Foreign Economic Assistance: Better Controls Needed Over Property Accountability and Contract Close Outs

Published by the Government Accountability Office on 1990-01-22.

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

     n      - =


                   United States
                   General Accounting Off’ice
                   Washington, D.C. 20548

                   National Security and
                   International AffMrs Division


                   January 22,199O
                   The Honorable Dante B. Fascell
                   Chairman, Committee on Foreign Affairs
                   House of Representatives
                   Dear Mr. Chairman:

                   This report is our initial responseto your April 20, 1989, request that
                   we review options for streamlining and revising the Agency for Interna-
                   tional Development’s (AID) contracting and procurement system. This
                   report respondsto your concernsabout the adequacy of AID'S internal
                   controls over its contracts.
                   In this report we examine AID'S procedures for (1) maintaining accounta-
                   bility for both AID-ownedand cooperating country titled nonexpendable
                   property in the possessionof contractors and (2) closing out and audit-
                   ing expired contracts in conformance with federal and AID contracting
                   policies and regulations. Our review was conducted at AID/Washington
                   and at AID missions in Ecuador and Bolivia. A full discussionof our
                   objectives, scope,and methodology is in appendix I. We will provide a
                   separate report on the other concernsoutlined in your request.

Redults in Brief   We found that (1) AID does not exercise adequate accountability for pro-
                   ject-funded nonexpendable property in the possessionof contractors
                   and (2) AID'S current policy and reporting requirements are not suffi-
                   cient to ensure systematic closeout and final audit of completed con-
                   tracts at the two overseasmissions we visited. AID internal audits and
                   evaluations have identified similar weaknessesin these areas, but AID
                   audit recommendations have not been satisfactorily resolved. The con-
                   tinuing existence of these weaknessesmakes the agency unnecessarily
                   vulnerable to the misuse by contractors of Am-financed property, and
                   can result in delays in the deobligation or decommitment of funds,
                   unfulfilled contractual commitments, and the lack of assurancethat
                   only allowable contract costs have been paid.



 lck of Accountability       AID regulations require that AID maintain accountability for project-
                             funded nonexpendableproperty in the possessionof its contractors. Our
:r Project-Funded            analysis showed that AID is not adequately complying with these regula-
‘unexpendable                tions, and therefore, doesnot know the value or condition of this prop
                             erty, or whether proper disposition is made for such property at the
FpefiY                       completion of contracts. BecauseAID did not have adequate records, we
I                            could not determine the quantity, type, or value of AID'S project-funded
                             property in the possessionof contractors. However, prior AID Inspector
                             General reviews indicate that the value of such property is significant.
                             AID regulations define nonexpendableproperty as property that is com-
                             plete in itself and does not lose its identity or becomea component of
                             another article when put into use. Further, it is defined as being durable,
                             with an expected service life of 2 years or more and a unit cost of more
                             than $600. Nonexpendableproperty typically includes computer hard-
                             ware and software, motor vehicles, office furniture and equipment, and
                             AID  regulations require contractors to submit to AID contracting officers
                             annual and final inventory reports of Am-ownednonexpendableprop
                             erty in their possession.AID Handbook 19 procedures require AID'S Office
                             of Financial Managementto maintain a general ledger account for AID-
                             owned property in the possessionof contractors and to compare that
                             data with annual property inventories submitted by contractors. AID
                             procedures do not require similar accountability for cooperating country
                             titled property. However, before contracts are closedout, contractors
                             are required to submit to AID a final inventory of nonexpendable prop
                             erty they have in their possessionbut which is titled to the cooperating
                             We found that AID's Office of Financial Managementwas not accounting
                             for and reporting on project-funded, Am-ownednonexpendableproperty
                             as called for by Handbook 19. Officials stated that the failure to imple-
                             ment a system of accountability for project-funded nonexpendableprop
                             erty can be attributed to the following factors:
                         . The requirement for a general ledger account of AID-ownedproperty in
                           the possessionof contractors has not been met becausethe volume of
                           vouchers generated by contractors throughout AID is too large for AID'S
                           limited staff resourcesto review.
                         l Contracting officers have not been submitting to the Office of Financial
                           Managementthe annual reports of contractor property inventories that
                           are necessaryfor reconciliation with a general ledger account.

