oversight

Afghanistan: USAID Oversight of Assistance Funds and Programs

Published by the Government Accountability Office on 2012-06-06.

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

                            United States Government Accountability Office

GAO                         Testimony Before the Subcommittee on
                            Oversight and Investigations, Committee
                            on Foreign Affairs, House of
                            Representatives


                            AFGHANISTAN
For Release on Delivery
Expected at 2:00 p.m. EDT
Wednesday, June 6, 2012



                            USAID Oversight of
                            Assistance Funds and
                            Programs
                            Statement of John P. Hutton, Director
                            Acquisition and Sourcing Management

                            Charles Michael Johnson, Jr., Director
                            International Affairs and Trade




GAO-12-802T
                                                June 6, 2012

                                                AFGHANISTAN
                                                USAID Oversight of Assistance Funds and Programs

Highlights of GAO-12-802T, a testimony
before the Subcommittee on Oversight and
Investigations, Committee on Foreign Affairs,
House of Representatives



Why GAO Did This Study                          What GAO Found
Since 2002, the United States has               The U.S. Agency for International Development (USAID) has experienced
appropriated nearly $90 billion to help         systemic challenges that have hindered its ability to manage and oversee
stabilize Afghanistan and build the             contracts and assistance instruments in Afghanistan. Key challenges include
Afghan government’s capacity to                 gaps in planning for the use of contractors and assistance recipients and having
provide security, enhance governance,           visibility into their numbers. For example, GAO reported in April 2010 that, absent
and develop a sustainable economy.              strategic planning for its use of contractors, individual offices within USAID often
To assist Congress in its oversight,            made case-by-case decisions on using contractors to support contract or grant
GAO has issued over 100 reports and             administration and risks, such as possible conflicts of interest, were not always
testimonies related to U.S. efforts in
                                                addressed. While having reliable data on contractors and assistance recipients is
Afghanistan, including those managed
                                                a starting point for informing agency decisions and ensuring proper management,
by USAID and the Departments of
Defense and State. USAID provides
                                                GAO has also reported on limitations in USAID’s visibility into the number and
assistance to Afghanistan through               value of contracts and assistance instruments in Afghanistan, as well as the
contracts and assistance instruments,           number of personnel working under them. USAID, along with other agencies, has
such as grants and cooperative                  not implemented GAO’s recommendation to address such limitations. USAID,
agreements, and in the form of direct           however, has taken other actions to mitigate risks associated with awarding
assistance—funding provided through             contracts and assistance instruments in Afghanistan. In June 2011, GAO
the Afghan national budget for use by           reported on USAID’s vendor vetting program, then in its early stages, which was
its ministries. Direct assistance is            designed to counter potential risks of U.S. funds being diverted to support
provided (1) bilaterally to individual          criminal or insurgent activity. GAO recommended that USAID take a more risk-
Afghan ministries or (2) multilaterally         based approach to vet non-U.S. vendors and develop formal mechanisms to
through trust funds administered by the         share vetting results with other agencies, both of which USAID agreed to do.
World Bank and the United Nations
Development Program. This testimony             GAO has found systematic weaknesses in USAID’s oversight and monitoring of
discusses findings from GAO reports             project and program performance in Afghanistan. In 2010, GAO reported that
issued primarily in 2010 and 2011 that          USAID did not consistently follow its established performance management and
cover USAID’s (1) management of                 evaluation procedures for Afghanistan agriculture and water sector projects. For
contracts and assistance instruments,           example, only two of seven USAID-funded agricultural programs included in
(2) oversight of development-related            GAO’s review had targets for all their performance indicators. Moreover, the
program performance and results, and            USAID Mission was operating without a required performance management plan.
(3) accountability for direct assistance.       In addition, GAO reported on a lack of documentation of key programmatic
                                                decisions and an insufficient method to transfer knowledge to successors. USAID
What GAO Recommends                             has taken several actions in response to these findings, such as updating its
                                                performance management plan and establishing mandatory guidelines on file
GAO is not making new                           maintenance to help ensure knowledge transfer.
recommendations but has made
numerous recommendations aimed at               USAID has established and generally complied with various financial and other
improving USAID’s management and                controls in its direct assistance agreements, such as requiring separate bank
oversight of assistance funds in                accounts and maintenance of records subject to audit. However, GAO found in
Afghanistan. USAID has generally                2011 that USAID had not always assessed the financial risks in providing direct
concurred with most of these                    assistance to Afghan government entities before awarding funds. For example,
recommendations and has taken or                USAID did not complete preaward risk assessments in two of eight cases of
planned steps to address them.                  bilateral assistance GAO identified. With regard to direct assistance provided
                                                multilaterally through the World Bank’s Afghanistan Reconstruction Trust Fund
                                                (ARTF), GAO found in 2011 that USAID had not consistently complied with its
                                                own risk assessment policies, and USAID had not conducted a risk assessment
                                                before awarding $1.3 billion to ARTF in March 2010. In response to GAO reports,
View GAO-12-802T. For more information,         USAID revised and expanded its guidance on preaward risk assessments for the
contact John P. Hutton at (202) 512-4841 or
huttonj@gao.gov, or Charles Michael
                                                World Bank and other public international organizations.
Johnson, Jr. at (202) 512-7331 or
johnsoncm@gao.gov.
                                                                                         United States Government Accountability Office
Mr. Chairman, Ranking Member Carnahan, and
Members of the Subcommittee:

We are pleased to be here to discuss accountability and oversight of
funds provided by the U.S. Agency for International Development
(USAID) to assist Afghanistan. Since 2002, the United States has
appropriated nearly $90 billion to help secure, stabilize, and rebuild
Afghanistan. To assist Congress in its oversight, we have issued over 100
reports and testimonies related to U.S. efforts in Afghanistan, including
those managed by USAID and the Departments of Defense and State. 1
Our reviews have focused on the U.S. strategy for Afghanistan, as well as
on specific U.S. efforts that build the Afghan government’s capacity to
provide security, enhance governance, and develop a sustainable
economy. 2 While drawing on our past work that identified numerous
challenges faced by U.S. agencies in Afghanistan, our statement today
focuses on USAID, which, among other things, has assisted Afghanistan
in the construction of roads, expansion of health and education, and
development of water and agricultural sectors. Specifically, we will
discuss findings from reports that cover USAID’s (1) management of
contracts and assistance instruments, such as grants and cooperative
agreements; (2) oversight of development-related program performance
and results; and (3) accountability for direct assistance—funding provided
through the Afghanistan national budget for use by its ministries.

Detailed information on the scope and methodology for our prior work can
be found in the reports we have cited throughout this statement. We
conducted the underlying performance audits in accordance with
generally accepted government auditing standards. Those standards
require that we plan and perform the audits to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and




1
 See the publicly released GAO reports and testimonies on Afghanistan listed and linked
here: http://www.gao.gov/docsearch/featured/afghanistan.html.
2
 For example, GAO, The Strategic Framework for U.S. Efforts in Afghanistan,
GAO-10-655R (Washington, D.C.: June 15, 2010); Afghanistan Security: Department of
Defense Effort to Train Afghan Police Relies on Contractor Personnel to Fill Skill and
Resource Gaps, GAO-12-293R (Washington, DC: Feb. 23, 2012); Afghanistan
Governance: Performance-Data Gaps Hinder Overall Assessment of U.S. Efforts to Build
Financial Management Capacity, GAO-11-907 (Washington, D.C.: Sept. 20, 2011); and
Afghanistan’s Donor Dependence, GAO-11-948R (Washington, D.C.: Sept. 20, 2011).




Page 1                                                                      GAO-12-802T
                     conclusions based on our audit objectives. We believe that the evidence
                     obtained provides a reasonable basis for our statement today.

                     USAID assists Afghanistan through the issuance of contracts and
                     assistance instruments and also by providing direct assistance. Contracts
                     and assistance instruments are awarded to USAID’s implementing
                     partners, who in turn carry out development programs and otherwise
                     support USAID’s mission in Afghanistan. For fiscal year 2011, USAID
                     reported that it obligated $2.9 billion on contracts and had assistance
                     instruments with a value of $705.9 million with performance in
                     Afghanistan. In contrast, direct assistance is provided through the Afghan
                     budget either (1) bilaterally to individual Afghan ministries or
                     (2) multilaterally through trust funds administered by the World Bank and
                     the United Nations Development Program. In 2010, international donors
                     agreed to increase the portion of their development aid that is delivered
                     through the Afghan government if the Afghan government showed
                     progress in reducing corruption and strengthening its public financial
                     management systems. Following that agreement, the United States
                     shifted more funding toward direct assistance, more than tripling such
                     awards—from $665 million in fiscal year 2009 to $2 billion in fiscal year
                     2010. USAID was the largest contributor of that direct assistance, with its
                     awards growing from $470 million in fiscal year 2009 to more than
                     $1.4 billion in fiscal year 2010, largely through the Afghanistan
                     Reconstruction Trust Fund (ARTF) administered by the World Bank. In
                     2012, USAID reaffirmed its commitment to increase the amount of
                     development assistance provided through the Afghan budget.


