oversight

El Salvador: Accountability for U.S. Military and Economic Aid

Published by the Government Accountability Office on 1990-09-21.

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

z                                                                                           \




I,                             lJtritcx1 States   (hwrul   Accounting   Office
       -.
4
                               Report to the Chairman, Subcommittee
,IiGAO                         on Western Hemisphere Affairs,
;I
’                              Committee on Foreign Affairs, House of
/                              IZepreseritatives
I,!I
                        ---   ----
i Sc~ptc~mlwr I !t!)O
h
1                              EL SALVADOR
                               Accountability for U.S.
                               Military and Economic
                               Aid




                                                                                           ?a
                                                                                 #Illlllllllll
                                                                                        ll
                                                                                   142266
National Security and
International Affalrs Division

R-238726

September 21, 1990

The Honorable George W. Crockett, Jr.
Chairman, Subcommittee on Western
  Hemisphere Affairs              7
Committee on Foreign Affairs
House of Representatives

Dear Mr. Chairman:

In response to your request, we reviewed the accountability and controls for U.S. military
and economic assistance to El Salvador. Our report discusses the accountability and controls
in place and the extent to which these can prevent misuse and diversion of US. assistance.
We will send copies of the report to appropriate congressional committees, the Secretaries for
Defense and State, and the Administrator of the Agency for International Development. We
will make copies available to other interested parties upon request.

This report was prepared under the direction of Joseph E. Kelley, Director, Security and
International Relations Issues, who may be reached on (202) 275-4128. Other major
contributors are listed in appendix IV.

Sincerely yours,




Frank C. Conahan
Assistant Comptroller General
Executive Summary


                   The United States provided El Salvador with $3.5 billion of military and
Purpose            economic assistance in the 1980s. The Chairman, Subcommittee on
                   Western Hemisphere Affairs, House Committee on Foreign Affairs,
                   requested that GAO review the accountability, controls, and monitoring
                   mechanisms for U.S. military and economic assistance to El Salvador.
                   GAO'S objectives were to determine if U.S. aid has been subject to misuse
                   and diversion and if internal controls were adequate.


                   The U.S. Defense Security Assistance Agency administers military aid.
,,,ground
RcanL
                   The U.S. Military Group in El Salvador is responsible for day-to-day
                   operations of the military assistance program, which in fiscal year 1990
                   was allocated $86 million.

                   The Agency for International Development (AID) has a mission in El
                   Salvador that plans, monitors, and controls economic assistance projects
                   and activities. In fiscal year 1990, $228.9 million was allocated for U.S.
                   economic aid to El Salvador. Under terms of AID assistance agreements,
                   El Salvador is required to set aside large amounts of local currencies to
                   fund development activities associated with AID'S program.


                   U.S. military aid to El Salvador has generally been used in accordance
Results in Brief   with conditions set forth in Foreign Military Sales agreements. However,
                   U.S. aid could be vulnerable to misuse or diversion because of control
                   weaknesses. The US. Military Group and the Salvadoran Armed Forces
                   plan to take action to improve controls over assistance.

                   Despite staff limitations, AID is generally following established policies
                   and procedures for managing and controlling appropriated economic
                   assistance to El Salvador, but some misuse has occurred.

                   El Salvador’s local currencies, which are associated with the AID pro-
                   gram, are vulnerable to misuse because Salvadoran agencies, which
                   have weak financial management capability, control the funds, not AID,
                   This is AID'S standard practice in any country when local currency is
                   involved. AID’S policy on its level of accountability for these funds is
                   unclear, and AID staff resources are insufficient to closely monitor all
                   local currency uses.




                   Page 2                        GAO/NSIAD-90-132   Accountability   for Aid to El Salvador
                        Executive   Summary




Principal Findings

Military Aid            GAO   did not find evidence that US. military aid had been diverted since
                        it last reported on this issue in August 1989 in El Salvador: Transfers of
                        Military Assistance Fuels (GAO/NE&D89-186). However, U.S. military per-
                        sonnel exercise limited oversight and rely heavily on Salvadoran con-
                        trols to ensure accountability.

                        El Salvador’s system for controlling and accounting for military supplies
                        and equipment is workable but antiquated. El Salvador has not empha-
                        sized management controls over logistics due to combat activities. Most
                        records are handwritten, and two military installations that GAO visited
                        lacked written policies and procedures. Taking physical inventory to
                        reconcile records with actual equipment and supplies on hand is done
                        infrequently. During warehouse spot checks, GAO found that the actual
                        amount in inventory was not accurately reflected in Salvadoran military
                        accountability records. Furthermore, El Salvador’s military lacks ade- ,
                        quate storage space, and U.S.-funded items such as outboard motors,
                        ammunition, and weapons were not adequately secured. This is critical
                        because the items could be stolen, affected by weather conditions,
                        sabotaged, or accidentally exploded.


Economic AID Projects   Because of internal control deficiencies in Salvadoran agencies that
                        implement aid projects, AID has increased its audit activity and, within
                        staffing constraints, emphasized project monitoring. Nevertheless, the
                        AID mission is not, as required, identifying financial control weakness
                        before substantial monies are disbursed. Yet AID Regional Inspector Gen-
                        eral audits have identified weaknesses in Salvadoran agencies’
                        accounting systems, management capabilities, inventory controls, and
                        internal control procedures, The AID mission and Regional Inspector Gen-
                        eral do not believe that project funds are widely misused in El Salvador.
                        However, the mission personnel described three cases of suspected
                        misuse that had been referred for investigation to AID’S Regional
                        Inspector General.


Local Currency Y        Local currencies are vulnerable to misuse because Salvadoran agencies
                        managing these funds have serious financial control weaknesses. Fur-
                        ther, AID has insufficient staff to account for all local currency use.



                        Page 3                       GAO/NSIAD-90-132   Accountability   for Aid to El Salvador
                      Executive   Summary




                      Almost half of the AID Regional Inspector audits of Salvadoran agencies
                      have identified significant accounting system problems.

                      AID’S policy on local currency accountability is not clear. The AID
                      Regional Inspector General has taken the position that the AID mission is
                      accountable for end use of local currency funds. Because staff con-
                      straints inhibit AID mission monitoring of local currency funds, the AID
                      mission is increasing the amount of local currency spent on general
                      expenses of the Salvadoran government. AID’S policy requires less
                      accountability for local currency used in this way. This action could
                      make the funds more vulnerable to misuse.


                          recommends that the Secretary of Defense, after coordination with
Recommendations       GAO
                      the Department of State, direct the Defense Security Assistance Agency
                      and the U.S. Military Group in El Salvador to work toward reaching an
                      agreement with the Salvadoran Armed Forces on actions needed to
                      improve internal controls. These actions can include

                  l appointing independent high-level officials to the Salvadoran property
                    accountability and Inspector General positions,
                  l performing periodic inventories of the Salvadoran Armed Forces’ prop-
                    erty to ensure that accountability for its custody and use is maintained
                    and to reconcile physical counts with records, and
                  9 authorizing the U.S. Military Group to conduct periodic spot checks of
                    selected U.S.-funded military items to provide reasonable assurance of
                    accountability and control.

                      In addition, GAO recommends that the Administrator,           Agency for Inter-
                      national Development, take the following actions:

                  . Ensure that the AID mission (1) performs in-depth financial management
                    assessments of Salvadoran organizations scheduled to implement new
                    AID dollar-funded projects and (2) works with El Salvador to correct
                    identified problems.
                  l Clarify AID’S local currency accountability guidance for El Salvador. The
                    guidance should clearly state (1) what constitutes reasonable assurance
                    that host government agencies have adequate financial systems to
                    manage local currency funds and (2) what degree of AID oversight and
                    monitoring is required.




                      Page 4                       GAO/NSIAMW132   Accountablllty     for Aid to El Salvador
                  Executive   Summary




                  The Department of Defense generally agreed with this report. Defense
Agency Comments   indicated that El Salvador’s military had appointed an Inspector General
                  and a Property Accountability Officer, installed a computer network to
                  assist in inventory control, and was working with US. trainers to bring
                  its system more in line with the U.S. model. Defense also commented
                  that authorization for on-demand U.S. spot checks of Salvadoran ‘facili-
                  ties and inventories and other control issues would be discussed with
                  Salvadoran officials during periodic joint program management reviews
                  to provide the needed additional emphasis on accountability and
                  controls.

                  AID  generally concurred with GAO'S overall findings. AID said it has
                  expanded the use of pre-award surveys, is moving towards annual
                  financial audits of all its programs in El Salvador to assess accounta-
                  bility and internal controls, and is providing technical assistance when
                  audits indicate accountability deficiencies. With these actions, AID
                  believes it is already implementing GAO'S recommendations regarding
                  dollar-funded projects. GAO believes that these actions will improve
                  accountability. However, in GAO'S opinion, the pre-award surveys do not
                  assess the overall management capacity of the implementing institution
                  in sufficient depth to determine if it has the capability to properly
                  manage AID projects and adequately account for project funds, In-depth
                  management assessments are more likely to identify deficiencies that
                  need to be corrected before substantial funds are disbursed.

                  AID  also indicated that it is preparing guidance which will (1) require its
                  missions to perform audits and financial assessments of host govern-
                  ment units that administer local currency accounts and (2) specify how
                  these accounts should be monitored. AID agreed that it had not defined
                  what constitutes reasonable assurance that host government agencies
                  have adequate financial systems to manage local currency funds and
                  indicated that its new guidance will better define what mission actions
                  are needed to provide reasonable assurance. AID said it would also
                  review its requirements to determine how they can be stated more
                  clearly.

                  The Department of State commented that GAO'S recommendations and
                  the measures already being implemented by AID and the U.S. Military
                  Group would ensure the integrity of the U.S. assistance program.




                  Page 5                        GAO/NSIAD-90-132   Accountability   for Aid to El Salvador
Contents


Executive Summary                                                                                              2

Chapter 1                                                                                                      8
Introduction           Objectives, Scope, and Methodology                                                      8


Chapter 2                                                                                                 10
Better Controls        Military Aid Program                                                               10
                       Some Sales Made Without US. Approval                                               13
Neededto Ensure        Limited U.S. Monitoring                                                            15
Accountability of      Salvador-an Controls Over Security Assistance                                      17
                       Conclusions                                                                        22
Military Assistance    Recommendations                                                                    22
                       Agency Comments                                                                    22

Chapter 3                                                                                                 24
Economic Aid           AID’s Program                                                                      24
                       AID Staffing                                                                       24
Program Controls       Cash Transfers                                                                     25
                       Concessional Food Sales                                                            26
                       Food Donations                                                                     27
                       Project Assistance                                                                 27
                       Need to Better Identify Control Weaknesses                                         31
                       Conclusions                                                                        33
                       Recommendations                                                                    33
                       Agency Comments and Our Evaluation                                                 33

Chapter 4                                                                                                 35
Local Currency Is      Local Currency Program                                                             35
                       AID Trust Fund                                                                     36
Vulnerable to Misuse   Private Sector Credit                                                              36
                       Extraordinary Budget Support                                                       36
                       Ordinary Budget Support                                                            39
                       AID’s Guidance Is Ambiguous                                                        41
                       Conclusions                                                                        42
                       Recommendations                                                                    42
                       Agency Comments                                                                    42




                       Page 6                      GAO/NSIAIMO-132   Accountability   for Aid to El Salvador
                       Contents




Appendixes             Appendix I: Comments From the Department of Defense                                 44
                       Appendix II: Comments From the Agency for                                           56
                           International Developmemt
                       Appendix III: Comments From the Department of State                                 62
                       Appendix IV: Major Contributors to This Report                                      64

Related GAO Products                                                                                       68

Tables                 Table 3.1 U.S. Economic Aid to El Salvador                                          24
                       Table 4.1: El Salvador Local Currency Program                                       35
                       Table 4.2: Auditors’ Opinions on Local Currency Audits                              38

Figures                Figure 2.1: Military Aid Funding for El Salvador (Fiscal                            11
                            Years 1980-89)
                       Figure 2.2: Types of U.S. Military Aid to El Salvador                               12
                            (Fiscal Year 1989)




                       Abbreviations

                       AID        Agency for International Development
                       CONARA     El Salvador’s National Commission for Area Restoration
                       GAO        General Accounting Office
                       IMET       International Military Education and Training Program
                       MAP        Military Assistance Program
                       MILGROUP   US. Military Group


                       Page 7                       GAO/NSIAD-W-132   Accountability   for Aid to El Salvador
Introduction


                        Since 1980, the United States has provided $3.5 billion of economic and
                        military aid to El Salvador to assist its government in an ongoing
                        struggle against a leftist insurgency. U.S. policy towards El Salvador
                        and the amounts and type of aid provided have been subjects of contin-
                        uing controversy for the U.S. administration and the Congress.

                        U.S. aid programs for El Salvador serve three basic purposes: military
                        aid, balance-of-payments support, and development or humanitarian
                        assistance. Military assistance primarily consisted of major end items
                        such as vehicles and aircraft prior to 1985. Since then, the majority of
                        military assistance has funded consumable items such as ammunition,
                        fuel, spare parts, and training. El Salvador receives almost all of its mili-
                        tary equipment and supplies from the U.S. military aid program.

                        El Salvador is also highly dependent on US. economic aid. The United
                        States funds cash transfers for balance-of-payments support, conces-
                        sional food sales and donations, and projects affecting virtually all
                        civilian sectors to restore infrastructure damaged by the war, provide
                        social services, and attempt to reactivate El Salvador’s economy.

                        Allegations of misuse and corruption have plagued the assistance pro-
                        grams and have been a continuing concern for the U.S. government. In
                        August 1989, we reported’ that El Salvador had improperly transferred
                        US-funded fuel to third parties without U.S. consent in violation of
                        assistance agreements. Regarding economic aid, there have been several
                        instances of alleged or actual misuse. For example, in 1984, allegations
                        surfaced that U.S. cash transfers had been diverted to U.S. bank
                        accounts. Corruption in the previous Salvadoran administration was a
                        major theme in political campaigns leading up to the presidential elec-
                        tion won by Alfred0 Cristiani, who took office in June 1989.


                        The Chairman, Subcommittee on Western Hemisphere Affairs, House
Objectives, Scope,and   Committee on Foreign Affairs, requested that we review the accounta-
Methodology             bility for and controls over US. military and economic assistance to El
                        Salvador. Our objectives were to determine (1) if any assistance had
                        been subject to misuse and diversion and (2) what accountability and
                        controls are in place.

                        Regarding military assistance, we performed work in Washington, DC.,
                        at the Department of State, the Defense Security Assistance Agency, and

                        ‘EL Salvador: Transfers of Military Assistance Fuels (GAO/NSIAD-89-186, Aug. 1989).



                        Page 8                                GAO/NSIAD90-132     Accountability   for Aid to El Salvador




                                                                    I
chnpter 1
lutroduction




military supply commands, where we examined the amounts and types
of aid provided to El Salvador since 1980. In El Salvador, we met with
officials of the U.S. Military Group (MILGROUP). We examined their
records and reports on Salvadoran accountability procedures and dis-
cussed the level of U.S. program oversight and knowledge of potential or
actual diversion or misuse of assistance. We also met with Salvadoran
Armed Forces officials at all levels. We visited the six Army brigades,
two Air Force bases, and a Navy installation as well as five other central
warehouse/logistical facilities throughout El Salvador. We reviewed El
Salvador’s policies and procedures for receipt, issuance, and delivery of
military supplies and equipment and performed physical spot checks of
warehouse inventories to verify the accuracy of the records and ade-
quacy of controls. Because our review focused on accountability for U.S.
assistance, we did not review El Salvador’s controls over its own
resources used for military salaries and other purposes.

Regarding economic assistance, we conducted work at the Department
of State and the Agency for International Development (AID) in Wash-
ington, D.C. We reviewed AID audits, cable traffic, evaluations, and other
reports on AID and Salvadoran oversight and control of funds and dis-
cussed accountability issues with program managers. In El Salvador, we
met with government officials in the Planning and Finance Ministries,
the Central Bank, and Salvadoran auditing agencies and with mayors
and local officials, and reviewed their procedures for controlling aid
funds. At the AID mission, we met with US. and Salvadoran staff
responsible for monitoring and controlling assistance activities. We
reviewed policy statements and program documents to evaluate controls
in place for the various aid programs. In Honduras, we met with the AID
Regional Inspector General and his staff regarding audits and investiga-
tions of aid programs in El Salvador and reviewed their work papers for
selected audits.

We conducted our review from July to December 1989 and performed
fieldwork in El Salvador during September and October 1989. Our work
was conducted in accordance with generally accepted government
auditing standards.