                             Page2                               GAO/NSLtiMO-W   Foreign Economic AseW

    Our review at the AID missions in Ecuador and Bolivia showed that these
    missions also were not accounting for project-funded nonexpendable
    property in the possessionof contractors, whether owned by the United
    States or by the cooperating country. Neither mission had records iden-
    tifying the amounts or types of such property in the possessionof con-
    tractors, or whether such property had been properly disposedof for
    expired contracts. Based’ondiscussionswith mission officials, we
    believe that inadequate accountability can be attributed to (1) a general
    lack of priority for project-funded property accountability, (2) the fail-
    ure of contractors to submit annual and final inventory reports, and (3)
    inadequate closure of completed contracts, which requires final invento-
    ries of both MD-ownedand cooperating country titled nonexpendable
    property in the custody of contractors.
    Although the missions could not provide information on the quantity or
    value of nonexpendableproperty in the possessionof contractors, our
    analysis of mission contracts indicated that many contracts provide for
    the procurement of such property. For example, a contract administered
    by the mission in Bolivia, valued at about $2.3 million, provided for the
    purchase of several computers and copier equipment for the contrac-
    tor’s use, and other office equipment for AID’S use. The property pur-
    chasedby the contractor was valued at $318,000, and was included in
    the contract’s funding for other direct costs.
    In discussingthis issue with the regional contracting officer for Ecua-
    dor! Bolivia, and Peru, he agreedthat there is inadequate accountability
    and control over property in the possessionof contractors at the mis-
    sions in his region. In early 1989, the contracting officer sent letters to
    11 contractors requesting a list of all property procured with contract
    funds, but only about four of the contractors replied.
     One contractor who respondedstated that property worth about
    .$14,000was being used in Bolivia and about $8,000 of such property
     was being used at the contractor’s office located in the United States.
    Another contractor, based in Costa Rica but performing contract ser-
     vices for the mission in Peru, reported that under his Peruvian contract
     he purchased computer equipment and office furniture worth about
     $10,000 for his office in Costa Rica. The contracting officer stated that
     he was unaware of the property in Costa Rica, and had no way of know-
Y   ing about such property if it had not been reported.
    AID procurement officials in Washington stated that the lack of account-
    ability for project-funded nonexpendableproperty is a problem for

    Page 3                               GAO/NSIAD9O67 Foreign Economic Adstance
               many overseasmissions. This is particularly true of property titled to
               the cooperating country. However, these officials did not know the
               extent to which such property may be at risk for misuse or improper
               disposition when the contract is completed.
               BecauseAID has not identified and reported the amount and type of
               nonexpendableproperty in the possessionof contractors, it does not
               know how much property has been provided to contractors. However,
               we believe that the amount of nonexpendableproperty unaccounted for
               by AID may be significant. For example, property funded by just one con-
               tract included Am-ownedcomputers and other equipment that cost
               $102,000 and similar property titled to the cooperating country that
               cost $60,000. AID had about 6,100 technical servicescontracts and
               grants active in fiscal year 1988 with total obligations of about $4.4 bil-
               lion. An unknown portion of this amount was for nonexpendable

yrior Audits   The AID Inspector General has identified the lack of accountability for
               nonexpendableproperty in the possessionof contractors as a significant
               problem, but the problem has not been corrected. For example, in March
               1986, the Inspector General reported that an examination of 122 con-
I              tracts, including AID/Washingtonand mission contracts, showed that at
/              least 24 included nonexpendableproperty that had not been accounted
               for or properly disposedof, The property had an estimated cost of $4
               million. The Inspector General concludedthat, in several cases,AID
               should have been reimbursed for lost, damaged,or misused property,
               but was not. Similar to our findings in Bolivia and Ecuador, the lack of
               records precluded a complete accounting of property. The Inspector
               General’s report recommendedthat AID establish a system of accounting
               and control over Am-funded nonexpendableproperty.
               The report also noted that the Office of Financial Managementwas mak-
               ing only limited progress in its efforts (initiated in 1984) to develop a
               property listing for active contracts. Our review shows that in the 4 l/2
               years since the Inspector General’sreport, AID has made no progress in
               establishing accountability and control over project-funded nonexpend-
               able property.