                     In carrying out its Afghan assistance efforts, USAID has experienced a
USAID Faces          number of systemic challenges that have hindered its ability to manage
Challenges in        and oversee contracts and assistance instruments, such as grants and
                     cooperative agreements. These challenges include gaps in planning for
Managing Contracts   the use of contractors and assistance recipients and having visibility into
and Assistance       their numbers. While this statement focuses on the challenges
                     confronting USAID in Afghanistan, our work involving the Departments of
Instruments          Defense and State has found similar issues not only in Afghanistan but
                     also in other countries, such as Iraq. The need for visibility into contracts
                     and assistance instruments to inform decisions and perform oversight is
                     critical, regardless of the agency or the country, as each agency relies
                     extensively on contractors and assistance recipients to support and carry
                     out its respective missions. While USAID has faced challenges, it has
                     also taken actions to help mitigate some of the risks associated with
                     awarding contracts and assistance instruments in Afghanistan. Most


                     Page 2                                                             GAO-12-802T
notably, through its vendor vetting program, USAID seeks to counter
potential risks of U.S. funds being diverted to support criminal or
insurgent activity.

Our work has identified gaps in USAID’s planning efforts related to the
role and extent of reliance on contractors and grantees. For example, we
reported in April 2010 that USAID’s workforce planning efforts, including
its human capital and workforce plans, do not address the extent to which
certain types of contractors working outside the United States should be
used. 3 We further reported in June 2010 that USAID’s workforce plan for
fiscal years 2009 through 2013 had a number of deficiencies, such as
lacking supporting analyses that covered the agency’s entire workforce,
including contractors, and not containing a full assessment of the
agency’s workforce needs, including identifying existing workforce gaps
and staffing levels required to meet program needs and goals. 4 Such
findings are not new. We noted, for example, in our 2004 and 2005
reviews of Afghanistan reconstruction efforts, when USAID developed its
interim development assistance strategy, it did not incorporate information
on the contractor and grantee resources required to implement the
strategy. We determined that this hindered USAID’s ability to make
informed decisions on resource allocations for the strategy. 5 Further, as
mentioned earlier, such findings have not been unique to USAID. For
example, in our April 2010 report, we noted that the Department of State’s
workforce plan generally does not address the extent to which contractors
should be used to perform specific functions, such as contract and grant
administration.

In the absence of strategic planning for its use of contractors, we found
that it was often individual offices within USAID that made case-by-case
decisions on the use of contractors to support contract or grant


3
 GAO, Contingency Contracting: Improvements Needed in Management of Contractors
Supporting Contract and Grant Administration in Iraq and Afghanistan, GAO-10-357
(Washington, D.C.: Apr. 12, 2010).
4
 GAO, Foreign Assistance: USAID Needs to Improve Its Strategic Planning to Address
Current and Future Workforce Needs, GAO-10-496 (Washington, D.C.: June 30, 2010).
5
 GAO, Afghanistan Reconstruction: Deteriorating Security and Limited Resources Have
Impeded Progress; Improvements in U.S. Strategy Needed, GAO-04-403 (Washington,
D.C.: June 2, 2004) and Afghanistan Reconstruction: Despite Some Progress,
Deteriorating Security and Other Obstacles Continue to Threaten Achievement of U.S.
Goals, GAO-05-742 (Washington, D.C.: July 28, 2005).




Page 3                                                                   GAO-12-802T
administration functions. In our April 2010 report, we noted that USAID
used contractors to help administer its contracts and grants in
Afghanistan, in part to address frequent rotations of government
personnel, as well as security and logistical concerns. Functions
performed by these contractors included on-site monitoring of other
contractors’ activities and awarding and administering grants. The
Departments of Defense and State have also relied on contractors to
perform similar functions in both Afghanistan and Iraq. While relying on
contractors to perform such functions can provide benefits, we found that
USAID did not always fully address related risks. For example, USAID did
not always include a contract clause required by agency policy to address
potential conflicts of interest, and USAID contracting officials generally did
not ensure enhanced oversight in accordance with federal regulations for
situations in which contractors provided services that closely supported
inherently governmental functions.