Page 9                       GAO/NSIAD-90-132   Accouutabiity   for Aid to El Salvador
Chapter 2

Better Controls Needed to Ensure
Accountability of Military Assistance

                       In the 198Os, the United States provided El Salvador almost $1 billion in
                       military aid. We did not find evidence that US. military aid to El
                       Salvador had been diverted or misused since our August 1989 report on
                       illegal fuel transfers. However, US. and Salvadoran controls are not suf-
                       ficient to provide reasonable assurance of proper use. Defense Depart-
                       ment officials in El Salvador do not closely monitor how the Salvadoran
                       Armed Forces use and control U.S. aid. Salvadoran procedures to store,
                       inventory, and control U.S.-funded supplies and equipment could be
                       improved to reduce opportunities for diversion and misuse.


                       From 1980 to 1989, the US. government provided $968 million in mili-
Military Aid Program   tary aid. Of this amount, $833 million (8’7 percent) was financed with
                       Military Assistance Program (MAP) grants, and $107 million (11 percent)
                       was financed with Foreign Military Sales loan credits. The remaining
                       $18 million (2 percent) paid for training under the International Military
                       Education and Training Program (IMET). Since 1986, almost all aid has
                       been in the form of MAP grants. The Defense Security Assistance Agency
                       administers U.S. military aid programs, and the MILGROUP in El Salvador
                       manages in-country program operations.




                       Page 10                      GAO/NSLAD-90-132   AccountabWy   for Aid to El Salvador
                                          Chapter 2
                                          Better Controls Needed to Etwure
                                          AccountabilIty  of Military A&stance




Flgure 2.1: Milltafy Aid Funding for El
Salvador (Fiscal Years 1980-89)
                                          220    Doll~n In MIllIona

                                          200




                                           8Q

                                           (Lo

                                           4s




                                                 1980       1981        1982      1083     1084     ls8s      1988          1987     lsee      lsm
                                                 Swrc#    of FundInS From 1980 to 1989

                                                 1       1 IMET
                                                          ForeignMilitarySales Credits
                                                          MilitaryA88i8tatW    Funds



                                          Of the $85 million in military aid for fiscal year 1989, $64 million was
                                          paid for ammunition, fuel, medical supplies, aircraft and vehicle mainte-
                                          nance, and other items to sustain military operations. About $16 million
                                          was used to replace equipment lost in combat, fund construction, and
                                          provide training. The remaining $5 million was embargoed by U.S.
                                          legislation.’




                                          ‘Section 539, Foreign Operations, Export Financing, and Related Programs Appropriations Act, 1989
                                          (the Harkin Amendment), requires that $6 million of the funds appropriated for military assistance
                                          for El Salvador not be expended until the President reports to Congress that El Salvador has substan-
                                          tially concluded all investigative action with respect to those responsible for the January 1981 deaths
                                          of two U.S. land reform consultants and has pursued all legal avenues to bring to trial and obtain a
                                          verdict on those who ordered and carried out the murders. This sanction also applied to military aid
                                          funds for fiscal years 1987 and 1988.



                                          Page 11                                      GAO/NSIAD-90-132    Accountability      for Aid to El Salvador
                                               Chapter 2
                                               Better Controls Needed to Ensure
                                               Accounulbillty  of Militnry Amistnnce




Figure 2.2: Types of U.S. Military Aid to El
Salvador (Fiscal Year 1989)




                                                                                                    Equipment, Maintenance




                                                                                                   7.5%
                                                                                                   Construction Projects




                                                          I=                                       Fsuw,-
                                                                                                   .0
                                                                                                   Training

                                               The Foreign Military Sales Program is administered under the authority
                                               of the Arms Export Control Act. The act requires that no defense article
                                               or service shall be sold or leased by the U.S. government unless the
                                               recipient country agrees

                                           l to obtain consent of the President before transferring any defense
                                             article, service, or training to a third party or permit its use for purposes
                                             other than those furnished and
                                           . to maintain the security of U.S.-supplied articles or services and provide
                                             substantially the same degree of security as would be provided by the
                                             United States.

                                               The Defense Department indicated that El Salvador should provide ade-
                                               quate security to U.S.-funded military items but that the legal require-
                                               ment to maintain security of U.S.-supplied articles or services refers to



                                               Page 12                                 GAO/NSIAlMO-132    Accountability   for Aid to El Salvador
                                chapter 2
                                Better Ckmtrola Needed to Ensure
                                Accountability  of Military A~sistaxwe




                                the safeguarding of classified information and equipment. The Defense
                                Department said that El Salvador had no classified articles when our
                                review was conducted. We note that the statute does not distinguish
                                between classified and nonclassified materials. Furthermore, the
                                Department was not able to provide any legal support for its position
                                that (1) the statute was not meant to apply to all U.S.-funded military
                                aid, and (2) the host country need not agree to provide substantially the
                                same security as would be provided by the United States for nonclassi-
                                fied U.S.-funded articles and services.

                                All Foreign Military Sales agreements signed by the United States and El
                                Salvador require the State Department’s approval before El Salvador
                                can transfer items to a third party. According to Salvadoran and State
                                Department officials, El Salvador has not requested consent to transfer
                                items.

                                MAPgrants are authorized by the Foreign Assistance Act of 1961. Prior
                                to fiscal year 1982, MAP grants funded defense articles and services
                                under procedures different from those used for Foreign Military Sales.
                                However, effective in 1982, section 603(a)(3) of the Foreign Assistance
                                Act authorized the transfer of MAPfunds to the Foreign Military Sales
                                trust fund for merger with the recipient country’s trust fund deposits.
                                up-financed purchases are made through the Foreign Military Sales
                                Program and are conducted under procedures governed by the Arms
                                Export Control Act.

                                Through the IMET program, the U.S. government spent about $17.6 mil-
                                lion in the 1980s to train Salvadoran military officers at US. military
                                installations in the United States and Panama. Under this program, the
                                U.S. government pays for training costs, including transportation and a
                                daily living allowance. Funds are controlled by the U.S. government, and
                                training must be approved by the Defense Security Assistance Agency
                                on a case-by-case basis.


                      Our August 1989 report stated that the Salvadoran Air Force sold
SomeSalesMade         61,107 gallons of MAP-funded fuel to the United States and to third par-
Without U.S. Approval t-les, including an organization involved in resupplying the Nicaraguan
                                Democratic Resistance. Our report expressed concern that (1) the third-
                                party transfers had not been approved by the United States and there-
                ”               fore violated sales agreements between the U.S. and Salvadoran govern-
                                ments and (2) El Salvador was generating cash from sales of MAP-funded



                                Page 13                                  GAO/NSIAD-!IO-132   Accountabiity   for Aid to El Salvador
Chapter 2
Better Cofitrols Needed to Ensure
Accountability   of Military Assistance




fuel-a result that we believed was not intended by the Arms Export
Control Act. Furthermore, use of the cash revenues was not subject
to U.S. control or approval.

Concerned that the U.S. government lacked control of fuel sales reve-
nues, the MILGROUP developed a memorandum of understanding detailing
the requirement for U.S. approval of fuel sales and other third-party
transfers. Furthermore, the Defense Security Assistance Agency estab-
lished procedures to credit US. payments for MAP-funded fuel for future
Foreign Military Sales to El Salvador.


We found, however, that the Defense Security Assistance Agency had
been refunding proceeds from US. purchases of MAP-funded fuel to a
Salvadoran account used for commercial purchases that are not
reviewed or approved by the United States. Between June 1987 and Sep-
tember 1989, Salvador-an officials spent over $1.1 million of fuel sales
proceeds to purchase items, including an automobile, camera equipment,
and a $300,000 building that M&GROUP officials believed may have been
overvalued. For all purchases from the account, the United States trans-
ferred funds to El Salvador’s military attache in Washington, D.C., upon
receipt of a request for payment.

The Financial Management Division of the Defense Security Assistance
Agency indicated that it was unaware that the Department of Defense
had planned to ensure that proceeds from MAP-financed fuel sales would
be used only for Foreign Military Sales purchases and would not be
made available to El Salvador for commercial purchases. On December
4, 1989, the Defense Security Assistance Agency directed its accounting
center to discontinue refunding the proceeds from MAP-funded fuel sales
to an account controlled by the Salvadoran government.

According to agency officials, fuel proceeds are now deposited in a For-
eign Military Sales trust fund account. This is to ensure that the agency
and the MILGROUP in El Salvador have an opportunity to review and
approve all purchases financed with these funds. In addition, the
Defense Security Assistance Agency indicated that it (1) has notified all
security assistance offices worldwide that recipient countries must use
proceeds from sales of MAP-funded fuel only to finance purchases under
the Foreign Military Sales Program and (2) has modified the Security
Assistance Manual to provide guidance concerning the proceeds from
the resale of items purchased with U.S. financing.



Page 14                                   GAO/NSIAD-W-132   Accountability   for Aid to El Salvador
               Chapter 2
               Better Controls Needed to Enmre
               Accountability  of Military Assistance




               The U.S. government conducts limited monitoring of El Salvador’s uses
Limited U.S.   of U.S.-funded defense items. Defense Department procedures require
Monitoring     security assistance organizations such as the MILGROUP in El Salvador to

               “observe and report on the utilization by the host country of defense articles,
               defense services, and training of U.S. origin. This function should be carried out as a
               secondary duty. How and to what extent such observation and reporting should and
               can be done will vary considerably from country to country and thus no standard
               procedures are described.. ..I’

               MILGROUP  officials told us that in the absence of more specific guidance,
               each member of the MILGROUP individually decides how much emphasis
               should be placed on monitoring responsibilities. The MILGROUP works
               with EL Salvador’s military to determine what items should be pro-
               vided, oversees aid shipments, and monitors some usage. According to
               the MILGROUP, its trainers are stationed at all the major military installa-
               tions in El Salvador (brigades, air bases, and central warehouse opera-
               tions) and are therefore generally aware of how U.S. assistance is being
               used.

               However, we found that the MILGROUP does not extensively monitor the
               Salvadorans’ use of US. military assistance. Because of staffing and
               time constraints, the MILGROUP does not closely review consumption rates
               of consumable items and does not conduct frequent inventories and spot
               checks of Salvador-an warehouses. As a result, the MILGROUP must rely
               heavily on the effectiveness and integrity of Salvadoran controls to
               ensure accountability.

               MILGROUP officials also told us that, in general, they have not established
               tight controls because, in their opinion, almost all assistance is in the
               form of equipment and supplies, much of which has no nonmilitary uses.
               For example, the aid includes repair parts for military aircraft and
               weapons and ammunition that are not sold commercially in El Salvador.
               Moreover, military equipment and supplies are in short supply.
               According to the US. military officials, El Salvador’s military needs
               exceed US. aid levels. For example, the MILGROUP estimated that El
               Salvador had needed over $100 million in 1989 for military supplies and
               equipment just to sustain operations, but the United States allocated
               $86 million. MLGROUP officials told us that because military supplies and
               equipment are in short supply, El Salvador’s military is careful to con-
               serve what it receives. To illustrate that supplies were in short supply,
               MILGROUP officials showed us that used syringes were being cleaned for
               reuse rather than thrown away at a military hospital we visited.



               Page 15                                  GAO/NSIAD-f)O-132   Accountability   for Aid to El Salvador
                        Chapter 2
                        Better Controls Needed to Ensure
                        Accountability  of Military Aesistance




                        However, our review of MILGROUP activities and Salvadoran policies and
                        procedures as well as our inventory spot checks indicated weaknesses in
                        the controls over US. military assistance.


Checks on Consumption   From May 1987 to April 1989, the MILGROUP conducted analyses on con-
and Inventories         sumption data on ammunition, fuel, communication spare parts, bat-
                        teries, medical supplies, and repair parts for helicopters, vehicles, and
                        weapons. At the time of our fieldwork, the MILGROUP had discontinued
                        some of these analyses and had limited its review to the use of fuel and
                        ammunition, which it viewed as the most critical items. Time and staff
                        constraints were given as reasons why more analyses of usage rates
                        were not being performed. The MILGROUP has only one officer to analyze
                        the data. Furthermore, according to the MILGROUP, there had been no
                        indications of diversion or misuse.

                        Consumption data on various materials can be analyzed to find indica-
                        tions of fraud, waste, and abuses. Without such analyses, however, it is
                        difficult to tell when assistance is being used for unnecessary purposes.

                        Periodic inventories and frequent spot checks of U.S.-funded supplies
                        and equipment can, in our opinion, help account for U.S. military aid.”
                        The MILGROUP has not conducted inventories or spot checks on a regular
                        basis. The MILGROUP Commander agreed that more frequent inventories
                        and spot checks could help El Salvador’s military to better control and
                        account for U.S.-funded supplies and equipment. In early 1989, U.S.
                        logistics trainers visited Salvadoran army brigades to observe logistics
                        operations at these units. The trainers discussed logistics issues and
                        needs with Salvadoran officers and conducted some spot checks of U.S.
                        military aid. A US. logistics trainer in El Salvador told us that a periodic
                        spot check program would not impose an unreasonable burden on U.S.
                        military personnel.

                        Periodic spot checks of selected items by U.S. personnel ensure that
                        appropriate accountability procedures are in place to prevent pilferage,
                        loss, or misuse of aid. MILGROUP staff told us that these checks could be
                        performed without significantly detracting from their other responsibili-
                        ties. At the end of our fieldwork, the MILGROUP Commander indicated
                        that he would work with the Armed Forces to implement these actions.

                        ‘Defense Department procedures implementing the Foreign Assistance Act require annual inventories
                        of MAP-funded equipment provided before 1982. In August 1989, the Inspector General from the U.S.
                        Southern Command in Panama reported that these inventories had not been done.



                        Page 16                                  GAO/NSIALMO-132   Accountability   for Aid to El Salvador
                            Chapter 2
                            Better Controls Needed to Ensure
                            Accountability  of Military Assistance




Staffing and Travel         According to MILGROUP officials, staffing and travel restrictions limit the
Restrictions                extent to which U.S. personnel can monitor the use of military aid in El
                            Salvador. For example, they said that they could not meet each arrival
                            of U.S. military aid or monitor daily use of fuel. In addition to staffing
                            constraints, US. military personnel are restricted from visiting combat
                            areas, As a result, they cannot observe the use of all military aid.


                            Control weaknesses within El Salvador’s Armed Forces could provide
Salvadoran Controls         opportunities for diversion and misuse. These weaknesses include inven-
Over Security               tory discrepancies, lack of written procedures, limited storage space,
Assistance                  and inadequate security provided for ammunition. Salvadoran officers
                            acknowledged that management control over logistics was not empha-
                            sized in the past, but they believe that recent and planned actions will
                            improve accountability and control practices. Salvadoran military offi-
                            cials appeared committed to correcting existing deficiencies.


Logistics Managemen.t Has   According to Salvadoran military officials, combat activities have been
Been Low Priority           the highest priority because of wartime conditions, and management
                            control over logistics has been a low priority. As a result, El Salvador’s
                            military logistics system has not advanced to accommodate an expanded
                            military and the U.S. military assistance program.

                            The Salvadoran Armed Forces grew from about 12,000 in 1980 to
                            approximately 57,000 in 1989. Because logistics has not been empha-
                            sized, Salvadoran forces have received limited logistics training, and the
                            number and quality of logistics personnel have not increased with troop
                            growth. As a result of the shortage of experienced and trained logistics
                            personnel, El Salvador’s military relies on an antiquated logistical
                            system to manage large quantities of materials.

                            Low emphasis on logistics has been cited in previous years’ U.S. assess-
                            ments of El Salvador’s military capabilities. In 1984, a U.S. Army assess-
                            ment team noted that lack of adequate logistics training would result in
                            misdirected priorities. In 1985, a U.S. logistics team reported a lack of
                            logistics emphasis, knowledge, and experience among Salvadoran
                            officers. The report recommended that the Armed Forces increase all
                            commanders’ knowledge and awareness of logistics and develop a logis-
                            tics officer corps.

                            El Salvador’s military logistics system is primarily supported by a
                            manual paperwork process. Most of the military units we visited were


                            Page 17                                  GAO/NSIAD-90-132   Accountability   for Aid to El Salvador
Chapter 2
Better Controls Needed to Ensure
Accountability  of Military Aseistance




using ledger books, card systems, and schedules to record receipt, issu-
ance, and on-hand balances. There was no standardized and systematic
method for keeping records among the units, and our spot checks indi-
cated some conflicting information in records. Salvadoran officers told
us that data discrepancies often occurred because not all written records
were updated simultaneously for each transaction. These manual sys-
tems do not permit easy tracking of receipt, issuance, and use of respec-
tive items.

The Defense Security Assistance Agency indicated that in February
1990, the Salvadoran military established a computer network for the
Air Force to assist with accountability and control of all major end items
and repair parts. This network is being expanded to encompass the
entire Salvadoran Armed Forces.