               Page 4                              GAO/NSIAE9087 Foreign Economic Assistance
                            The AID office adm$istering a contract is responsible for timely initiat-
Improvements Needed         ing contract close-outprocedures to ensure, among other things, that (1)
in Closing Out Expired      property clearancehas been received, (2) all interim or disallowed costs
                            have been settled, (3) the contractor’s final invoice has been submitted,
                            (4) excessfunds are deobligated or decommitted,l and (6) a contract
    II                      audit is completed. Our review showed that many AID missions do not
    I                       have a system for ensuring that contracts are closed out, as required by
                            federal regulations. Also, AIDdoesnot know if all expired contracts
                            administered by the missions are being closedout becauseit does not
                            have an information system to keep track of this information,
                            AIDdoes have a system for closing out contracts administered in Wash-
                            ington byi the Office of Procurement, and the AIDProcurement Executive
                            has directed the overseasmissions to establish a similar procedure tai-
                            lored to fit their own needs.(Contract Information Bulletin 87-6, Janu-
                            ary 14,1987.) We found, however, that the missions in Ecuador and
                            Bolivia had not established contract close-outprocedures as directed,
                            and according to AID’S Procurement Executive, several other overseas
                            missions also have not established adequate contract close-out proce-
                            dures. For example, during his 1988 assessmentsat six missions in
                            Africa, Latin America, and the Caribbean, the Procurement Executive
                            found that contract closeouts were generally not being done.

Lac i of Agency Reporting   AID monitors the number of AID/Washingtoncontracts that have expired
on b:ontract Close Out      and the number that have been closed out. However, for overseasmis-
                            sions, it only tracks the contracts that have expired. AID’sContract On
                            Line,..Reporting System shows that from October 1,1083, through March
                            31, 1989, 2,718 mission contracts valued at $737.7 million had expired.
                            Whether closeout procedures were completed on these contracts was
                            unknown becausethe overseasmissions do not routinely report this
                            Data show that of the 3,190 contracts administered in Washington by
                            the Office\of Procurement, which expired from October 1, 1983, through
                            April 30,1989,1,361, or about 43 percent, had been closed out. Over
                            1,000 contracts, grants, and cooperative agreementscompleted prior to
                            1983 were closed administratively without following formal close-out
                            procedures. This effort, however, doesnot include mission contracts, nor

                            ‘JZxcesefunds from contracts funded by direct appropriation are deobligated, and depending on the
                            accounts involved are either reprogrammed or returned to the Treasury. Excess funds from contracts
                            funded under bilateral agreements are decommitted and returned to the respective project.

                            Page 6                                          GAO/NSLAD9O87       Foreign Economic AssMance

                   does it include AID/Washingtoncontracts awarded by organizations
                   other than the Office of Procurement.

                   The benefit of closing out expired contracts has been demonstrated by
                   the AID/WashingtonOffice of Procurement and the mission in Pakistan.
                   According to Office of Procurement records, about $9 million was deob-
                   ligated as of June 1989 by closing out expired AID/Washingtoncontracts,
                   According to the AIDCompetition Advocate, the mission in Pakistan
                   recently established comprehensiveclose-outprocedures that could be
                   considereda model for other missions. He said that approximately
                   $240,000 was deobligated becauseof contract closeouts in that country.
                   Contract close-outprocedures state that the office administering the
Lihited Contract   contract is responsible for ensuring that a contract audit is conducted.
Abdit Coverage     AID’S policy on contract closeouts for Washington-administered con-
                   tracts requires a final audit of costs for contracts worth $600,000 or
                   more. These audits are the responsibility of the Regional Inspector Gen-
                   eral for AID/Washington.Contracts valued at less than $600,000 are to
                   receive a desk review of costsby the responsible office, unless the con-
                   tracting officer believes a cost audit is necessary.The missions have
                   been instructed to use this policy as a guide in establishing their close-
                   out procedures;however, we found that no clear threshold for request-
                   ing a final audit of mission contract costs has been established
                   In examining AID'S contract information system, we found that AID can-
                   not accurately identify the extent that its expired contracts have or
                   have not been audited. Neither AID/Washingtonnor the missions in
                   Ecuador and Bolivia keep track of this information.

