  The auditor determined that the agency was not in compliance with selected provisions of
applicable laws and regulations that could have a direct and material effect on amounts
reported in the financial statements.




Page 5                                         GAO-03-1170T USAID Financial Management
Table 2: Weaknesses Reported by the USAID Inspector General in Fiscal Years 2000
Through 2002

                                                              Fiscal year
                                                  2000    2001     2002
Reported material weaknesses
Reconciling fund balance with Treasury                             X
Recognizing, recording, and reporting accounts    X                X
receivable
Calculating and reporting accounts payable        X                X
Recording and classifying advances to grantees    X       X        X
and related expenses
Computer security deficiencies                    X       X        Reported as a
                                                                   Compliance with
                                                                   Laws and
                                                                   Regulations
                                                                   Condition
Process for preparing the Management's            X                Now a Reportable
Discussion and Analysis needs improvement                          Condition
Allocating program expenses on its Statement of                    X
Net Costs
Reviewing, analyzing, and deobligating                    X        X
unliquidated obligations
Calculating credit program allowances                              X
Reportable conditions
Reconciling fund balance with Treasury            X
Calculating and reporting accounts payable                X
Recognizing, recording, and reporting accounts            X
receivable
Establish monthly closing procedures                               X
Improve controls and management of property at                     X
overseas missions
Process for preparing the Management's                    X        X
Discussion and Analysis needs improvement
Compliance with laws and regulations
Chief Financial Officers Act of 1990              X
Federal Financial Management Improvement Act X            X        X
of 1996
Computer Security Act of 1987                     X       X        X
Debt Collection and Improvement Act of 1996                        X
Source: USAID Inspector General reports.




Page 6                                        GAO-03-1170T USAID Financial Management
The increase in reported material weaknesses, reportable conditions, and
noncompliance is, in part, due to the full scope audits that were not
possible in prior years. As financial information improved over the years, it
has assisted the USAID IG in identifying additional internal control and
system weaknesses. Identifying these additional weaknesses is
constructive in that they highlight areas that management needs to address
in order to improve the overall operations of the agency and provide
accurate, timely, and reliable information to management and the
Congress.

Several of the weaknesses reported by the USAID IG are chronic in nature
and resolution has been a challenge. For example, similar to the USAID
fiscal year 2002 material weakness, in 1993 we reported11 that USAID did
not promptly and accurately report disbursements. At that time, USAID
could not ensure that disbursements were made only against valid,
preestablished obligations and that its recorded unliquidated obligations
balances were valid. Additionally, we reported USAID did not have
effective control and accountability over its property.

The chronic nature of the reported weaknesses at USAID reflect challenges
with people (human capital), processes, and financial management
systems. USAID management represented to us that, over time, they have
lost a significant number of staff in this area and face challenges recruiting
and retaining financial management staff. Further, according to IG
representatives, many of the individuals that financial managers must
depend on to provide the data that are used for financial reports are not
answerable to the financial managers and often do not have the
background or training necessary to report the data accurately. Also
contributing to the challenge are USAID’s nonintegrated systems that
require data reentry, supplementary accounting records, and lengthy and
burdensome reconciliation processes.




11
  U.S. General Accounting Office, Financial Management: Inadequate Accounting and
System Project Controls at AID, GAO/AFMD-93-19 (Washington D.C.: May 24, 1993).




Page 7                                     GAO-03-1170T USAID Financial Management
Financial Management    Transforming USAID’s financial and business management environment
                        into an efficient and effective operation that is capable of providing
Reform Will Require a   management and the Congress with relevant, timely, and accurate
Long-term               information on the results of operation will require a sustained effort.
                        Improved financial systems and properly trained financial management
Commitment              personnel are key elements of this transformation. While these challenges
                        are difficult, they are not insurmountable. Without sustained leadership
                        and oversight by senior management, the likelihood of success is
                        diminished.