During our fieldwork, we attempted to determine the location of a
random sample of 150 M-16 rifles and 150 M-9 pistols delivered to El
Salvador over the last 10 years. We provided a list of serial numbers for
these weapons to the officials at the Salvadoran Armed Forces logistics
headquarters and requested data showing the location of each weapon.
The officials explained that extracting this data from the system would
be difficult, but they subsequently provided us a list of the specific rifles
and pistols from our samples that, according to Salvadoran records,
were located at one of the brigades we were to visit. When we visited
this brigade, we were shown other lists detailing weapons assigned to
the brigade, but none of the rifles and pistols in our sample were on the
lists. We subsequently located most of the pistols by accident during a
visit to a central warehouse in San Salvador. Because of time con-
straints, we were unable to determine where the sample rifles and some
of the pistols were actually located. These tests of military records do
not indicate that the weapons in our sample had been diverted. The tests
do indicate, however, that the military’s central inventory records were
incorrect and that an internal control problem exists.

According to the Vice Chief of Staff, El Salvador’s military has made
efforts to improve the quality of its logistics personnel and needs to
emphasize training in order to correct these problems. Officials told us
that they are concerned about logistics and believe they could do more
but that they have been unable to concentrate on this area due to the
focus on combat. The Vice Chief of Staff indicated that more capable
officers will be placed in logistics positions as the conflict subsides,




Page 18                                  GAO/NSIAIMO-132   Accountability   for Aid to El Salvador
                   Chapter 2
                   Better Control8 Needed to Fhmre
                   Accountability of Military AeeMance




                   In the last 2 years, the United States has increased emphasis on Salva-
                   doran logistics training. For example, 61 officers attended U.S. facilities
                   for training in inventory, supply, and other logistics fields. Furthermore,
                   U.S. military trainers have provided other logistics training in automo-
                   tive maintenance and repair, material security, and supply management.

                   According to the MILGROUP Commander, in addition to training, the
                   appointment of a high-ranking official, such as the Vice Chief of Staff or
                   the Chief of Logistics, to monitorthe property accountability control
                   program would improve accountability for U.S. military aid and help to
                   limit potential for diversion or misuse of material. In addition, an active
                   Inspector General operation could investigate fraud and abuse and also
                   review and report on weaknesses in accountability and internal control
                   policies and procedures.

                   According to a Ministry of Defense official, the Inspector General should
                   be responsible for oversight of military accountability and use of mate-
                   rial. The Inspector General position at the Ministry of Defense had not
                   been filled since 1980 because of personnel and resource shortages.
                   Since the position was vacant, the Armed Forces was enforcing its own
                   accountability and control of military assistance. As a result, there was
                   a potential conflict of interest that could affect the Salvadorans’ ability
                   to provide adequate assurances that US. miltary assistance is being
                   used properly.

                   The Defense Security Assistance Agency indicated that since we com-
                   pleted our fieldwork, a Salvadoran colonel has been assigned primary
                   responsibility to ensure that material and equipment are adequately
                   accounted for and controlled, The agency also indicated that there is
                   now a clear chain of command for the Salvadoran logistics system,
                   which was not the case in the past. A Salvadoran military Inspector
                   General, who will investigate allegations of irregularities in logistics
                   matters, has also been appointed.


Evolving Written   El Salvador’s military headquarters has established overall logistics pol-
Procedures         icies and procedures. Each military unit is required to develop its own
                   standard operating procedures based on this guidance. Headquarters
                   directives include procedures for reporting receipt and distribution, con-
                   ducting inventories, and accounting for military property. All military
               Y
                   units are required to submit periodic reports to headquarters about
                   material received, issued, consumed, on hand, and missing or lost.



                   Page 19                               GAO/NSLUMt%132   Accountability   for Aid to El Salvador
                           Chapter 2
                           Better Contmls Needed to Ensure
                           Accountability of MWary Assistance




                           According to Salvadoran directives, commanders at headquarters, cen-
                           tral warehouses, brigades, units, and individual soldiers are held
                           accountable for assigned items and are required to pay for losses due to
                           negligence. For example, a soldier at the Second Brigade lost 15 com-
                           passes, and their cost was deducted from his salary. Furthermore, the
                           Armed Forces Chief of Logistics told us that to ensure accountability of
                           arriving shipments of military aid, the Chief and/or several other staff
                           meet most shipments so that the shipments can be entered into the prop-
                           erty accountability system as received.

                           Written logistics operating procedures, however, were not in place at all
                           military units. Of the 14 units we visited, one Army brigade and one Air
                           Force base did not have written procedures. Although this is not a wide-
                           scale weakness, it does provide opportunities for mistakes and misuse,
                           especially when responsible logistics personnel are absent.

                           Salvadoran officials are attempting to improve controls by updating and
                           coordinating key guidance documents. The Vice Chief of Staff is heading
                           a committee to update army regulations to better describe accountability
                           responsibilities and has requested assistance in preparing these
                           regulations.


Inadequate Storage Space   Military aid agreements require El Salvador to provide the same degree
                           of security to U.S.-funded defense items as would be provided by the
                           United States. Of the 14 military units we visited, 7 had limited storage
                           space. As a result, some U.S.-funded supplies and equipment were inade-
                           quately secured. For example, at a naval installation, 13 outboard
                           motors were stored outside due to lack of space within the warehouse.
                           According to MILGROUP officials, inadequate secured storage space is a
                           problem at many installations- a problem exacerbated by damage
                           caused during the 1986 earthquake. In addition, disposal of unusable
                           material has been delayed by bureaucratic problems, such as long
                           waiting periods for the EL Salvador Court of Accounts to examine and
                           designate items as totally unusable and approve disposal, thereby
                           leaving less storage space for new supplies.

                           MILGROUP   staff were particularly concerned that some US-funded
                           ammunition was not properly secured at four military units. The lack of
                           adequate storage space for ammunition is critical because it could be
                           stolen, affected by weather conditions, sabotaged, or accidentally
                           exploded. For example, we saw ammunition being stored in a
                           20-year-old condemned building that had been damaged by the 1986


                           Page 20                              GAO/NSIAIHO-132   Accountability   for Aid to El Salvador
                          Chapter 2
                          Better Controls Needed to Ensure
                          Accountability  of Military Assistance




                          earthquake. At one brigade, 69,000 rounds of small arms ammunition
                          and 132 grenades were stored in an unguarded building with multiple
                          access points, and at one Air Force base, ammunition, bombs, and mis-
                          siles were stored in an open hangar. In commenting on a draft of this
                          report, the Defense Security Assistance Agency indicated that the Salva-
                          doran Armed Forces are continually constructing and upgrading facili-
                          ties to store and secure materials and that U.S.-funded projects were in
                          process to improve physical security at two locations where we had
                          noted security deficiencies.


Inventory Discrepancies   According to Salvadoran officers, comprehensive inventories have been
                          performed about every 3 years, when there has been a change in the
                          commander or logistics officer. When inventories have been conducted,
                          there have been significant differences between amounts on hand and
                          amounts recorded in inventory records. For example, Salvadoran and
                          US. military personnel inventoried automotive and weapons repair
                          parts at a military warehouse in September 1989. Of the 1,944 types of
                          items counted, 984, or over half, did not match inventory records. For
                          609 of the 984 discrepancies, the warehouse had fewer items than the
                          records reflected, and in 476 cases it had more. The Armed Forces had
                          asked the MILGROUP for help in conducting the inventory because it did
                          not know what it actually had on hand.

                          During our fieldwork, we conducted 86 spot checks, or physical counts,
                          of material at 14 military units (six Army brigades, two Air Force bases,
                          a Navy base, a military training base, and four central warehouses). The
                          items checked included aircraft, patrol boats, automotive repair parts,
                          weapons, ammunition, explosives, binoculars, flashlights, ball bearings,
                          tires, and blankets. In most cases, some inventory records were avail-
                          able. In 25 cases inventory records and our physical counts differed. Of
                          the 25 discrepancies, 11 indicated items in excess of the number shown
                          on the records. For example, at one Army brigade the records indicated
                          that 1,072 go-millimeter cartridges were in stock, yet our physical count
                          was 1,903. In 14 cases, our spot checks indicated that the number of
                          items was less than the number recorded. For example, records at one
                          brigade indicated that 470 flares were in stock, but we actually found
                          417.

                          Periodic inventories of property can help verify the accuracy of
                          accountability procedures. Inventory teams could randomly check
                          selected items on a quarterly basis at specified units. The MILGROUP Com-
                          mander stated that the results should be reviewed to ensure that


                          Page 21                                  GAO/NSIAD-90432   Accountability   for Aid to El Salvador
                  Chapter 2
                  Better Cmtrola    Needed to Enmre
                  Accountability   of Military Assistance




                  accountability procedures are effective. If these procedures were found
                  not to be in effect, an investigation should be initiated by the
                  Salvadoran Chief of Staff, the Property Accountability Officer, or the
                  Salvadoran military Inspector General.


                  We did not find evidence of any recent diversion or misuse of military
Conclusions       assistance, but U.S. aid could be vulnerable to misuse or diversion
                  because of control weaknesses. For example, some written procedures
                  are lacking, storage space is inadequate, and inventories and spot checks
                  are not regularly performed. The MILGROUP and the Salvadoran Armed
                  Forces plan to take action to improve controls over assistance.


                  We recommend that the Secretary of Defense, after coordination with
Recommendations   the Department of State, direct the Defense Security Assistance Agency
                  and the MILGROUP in El Salvador to work toward reaching an agreement
                  with El Salvador’s military on actions needed to improve internal con-
                  trols. These actions could include

                  appointing independent high-level officials to the Salvadoran property
                  accountability and Inspector General positions,
                  performing periodic inventories of Salvadoran Armed Forces property
                  to ensure that accountability for their custody and use is maintained
                  and to reconcile physical counts with records, and
                  authorizing the MILGROUP to conduct periodic spot checks of selected
                  U.S.-funded military items to provide reasonable assurance of accounta-
                  bility and control.


                  The Department of Defense generally concurred with our draft report.
Agency Comments   The Department indicated that actions have already been or would be
                  initiated on our recommendations to improve controls and
                  accountability.

                  The Department reported that the Salvadoran Armed Forces had
                  appointed an Inspector General and assigned to a high-level logistics
                  officer the primary responsibility for accountability and control for
                  materials and equipment. In addition, El Salvador’s military has
                  installed a computer network to assist in inventory control and was
                  working with U.S. trainers to make its system more in line with the US.
                  model through construction of physical security improvements, logistics
                  training, and inventories to reconcile records with amounts on hand.


                  Page 22                                   GAO/NSIAD-90-132   Accountability   for Aid to El Salvador
chapter 2
Better ControhJ Needed to Jihmre
Accountability  of lWl&ary Aimistance




According to the Department of Defense, a bilateral agreement
regarding the provision of U.S.-funded military articles and services to
El Salvador provides U.S. military personnel adequate access to Salva-
doran military facilities to observe and review Salvadoran security and
use of U.S. military aid. Furthermore, Defense commented that it meets
semiannually with Salvadoran military representatives to review pro-
gram progress and agree on necessary program improvements. Defense
indicated that it would discuss this bilateral agreement, the U.S. desire
for access to Salvadoran facilities to perform inventory spot checks and
other accountability and control issues with El Salvador’s military
during these semiannual program management reviews. Defense
believed that this mechanism would give the needed additional emphasis
to accountability and control issues.




Page 23                                 GAO/NSIAD-fJO-132   Accountability   for Aid to El Salvador
Chapter 3

Economic Aid Program Controls


                                    The Agency for International Development (AID) uses established poli-
                                    cies and procedures to control direct assistance funds in El Salvador. AID
                                    and the government of El Salvador have developed adequate systems to
                                    account for balance-of-payments aid, and AID monitors implementation,
                                    verifies expenses, and audits item end use for its projects and other
                                    activities. AID believes that these actions protect U.S. funds against
                                    misuse and diversion. However, AID auditors have found that some costs
                                    have not been properly documented, and they are investigating two
                                    projects for possible misuse of funds. El Salvador’s capacity to manage
                                    and control funds is generally weak. Accountability for AID'S large
                                    annual program budget, averaging $258 million since 1980, has
                                    depended on a relatively small number of staff in El Salvador to identify
                                    and correct control problems quickly. More attention to identifying
                                    potential control problems when designing new projects would reduce
                                    the likelihood that U.S. funds could be misused or diverted.


                                    The US. economic aid program for El Salvador is the largest in the
AID’s Program                       western hemisphere and the fourth largest in the world. AID provides
                                    cash grants for balance-of-payments support, administers U.S. conces-
                                    sional food sales and donations, and funds projects affecting virtually
                                    all civilian sectors. Between 1980 and 1989 U.S. economic assistance to
                                    El Salvador totaled nearly $2.6 billion. Table 3.1 shows economic assis-
                                    tance levels for the last 10 years.

Table 3.1 U.S. Economic Aid to El
Salvador                            Dollars    in millions
                                                                                          Fiscal years
                                    Type of aid                                1980-86       1987      1988           1989             Total
                                    Cash transfers                               $712.0    $161.0       $155.0       $157.0        $1.185.0
                                    Food sales (loans)                            232.1      38.0          35.5        40.0           345.6
                                    Food donations                                 37.6      10.9          20.8         5.4             74.7
                                    Proiects                                      589.8     159.7         110.6       111.9           972.0
                                    Total                                      $1,571.5   $369.6       $321.9        $314.3        $2.577.3

                                    Note: Figures represent obligated funds.
                                    Source: U.S. AID mission, El Salvador.



                                    In August 1989, the AID mission in El Salvador had positions for 39 U.S.
AID Staffing                        direct hire employees who were to be responsible for program oversight.
                    Y               AID officials told us that, considering program size, staff levels in El Sal-
                                    vador were low compared to other AID missions. For example, the AID



                                    Page 24                                    GAO/NSIAIHO-132      Accountability   for Aid to El Salvador
                 Chapter 3
                 Economic Aid Program Controls




                 mission in Guatemala had 33 U.S. direct hire positions to manage its
                 1989 program budget of $143 million, which is less than half the size of
                 the El Salvador program budget. The AID mission in Peru had 22 U.S.
                 direct hires to manage its 1989 program budget of $39 million, which is
                 only 13 percent of the size of El Salvador’s program budget. In addition,
                 AID has had difficulty filling its U.S. direct hire positions in El Salvador.
                 For example, in August 1989, it had seven vacant positions.

                 In June 1989, the mission indicated that it needed six more U.S. direct
                 hire staff to manage its program properly. During our fieldwork, the
                 Ambassador said he was reluctant to approve additional permanent
                 staff because of security and other considerations. After our fieldwork
                 was completed, AID headquarters officials also stated that the mission
                 would probably not get additional staff. The subsequent escalation of
                 violence in El Salvador in late 1989 and the temporary removal of many
                 AID staff indicate that the staffing issue will continue to be a problem for
                 the mission. AID headquarters officials acknowledged that staffing at the
                 El Salvador mission was low and that filling positions of staff departing
                 in 1990 would be difficult. The AID mission has urged its headquarters to
                 strengthen recruiting efforts to minimize future vacancies.

                 Even though the mission has a relatively low number of staff to manage
                 its program, the mission believes it has been able to fulfill required mon-
                 itoring and control responsibilities, in part, because much of the pro-
                 gram involves cash transfers and concessional food sales, which do not
                 require intense AID oversight to track disposition of the dollars and food.
                 However, mission management believes that an excessive work load and
                 concern about security could eventually cause staff burnout and reduce
                 productivity.


                 Between 1980 and 1989, the United States provided $1.5 billion in Eco-
Cash Transfers   nomic Support Funds to El Salvador. In 1989, the level of Economic Sup-
                 port Funds was $206.6 million. Of this, $157 million was for cash
                 transfers to improve El Salvador’s balance-of-payments position, and
                 the remaining $49.6 million was obligated to specific projects.

                 For the balance-of-payments program, the United States deposits dollars
                 into Salvadoran government accounts at four U.S. commercial banks. El
                 Salvador’s Central Bank then draws from these funds to support the
                 sale of dollars to importers. In exchange, Salvadoran importers provide
                 the Central Bank with local currencies, which are used for develop-
                 mental purposes, as discussed in chapter 4.


                 Page 25                         GAO/NSIAD-SO-132   Accountability   for Aid to El Salvador
                                                                                                       .

                   Chapter 3
                   JCconomic Aid Program   C-ontmlm




                   AID  requires that cash transfer funds be used for imports that come from
                   the United States and other approved countries and that they be used to
                   sustain industrial and agricultural production. The Salvadoran govern-
                   ment must identify the importer, cost, purpose, and origin of the
                   imported goods or services. To ensure that the imports meet the above
                   criteria, AID periodically reviews the eligibility of purchased imports and
                   verifies that the prices paid were reasonable. AID explained that the last
                   detailed eligibility review was completed in May 1988 but that AID had
                   just begun to review the eligibility of imports since that time.