                   During our review we found several indicators that audit coverageis a
                   problem area in the administration of AID contracts. For example, in a
                   1986 memorandum, AID'S Procurement Executive stated that, basedon
                   internal evaluations of the Agency’s contracting system, contract
                   officers in Washington and overseasbelieved that they were receiving
                   insufficient audit support in routine contract functions, including close
                   We obtained the views of several overseascontract officers concerning
          Y        the adequacy of final audit coveragefor completed contracts, Their gen-
                   eral view was that such coveragewas inadequate. Factors cited as con-
                   tributing to the problem included low mission priority, lack of

                   Page 6                              GAO/NSIAB9067 Foreign Economic AssWance
                      procedures for contract closeout, and limited AIDInspector General
                      resourcesto respond to audit requests.
                      The March 1986 AIDInspector General report on deficiencies in the close
                      out of expired AIDcontracts suggeststhat the problem of limited audit
                      coveragehas affected AID’S contracting system for years. The report
                      stated that final audits, when required, were not requested for many of
                      the expired contracts, and that final audits were not being systemati-
                      cally requested by contracting officers. The Inspector General said that
                      such conditions applied to a substantial portion of all expired AID
                      Another problem in providing contract audit coverageis the current
                      backlog of requests for final audits. For example, the Regional Inspector
                      General for AID/Washington,who is responsible for auditing contractors
                      baaedin the United States, stated that becauseof staff limitations, his
                      office has a 3-year backlog of contract close-out audit requests that have
                      not been performed. He also stated that the DefenseContract Audit
                      Agency, which also audits AIDcontracts when requested, is about 2
                      years behind in performing contract close-out audits. He stated that the
                      lack of agencywide reporting on audit coveragemakes it impossible to
                      determine the extent to which completed contracts are receiving final
                      cost audits.

L&k of Reporting on   BecauseAIDlacks an adequate reporting system for mission close-out
Audit Activities      actions, it is not possible to determine whether individual missions have
                      established sound audit requirements, whether these requirements are
                      consistent with current policy guidance, or to what extent these require-
                      ments are being met. The Inspector General has attempted to maintain
                      an inventory of all audits requested for AIDcontracts and the status of
                      these requests from data in the Agency’s contract information system.
                      However, the system doesnot keep track of the universe of expired AID
                      contracts so that this information can be compared with audits
                      requested and performed.
                      AIDis in the processof implementing a new contract information system
                      which, according to system design documents,will be capable of keeping
                      track of contract expiration dates, the dates of contract audit requests
           Y          and completion, and the date the contract is closed out. With this system
                      the AID Inspector General and contract managementofficials should be
                      able to monitor compliance with federal regulations governing contract
                      close out and audit coverage.

                      Page 7                             GAO/NSL%D-904 7 Foreign Economic Addance
                      assessthe adequacy of its internal controls and submit a year-end state-
Issues                ment to the President and the Congresson the results of this assessment.
                      We noted that AID’Slatest internal control assessmentreport, dated
                      December29,1988, cited the lack of adequate audit coverageas a mate-
                      rial internal control weakness.However, it did not addressthe other two
                      control weaknessesdiscussedin our report-inadequate accountability
                      of project-funded nonexpendableproperty in the possessionof contrac-
                      tors and the lack of adequate contract closeouts. We were unable to
                      determine specifically why AIDdid not include these two control weak-
                      nessesin their assessmentreport.

                      Baaedon our review, we believe that AIDhas not been exercising ade-
C@clusions and        quate accountability and control over project-funded nonexpendable
R&commendations       property in the possessionof contractors, or ensuring that expired con-
                      tracts are properly closed out and audited. To correct these areas of vul-
                      nerability, we recommendthat the AIDAdministrator

                      develop an inventory of AID-ownedand cooperating country titled
                      nonexpendableproperty in the possessionof contractors and, basedon
                      the significance of this inventory, develop and implement an appropri-
                      ate system for the proper accountability and control of such property;
                      ensure that specific requirements for contract close outs are established
                      for the overseasmissions, including standard requirements or thresh-
                      olds for final contract audits;
                  l   ensure that the Agency’s new contract information system is used to
                      keep track of the extent that expired contracts are being closedout and
                      audited for both AID/Washingtonand the overseasmissions; and
                  .   develop a plan for eliminating the backlog of completed but unaudited