Over the last four years, we have reported on limitations in USAID’s
visibility into the number and value of contracts and assistance
instruments with performance in Afghanistan, as well as the number of
personnel working under those contracts and assistance instruments.
Having reliable, meaningful data on contractors and assistance recipients
is a starting point for informing agency decisions and ensuring proper
management and oversight. In 2008, in response to congressional
direction, USAID along with the Departments of Defense and State
designated the Synchronized Predeployment and Operational Tracker
(SPOT) database as their system of record to track statutorily required
information on contracts and contractor personnel working in either Iraq
or Afghanistan, a designation which the agencies reaffirmed when the
requirement was expanded to include assistance instruments and
associated personnel. 6 However, we found that as of September 2011,
SPOT still did not reliably track this information. 7 As a result, USAID relied
on other data sources, which had their own limitations, to prepare a 2011
report to Congress. Specifically, we found USAID’s reporting to be
incomplete, particularly in the case of personnel numbers that were based
on unreliable data. For example, for the number of contractor and



6
Pub. L. No. 111-84, § 813 (amending Pub. L. No. 110-181, § 864).
7
 GAO, Iraq and Afghanistan: DOD, State, and USAID Cannot Fully Account for Contracts,
Assistance Instruments, and Associated Personnel, GAO-11-886 (Washington, D.C.:
Sept. 15, 2011).




Page 4                                                                   GAO-12-802T
assistance personnel in Afghanistan, USAID developed estimates that,
according to a USAID official, were based in part on reports submitted by
only about 70 percent of its contractors and assistance recipients.
Further, USAID acknowledged that it had limited ability to verify the
accuracy or completeness of the data that were reported. Similarly, we
found that the Department of Defense underreported the value of its
contracts in Iraq and Afghanistan by at least $3.9 billion, while the
Department of State did not report statutorily required information on
assistance instruments and the number of personnel working on them in
either country.

Given the repeated limitations we have found in SPOT and the ability of
USAID, Defense, and State to provide statutorily required information, we
recommended in 2009 and then subsequently reiterated that the three
agencies develop a joint plan with associated time frames to address
limitations and ensure SPOT’s implementation to fulfill statutory
requirements. 8 In response to our 2009 recommendation, USAID did not
address the recommendation, while the Departments of Defense and
State cited on-going interagency coordination efforts as sufficient.
However, we concluded that based on our findings, coordination alone is
not sufficient and have continued to call for the agencies to develop a
plan. We have recently begun reviewing the three agencies’ April 2012
report to Congress on their contracts, assistance instruments, and
associated personnel in Iraq and Afghanistan and the actions they are
taking to improve their database.

In addition to our work on these matters, the congressionally established
Commission on Wartime Contracting in Iraq and Afghanistan examined
waste, fraud, abuse, accountability, and other issues in contingency
contracting. In its final report, which was issued in August 2011, the
Commission made a number of recommendations, several of which were
directed toward USAID as well as the Departments of Defense and
State. 9 Recommendations include those related to using risk factors to
decide what functions are appropriate to contract for in contingency



8
 GAO, Contingency Contracting: DOD, State, and USAID Continue to Face Challenges in
Tracking Contractor Personnel and Contracts in Iraq and Afghanistan, GAO-10-1
(Washington, D.C.: Oct. 1, 2009).
9
 Commission on Wartime Contracting in Iraq and Afghanistan, Transforming Wartime
Contracting: Controlling Costs, Reducing Risks (Arlington, Va.: Aug. 2011).




Page 5                                                                  GAO-12-802T
settings, ensuring the government can provide sufficient acquisition
management and contractor oversight, and taking actions to mitigate the
threat of additional waste due to a lack of sustainment by host
governments. We are currently reviewing what actions USAID and the
Departments of Defense and State are taking to address the
Commission’s recommendations.