                   Between detailed AID eligibility reviews, El Salvador’s Central Bank pro-
                   vides monthly listings of imports financed by the balance-of-payments
                   program. We reviewed 32 transactions from the Central Bank’s consoli-
                   dated list of 4,784 transactions made from September 1987 to August
                   1989. These transactions were financed by a balance-of-payment cash
                   grant of $159 million. The list contained all the information AID required
                   for each transaction we reviewed, including dollar and local currency
                   value, product type, name of exporter, exporter country, payment dates,
                   and importer.

                   AID and the Central Bank have adequate systems to monitor the cash
                   transfer program. In 1983, the Central Bank set up a price-checking unit
                   to verify that imports meet program guidelines and are properly priced.
                   During our prior review of the mechanisms for controlling cash transfer
                   funds, we found that adequate controls were in place.’ In a 1989 report,
                   the AID Regional Inspector General noted some minor program deficien-
                   cies but found no significant ineligible transactions based on tests of
                   imports financed and did not identify any internal control weaknesses.


                   Between 1980 and 1989, the Public Law 480 Title I program has pro-
ConcessionalFood   vided $345.6 million in low-interest, long-term loans to El Salvador to
Sales              purchase food from the United States. During fiscal year 1989, the pro-
                   gram provided food worth $40 million. Through the program, the United
                   States sells food on concessional terms to the Salvadoran government,
                   which resells the food through commercial channels. Sales proceeds are
                   to be used for local currency activities, as discussed in chapter 4. The
                   program helps to meet El Salvador’s food needs and also reduces the



                   ‘Foreign Aid: Improving the Impact and Control of Economic Support Fund (GAO/NSIAD-88-182,
                   June 1988).



                   Page 26                              GAO/NSJAD-!#I32     Accountability   for Aid to El Salvador
                     Chapter 3
                     Economic Aid Program   Controls




                     balance-of-payments deficit by funding purchases that, without conces-
                     sional financing, would have to be purchased with other sources of for-
                     eign exchange.

                     The Salvador-an government, through food sales agreements with
                     Salvadoran commercial banks, exercises control over food sales and
                     financial accounting of sales proceeds. Based on our review of Salva-
                     doran government and commercial bank reports, we determined that the
                     system to control the delivery and sale of food commodities is adequate.
                     AID receives reports from the Central Bank on the arrival and sale of the
                     food and verifies that the sales proceeds are deposited in designated
                     accounts on a timely basis.


                     Between 1980 and 1989, the Public Law 480 Title II program provided
Food Donations       $74.7 million worth of food to El Salvador. Through the program, the
                     United States donates food for distribution to the poor. In 1989, donated
                     food worth $6.4 million was managed and distributed by El Salvador’s
                     National Commission for Area Restoration (CONARA) and Catholic Relief
                     Services, a U.S. private voluntary organization.

                     Although small compared to other AID activities, the food donation pro-
                     gram has received extensive media attention. The media have alleged
                     that food managed by CONARA had been illegally sold. AID officials stated
                     that these allegations were exaggerated and that although there may
                     have been some minor diversion of food, it was not a serious problem in
                     El Salvador. AID closely monitors the activities of the food donation pro-
                     gram by using a local firm to observe the arrival, inventory, and distri-
                     bution of the food. We tested the inventory control process at a food
                     warehouse and found no problems with the system. We reviewed the
                     inventory cards and warehouse receipts for dry milk and cooking oil.
                     The warehouse receipts agreed with the inventory control card entries
                     and the quantity of dry milk on hand agreed with the inventory control
                     card balance. We also observed food distribution activities at one loca-
                     tion and found that the receipt and usage documents, required by
                     CONARA directives, were on hand.



                     Between 1980 and 1989, the United States provided $972.0 million in
Project Assistance   project assistance to El Salvador. AID designs, plans, implements, and
           yi        closely monitors projects based on mission-identified problems. In 1989,
                     project assistance totaled $111.9 million-$49.6 million from Economic
                     Support Funds and $62.3 million from Development Assistance funds.


                     Page 27                           GAO/NSLAD4O-132   Accountability   for Ald to El Salvador
Chapter3
Economic   Aid Program   Controla




These funds supported nearly 70 Salvador-an government and private
agencies. Through these projects, AID restores sabotaged public services,
rebuilds the infrastructure, helps displaced persons, provides loans and
small business incentives, and provides education and social services
vital to El Salvador.

El Salvador’s government staff and private sector organizations lack
financial management capabilities and, according to AID, have serious
internal control weaknesses. Because of this situation, extensive moni-
toring by AID staff is required to ensure that project goals are met and
that the funds are being spent as intended. The AID mission and the
Regional Inspector General do not believe that project funds are widely
misused in El Salvador. However, the mission personnel did describe
three cases in which misuse may have occurred. In each case, the AID
mission asked the Regional Inspector General to audit the programs as
soon as irregularities were identified.

One case involved a Salvadoran private voluntary organization that had
received about $4 million of AID funds for distributing food and medicine
to displaced families. In December 1987, employees of the organization
notified the mission of accounting irregularities, and 3 months later, the
mission discontinued funding. In a January 1989 audit, the Regional
Inspector General questioned $2.2 million in costs because of insufficient
documentation and disallowable costs and referred additional findings
of possible fraud to its investigative branch for further review. In
September 1989, the mission director told us that the organization was
no longer in business and that the questioned costs may never be
recovered.

Another case involved a U.S.-based private voluntary organization that
had a $6.9 million grant from AID for resettling Salvadorans displaced by
the war and helping them to become self-sufficient. An AID audit ques-
tioned $200,000 of project costs, and in June 1989, the Regional
Inspector General directed the mission to discontinue funding the organ-
ization’s activities in El Salvador. As of July 2, 1990, this case was still
under investigation.

The third case involved the Ministry of Health section responsible for
purchasing and distributing medicines and medical equipment. An AID-
contracted program monitor notified the mission that vehicle spare
parts were being stolen from a warehouse. Because of this information,
the organization and the mission replaced all warehouse guards, hired a



Page 28                             GAO/NSlAIMJO-132   Accountability   for Aid to El Salvador
                            Chapter 3
                            Economic Aid Program   Controls




                            local firm to inventory the spare parts, and asked the Inspector General
                            to audit the organization.


Mission Attempts to Limit   According to AID, the mission has made a concerted effort over the last
Misuse                      2 years to address problems of misuse. To accomplish this, AID uses a
                            variety of controls to reduce the vulnerability of project funds. For
                            example, the mission has increased its monitoring, particularly on
                            projects with local private voluntary organizations. According to AID,
                            the organizations often have accounting and financial control systems
                            that do not meet U.S. government and AID standards. The mission has
                            used AID auditors and local accounting firms to identify financial control
                            and management weaknesses in agencies responsible for administering
                            its programs. The mission has also implemented technical assistance
                            projects and established semiautonomous management units in some
                            agencies to insulate project funds from the agencies’ weak internal con-
                            trols. Finally, the mission has occasionally used banks to help certify
                            vouchers submitted to AID for payment.

                            In an effort to address El Salvador’s long-term financial management
                            capabilities, AID began a $11 million project in fiscal year 1988 to pro-
                            vide technical assistance to the Court of Accounts (the government of El
                            Salvador’s supreme audit agency) and other government agencies.
                            Although the financial management weaknesses in El Salvador will take
                            years to correct, the mission believes this approach is the best way to
                            limit the risk of misuse and diversion,


Project Monitoring and      AID and the mission have established policies and procedures to validate

Expense Validating          expenses and monitor projects. These procedures detail the accounting,
                            reporting, and monitoring requirements both AID staff and the imple-
                            menting agencies must perform. Our review showed that the mission has
                            generally complied with requirements outlined in agency and mission
                            regulations.

                            To determine AID mission’s compliance with AID payment voucher
                            processing guidance, we examined 15 vouchers from two projects. These
                            vouchers accounted for $1.8 million of the $18.0 million in fiscal year
                            1989 expenditures for these projects. Each voucher we examined had
                            been approved and reviewed in accordance with AID and mission cri-
                            teria. For example, the Controller’s office had checked each voucher for
                            mathematical accuracy, attached all required documentation, and
                            ensured that each voucher was approved and certified by the project


                            Page 29                           GAO/NSIAD-90432   Accountability   for Aid to El Salvador
                         Chapter 3
                         Economic Aid Program   Controls




                         officer. The implementing agencies had adequate support for the
                         expenditures as well. We visited two agencies receiving project assis-
                         tance funds to validate expenses claimed on the vouchers we had
                         reviewed at AID. In both cases, the organizations had maintained original
                         documentation to support these expenditures and had followed their
                         accounting policies and procedures.

                         Established monitoring requirements enable AID to ensure that intended
                         benefits of the project are being realized and that AID personnel are
                         keeping abreast of project activities. AID said that it has used project
                         monitoring as one tool to prevent misuse and diversion of U.S. assis-
                         tance and has augmented its U.S. direct hire staff with 203 foreign
                         national, third country, and contract employees to ensure monitoring
                         responsibilities are met. We found that AID staff were fulfilling moni-
                         toring responsibilities by helping implementing agencies overcome man-
                         agement weaknesses and conducting site visits-often        to war zone
                         areas. We accompanied AID staff on project visits and observed that they
                         knew what progress should have been made since their last site visit
                         and that they determined the causes for delays or other problems. Addi-
                         tionally, we visited an inventory and maintenance management unit
                         established by AID at the Ministry of Public Works. This unit was fol-
                         lowing established control policies and procedures.


AID Regional Inspector   In auditing assistance projects during fiscal year 1989, AID'S Regional
Audits                   Inspector General identified numerous internal control weaknesses in
                         both Salvador-an government and private organizations receiving AID
                         funds.

                         For example, an audit of one part of an earthquake recovery project
                         found that the Salvador-an implementing agencies lacked adequate
                         supervision over the accounting process, had inadequate payroll pay-
                         ment procedures, and did not segregate program funds from other
                         monies.

                         In fiscal year 1989, the Regional Inspector General conducted seven
                         audits covering over $66 million for assistance projects. The audits dis-
                         closed problems with internal controls and accounting systems. The mis-
                         sion indicated that it was working closely with AID’S Regional Inspector
                         General to correct identified problems as soon as possible to reduce AID’S
                         financial exposure and had assigned one officer to work full-time
                         tracking audit recommendations to ensure timely corrective action.



                         Page 30                           GAO/NSLW-90-132   Accountability   for Aid to El Salvador
                          chapter 2
                          Economic Aid Program Controls




                          The mission believes that the audits have been helpful. AID officials also
                          believe, however, that mission staff have spent much of their time
                          responding to audit recommendations rather than fulfilling ongoing
                          monitoring and control responsibilities. According to the mission, at any
                          one time between 10 and 20 personnel in El Salvador are engaged in
                          auditing, monitoring, and checking end use.

                          According to the AID Regional Inspector General, audit activity is gener-
                          ally a normal and nonburdensome activity that usually results in
                          favorable opinions from the auditors. However, when agencies have
                          inadequate financial systems, auditors’ opinions are unfavorable and
                          additional management effort is required to correct identified problems.
                          He noted that the problem in El Salvador is not that too many audits are
                          done but that actions to correct identified problems have required addi-
                          tional effort by mission personnel.


                          Despite the mission’s efforts to control funds, Salvadoran implementing
Need to Better            agencies continue to be affected by serious internal control weaknesses
Identify Control          that expose AID to substantial financial risk. To safeguard U.S. interests,
Weaknesses                AID is required to ensure that host country agencies have financial man-
                          agement systems in place. Mission assessments to ensure that agencies
                          have adequate financial management capabilities are not identifying
                          weaknesses before substantial money is disbursed. The Regional
                          Inspector General has questioned more than $2.2 million in expenditures
                          over the last year, mainly due to the lack of financial management capa-
                          bilities of the implementing agencies.


Assessing Financial       AID directives require the mission to review implementing agencies’
Management Capabilities   capabilities regarding financial management, contracting, training,
                          reporting, and other administrative functions. In our opinion, these
                          assessments should determine if accounting systems and internal control
                          weaknesses expose US. funds to significant risk.

                          According to AID, financial management assessments in the design stage
                          can test overall project assumptions and identify additional project ele-
                          ments to address, such as internal controls. The directives indicate that
                          the assessments should be completed early enough so that AID can
                          include remedial assistance in the project design. To implement agency
                          directives, mission procedures require financial analysts to assess the
                          accounting and financial control systems of implementing agencies
                          during the project development process.


                          Page 31                         GAO/NSIAJMO-132   Accountability   for Aid to El Salvador
                  Chapter 3
                  Economic Aid Program Controls




                  After we completed our fieldwork, the mission Director revised project
                  design procedures to clarify AID responsibilities when new projects are
                  planned. This revision requires controller analysts to ensure that sound
                  financial cost projections are made and that recipients have effective
                  systems for financial control, contracting, and payment. In addition,
                  these analysts are required to determine the need for and number of
                  audits for each project. Furthermore, if these financial management
                  assessments show that an agency does not have the financial and man-
                  agement capability to administer project funds, AID must provide outside
                  assistance until the organization develops the capabilities.


Weak Management   The mission Controller’s office has only two qualified financial analysts
Assessments       capable of performing in-depth financial management assessments.
                  Because of staffing limitations, the Controller must assign these staff
                  other responsibilities, and according to the Controller, they cannot
                  devote extensive time to financial management assessments. For
                  example, one analyst is responsible for reviewing each expense under a
                  $98 million earthquake recovery project and spends much time
                  approving and certifying expenses.

                  In June 1989, an internal review of the Controller’s office concluded
                  that its staff are inexperienced and, as a result, have been unable to
                  perform detailed financial management services. The assessment sug-
                  gested that the Controller’s office should play a larger role during the
                  project design process but that the staff would first have to receive
                  intensive training. The Controller agreed with this assessment but added
                  that training staff has been difficult because direct-hire U.S. staff often
                  leave the country before they have been fully trained, and foreign
                  national employees have often taken higher paying jobs after being
                  trained.

                  Mission staff responsible for planning and implementing projects told us
                  that more detailed financial analyses were needed before funds are dis-
                  bursed. The staff cited two recently contracted assessments as examples
                  of the type of financial assessments that would permit them to ade-
                  quately plan control systems to protect AID funds. Because it did not
                  have internal staff available, the mission used outside contractors in
                  1989 to conduct detailed finanacial management assessments on two
                  Salvadoran agencies. The studies involved an extensive review of the
                  internal control systems of the Ministry of Public Works and the water
                  department and identified numerous financial management weaknesses.



                  Page 32                         GAO/NSIAD-90-132   Accountability   for Aid to El Salvador
                       Chapter 3
                       Jkonomic Aid Program   Controls




                       The studies reported that the internal audit department of the Ministry
                       of Public Works was not staffed with qualified personnel but had a
                       driver, an engineer, and two land surveyors. Other findings led the team
                       to question the Ministry’s ability to manage AID project funds. A sepa-
                       rate review of the water department found that several prior AID
                       projects with the water department could probably not be audited
                       because record keeping was so poor. Both agencies are currently major
                       participants in AID’S $112 million public services restoration project.


                       Because of internal control deficiencies in the Salvador-an government
Conclusions            and nongovernmental organizations used to implement AID projects, AID
                       has increased audit activity and, within staffing constraints, emphasized
                       project monitoring. Nevertheless, AID mission assessments are not identi-
                       fying financial control weaknesses before substantial monies are
                       disbursed.


                       We recommend that the Administrator, Agency for International Devel-
Recommendations        opment, ensure that its mission in El Salvador (1) performs in-depth
                       financial management assessments of Salvadoran organizations sched-
                       uled to implement new AID projects and (2) works with El Salvador to
                       correct identified problems.


Agency Comrnents and   recommendations were already being implemented. AID commented that
Our Evaluation         its mission in El Salvador has expanded the use of pre-award financial
                       surveys of Salvador-an implementing institutions that have not previ-
                       ously received project funds, having completed 15 surveys in the last
                       year. In addition, AID said that its mission is moving toward annual
                       financial audits of all its programs as a primary means of assessing and
                       reassessing accountability and internal controls. AID also reported that it
                       has funded technical assistance to Salvadoran institutions and, in some
                       cases, concurrent audits to overcome internal control deficiencies.

                       We believe that these actions will improve accountability for U.S. dollar-
                       funded projects. However, in our opinion, the pre-award surveys do not
                       assess overall management capacity of the implementing institution in
                       sufficient depth to determine if it has the capability to manage AID
                       projects properly and to account for project funds adequately. In con-
                       trast, the in-depth management assessments, which AID has funded in
                       two recent cases, provide detailed reviews of all management aspects


                       Page 33                           GAO/NSIALHO-132   Accountability   for Aid to El Salvador
Chapter 3
Economic Aid Program   Controls




and as a result are more likely to identify deficiencies that need to be
corrected before substantial funds are,disbursed. Therefore, we believe
that AID should expand the use of these in-depth assessments.