                        In its fiscal year 2002 Performance and Accountability Report, USAID
                        noted that it was in the process of implementing an agencywide financial
                        management system. USAID reported that the system has been
                        successfully implemented in Washington. In June 2003, USAID awarded a
                        contract for the implementation of the system overseas. According to
                        USAID officials, they anticipate this effort to be completed by fiscal year
                        2006. While we are encouraged by USAID’s progress toward implementing
                        an integrated system, it should be noted that this is the second attempt in
                        the past 10 years to implement an agencywide integrated financial
                        management system. To provide reasonable assurance that the current
                        effort is successful, top management must be actively involved in the
                        oversight of the current project. Management must have performance
                        metrics in place to ensure the modernization effort is accomplished on
                        time, within budget, and provides the planned and needed capabilities.

                        In this regard, in fiscal year 2002, USAID redesigned its overall governance
                        structure for the acquisition and management of information technology.
                        Specifically, USAID created the Business Transformation Executive
                        Committee, chaired by the Deputy Administrator and with membership
                        including key senior management. The committee’s purpose is to provide
                        USAID-wide leadership for initiatives and investments to transform USAID
                        business systems and organizational performance. The committee’s roles
                        and responsibilities include:

                        • Guiding business transformation efforts and ensuring broad-based
                          cooperation, ownership, and accountability for results.

                        • Initiating, reviewing, approving, monitoring, coordinating, and
                          evaluating projects and investments.




                        Page 8                                 GAO-03-1170T USAID Financial Management
             • Ensuring that investments are focused on highest pay-off performance
               improvement opportunities aligned with USAID’s programmatic and
               budget priorities.

             Active, substantive oversight by this committee over USAID’s information
             technology investments, including its agencywide integrated financial
             management system initiative, will be needed for business reform efforts to
             succeed.

             In addition to improved business systems, it is critical that USAID have
             sustained financial management leadership and the requisite personnel and
             skill set to operate the system in an efficient and effective manner once it is
             in place. We have reported for years and USAID acknowledges that human
             capital is one of the management challenges that must be overcome. As
             previously noted, since the early 1990s we have reported that USAID has
             made limited progress in addressing its human capital management issues.
             Within the area of financial management, progress in this area has also
             been slow, with no specific plan of action on how to address shortages of
             trained financial managers. USAID represented to us that as part of its
             agencywide human capital strategy, it plans to specifically address its
             financial management personnel challenges.

             In addition to addressing systems and human capital challenges, USAID is
             working to improve its processes and internal controls. Effective
             processes and internal controls are necessary to ensure that whatever
             systems are in place are fully utilized and that its operations are as efficient
             and effective as possible. USAID is working to eliminate the material
             weaknesses, reportable conditions, and noncompliance reported by the
             USAID IG in fiscal year 2002. For fiscal year 2003, the Administrator of
             USAID and the IG agreed to work together to provide for the issuance of
             audited financial statements by November 15, 2003, in line with the Office
             of Management and Budget’s accelerated timetable for reporting. To meet
             this tight timeframe, the CFO must provide timely and reliable information
             that can withstand the test of audit with little to no needed adjustment.
             However, given the continued financial management system, process, and
             human capital challenges, meeting this goal will be difficult.



Conclusion   USAID appears to be making a serious attempt to reform its financial
             management, as evidenced by initiatives to improve its human capital,
             internal controls, and business systems. However, progress to date is most
             evident in the improvement in the opinions on its financial statements,



             Page 9                                   GAO-03-1170T USAID Financial Management
                  which reflect USAID’s ability to generate reliable information one time a
                  year, rather than routinely for purposes of management decision making.
                  Through fiscal year 2002 these improved opinions reflect a significant
                  “heroic” effort to overcome human capital, internal control, and systems
                  problems. Although these improved opinions represent progress, the
                  measures of fundamental reform will be the ability of USAID to provide
                  relevant, timely, reliable financial information and sound internal controls
                  to enable it to operate in an efficient and effective manner.


                  Mr. Chairman, this concludes my statement. I would be pleased to answer
                  any questions you or other members of the Subcommittee may have at this
                  time.



Contacts and      For further information about this testimony, please contact Gregory D.
                  Kutz at (202) 512-9095 or kutzg@gao.gov or John Kelly at (202) 512-6926 or
Acknowledgments   kellyj@gao.gov. Other key contributors to this testimony include Stephen
                  Donahue, Dianne Guensberg, and Darby Smith.




(192107)          Page 10                                GAO-03-1170T USAID Financial Management
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