In response to continued congressional attention and their own concerns
about actual and perceived corruption and its impact on U.S. and
international activities in Afghanistan, U.S. government agencies have
established efforts to identify malign actors, encourage transparency, and
prevent corruption. Under the auspices of its Accountable Assistance for
Afghanistan initiative, USAID is seeking to address some of the
challenges associated with providing assistance in Afghanistan. One
element of the initiative is the vendor vetting program. In January 2011, in
order to counter potential risks of U.S. funds being diverted to support
criminal or insurgent activity, USAID created a process for vetting
prospective non-U.S. contractors and assistance recipients (i.e.,
implementing partners) in Afghanistan. This process is similar to the one
USAID has used in the West Bank and Gaza since 2006. USAID’s
process in Afghanistan was formalized in a May 2011 mission order,
which established a vetting threshold of $150,000 and identified other risk
factors, such as project location and type of contract or service being
performed by the non-U.S. vendor or recipient. The mission order also
established an Afghanistan Counter-Terrorism Team that can review and
adjust the risk factors as needed.

At the time our June 2011 report on vetting efforts was issued, USAID
officials said that the agency’s vendor vetting process was still in the early
stages, and that it would be an iterative implementation process, some
aspects of which could change—such as the vetting threshold and the
expansion of vetting to other non-U.S. partners. 10 We recommended that
USAID consider formalizing a risk-based approach that would enable it to
identify and vet the highest-risk vendors and partners, including those
with contracts below the $150,000 threshold. We also made a
recommendation to promote interagency collaboration to better ensure
that non-U.S. vendors potentially posing a risk are vetted. Specifically, we



10
 GAO, Afghanistan: U.S. Efforts to Vet Non-U.S. Vendors Need Improvement,
GAO-11-355 (Washington, D.C.: June 8, 2011).




Page 6                                                                 GAO-12-802T
                       recommended that USAID, the Department of Defense (which had a
                       vendor vetting program), and the Department of State (which did not have
                       a vendor vetting program comparable to USAID’s or Defense’s) should
                       consider developing formalized procedures, such as an interagency
                       agreement, to ensure the continuity of communication of vetting results
                       and to support intelligence information, so that other contracting activities
                       may be informed by those results. USAID concurred with our
                       recommendations and noted that the agency had already begun to
                       implement corrective measures to ensure conformity with our
                       recommendations and adherence to various statutes, regulations, and
                       executive orders pertaining to terrorism. Specifically, under the May 2011
                       mission order, the Afghanistan Counter-Terrorism Team is to work to
                       establish an interagency decision-making body in Afghanistan to
                       adjudicate vetting results, establish reporting metrics for USAID’s vetting
                       process, and work with the vetting unit to modify as needed the criteria
                       used to establish risk-based indicators for vetting.


                       We have previously reported on systematic weaknesses in USAID’s
USAID Has Taken        oversight and monitoring of the performance of projects and programs
Some Action to         carried out by its implementing partners in Afghanistan. In 2010, we
                       reported that USAID did not consistently follow its established
Strengthen Oversight   performance management and evaluation procedures with regard to its
of Program             agriculture and water sector projects in Afghanistan. 11 There were various
Performance            areas in which the USAID Mission to Afghanistan needed to improve. We
                       found that the Mission had been operating without an approved
                       Performance Management Plan to guide its oversight efforts after 2008.
                       In addition, while implementing partners had routinely reported on the
                       progress of USAID’s programs, we found that USAID did not always
                       approve the performance indicators these partners were using and did
                       not ensure, as its procedures require, that implementing partners
                       establish targets for each performance indicator. For example, only two of
                       seven USAID-funded agricultural programs that were active during fiscal
                       year 2009 and included in our review had targets for all of their indicators.
                       Within the water sector, we found that USAID collected quarterly progress



                       11
                         GAO, Afghanistan Development: Enhancements to Performance Management and
                       Evaluation Efforts Could Improve USAID’s Agricultural Programs, GAO-10-368
                       (Washington, D.C.: July 14, 2010) and Afghanistan Development: U.S. Efforts to Support
                       Afghan Water Sector Increasing, but Improvements Needed in Planning and Coordination,
                       GAO-11-138 (Washington, D.C.: Nov. 15, 2010).




                       Page 7                                                                    GAO-12-802T
reports from five of the six water project implementers for the projects we
reviewed, but it did not analyze and interpret this information as required.
We also found that USAID could improve its assessment and use of
performance data submitted by implementing partners or program
evaluations to, among other things, help identify strengths or weaknesses
of ongoing or completed programs.

