n - = 44 I. i ‘&Ii A -. -1 United States General Accounting Off’ice Washington, D.C. 20548 National Security and International AffMrs Division B-236711 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 / I I separate report on the other concernsoutlined in your request. j 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. Y Page1 ‘/ 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 appliances. 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 country. 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 Y 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 B-226711 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 property. -A- 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 Coqtracts I 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 information. 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 Y ‘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 B-226711 - 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. I 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 outs. 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 contracts. 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 contracts. 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 Y Page 9 GAO/NSIAD-9067 Foreign Economic Aesis~ce I --- I1 * I (Iixdents Ii 1’ A pendix I 12 0 4 ‘ective, Scope,and Mythodology A$pendix II 13 Cdmments From the GAO Comments 15 Ahency for International D&elopment I Aependix III 16 Major Contributors to This Report Abbreviation AID Agency for International Development Page10 GAO/NSIALb90-67Foreign Economic Assistance ij . . 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 administration. 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 report. 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. Y 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 1 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 Y 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 ChmmenWRkomtheAgencyfor International Development -2- 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. Sincerely, 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. Y Page 16 GAO/NSlAD-908 7 Foreign Economic A~dstance I ; ’ Apptjndix III M$jorContributorstoThisReport 1 Albert H. Huntington, Assistant Director National Security and LymB Mo()re Adviwr International Affairs Norman’ T. Th&pe, Evaluator-in-Charge Division, Washington, (472171) Page 16 GAO/NSIAD-9087 Foreign Economic Assistance , ’ ‘. .
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)