Page 34                           GAO/NSIAD-W-132   Accountability   for Aid to El Salvador
Chapter 4

Local Currency Is Vulnerable to Misuse


                                              AID assistance agreements require that El Salvador set aside local cur-
                                              rency funds to pay for development activities agreed upon with the
                                              United States. In fiscal year 1989, Salvadoran-owned local currencies
                                              made available as a result of U.S. Economic Support Fund cash grants
                                              and Public Law 480 Title I food sales agreements amounted to roughly
                                              23 percent of El Salvador’s total government expenditures. Because the
                                              Salvadoran government lacks adequate financial management and
                                              accounting systems, these funds are vulnerable to misuse. AID does not
                                              attempt to closely control all local currency uses. Although AID bears
                                              some responsibility for monitoring these funds, AID’S policy guidance is
                                              ambiguous and does not specifically define what level of involvement is
                                              required.


                                              The local currency program in El Salvador was designed to strengthen
Local Currency                                the government’s capacity to plan, manage, and fund economic and
Program                                       social development programs. Local currency is generated from U.S.
                                              cash grants and food sales agreements, which over the last 3 years
                                              required that over 3 billion colones be set aside for mutually agreed-
                                              upon purposes. (See table 4.1.) According to AID, these funds are owned
                                              by El Salvador.

Table 4.1: El Salvador   Local Currency
Program
                                              -Currency   in Millions
                                                                                                       Calendar        year
                                              Fund source                           1987                                1988                           1989
                                              __-.-                     Dollars   Colones              Dollars      Colones               Dollars   Colones
                                              U.S. cash grants            $194        968                $157             785                $144        718
                                              US. food sales                 46       230                      38         190                  26        130
                                              Total                       $240      1,198                $195            975                $170        848


                                              On October 17, 1989, El Salvador agreed to set aside about 1 billion
                                              colones for expenditure in calendar year 1990’ for the following
                                              purposes:

                                          l     trust fund-50 million colones,
                                              AID
                                          l private sector credit-103 million colones,
                                          . development and investment projects-517 million colones, and
                                          . government operating expenses, such as salaries-371 million colones.


                                              ‘El Salvador operates its budget on a calendar year basis. Funds set aside in U.S. fiscal year 1989 are
                                              spent in calendar year 1990.



                                              Page 36                                       GAO/NSIAD-90-132        Accountability   for Aid to El Salvador
                                                                                                               .

                        Chapter 4
                        Local Currency   Is Vulnerable   to Misuse




                        The AID trust fund finances mission operation and maintenance costs.
AID Trust Fund          For example, trust funds are used to hire foreign nationals to monitor
                        local currency projects. Each year, AID and El Salvador negotiate how
                        much local currency will be deposited into the fund. In October 1989, El
                        Salvador agreed to deposit 60 million colones, equivalent to $10 million,
                        to pay for AID costs in calendar year 1990 or until fully expended. AID is
                        the principal administrator of the trust fund and approves all disburse-
                        ments. Because AID, rather than the Salvadoran government, directly
                        controls these funds, AID officials believe the funds are less vulnerable to
                        misuse than are other local currency funds that AID does not directly
                        control.


                        In October 1989, El Salvador agreed to use 103 million colones,
Private Sector Credit   equivalent to $21 million, on private sector credit lines for specific pur-
                        poses such as agro-industrial loans. Through agreements between AID
                        and the Central Bank, overall loan purposes, uses, and procedures are
                        established. The Central Bank, not AID, controls the credit lines through
                        the use of intermediate credit institutions that process and approve
                        loans. AID requires the Central Bank to provide periodic progress and
                        evaluation reports.

                        Since 1981, the Central Bank has made 11,733 local currency loans
                        valued at $137 million. AID relies on the Bank’s reports to monitor the
                        program. A 1989 AID audit report stated that the credit lines provided El
                        Salvador with needed banking system liquidity. Although the audit
                        identified problems with loan recipients’ use of the resources, a majority
                        of the loans were being used for eligible purposes.


                        In 1983, because of administrative delays in disbursing local currency
Extraordinary Budget    derived from external investment sources, the government of El Sal-
SUPport                 vador, with AID’S support, established a separate or extraordinary
                        budget. According to an AID contracted assessment, the extraordinary
                        budget lent flexibility and efficiency to government funding and imple-
                        mentation of local currency projects. AID convinced El Salvador to create
                        a Technical Secretariat for External Finances, under the Ministry of
                        Planning, to manage and monitor extraordinary budget programs and
                        expedite the use of local currency development and investment funds.
                        The extraordinary budget will receive 517 million colones, or the
                        equivalent to $103 million, for calendar year 1990.




                        Page 36                                  GAO/NSIA.WO-132   Accountability   for Aid to El Salvador
                      Chapter 4
                      Local Currency   Ie Vulnerable   to Misuse




                      Local currencies from the extraordinary budget fund discrete projects
                      planned jointly by AID and El Salvador. In 1989, over 160 projects imple-
                      mented by more than 40 Salvadoran agencies were financed through the
                      extraordinary budget. AID provides the Secretariat with technical assis-
                      tance to plan, program, and approve these projects. AID policy does not
                      state what level of accountability is required, nor does it specifically
                      require that missions trace funds to end use. AID assistance agreements
                      require the Secretariat to report quarterly on local currency use.
                      Although these reports are AID'S primary mechanism for monitoring
                      extraordinary budget local currency projects, AID also conducts some
                      project site visits.


AID Audits Identify   In 1988, an AID audit on CONARA, a major user of local currencies,
                      reported on financial irregularities and questioned expenditures
Problems              equivalent to $1.3 million. Of this amount, AID concluded that the
                      equivalent of $326,000 had been used for illegal transactions. Because
                      the Director of CONARA was implicated in wrongdoing, the President of El
                      Salvador directed that he be replaced. After the audit, AID contracted
                      with an accounting firm to monitor all disbursements made by CONARA.
                      AID'S mission Director estimated the annual cost of monitoring CONARA
                      programs at $1.36 million, of which $140,000 was for concurrent audits
                      to monitor transactions as they occurred. The CONARA program received
                      approximately $44 million, or 221 million colones, for expenditure in
                      calendar year 1990. AID will continue funding concurrent audits at
                      CONARA through fiscal year 1990.

                      AID  officials told us that, as a result of the CONAFW scandal, AID has
                      become more aggressive in monitoring and auditing programs receiving
                      local currency funds. For example, the Municipalities in Action Program,
                      implemented by CONARA, provides local currency to mayors for hundreds
                      of small-scale local community development projects. AID staff periodi-
                      cally visit project sites, and some staff work at CONARA regional offices.
                      According to AID mission officials, the vulnerability to misuse of local
                      currency funds used by CONARA is generally low because AID is heavily
                      involved in monitoring programs. However, the mission Director said
                      that staff levels are insufficient to monitor all uses of local currency as
                      intensively as the mission monitors CONARA projects.

                      The AID mission in El Salvador has increased audit coverage of local cur-
                      rency projects. Working with AID, the Secretariat contracted with six
                      accounting firms approved by the AID Regional Inspector General to con-
                      duct 59 audits of local currency projects. These projects involved 66


                      Page 37                                  GAO/NSIAIHO-132   Accountability   for Aid to El Salvador
                                                                                                                                .


                                         Chapter 4
                                         Local Currency   Ia Vulnerable   to Mi8uae




                                         Salvadoran government organizations and covered local currency funds
                                         equivalent to over $300 million. At the time of our fieldwork, the Secre-
                                         tariat had received draft reports for each audit, which together indi-
                                         cated that the audited agencies have significant problems with internal
                                         controls and record keeping.

                                         According to the Regional Inspector General, financial audits can pro-
                                         vide four types of opinions concerning the state of financial records,
                                         internal controls, or compliance with agreement terms (unqualified,
                                         qualified, adverse, and disclaimer). As shown in table 4.2, almost half of
                                         the opinions indicated significant accounting system problems, and only
                                         11 of the draft audit reports contained an unqualified auditor opinion.
Table 4.2: Auditors’ Opinions on Local
Currency Audit8                          Opinion                                                                        Number of audits
                                         Unqualified         No significant problems                                                      11
                                         Qualified           Limited identifiable problems with internal control                          21
                                                               systems
                                         Adverse             Significant errors or accounting system problems                              3
                                         Disclaimer          No opinion due to significant accounting system                              24
                                                               problems


                                         AID  officials said that the quality of the drafts was inconsistent and that
                                         in some cases the local auditors had focused on insignificant problems.
                                         AID acknowledged, however, that the draft audits revealed serious
                                         accounting system and internal control problems. At the time of our
                                         fieldwork, AID was reviewing these draft reports to determine which
                                         problems required immediate corrective action and to decide if further
                                         funds should be suspended for some projects. In commenting on a draft
                                         of this report, AID indicated that the Secretariat would provisionally cer-
                                         tify that implementing units are capable of managing and accounting for
                                         local currency funds and take necessary actions to correct deficiencies.
                                         If the Secretariat cannot provide certification after one year, either
                                         funding will be discontinued, or a concurrent audit will be funded to
                                         review transactions and provide technical assistance to clear up
                                         deficiencies.


Improving Financial                      According to the mission Director, improvements in the financial man-
Management *                             agement systems of Salvadoran agencies are crucial to reducing the
                                         potential for misuse of local currency funds. Prompted by audit findings
                                         on local currency, AID has increased technical assistance to strengthen
                                         government financial systems. According to AID, this will help to reduce


                                         Page 38                                  GAO/NSIABSO-132   Accountability   for Aid to El Salvador
                  chapter 4
                  Local Currency   Ia Vulnerable   to Mimee




                  both opportunities for local currency misuse and the accountability and
                  management burden on AID’Sstaff.

                  The Secretariat, with AID’Sassistance, is working to improve organiza-
                  tions managing local currency funds. In 1988, an Am-contracted assess-
                  ment of the Secretariat revealed weak and inefficient management
                  control systems. With AID’Sassistance, the Secretariat initiated new
                  accounting and internal control standards for implementing organiza-
                  tions and developed an audit group to perform and coordinate audits of
                  these organizations. The Secretariat also designed a program to train
                  personnel from implementing organizations on financial management
                  and evaluation. AID is assisting the Secretariat in monitoring and imple-
                  menting audit recommendations, prequalifying accounting firms to per-
                  form audits, and training Salvadoran government auditors responsible
                  for examining and certifying the validity of all government expenditures
                  prior to disbursement.

                  According to AID, El Salvador’s new administration, which took office in
                  June 1989, is attempting to combat fraud and corruption by drafting
                  reforms to strengthen its financial, legal, and economic policies. The gov-
                  ernment has agreed to ensure that its agencies receiving extraordinary
                  budget funds have adequate financial systems in place by 1991.
                  Salvadoran and AID officials stated that due to the guerrilla insurgency
                  and the magnitude of current financial management weaknesses, it will
                  take time to implement these reform initiatives.


                  Each year, AID and the government of El Salvador negotiate the amount
Ordinary Budget   of local currency to be provided for general budget support. In October
SUPpofi           1989, El Salvador and AID agreed to use 371 million colones, equivalent
                  to approximately $74 million, for general budget support in calendar
                  year 1990. These funds, managed by the Ministry of Finance, pay for
                  government operating expenses, such as salaries, which are part of the
                  Salvadoran ordinary budget. These funds are not monitored or audited
                  by AID at the same level as projects in the extraordinary budget. In addi-
                  tion, the Secretariat does not monitor these local currency funds. As a
                  result, these funds are, in our opinion, more vulnerable to misuse.

                  Local currency in the ordinary budget is used to fund general govern-
                  ment activities rather than discrete development projects funded by the
                  extraordinary budget. AID approves the release of funds based on expen-
                  diture reports submitted by the Ministry of Finance. These reports
                  describe general expense categories but do not detail how the funds are


                  Page 39                                 GAO/NSIALWO-132   Accountability   for Aid to El Salvador
                           Chapter 4
                           Local Currency   Is Vulnerable   to Misuse




                           spent. AID’S involvement is limited to a cursory documentation review
                           rather than the actual planning and programming done for local cur-
                           rency channeled through the extraordinary budget. AID officials said
                           that El Salvador has a system to verify that local currency was trans-
                           ferred to appropriate budgets and spent by targeted agencies. However,
                           according to agency guidance, AID is not required to trace funds to actual
                           end use, and therefore, AID does not ensure that the funds are used as
                           intended.

                           When local currency is used to support general budget expenses, AID gui-
                           dance requires the mission to ensure that documentation verifies that
                           the local currency was transferred to the intended account, but it does
                           not require AID to trace the funds to their end use. The guidance requires
                           AID to have “reasonable assurance” that host governments have ade-
                           quate financial systems to manage the local currency funds. At the time
                           of our fieldwork, the AID mission had not reviewed the financial systems
                           of government agencies implementing ordinary budget projects.


Disadvantages to General   Several factors make general budget support more vulnerable to misuse.
Budget Support             First, neither AID nor the Secretariat has front-end involvement in plan-
                           ning and developing ordinary budget local currency projects. AID does
                           not program, approve, or review the specific uses of these local currency
                           funds and does not monitor end use. Second, general budget support
                           activities have not been audited. During our fieldwork, AID contracted an
                           accounting firm to review the Ministry of Finance’s financial control
                           systems and render an opinion on the system’s adequacy. However, the
                           Ministry of Finance does not actually spend these funds. It transfers
                           them to ministries such as Health and Education, where they are com-
                           mingled with other funds before being spent on ministry activities.
                           Because the local currency funds are commingled with other funds to
                           pay for ordinary budget expenses, end-use accounting of these curren-
                           cies is not possible.


Increased General Budget   Despite the disadvantages of using local currency for general budget
                           support, AID plans to increase funds managed through the ordinary
support                    budget from 100 million colones, or $20 million, in calendar year 1989 to
                           371 million colones, or $74 million, for calendar year 1990. The Director
             Y             of AID’S Office of Central American Affairs stated that the mission in El
                           Salvador is increasing local currency amounts to support general budget
                           expenses because agency guidance limits mission accountability and
                           management burden for local currencies used in this way. The Director


                           Page 40                                  GAO/NSLAD90-132   Accountability   for Aid to El Salvador
                    Chapter 4
                    Local Currency   Is Vulnerable   to Misuse




                    attributed this change to recent AID audits that criticized the El Salvador
                    mission for lax accountability over extraordinary budget projects and
                    recommended actions to better account for end use-actions that mis-
                    sion officials believe will be difficult to fully implement, given the
                    amount of local currency involved and AID staff limitations.

                    Although we recognize that close monitoring of local currency use places
                    a management burden on AID’S limited staff, we believe that increased
                    general budget support will heighten the vulnerability of these local cur-
                    rency funds. Because El Salvador’s financial management is generally
                    weak and AID does not require end-use accountability for these funds,
                    AID has no assurance that funds are used for intended purposes. Mini-
                    mizing vulnerability of local currency, given AID staff constraints, is a
                    problem that cannot be easily solved.


                          guidance for local currency accountability is ambiguous in defining
AID’s Guidance Is   AID’S
                    the mission’s level of accountability for local currency funds. The
Ambiguous           Director of AID’S Office of Central American Affairs stated that clari-
                    fying local currency accountability has historically been a struggle for
                    AID policymakers. Because of the growth in local currency programs
                    worldwide, limited AID staff, and AID Inspector General policy interpre-
                    tations, there is an ongoing effort to clarify AID policy.

                    In El Salvador, accountability for local currency is a subject of disagree-
                    ment between AID mission personnel and AID auditors. The AID Regional
                    Inspector General contends that the mission in El Salvador is account-
                    able for tracing local currency to end use if the mission assists El
                    Salvador in planning, programming, and approving extraordinary
                    budget projects. In contrast, the AID mission believes it should be able to
                    assist in planning and monitoring local currency activities without
                    accepting full end-use accountability.

                    Recent AID policy guidance states that if missions program local curren-
                    cies on a sectoral basis and the projects are not being undertaken by
                    strong, highly respected host government or private sector institutions,
                    missions should take a more “active role” in monitoring. Additionally,
                    policy guidance requires missions to have “reasonable assurance” that
                    host government agencies have adequate budget and financial manage-
                    ment systems to ensure that local currency objectives are met. However,
                    the policy does not specify what level of AID involvement would meet
                    the “active role” and “reasonable assurance” requirements.



                    Page 41                                  GAO/NSLAD-90-132   Accountability   for Aid to El Salvador
                                                                                                          rl




                  Chapter 4
                  Local Currency   Is Vulnerable   to Misuse




                  We believe that reducing the vulnerability of local currency funds can
Conclusions       best be accomplished by improving El Salvador’s financial management
                  capability. AID is providing technical assistance to improve Salvadoran
                  financial management systems. However, AID officials acknowledged
                  that this is a long-term effort.