In addition, USAID officials face a high risk security environment and the
USAID Mission to Afghanistan has experienced high staff turnover, which
hinder program oversight. For example, in July 2010, we reported that the
lack of a secure environment has challenged the ability of USAID officials
to monitor construction and development efforts. 12 Also, USAID
personnel are assigned 1-year assignments with an option to extend
assignments for an additional year—which USAID acknowledged
hampered program design and implementation. The Department of
State’s Office of the Inspector General noted in its 2010 inspection of the
entire embassy and its staff, including USAID, that 1-year assignments
coupled with multiple rest-and-recuperation breaks limited the
development of expertise and contributed to a lack of continuity. 13 We
also found that a lack of documentation of key programmatic decisions
and an insufficient method to transfer knowledge to successors had
contributed to the loss of institutional knowledge—a challenge that we
reported USAID should address.

In the absence of consistent application of its existing performance
management and evaluation procedures and the lack of mechanisms for
knowledge transfer, USAID programs are more vulnerable to corruption,
waste, fraud, and abuse. In 2010, we recommended, among other things,
that the Administrator of USAID take steps to (1) address preservation of
institutional knowledge, (2) ensure programs have performance indicators
and targets, and (3) consistently assess and use program data and
evaluations to shape current programs and inform future programs.




12
 GAO-10-368.
13
  United States Department of State and the Broadcasting Board of Governors Office of
Inspector General, Report of Inspection: Embassy Kabul, Afghanistan, Report Number
ISP-I-10-32A (Washington, D.C.: Feb. 2010).




Page 8                                                                     GAO-12-802T
                    USAID concurred with these recommendations and identified several
                    actions the agency is taking in Afghanistan to address them, including the
                    following:

                    •    In 2011, USAID established mandatory technical guidance for
                         program monitoring officials on how to establish and where to
                         maintain files, in addition to key responsibilities of the office director to
                         ensure that files are maintained before officials leave their positions.

                    •    In 2010, USAID approved a new performance management plan for
                         its agriculture programs and worked with its implementing partners to
                         align their existing indicators with those in the new plan.

                    •    In 2011, USAID delegated more authority to field program officers to
                         serve as activity managers of agriculture programs, making them
                         responsible for conducting regular project monitoring and reporting on
                         program performance, verifying data reported by implementing
                         partners, and assuring the quality of data being reported through
                         regular site visits. In addition, USAID has taken steps to increase the
                         use of third-party monitoring to ensure data integrity and quality.


                    Risk assessments and internal controls to mitigate identified risks are key
USAID Has Taken     elements of an internal control framework to provide reasonable
Some Action to      assurance that agency assets are safeguarded against fraud, waste,
                    abuse, and mismanagement. Although USAID conducted preaward risk
Improve             assessments for most of its bilateral direct assistance to the Afghan
Accountability of   government, we found that USAID’s policies did not require preaward risk
                    assessments in all cases. For example, we reported in 2011 that USAID
Direct Assistance   did not complete preaward risk assessments, such as determining the
                    awardees’ capability to independently manage and account for funds, in
                    two of the eight cases of bilateral direct assistance. 14 USAID made those
                    two awards after the USAID Administrator had committed to Congress in
                    July 2010 that USAID would not proceed with direct assistance to an
                    Afghan ministry before it had assessed the institution’s capabilities. We
                    recommended that USAID update its risk assessment policies to reflect
                    the USAID Administrator’s commitment to Congress. USAID has since



                    14
                      GAO, Afghanistan: Actions Needed to Improve Accountability of U.S. Assistance to
                    Afghanistan Government, GAO-11-710 (Washington, D.C.: July 20, 2011).




                    Page 9                                                                     GAO-12-802T
updated its policies to require preaward risk assessments for all bilateral
direct assistance awards, periodic reassessment, and risk mitigation
measures, as appropriate. Since October 2011, USAID has awarded
$35 million in direct assistance funds to two Afghan ministries and, in
compliance with its updated policies, completed risk assessments prior to
awarding the funds in both cases.

We also found that USAID established general financial and other
controls in its bilateral direct assistance agreements with Afghan
ministries, including requiring that the ministries:

          •   establish separate noncommingled bank accounts,

          •   grant USAID access rights to the bank accounts,

          •   have a monitoring and evaluation plan,

          •   comply with periodic reporting requirements, and

          •   maintain books and records subject to audit.