                      AIDgenerally agreed with the matters discussedin our report but did not
Agency Comments and   fully addressour recommendationsin its written comments(see app. II).
Our Evaluation        The Chief of AID’Sprocurement policy staff told us that AIDwould
                      addressour recommendationsmore fully after our final report is issued.
                      AIDstated that it has taken somesteps to correct the problems discussed
                      in our report, and that it recognizesmore effort is neededto assurebet-
                      ter managementover project-funded nonexpendableproperty, contract
                      close outs, and final contract audits. AIDstated that it will (1) review its

                      Page 8                               GAO/NSL4D-9O87Foreign Economic Assistance
I        B236711

        current regulations that require an accounting of nonexpendableprop-
        erty to determine whether they can be modified for easier implementa-
        tion and (2) consider requiring reports’ for limited types of
        nonexpendableproperty. AID also stated that it has made contract close
        outs a consideration in the review and certification of contracting sys-
        tems, and a more simplified system for closeouts is being developed.

        In developing its more simplified system forclosing out contracts, we
        would urge that AID include standard requirements or thresholds for
        final contract audits and track expired contracts to ensure that they are
        closed out and audited.

        We are sending copiesof this report to the SenateCommittee on Foreign
        Relations, other concernedcongressionalcommittees, the Acting Admin-
        istrator of AID, and the Director, Office of Managementand Budget. We
        will also make copies available to others upon request.

        This report was prepared under the direction of Harold J. Johnson,
        Director, Foreign Economic Assistance Issues.He can be reached at
        (202) 2756790, if you or your staff have any questions. Other major
        contributors are listed in appendix III.
        Sincerely yours,

        Frank C. Conahan
        Assistant Comptroller General


        Page 9                             GAO/NSIAD-9067 Foreign Economic Aesis~ce
   I                                                                                             ---
   I1                                                                                                  *

(Iixdents                                                                                                  Ii

A pendix I                                                                                       12
0 4 ‘ective, Scope,and
A$pendix II                                                                                      13
Cdmments From the        GAO Comments                                                            15
Ahency for
Aependix III                                                                                     16
Major Contributors to
This Report


                         AID      Agency for International Development

                         Page10                           GAO/NSIALb90-67Foreign Economic Assistance


         Page 11   GAO/NSIAD-9087 Foreign Economic Assistance
    At the request of the Chairman, HouseCommittee on Foreign Affairs,
    we are reviewing options for streamlining and revising the contracting
    and procurement system of the Agency for International Development
    (AID).As part of that overall review, this report examines selectedareas
    of internal control and accountability in AID’S system for contract
    We examined the AID’Saccounting for Am-owned and cooperating coun-
    try titled nonexpendableproperty in the possessionof contractors and
    its close out and audit of expired contracts to determine if these activi-
    ties were being performed in accordancewith federal and AID contract
    policies and regulations. We reviewed contract files and discussed
    related matters with AID officials at AID/Washingtonand at the AID mis-
    sions in Quito, Ecuador, and La Paz, Bolivia. We analyzed federal and
    AID Acquisition Regulations; other applicable agency policies and guide-
    lines; and AID Inspector General and other internal audit and evaluation
    reports covering nonexpendableproperty, audit coverage,and close outs
    of AIDcontracts. We also reviewed AID'S latest internal control assess-
    ment report performed in compliance with the Financial Integrity Act to
    determine if it addressedthe internal control weaknessesincluded in our

    AIDprovided written commentson a draft of this report, which are dis-
    cussedin the report and are presented in full in appendix II. Our survey
    was made in accordancewith generally acceptedgovernment auditing
    standards and was performed between October 1988 and August 1989.