                  Although local currency is vulnerable to misuse, AID officials believe
                  that AID oversight and monitoring tend to decrease vulnerability. How-
                  ever, AID has insufficient staff in El Salvador to closely monitor and
                  account for all local currency uses. AID has chosen to support the ordi-
                  nary budget by increasing the use of local currencies, which, according
                  to agency guidance, require less monitoring effort. This action will
                  lessen accountability of these funds and increase their vulnerability to
                  misuse.

                  AID’S  guidance does not specifically require end-use accountability for
                  local currency and does not clarify what level of accountability is
                  required. Consequently, the issue of accountability has been a source of
                  disagreement between AID mission personnel and the AID Regional
                  Inspector General, We recognize that flexibility in local currency gui-
                  dance is essential because of the political and economic environment in
                  which AID operates. However, reaching full agreement on the level of
                  accountability is critical, given the magnitude of El Salvador’s local cur-
                  rency program, the limitation on AID staff levels, and the generally weak
                  ability of Salvadoran institutions to manage and control funds,


                  We recommend that the Administrator, Agency for International Devel-
Recommendations   opment, clarify AID’S local currency accountability guidance for El
                  Salvador. The guidance should clearly state (1) what constitutes reason-
                  able assurance that host government agencies have adequate financial
                  systems to manage local currency funds and (2) what degree of AID over-
                  sight and monitoring is required.


                      generally concurred with our findings and recommendations. AID
Agency Comments   AID
                  agreed that it had not defined what constitutes reasonable assurance
                  that host government agencies have adequate financial systems to
                  manage local currency funds. AID stated that it is preparing new opera-
                  tional guidance that better defines its criteria on reasonable assurance.
          J       According to AID, the new guidance will also specify how local currency
                  accounts will be monitored and will require AID missions to perform
                  financial assessments of host government units that administer local


                  Page 42                                  GAO/NSLABQO-132   Accountability   for Aid to El Salvador
chapter 4
Local Currency   b Vulnerable   to lwlluee




currency. In addition, AID commented that it is reviewing its accounta-
bility requirements for monitoring local currency to determine how they
can be stated more clearly.




Page 43                                      GAO/NSlAIMO-132   Accountability   for Aid to El Salvador
Appendix I

Comments F’rom the Department of Defense ”


Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.                               DEFENSE   SECURITY      ASSISTANCE       AGENCY

                                                              WASHINGTON,    DC 20301.2800



                                                                                                      0 6 JUN 1990
                                                                                                In reply          refer   to:
                                                                                                I-034091/90

                             Mr. Frank C. Conahan
                             Assistant   Comptroller  General
                             United States General Accounting                   Office
                             Washington,   D.C. 20548
                             Dear    Mr.      Conahan:
                                  This is the Department of Defense (DOD) response to the
                             General Accounting    Office  (GAO) draft    report;    "El SALVADOR:
                             Accountability   for  U.S. Assistance,"     dated April    25, 1990
                             (GAO Code 463785/OSD Case 8318).        With the exception     of one
                             recommendation,    the DOD concurs with the GAO report.
                                    The El Salvador Armed Forces and U.S. Military                Group are
                             already      in the process of implementing           the corrective     actions
                             recommended by the GAO. An Inspector               General has been
                             appointed.        Other positions      of responsibility      have been
                             established       and filled     to ensure accountability        and control     of
                             material       has been accomplished.        A computer network has been
                             installed       to assist    with inventory    control    and U.S. trainers
                             are    working more closely        with their    Salvadoran     counterparts
                             responsible       for accountability       and control    of material      and
                             equipment       in order to bring their       system in line with the U.S.
                             model.
                                     The only recommendation       that has not been accomplished                  to
                             date is the El Salvador Armed Forces authorization                       for on
                             demand spot checks.           The DOD does not, however, consider                  a
                             memorandum of understanding           to be necessary         or desirable         to
                             accomplish      this recommendation.         The DOD only disagrees              with
                             the mechanics,        not the spirit,      of the recommendation.               An
                             agreement,      13 United States Treaties          985, exists        with regard
See comment I,               to use, security         and the observation,        and review of defense
                             articles     and services.       The DOD considers         that any additional
                             requirement       could become a contentious          issue in U.S. relations
                             with El Salvador.          It is the DOD position          that the current
                             agreement,      as well as, the access to facilities                and equipment
                             afforded     to U.S. personnel,       is adequate.        As an alternative             to
                             the memorandum of understanding,             in order to provide            the
                             needed additional         emphasis,   the DOD will       discuss      13 United
                             States Treaties        985 during the semi-annual            program management
                             reviews     held in April      and November of each year between the
                             U.S. and El Salvador.           A specific     request     for access to
                             facilities      and inventory      of selected     items would be made a
                             part of the action         items to be accomplished           following       the
                             program management reviews.             During the next following               program




                                    Page 44                                 GAO/NSJAJJ-90-132    Accoontability       for Aid to El Salvador
        Appendix I
        Commenta From the Department   of Defexue




                                          -2-
    management review,      the results   of the     access       and inventory
    will be evaluated     for compliance.
         The Department of Defense is pleased to have the
    opportunity   to review and respond to the GAO draft   report.
    The recommendations    offered as a result of the GJiO review                     were
    well received   by the DOD.


                                                             Sincerely,




                                                                     6lENNLRUDD
                                                                    4CllNG DIRECTOR




Y




        Page 46                            GAO/NSIAJMO-182      Accountnbility   for Aid to El Salvador
                      Appendix    I
                      Commenta        From the Department         of Defense




                                 anoImAFTRBFoRT    - IlwaD APRIL 25,  1990
                                      (GAO CODE 463785) 08D CASE 8318
                         "EL    SALVADORI         ACCOWTAEILITY                     FOR U.S.        ASSIS!CMCI"

                                           DBPARTRRUT OF DRPXHSE CCMMERTS
                                                             l     *   *    t   *



                                                                 FIlVDIW

                 -8                                    as.             Md       Pmaaw          to     El    Balvador
                 The GAO reported           that,    since 1960, the U.S. has provided-
                 $3.5 billion         of economic and military             aid to El Salvador.
                 The GAO explained            that the U.S. aid programs provide
                 military      aid, balance-of-payment               support,    and assistance       for
                 development        and humanitarian          purposes.        The GAO further
                 explained       that,     prior   to 1985, military           assistance     consisted
                 of major end items such as vehicles                    and aircraft--but         now
                 the U.S. provides            mainly consumables,          such as ammunition,
                 fuel,     spare parts,         and training.         The GAO observed that
                 El Salvador        depends on U.S. economic aid, consisting                     of (1)
                 cash transfers          for balance-of-payments              support,    (2)
                 concessional         food sales and donations,               and (3) projects
                 affecting      all civilian         sectors     (i.e.,    to restore
                 infrastructure          damages by war , to provide             social    services,
                 and to attempt to reactivate                 El Salvador's        economy).
                 The GAO commented that allegations             of misuse and corruption
                 have plagued the assistance          programs and have been a
                 continuing    concern for the U.S. Government.              The GAO had
                 previously    reported    that El Salvador       had improperly
                 transferred    U.S.-funded      fuel to third      parties   without   U.S.
                 consent in violation        of assistance      agreements.       The GAO
                 added that there have also been instances                of alleged   misuse
                 of economic aid.        For example, the GAO noted that , in 1984,
                 allegations     surfaced    that U.S. cash transfers         had been
Now on p, 8.     diverted    to U.S. bank accounts.          (p. 2, pp. g-g/GAO Draft
                 Report)
                 pODm:                Concur.      It should be noted that the DOD has
See pp. 13-14.   already    taken atepr to correct         the fuel issue addreased in
                 the referenced       prior    GAO report.    On December 4, 1989, the
                 Defense Security        Assistance    Agency requested   the Security
                 Assistance     Accounting      Center to establish    a separate
                 Salvadoran     holding     account for proceeds of sales of Military
                 Assistance     Program funded fuels.         Also on February    8, 1990,
                 ------------------------------------------------------------
                 LL/ GAO/NSIAD-99-186,                     "EL SALVADOR: Tranafers  of Military
                        Assistance           Fuels,"        Dated August 29, 1989 (OSD
                       Case     7899)




                      Page 46                                           GAO/NSLADQO-182             Accountability     for Aid to El Salvador
      .
                          Appendix I
                          Commenta From the Department   of Defense




                    the    DefenaeSecurity   Assistance  Agency issued a change to
                    DOD 5105.38.M,    the Defense Securitv   Assistance     Manaaement
                             which provided    guidance concerning    resale proceeds
                            s purchased with U.S. financing.        In addition   to
                    El Salvador,   the resale guidance applies      to Honduras,
                    Israel,  and the Philippines.
                    m:                w            Amme           Pro-         The GAO reported
                    that,    form 1980 to 1989, the U.S. Government provided                      $958
                    million     in military       aid, of which $833 million            was financed
                    with Military         Assistance     Program grants and $107 million
                    financed      with Foreign Military          Sales loan credits.           The GAO
                    explained      that the Defense Security           Assistance       Agency
                    administers       U.S. military       aid programs,      while the U.S.
                    Military      Group in El Salvador manages the in-country                   program
                    operations.         The GAO reported       that,    for FY 1989, $64 million
                    in U.S. military          aid paid for ammunition,           fuel,    medical
                    supplies,      aircraft      and vehicle     maintenance       to sustain
                    military      operations.        According    to the GAO, $16 million            was
                    used to replace          equipment    lost in combat, fund construction,
                    and provide       training.       The GAO explained       that the Foreign
                    Military      Sales program is administered            under the authority
                    of the Arms Export Control              Act of 1976, which required            that
                    no defense article           or service    shall   be sold or leased          by the
                    U.S. Government unless the recipient                 country      agrees to:
                                    obtain     consent of the President    before
                                    transferring      any defense article,    service, or
                                    training     to a third   party or permit its use for
                                    purposes other than those furnished;          and
                                    maintain   the security   of U.S. supplied articles                 or
                                    services   and provide  the same degree of security
                                    as provided   by the United States.
                    The GAO further     explained  that all Foreign Military      Sales
                    agreements   signed by the United States and El Salvador
                    require   the State Department's     approval   before El Salvador
                    can transfer    items to a third    party.    According  to the GAO,
                    El Salvador   ha8 not requested     consent to transfer    items.
Now on pp, 12-13.   (pp. 2-3, pp. 12-16/GAO Draft Report)
                                         Concur.      The security     requirements     described
                    by the GAO fk articles           acquired    by Foreign Military        Sales
See pp. 12-13.      purchasers    refers    to the af au rdina of clas ified
                    Jnformation     and equipment!        zhe'security     of UYS. supplied
                    articles    or services     referred     to in the GAO report        regards
                    phvsical    securitv    of articles      acquired    by Foreign Military
                    Sales purchasers.         El Salvador had no classified          articles
                    when the GAO review was conducted.

                                                            -2-




                          Page 47                            GAO/NSIAIMO-132    Accountability   for Aid to El Salvador
         Appendix I
         Comments     From the Department   of Defense




    -:                                                                      . The GAO
    referenced       ite August 1989 report,            which found that the
    Salvadoran       Air Force sold 61,107 aallons               of militarv
    assistance       program-funded         fuel to-the      United States-and          to
    third    parties,       including      an organization        involved     in re-
    supplying      the Nicaraguan          Democratic     Resistance.        In that
    prior    report     the GAO expressed concern that (1) third-party
    transfer8      had not been approved by the United States and,
    therefore,       violated       sales agreements between the U.S. and
    Salvadoran       governments        and (2) El Salvador was generating
    cash from sales of Military                Assistance     Program-funded         fuel--
    which the GAO maintained               waa not intended         by the Arms Export
    Control     Act.      In that prior        report,    the GAO also pointed            out
    that the use of the cash revenues was not subject                         to U.S.
    control     or approval.           The GAO found that,          concerned because
    the U.S. Government lacked control                  of fuel sales revenues,
    the U.S. Military            Group developed a memorandum of
    understanding         detailing      the requirements        for U.S. approval
    of fuel sales and other third-party                   transfers.       The GAO
    further     found that the Defense Security                 Assistance       Agency
    has established           procedures     to credit      U.S. payments for
    Military     Assistance         Program-funded      fuel for future          Foreign
    Military      Sales to El Salvador.
    The GAO concluded,            however, that the Defense Security
    Assistance       Agency had been refunding             proceeds from U.S.
    purchases      of Military         Assistance     Program-funded      fuel to a
    Salvadoran       account used for commercial              purchases     that are
    not reviewed         or approved by the U.S.            The GAO further
    concluded      that,      between June 1987 and September 1989,
    Salvadoran       officials       spent over $1.1 million          of fuel sales
    proceeds to purchase             items --including      an automobile,       camping
    equipment,       and a $300,000 building,             which the U.S. Military
    Group believes          may have been overvalued.             The GAO reported
    that the Financial            Management Division         of the Defense
    Security    Assistance         Agency was unaware that the DOD had
    planned to ensure proceeds from Military                    Assistance      Program-
    financed     fuel sales would be used only for Foreign Military
    Sales purchases           and would not be made available             to El
    Salvador     for commercial          purchase.      The GAO noted that,        on
    November 30, 1989, the Defense Security                    Assistance      Agency
    directed     its accounting          center to discontinue         refunding     the
    proceeds     from Military          Assistance     Program-funded       fuel sales
    to an account controlled               by the Government of El Salvador.
    The GAO further           noted that fuel proceeds would now be
    deposited      in an account that can be used only to finance
    Foreign Military           Sales purchases--to         ensure that the Defense
    Security    Assistance         Agency and the U.S. Military             Group in El
    Salvador    have the opportunity              to review and approve all
    purchases      financed       with those funds.         The GAO reported       that
                                               -3-

”




        Page 48                                GAO/NSIAD-90-132    Accountability   for Aid to El Salvador
                                 Appendix   I
                                 Commente       Prom the Department   of Defense




                             the Security    Aesistance      Agency and the U.S. Military         Group
                           in El Salvador have the opportunity             to review and approve
                           all purchases     financed     with those funds.        The GAO reported
                           that the Security       Assistance    Manual will      be modified   to
                           require   that all recipient        countries     only use proceeds from
                           sales of Military       Assistance     Program-funded     fuel to finance
                           purchases    under the Foreign Military           Sales program.   (pp. 16-
Now on pp. 13-14           18/GAO Draft    Report)

                           QoD   Rq@ponse r     Concur.     The GAO description        of the situation
                           in El Salvador during         1989 is accurate       and the DOD concurs.
                           Since that time, however, a separate trust                fund account has
                           been established        for deposit     of any proceeds from Military
                           Assistance     Program funded fuel sales.            Those funds are not
                           refunded    directly      to El Salvador     and are available       for
                           Foreign Military        Sales purposes.       Further,    a change has been
                           made to the Securitv         Assistance     Manaaement ManuaL, DOD
                           5105.38.M,     which provides       guidance concerning       resale
                           proceeds of items purchased with U.S. financing.
                           m:                   JJ&&Q$ U.S. m.                            The GAO reported           that,
                            in the absence          of specific         guidance,       each member of the U.S.
                           Military      Group individually              decides how much emphasis should
                           be placed on monitoring                responsibilities.                The GAO found
                            that,    from May 1987 to April                1989, the Military              Group
                           conducted        analyses       of consumption          data for ammunition,              fuel,
                           communication           spare parts,         batteries,       medical        supplies,      and
                           repair      parts.       According       to the GAO, because of time and
                            etaff   constraints          and the absence of indications                     of
                           diversion        or misuse, some of the analyses                      had been
                           discontinued          or were limited           to certain         items--such       as fuel
                           and ammunition,           which were viewed as the most critical
                            items.      The GAO further           found, however, that the Military
                           Group had not conducted                inventories         or spot checks of U.S.
                            funded supplies          and equipment on a regular                    basis.      The GAO
                           concluded        that such inventories               and spot checks could help
                           El Salvador's          military      to better        control        and account for
                           U.S. military          aid.       The GAO further          concluded         that periodic
                           spot checks of selected                items      by U.S. personnel             assure that
                           appropriate          accountability          procedures        are in place to
                           prevent      pilferage,         loss, or misuse of aid.                  The GAO
                           commented that,           according        to the Military            Group staff,        such
                           spot checks could be performed without                           significantly
                           detracting         from other responsibilities.                      The GAO also
                           observed that staffing               and travel         restrictions,           which keep
                           U.S. military          personnel       from visiting           combat areas, limit
                           the extent         to which U.S. personnel                can monitor          use of
Now on pp. 3, 15-17.       ;i$.i.~y      aid in El Salvador.                (pp. 2-3, pp.18-22/GAO               Draft