In addition to these general financial controls, USAID is required to
establish additional monitoring and approval controls in its direct bilateral
assistance agreements that provide USAID funds to Afghan ministries to
contract for goods and services. 15 USAID had agreements with two
Afghan ministries that allowed them to contract out. However, we
previously found that USAID did not always document its approval of
these ministries’ procurements prior to contract execution. We
recommended that USAID ensure compliance with the monitoring and
approval requirements. We are now following up with USAID to ensure it
is implementing our recommendation.

With respect to direct assistance provided multilaterally through public
international organizations such as the World Bank, USAID’s policy is to
generally rely on the organization’s financial management, procurement,
and audit policies and procedures. We found, however, that USAID has
not consistently complied with its multilateral trust fund risk assessment


15
  These agreements provide funds to Afghan ministries to enter into contracts for goods
and services and require USAID to monitor and approve certain steps of the procurement
process for contracts over $250,000, as appropriate.




Page 10                                                                    GAO-12-802T
policies in awarding funds to the World Bank’s ARTF. For example, in
2011, we reported that USAID did not conduct a risk assessment before
awarding an additional $1.3 billion to the World Bank for ARTF. 16 We also
found that USAID did not conduct preaward determinations for 16 of
21 modifications to the original World Bank grant agreement. In response
to our findings and a prior GAO report, USAID revised and expanded its
guidance on preaward risk assessments for the World Bank and other
public international organizations. 17 Under the revised guidance, USAID
is required to determine the World Bank’s level of responsibility through
consideration of several factors, including the quality of the World Bank’s
past performance and its most recent audited financial statements.

The World Bank has established financial controls over donor
contributions to the ARTF. For example, the World Bank hired a
monitoring agent responsible for monitoring the eligibility of salaries and
other recurrent expenditures that the Afghan government submits for
reimbursement against ARTF criteria. The World Bank also reports that it
assesses projects semi-annually as part of regular World Bank
supervision in accordance with its policies, procedures and guidelines
based in part on project visits. However, we found examples that the
financial controls established by the World Bank over the ARTF face
several challenges:

•     The World Bank and international donors have expressed concern
      over the level of ineligible expenditures submitted by the Afghan
      government for reimbursement. While ineligible expenditures are not
      reimbursed, the bank considers the level of ineligible expenditures to
      be an indicator of weaknesses in the Afghan government’s ability to
      meet agreed-upon procurement and financial management standards.

•     Afghanistan’s Control and Audit Office conducts audits of Afghan
      government programs, including those funded by the ARTF, but
      lacked qualified auditors and faced other capacity restraints,
      according to the Special Inspector General for Afghanistan
      Reconstruction and USAID. As a result, the office used international



16
    GAO-11-710.
17
  GAO, UN Office for Project Services: Management Reforms Proceeding but
Effectiveness Not Assessed and USAID’s Oversight of Grants Has Weaknesses,
GAO-10-168 (Washington, D.C.: Nov. 19, 2009).




Page 11                                                                GAO-12-802T
                      advisers and contracted auditors, funded by the World Bank, to help
                      ensure that its audits of ARTF complied with international auditing
                      standards.

                  •   Security conditions prevented Afghanistan’s Control and Audit Office
                      auditors from visiting most of the provinces where ARTF funds were
                      being spent. The office was able to conduct audit tests in 10 of
                      Afghanistan’s 34 provinces from March 2009 to March 2010 and
                      issued a qualified opinion of the financial statements of ARTF’s salary
                      and other recurrent expenditures.


                  Mr. Chairman, Ranking Member Carnahan, and Members of the
                  Subcommittee, this concludes our statement. We would be happy to
                  answer any questions you may have at this time.


                  For further information on this statement, please contact John P. Hutton
Contacts and      at (202) 512-4841 or huttonj@gao.gov or Charles Michael Johnson, Jr. at
Acknowledgments   (202) 512-7331 or johnsoncm@gao.gov. In addition, contact points for
                  our Offices of Congressional Relations and Public Affairs may be found
                  on the last page of this statement. Individuals who made key contributions
                  to this statement include Johana R. Ayers, Assistant Director; Tetsuo
                  Miyabara, Assistant Director; Pierre Toureille, Assistant Director; Thomas
                  Costa; David Dayton; Emily Gupta; Farahnaaz Khakoo-Mausel; Bruce
                  Kutnick; Angie Nichols-Friedman; Mona Sehgal; and Esther Toledo.




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                  Page 12                                                          GAO-12-802T
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