    Page 12                             GAO/NSlAD9O87   Foreign Economic Assistance
 y i
 Appendix II

 CommentsFrom the Agency for
 Intemtioti Development

 Not& GAO comments
 sup lementing those in the
 rep rt text appear at the                       AOENCY   FOR    INTERNATIONAL              DEVELOPMENT
 end of this appendix.                                          WASHINQTON.   D.C   20523


                                                                                                          MnJ   3 1989
                              Mr. Frank C. Conahan
                              Assistant    Comptroller   General
                              Nati.onal Security     and
                                International    Affairs   Division
                              General Accounting Office
                              Washington, D.C. 20548
                              Dear Mr. Conahan:

                              This is to provide our comments on the draft report entitled
                              FOREIGN AID: Inadequate Controls over Non-expendable    Property
                              and Insutficient    Contract Closeouts which was sent to Acting
                              Administrator    Mark Edelman by letter dated October 19.
                              The draft audit report covers two areas of long-standing         concern
                              to AID. We recognize that AID has not maintained complete
                              accounts of non-expendable    property    (NXP) in the custody of its
                              contractors  and that AID does not have systems in place
                              everywhere to assure final audit and closeout of all of its
                              contracts.  As the report notes, past AID audits and
                              evaluations have also identified      these areas.    We have taken
                              some steps to try to correct     the problems, and we recognize
                              that effort  is needed to assure better management of these
                              aspects of our contracts.
                              AID has for some time had regulations          in place that require an
                              accounting    of NXP in the possession of contractors.           The
                              problem has been in implementing         the very labor intensive
                              regulations.      We will review the regulations        to determine
                              whether they can be modified in order to be more easily
                              implemented and monitored.        Given the lifespan      of many of AID's
                              contracts,    much NXP is expended by the end of the project           - its
                              useful life completed.       AID will consider whether it might be
                              more effective     if NXP reports were required       for more limited
                              types of commodities/equipment,        taking into account expected
                              lifespan,    value, and other pertinent      factors.     While automation
                              may help with tracking,      with each additIona       reporting
Sef3Comment 1                 requirement     we risk being bogged down with paperwork to the
                              detriment    of our basic purpose.

                                       Page 13                                   GAO/NSL4D9O87Foreign Economic Adstance
   -4                    AppendlxIx
                         International Development


                Concerning final audits and closeout of contracts,                   we have
                already made substantial         efforts    to assure that Missions
                establish     systems to assure contract         closeout.       AID/W has
                pr,ovided to the Missions a sample system that they can use, and
                a bore simplified       system is now in the final stages of
                development.       AID has made closeouts        a basic consideration          in
                the review and certification           of contracting      systems within the
                Agency.     If it is discovered        during a contracting         system review
                that a Mission does not close out contracts,                 the need to do so
                la a prominent recommendation in the report from the
                Procurement Executive to the Mission Director                  on the results      of
                the review.       One editorial     point concerning       closeout deserves
                correction.       The sentence which finishes         at the top of page 10,
                states that over 1,000 contracts,            grants,   and cooperative
    ,           a reements completed prior to 1983 were closed without proper
                c !!Ioaeout procedures.       It is more appropriate        and accurate to
See Comment 2   say that they were closed administratively              without      following.
                formal closeout procedures.
                In summaryt we recognize the importance of properly        managing
                the Agency s contracts,      and we will take steps to assure
                better    accounting  of NXP and more timely closeout of
                contracts.      At the same time it should be noted that, given the
                current    staff and funding resources,    accomplishing  this task
See pmment 1    will mean reallocating     resources that would otherwise     go to
                program activities.

                                                       Procurement       Executive

                         Page 14                                  GAO/NE&ID-90-67Foreign Economic Aasiatance
              (1) The wording in the text has been revised to incorporate this sug-
A0 Comments   gested change.

              (2) Proper stewardship of resourcesis a basic part of program manage-
              ment and the lack of adequate internal controls can be detrimental to
              accomplishing the program’s objectives. Reasonableinternal controls
              equates to a satisfactory level of confidence that the objectives will be
              accomplished given considerations of costs,benefits, and risks. Our sur-
              vey has indicated that improved controls can lead to better use of avail-
              able resources.


              Page 16                             GAO/NSlAD-908   7 Foreign Economic A~dstance
’   Apptjndix III



                            Albert H. Huntington, Assistant Director
    National Security and   LymB      Mo()re
    International Affairs   Norman’ T. Th&pe, Evaluator-in-Charge
    Division, Washington,

    (472171)                Page 16                                GAO/NSIAD-9087 Foreign Economic Assistance

                                               ,      ’       ‘.