                                                                         -4-

                       Y




                                 Page 49                                  GAO/NSIAD-W132        Accountability   for Aid to El Salvadur
                                                                                                             ,


                        Appendix I
                        Comments Prom the Department    of Defense




               WDB                   Partially      Concur.      The El Salvador Armed
               Forces    are aware of their          responsibilities           regarding
               equipment      provided     by the U.S. to El Salvador.                  It should be
               noted, however, that title             to the material           provided      by the
               U.S. to El Salvador has passed to the Government of El
               Salvador.       While the El Salvador Armed Forces facilities                        may
               not be of such quantity             and quality       as to afford         the same
See pp. 20-a   level    of physical       security    as the U.S., this does not
               indicate     that storage or physical             security       is inadequate.
               The El Salvador        Armed Forces are continually                 constructing
               new facilities        and upgrading       existing      facilities         to store
               and physically        secure material.           El Salvador        is in the
               process,     through    Foreign Military          Sales cases, of upgrading
               physical     security     at the Comalapa Air Base and the 4th
               Brigade.       The DOD recognizes         that improvements             can and are
               being made.        It is the DOD view that the existing                      and
               planned upgrades to facilities               and logistics          training
               respond to the GAO observations.
               -:                                                                                   . The
               GAO found that,            because combat activities              have been given
               the highest         priority,        logistics      have not been emphasized--
               which has resulted              in the Salvadoran         forces receiving
               limited      logistics        training.          The GAO further      found that the
               number and quality              of logistics        personnel     has not increased
               with the expanded military                    force size and the U.S. security
               assistance        program.         The GAO reported         that,   as a result,
               El Salvador's          military        relies     on an antiquated       logistical
               system.        The GAO noted that low emphasis on logistics                         has
               been cited        in U.S. assessments of El Salvador's                     military
               capabilities         prepared in 1984 and 1985.
               The GAO found that the El Salvadoran                       military       logistics
               system is primarily            supported       by a manual paperwork process,
               with no standardized             and systematic          record keeping among the
               units.     The GAO reported            its spot checking            indicated        that
               the records       contained       conflicting         information.           The GAO
               further    reported      that,     while El Salvador's              military        head-
               quarters     has established           overall      logistica       policies        and
               procedurea      for reporting          receipt      and distribution,
               conducting      inventories,          and accounting           for military
               property --each military             unit is required             to develop its own
               standard     operating       procedures.          The GAO further            found that
               written    logistics       operating        procedures        were not in place at
               two of the 14 units           the GAO visited.              The GAO also reported
               that seven units         had limited          storage space, which resulted
               in some U.S.-funded            supplies       and equipment         being
               inadequately       secured.         The GAO pointed           out that the lack of
               adequate storage         space      for ammunition          is critical          because it
               could be (1) stolen,             (2) affected         by weather conditions,
                (3) sabotaged,       or (4) accidently             exploded.         The GAO also
               found that physical            inventories        taken to reconcile              records
                                                           -5-




                        Page 60                             GAO/NSIAD-DO-132     Accountability   for Aid to El Salvador
                            Appendix I
                            Commenta Fhm      the Department    of Defense




                         with    actual    equipment on hand were done infrequently.                   The
                        GAO    concluded     that,   based on 86 spot checks conducted at 14
                        unita,     the actual      amount.in      the inventory      was not accurately
                        reflected      in Salvadoran       military     accountability      records.
                        The GAO further         concluded,      however, that there was no
                        evidence      of any recent diversion           or misuse of military
                        assistance.        In summary, the GAO nonethelese              concluded    that
                        U.S. aid could be vulnerable                to misuse or diversion       becauee
Nowon pp. 2-3, 17-22.   of control       weakness.      (pp. 3-4, pp. 22-31/GAO Draft Report)
                        I)oD                   concur.      The GAO review of the situation              in
See pp. 17-19.           El Salvador      during     1989 ie accurate         and the DOD concurs.
                        Since that time, however, changes have been made by
                         El Salvador      concerning       accountability         and control    of
                        material     and equipment.          A Colonel      is in charge of logistics
                        whose primary        responeibility        is to insure material          and
                        equipment      accountability        and control.          There is also a clear
                        chain of command for the logistics                  system which was not the
                        case in the paet.           The Government of El Salvador              has
                        appointed      an Inspector        General,     Vladiniro      Pineda Villalta,
                        who will     inveetigate       allegation8        of irregularity      in
                         logistic8     matters.       The El Salvador Armed Forces are
                         conducting     inventoriee        of material      with the assistance         of
                        U.S. personnel         in order to bring accountability               and control
                         in line with the U.S. model.
                        -:                  -cow                                          . The GAO reported
                        that the Agency for International                       Development use8
                        established          policies        and proceduree         to control       direct
                        assistance         funds in El Salvador.,               According      to the GAO, the
                        Agency for International                  Development and the government of
                        El Salvador          have developed          adequate systems to account for
                        balance-of-payments                aid--and      the Agency monitor8
                        implementation,             verifies      expenses,        and audits      item end use
                        for its projects             and other activities.               The GAO reported
                        that,      although       it ie the position            of the Agency for
                         International          Development that U.S. funds are protected
                        against       misuse      and diversion          by Agency action8,            that
                        Agency'8        auditors       have nonetheless            found that some costs are
                        not properly           documented and are inveetigating                    two projects
                         for    poseible       mieuse of funds.              The GAO reported          that,
                        because the Salvadoran                  capacity      to manage and control            funda
                         is generally          weak, accountability              for the Agency for
                         International          Development'8          annual program, which haa
                        averaged $260 mission                 since 1980, haa depended on a
                         relatively        emall Agency staff              in El Salvador        to identify       and
                         correct       control      problems quickly.              The GAO concluded         that
                         the Agency for International                    Development mission assessments
                        are     not identifying            financial       control     weaknesses before
                        monies are diebureed.                  (p. 4, pp. 33-Sl/GAO Draft Report)
Now on pp, 2-4,24-34.
                        J3oD Relrm              The DOD notea         the GAO finding.
                                                                     -6-




                            Page 61                                  GAO/NSIADSO-132      AccountabiUty    for Aid to El Salvador
                           Commenta   From the Department          of Defense




                        r32fwmB          Lecal~I8VLaneEgbl@~niruse                               . The GAO
                        reported     that the procedures       of the Agency for International
                        Development A8aistance         require    that El Salvador           set aside
                        local    currency    funds to pay for development             activities
                        agreed upon with the United States.                According       to the GAO,
                        in FY 1989, Salvadoran-owned           local    currencies,        made
                        available      as a result    of U.S. Economic Support Fund cash
                        grants and Public Law 480 Title             I food sales agreements,
                        amounted to about 23 percent           of El Salvador's          total
                        government      expenditures.      The GAO concluded          that,      because
                        the Salvadoran       government    lacks adequate financial
                        management and accounting          systems, those funds are
                        vulnerable      to misuse.     The GAO further        reported       that the
                        Agency for International          Development has insufficient                staff
                        to account for all local currency             use.       The GAO also found
                        that about half of the Agency's             Regional      Inspector       audits    of
                        Salvadoran      agencies have identified          significant        accounting
                        ayafem problems.         The GAO reported       that El Salvador           has
                        agreed to ensure that its agencies have adequate financial
                        systems in place by 1991.
                        The GAO also concluded           that the Agency for International
                        Development       policy    on local currency      accountability          is not
                        clear.      According     to the GAO, the Regional         Inspector         General
                        has taken the position           that the Agency mission          is, in fact,
                        accountable       for use of local currency         funds.      Tee GAO found,
                        however,      that because of staff       constraints,       the Agency for
                        International        Development mission      is increasing         the amounts
                        of local      currency    spent on general      expenses of the
                        Salvadoran       government--which,      under Agency policy,            requires
                        less accountability.           The GAO generally       concluded       that such
                        practices       could make the funds more vulnerable              to misuse.
Now on pp. 2-4,35-42.   (p. 4, pp. 52-67/GAO Draft Report)
                        -Renaonoet              The    DOD     notes    the GAO finding.




                                              I  The GAO recommended that the Secretary        of
                        Defense,     after  coordination     with the Department of State,
                        direct    the Defenee Security       Assistance    Agency and the U.S.
                        Military     Group in El Salvador       to develop a memorandum of
                        understanding      with El Salvador       for improving  internal
                        controls,     to include    the following.
                                      appointing           independent     high-level         officials   of the
                                      Salvadoran           property    accountability          and Inspector
                                      General         pOaitiOn8;

                                                                       -7-
                    Y




                           Page 52                                     GAO/NSIAlHO-132     Accountability   for Aid to El Salvador
                        Appendix I
                        Comments Prom the Department        of Defense




                                 performing     periodic    inventories      of Salvadoran
                                 Armed Forces property         to ensure that
                                 accountability       for their    custody and use is
                                 maintained     and to reconcile        physical  counts with
                                 records:     and
                               authorizing      the U.S. Military      Group to conduct
                               periodic     spot checks of selected        U.S. funded
                               military     items to provide      reasonable   assurance                   of
Now on p, 22                   accountability      and control.       (pp. 31-32/GAO
                         Draft Report)
                 pOD Bapgonaec              Partially      Concur.        The recommendations
                 offered       aa a result          of the GAO review were well received                     by
                 the El Salvador Armed Forces, U.S. Military                            Group, and the
                 DOD. The DOD does not, however, consider                             a memorandum of
                 understanding            to be necessary          or desirable.         A memorandum of
                 understanding            would do little          to ensure or enhance
                 accountability             and control        of U.S. funded material             by the El
                 Salvador        Armed Forces.           Instead,       the Defense Security
                 Assistance          Agency will       discuss       and provide       copies of
                  13 UST 985, "EL SALVADOR, Defense:                         Furnishing      of Articles
See comment 1.   and Services,"             to the representatives             of the El Salvador            and
                 U. S. Military            Group during each semi-annual                 program
                 management review.                 The program management reviews are held
                 in April        and November of each year in Washington,                         D.C.
                 Prior     to each review,            a list     of topics       is prepared by the
                 Defense Security             Assistance        Agency and provided           to all
                 participants.             The El Salvador           representatives         at the
                 program management review are the persons responsible                                 for
                 accountability            and inventory         control.        During the review an
                 action      item list        is developed which sets forth                  actions     to be
                 accomplished           in a certain         time frame and the agency
                 responsible          to complete the action.                 A copy of the list           is
                 provided        to each participant.                If problems occur between
                 reviews       regarding        any action,        the Defense Security
                 Assistance         Agency tries         to resolve        the issue.        During the
                 following         review,      the results        of the previous         review actions
                 are discussed            and the cycle begins again.                  The 13 UST 985
                 agreement,          access, accountability               and control        can be made a
                 topic     and action         item for each review.
                        A Salvadoran   Colonel   is in place in the armed forces
                 logistics     section  to insure    control    and accountability   of
                 material     and equipment.     Since the GAO review,       a clear chain
                 of command has also been established            to help alleviate
                 problems of accountability         and control.
                                                              -8-




                       Page 53                                  GAO/NSIAD-90-132      Accountability   for Aid to El Salvador
                                                                                                       ,


                     Appendix I
                     Comment8 From the Department     of Defense




                Beginning      in February   1990, the Salvadorans established     a
                computer network for the Air Force which is assisting           with
                accountability       and control  of all major end items    and repair
                parts.     This network is being expanded and will       encompass
                the entire       El Salvador Armed Forces.
                The U.S. trainers         in El Splvador have been working closely
                with their     Salvadoran     counterparts    responsible   for
                accountability      and control     of material    and equipment in
                order to bring      their    system in line with the U.S. model.
                This includes      record keeping procedures        and inventory
                control.
                The Government of El Salvador has appointed                an Inspector
                General,    Vladiniro    Pineda Villalta,       to investigate
                allegations     of irregularities       in logistics    matters.
                The U.S. Military        Group is accompanying         Salvadoran
                counterparts      viewing     Salvadoran     equipment and facilities,          as
                time and circumstances          permit,    to identify     and correct      any
                potential     problems regarding        accountability      and control      of
                U.S. funded equipment.            However, the U.S. Military           Group has
                not yet requested         (nor have they received)         authorization
                from the El Salvador Armed Force8 for on demand access to
                all El Salvador Armed Forces facilities                to spot check
                selected     U.S. funded military        items and facilities.

                B                          The GAO recommended that the
                Administrator,        Agency for International       Development,    ensure
                that its mission         in El Salvador    (1) perform in-depth
                financial      management assessments of Salvadoran          organizations
                scheduled      to implement new Agency for International
                Development       projects    and (2) work with El Salvador       to
Now on p. 33.   correct    identified      problems.   (p. Sl/GAO Draft Report)
                &?D Resm             The DOD notes       the GAO recommendation.
                                              The GAO recommended that the
                -                        Agency for International         Development,     clarify
                the Agency's          local   currency   accountability      guidance    for El
                Salvador,       including      a clear statement        as to (1) what
                constitutes         reasonable     assurance that host government
                agencies      have adequate financial          systems to manage local
                currency      funds and (2) what degree of Agency for
                International           Development oversight       and monitoring     is
Now on p. 42.   required.        (p. 68/GAO Draft Report)
                m                    The DOD notes       the GAO recommendation.
                                                        -9-




                     Page 54                              GAO/NSIAD90-132    Accountability   for Aid to El Salvador
              Appendix   I
              htunenti       Prom the Department   of Defen8e




              The following is GAO’S comment on the Defense Department’s letter
              dated June 6, 1990.


              1. We agree that there are other ways to develop an adequate mecha-
GAO Comment   nism for discussing and reaching agreement on actions needed to
              improve control of U.S. military aid, and we have revised our recom-
              mendation accordingly.




              Page 55                                  GAO/NSIAD9O-132   Accountability   for Aid to El Sahdor
 Appendix II

 Comments From the Agency for
 International Developrriemt


                                         AGENCY FOR INTERNATIONAL                    DEVELOPMENT
                                                         320TWENlYFIRSTSTREET,N.W.
                                                             WASHMGTON.D.C.20523




                7%~Adminhrator                                                        June 15, 1990


                Mr.     Frank C. Conahan
                Assistant         Comptroller        General
                National       Security       and
                    International          Affairs     Division
                General       Accounting        Office
                Washington,         D.C.      20548
                Dear    Mr.     Conahan:

                     The Agency for International             Development       (A.I.D.)                            generally
                concurs    with     the GAO’s overall     findings      in its draft                              report,
                “El Salvador:          Accountability   for U.S. Assistance.”                                     I would
                like    to highlight       four key conclusions       contained       in                        the report:
Now on p, 24.          A.I.D.      uses established               policies  and procedures    to                    control
                       direct      assistance     funds           in El Salvador.     (P. 33)
Now on p, 27.          The system         to    control    the delivery     and sale of                     PL 480
                       agricultural            commodities     is adequate.     (P. 39)
Now on p. 28.          The Regional    Inspector  General   (RIG) does not believe                                       that
                       project   funds are widely   misused    in El Salvador.    (P.                                    41)

Now on p. 30.          A.I.D.   staff    are fulfilling          monitoring                responsibilities                   by
                       helping    implementing        agencies     overcome                management
                       weaknesses     and conducting         site    visits              -- often        to war          zone
                       areas.     (P. 45)
                       These conclusions            of the GAO and the RIG, together              with    the
                detailed       comments of the A.1 .D. Mission              in El Salvador
                (enclosed),        suggest       that   the Mission    is already      implementing
                the recommendations              at the end of Chapter          3 of the draft
                report.        These recommendations             state that     the Administrator
                should     ensure     that     the A. I.D.     Mission   in El Salvador:         (1)
                perform      in-depth      financial        management   assessments      of Salvadoran
                organizations         scheduled       to implement     new A.I.D.      projects;       and
Now on p. 33.   (2) work with         El Salvador         to correct   identified      problems.
                (P. 51)
                      Chapter    4 of the draft          report     concerns      the management         of
                host country-owned          local     currency.        It recommends         that    the
                Administrator       clarify      A.I.D.    ‘s local      currency     accountability
                guidance      by defining:        (1) what c onstitutes           reasonable       assurance


                                  PHONE: ~202~647-9620                                     PAX ,7,02,647 1770




                        Page 56                                          GAO/NSIAD-fW132        Accountability       for Aid to El Salvador
       Appendix II
       Comments From the Agency for
       International Developmemt




                                                 - 2 -
that    host      government     agencies     have adequate   financial                        systems
to manage         local   currency     funds;    and (2) what degree                      of    A.I.D.
oversight         and monitoring       is required.

      A.I.D.      supplemental      Guidance       on Programming          Local Currency
(A.I.D.      Handbook     1, Part     IV) is the basis           on which USAID/El
Salvador      and all     missions     administer        local     currency       programs.
We have reviewed          that   guidance      and agree       that     “reasonable
assurance”        is not defined.          Indeed,     the guidance          implicitly
assumes that         each mission       is in the best position               to judge
whether      or not the institution            designated        to receive         local
currency       funds is, or is not,           able   to manage the funds properly.

       The guidance         defines      A. I.D.    “oversight         and monitoring”
responsibilities            in the context          of the degree           to which A.I.D.
is involved          in jointly       programming        the host country-owned              local
currency.          When the funds are jointly                  programmed        to support
budget       requirements,        the guidance         explicitly         states    that
A.I.D.     ‘s role may be limited               to ensuring         that    the local
currency        was actually        transferred        to the appropriate             account,
and that        the funds need not be traced                   to their       end use because
they will         have been combined           with    other      funds and will         not be
traceable.
      The Agency is currently                  preparing         operational           guidance
which will         require      missions       to perform          financial        assessments      of
the host government               units    which administer               local     currency
special    accounts;          indicate       how special           accounts       will     be
monitored      and reported            on; and ensure            that    audits        are performed
on local      currency        special      account       activities.            This operational
guidance      will      also    better     define      what constitutes                “reasonable
assurance”         that    host governments            have adequate            financial
systems     to manage local             currency       resources,            We are also
reviewing      A. I.D. ’ s accountability                requirements           for monitoring
host country-owned              local     currency       to determine           how these
requirements          can be stated          more clearly.

       I believe      that         these  new guidelines         will      be responsive              to
the local       currency           recommendations      identified          in the draft
report.
       Enclosed      are     the     Mission’s      more    detailed       comments            on the
report.
                                                               ,I -1          -Y
                                                          Sdncerely,
                                                                           \ ’
                                                         1;      ” ,! ,
                                                          <I. ),(.   ‘A/ a ‘i, T’
                                                                                ..S”
                                                           Ronald      W. Roskens

Enclosure:          as stated




      Page 67                                      GAO/NSIAD9O-132       Accountability        for Aid to El Salvador
                     Appendix II
                     Comments From the Agency for
                     International Developmemt




                            USAID/El          Salvador     Comments      on GAO Draft            Report:

                          “El     Salvador:         Accountability          for   U.S.      Assistance”


                A.    Financial        Control       of   Development       Assistance

                The draft        report     recommends          that    the Administrator,               Agency for
                International           Development      , ensure         that   its mission           in El
                Salvador        (1) perform        in-depth        financial       management          assessments
                of Salvadoran           organizations           scheduled      to implement            new A.I.D.
                projects
                       _       and- (2) work with            El Salvador         to . .correct. . . i. dentified
                                                                                                          .
                problems.          FOUr major        procedures         are usea by tne Mlsslon                  to
                monitor       and assure        accountability.

                1.    Pre-award    Surveys.         Generally,       monies    are not disbursed          to
                      new implementing        institutions          until   a pre-award       survey     has
                      been completed       and internal          control    deficiencies       have been
                      resolved.     During      the last       12 months alone,          the Mission      has
                      completed    15 pre-award          surveys     of new implementing
                      institutions      and another          2 pre-award     surveys       are currently
                      in process,     for a total          of 17: see Table         1.     The RIG
                      managed 7 of these          surveys;       see Table     2.
See pp. m-33.
                2.    Financial         Audits/Reviews.              Development         assistance         programs
                      in El Salvador            are audited          on a regular         basis.        The Mission
                      is moving         toward     annual      financial         audits      of all     programs.
                      These financial             audits     provide        the Mission          with   the primary
                      means of assessing               and reassessing            accountability            and
                      internal        controls       before      additional         funds are disbursed              or
                      new grants          are signed       with      implementing          entities       already
                      receiving         A.I.D.     funds.        During       the last       12 months alone,
                      the Mission           has completed           12 financial         audits/reviews           and
                      another        17 are currently             in process,         for a total         of 29; see
                      Table       1.    In addition,         local      PVOs funded          by A.I.D.        are
                      required        to have annual           financial         audits      performed        by
                      U.S.-affiliated            CPA firms;          7 of these         audits      were performed
                      last     year:      see Table       2.

                3.    Technical        Assistance.              When the financial           audits/reviews
                      ,
                       indicate       deficiencies            in internal         controls    and
                      accountability,              the Mission          often     resolves    these problems
                      by providing           technical          assistance        from U.S.-affiliated          CPA
                       firms    or other         institutional            contractors.        This approach       to
                      strengthening            accounting          systems      by providing        technical
                      assistance         has helped          close      63 audit       recommendations        and
                       resolve     another         47 recommendations.

                4.    Concurrent         Audits/Monitoring.           When the financial               audits
                      reveal       serious     deficiencies        (or irregularities)              which
                      cannot       be resolved        in a relatively         short     time,     the Mission
                      discontinues          funding      or continues       funding       subject      to the
                      installation         of an on-site         concurrent        financial        audit     or




                     Page 68                                     GAO/NSIAD-90-132        Accountability    for Aid to El &dvador
                         Appendix II
                         Comments From the Agency for
                         Intematlonal Developmemt




                                                                  - 2 -
                       financial    monitoring     engagement.       Currently       there    is one
                       concurrent    audit     and one financial      monitoring        arrangement
                       in operation     for development      assistance        programs;      see Table
                       1.

                 B.    Financial        Control      of   Local     Currency

                 The Draft       Report    recommends        that    the Administrator,          Agency for
                 International         Development,        clarify      A.I.D.‘s    local     currency
                 accountability         guidance      for El Salvador.           This clarification
                 should     clearly     state     (1) what constitutes           reasonable        assurance
                 that    host government         agencies        have adequate      financial       systems
                 to manage local          currency      funds,      and (2) what degree          of A.I.D.
                 oversight       and monitoring         is required.

                 The primary           means of monitoring           accountability           and assessing
                 internal       controls         for local     currency     rests       with   two Salvadoran
See pp. 36-42.   agencies,         the Court        of Accounts      and the Technical             Secretariat
                 for External           Financing        (SETEFE).      Working       through      the Court         of
                 ACCOUntS and SETEFE, the Mission                     obtains       reasonable         assurance
                 that     funding       objectives        are met.      As explained          below,      the
                 Mission       believes        that    it has properly        implemented          A.I.D.       policy
                 to monitor          the use of host country-owned                  local     currency        funds.

                 1.    The Court        of Accounts,          with a fulltime             staff       of 913, is
                       responsible        for auditing           all    government          agencies.         The
                       Mission      has been working             with     the Court         of Accounts         since
                       1986 in an effort             to modernize           its    audit      systems.        A
                       contract       funded     by A.I.D.         was signed          with     Price    Waterhouse
                       to train       its   staff;     evaluate         its     operations;          and recommend
                       changes      to its systems,            organization,            and authorizing
                       legislation.           To date 125 employees                  of the Court          of
                       Accounts       have been trained              in governmental             accounting        and
                       822 have been trained                in modern fiscal              control.         In May
                       1990, the Court            announced        publicly        its    plan      to implement
                       the numerous         changes       recommended           by the Price           Waterhouse
                       study.       The Mission         is pleased          with     the progress          to date
                       and the new direction                at the Court.

                 2.    SETEFE was encouraged               by the Mission            in 1985 to hire           CPA
                       firms      to audit      all   of the implementing                units     receiving
                       funds      from the extraordinary                budget.        SETEFE implemented
                       contracts       to carry       out some 55 audits               for the period
                       1984/85,       and the Mission           contracted        with      a consulting        firm
                       to verify       the implementation               status     of the recommendations
                       resulting       from these         audits.         The Nission         concurrently
                       asked the RIG to provide                  training       materials        to SETEFE on
                       GAO auditing          standards,        and asked prequalified
                       U.S.-affiliate           CPA firms        to perform        the work.          The RIG
                       provided       guidelines        to the SETEFE audit               supervisor         as well
                       as on the job training                concerning         work plans,          work papers,
                       sampling




                         Page 69                                     GAO/NSJ.AD-30432       Accountability    for Aid to El Salvador
                        Appendix II
                        Comments From the Agency for
                        International Developmemt




                                                                 -   3 -

                      techniques,     etc.    As a result,      62 audits  covering     the
                      period     from January   1986 to June 1988 were performed            in
                      1989 using GAO auditing        standards;     see Tables     1 and 2.

                 3.   As a result          of the success         of this          audit       process,        the
                      Mission       and SETEFE entered            into      an agreement               in 1990
                      whereby       SETEFE would provisionally                     certify         that
                      implementing           units   are capable          of managing              and accounting
                      for local         currency     funds.       During         this      one year provisional
                      period,       all    necessary      actions       to correct             deficiencies          will
                      be taken.          If SETEFE is unable              to provide             final
                      certification           of an implementing             unit,         either        funding     will
                      be discontinued             or an agreement           will      be reached            to initiate
                      or continue          a concurrent        audit      to review            transactions          and
                      provide       technical       assistance        to clear           up the deficiencies.

                 4.   For ordinary         budget     support,      the Ministry         of Finance
                      provides      A.I.D.     with    a programming          proposal       which
                      identifies       areas     of activities,           such as education           and
                      health , to be funded.              After     the ordinary         budget     support
                      program     is approved         by A.I.D.,        the Ministry         of Finance
                      reports     to A.I.D.        the disbursements            made by Ministries
                      against     the original         agreement.          In this     way and in
                      accordance        with A.I.D.       policy      the Mission        ensures      that
                      documentation         exists     to demonstrate           that   local     currency   was
                      transferred        to appropriate          budget      accounts      for disbursement.

                 C.   Mission       Efforts       to   Improve       Accountability

                 The Mission       concurs     with   the RIG that    audits                  are      integral      to
                 assuring      proper    control    of funds and effective                          program
                 implementation        fOK both development        assistance                       programs      and
                 local    currency     programs.

See pp. 37-39.   1.   During       the last      12 months 103 audit         reports     have been
                      completed        for development        assistance       programs,      either      in
                      draft      or in final:         see Table     2.   The Mission       takes     great
                      pride      in having      closed     63 audit    recommendations          and
                      resolved        another     47 during     this   period.       The closure        and
                      resolution         of these      recommendations       clearly     demonstrates
                      the Mission’s           commitment     and continued        progress       in
                      improving        accountability        of the development          assistance
                      program.

                 2.   Regarding      the local     currency      program      SETEFE is primarily
                      responsible       for monitoring        the resolution         and closure   of
                      the recommendations          that    have resulted         from its   62
                      financial     audits      of various      Government       of El Salvador
                      implementing        agencies    during     the past 12 months;          see Tables
                      1 and 2.       SETEFE uses GAO auditing              standards    and is
                      assisted     by the implementing           agencies,       the Court    of




                        Page 60                                       GAO/NSIAJMO-132         Accountability      for hid to El Salvador
            Appendix II
            Comments From the Agency for
            Internations Developmemt




                                               - 4 -
           AccOUntS,      and Price    Waterhouse.      The Mission               monitors           the
           progress      of these   efforts    to improve   internal               control.

    Table    1 summarizes      the audits/reviews        completed    or in process
    for both development          assistance      and host country-owned      local
    currency     during    the last      12 months.    Table    2 summarizes    the
    audit    reports    issued    and in process      during    the last   12 months.



                 TABLE 1 .--Audits/Reviews            Completed  or in Process
                  During  the 12 Month       Period      June 1989 - May 1990


                                                          Development               Local
    Type    of   Audit/Review                             Assistance              Currency             Total
    Pro-award    Surveys                                       17                             2            19
    Financial   Audits/Reviews                                 29                             :            31
    Technical    Assistance                                     1                                           3
    Concurrent    Audits/Monitoring                             2                             2             4
    SETEFE Annual        Financial    Audits
       by U.S. -Affiliated         CPA Firms                     0                     62                  62
       TOTAL                                                   27                      m                1m




                  TABLE 2 .--Audut Reports  Issued                   and in Process
                 During the 12 Month Period    June                  1989 - May 1990


                                                Final            Draft                                    In
    Type    of   Audit    Report               Reports          Reports           Total                Process
    RIG Pre-award        Audits                       6                1               7
    Non-RIG Prc-award           Audits            9                    0               9
    RIG Financial        Audits                  12                    1              13
    GAO Audits                                        2                1               3
    Financial     Reviews                             1                1                  2
    Financial     Audits      of
       Local   PVOs                                   7                0                7                       0
    SETEFE Annual        Financial
       Audits   by U.S.-Affiliated
       CPA Firms                                 25                   37              62                        0
       TOTAL                                     ET                  7-i            1m                     ii




Y




            Page 61                               GAO/NSIAB96-132          Accountability         for Aid to El Salvador
Appendix III

CommentsFrom the Department of State                                                                                   l




                                                                           United States Department of State

                                                                           Whthington, D.C.     20520




               Dear     Mr.   Conahan:

                     This     is in response          to your letter          of April    25, 1990, which
               forwarded        copies    of the      report     entitled       “El Salvador:
               Accountability          for U.S.       Assistance”         (code 463785)       for review and
               comment.
                      Enclosed       are brief      comments      prepared         by the    Bureau      of
               Inter-American           Affairs.

                       We appreciate         the   opportunity        to   review     and comment         on the
               draft     report.

                                                                      Sincerely,




                                                                     Eliza % eth      A. Gibbons
                                                                     Associate        Comptroller
                                                                     Office    of     Financial         Management


               Enclosure:
                     As stated.


               Mr.     Frank C. Conahan
                       Assistant       Comptroller      General,
                               National      Security      and
                                  International        Affairs      Division,
                                       U.S. General        Accounting       Office,
                                               Washington,      D.C.       20548




                       Page 62                                   GAO/NSIAIMO-132       Accountability    for Aid to El Salvador
        Appendix III
        Commentn hm       the Department    of State




GAO Draft     Report  Comments:            El   Salvador:      Accountability          for   U.S.
Assistance       (Code 463785)



       I appreciate         the opportunity         to review     and comment on the
GAO’s draft        report      on assistance        to El Salvador.        While deferring
to the Department             of Defense      and the Agency for International
Development        for a detailed          response     to the GAO’s findings         and
recommendations,            I would note only         that     it is encouraging      to have
established        that     U.S. assistance         to El Salvador,      with    only a few
exceptions,        has been used for the purposes                 for which it was
intended.         The corrective         measures     recommended      in your report      and
those     already     being      implemented       by AID and the U.S. Military           Group
in El Salvador,           further     ensure     the integrity       of our assistance
program.




                                                            Michael   G. Kozak,         ’
                                                            Acting   Assistant        Secretary
                                                            for Inter-American          Affairs




        Page 63                                  GAO/NSIAIMO-132     Accountability    for Aid to El Salvador
  Ppe

k%i         Contributors to This Report


National Securitc and     :X~~p~~~~~~~~~~~~~~~~~~
International Affairs     Mario Zavala, Evkuator
Division,   Washington,   Karen Creller, Evaluator
D.C.

                          Paul Rhodes, Deputy Project Manager
Atlanta Regional          Janice S. Villar, Evaluator
Office                    Raymond H. Murphy, II, Evaluator




                          Page 64                    GAO/NSIAIMO-132   Accountability   for Aid to El Salvador
Page 65   GAO/NSIAD-90-132   Accountability   for Aid to El Salvador
Page 66   GAO/NSIAIWO-132   Accountability   for Aid to El Salvador
Page 07   GAO/NSIAD-90432   Accountability   for Aid to El Salvador
                                                                                     r


                                                                                         ‘*
l%elaM GAO Products


              El Salvador: Extent of U.S. Military Personnel In Country        (GAO/
              NSIAD-QO-227FS, July 1999)

              Foreign Aid:Efforts to Improve the Judicial System in El Salvador             (GAO/
                         May 1990)
              NSIAD-90-81,

              El Salvador: Pipeline of U.S. Military and Economic Aid        (GAO/
              NSL~D-~O-~~~FS, Feb.1990)

              El Salvador: Transfers of Military Assistance Fuels       (GAO/N&W-89-186,
              Aug. 1989)

              El Salvador: Limited Use of US. Firms in Military Aid Construction
              (GAO/NSIAD-89-132, July 1989)

              Central America: Impact of U.S. Assistance in the 19808        (GAO/
              NSIAD-89-170, July 1989)




(res7aa)      Page 68                      GAO/NSIAD!W132   Accountability   for Aid to El Salvador
Ordering   Information

‘I’hc* first five copies of each GAO report are free. Addit,ional copies
arc! $2 each. Orders should be sent. to t,he following address, accom-
panitvl by a check or money order made out to the Superintendent
of I)ocumrd,s,     when necessary. Orders for 100 or more copies to be
mailed to a single address are discounted 26 percent.

I1.S. Gc~neral Account,ing Office
I’.(). Box 6016
(Zthersburg,    MI) 20877

Orders may also be placed by calling    (202) 2756241.