Financial Management
Sustained Effort Needed to Resolve Long-Standing Problems at U.S. Agency for International Development Gao ID: GAO-03-1170T September 24, 2003GAO has long reported that the U.S. Agency for International Development (USAID) faces a number of performance and accountability challenges that affect its ability to implement its foreign economic and humanitarian assistance programs. These major challenges include human capital, performance measurement, information technology, and financial management. Effective financial management as envisioned by the Chief Financial Officers Act of 1990 (CFO Act) and other financial management reform laws is an important factor to the achievement of USAID's mission. USAID is one of the federal agencies subject to the CFO Act. In light of these circumstances, the Subcommittee on Government Efficiency and Financial Management, House Committee Government Reform asked GAO to testify on the financial management challenges facing USAID, as well as the keys to reforming USAID's financial management and business practices and the status of ongoing improvement efforts.
USAID has made some progress to improve financial management, primarily in achieving audit opinions on its financial statements. Through the rigors of the financial statement audit process and the requirements of the Federal Financial Management Improvement Act of 1996 (FFMIA), USAID has gained a better understanding of its financial management weaknesses. However, pervasive internal control weaknesses continue to prevent USAID management from achieving the objective of the CFO Act, which is to have timely, accurate financial information for day-to-day decision making. USAID's inadequate accounting systems make it difficult for the agency to accurately account for activity costs and measure its program results. Compounding USAID's systems difficulties has been the lack of adequate financial management personnel. Since the early 1990s, we have reported that USAID has made limited progress in addressing its human capital management issues. While some improvements have been made over the past several years, significant challenges remain. Transforming USAID's financial and business environment into an efficient and effective operation that is capable of providing timely and accurate information will require a sustained effort. USAID has acknowledged the challenges it faces to reform its financial management problems and has initiatives underway to improve its systems, processes, and internal controls. USAID has also recognized the need for a specific human capital action plan that addresses financial management personnel shortfalls.
GAO-03-1170T, Financial Management: Sustained Effort Needed to Resolve Long-Standing Problems at U.S. Agency for International Development
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Testimony:
Before the Subcommittee on Government Efficiency and Financial
Management, Committee on Government Reform, House of Representatives:
For Release on Delivery Expected at 2:00 p.m. Wednesday, September 24,
2003:
FINANCIAL MANAGEMENT:
Sustained Effort Needed to Resolve Long-Standing Problems at U.S.
Agency for International Development:
Statement of Gregory D. Kutz, Director Financial Management and
Assurance:
GAO-03-1170T:
GAO Highlights:
Highlights of GAO-03-1170T, a testimony before the Subcommittee on
Government Efficiency and Financial Management, Committee on
Government Reform, House of Representatives
Why GAO Did This Study:
GAO has long reported that the U.S. Agency for International
Development (USAID) faces a number of performance and accountability
challenges that affect its ability to implement its foreign economic
and humanitarian assistance programs. These major challenges include
human capital, performance measurement, information technology, and
financial management. Effective financial management as envisioned by
the Chief Financial Officers Act of 1990 (CFO Act) and other financial
management reform laws is an important factor to the achievement of
USAID‘s mission. USAID is one of the federal agencies subject to the
CFO Act.
In light of these circumstances, the Subcommittee asked GAO to testify
on the financial management challenges facing USAID, as well as the
keys to reforming USAID‘s financial management and business practices
and the status of ongoing improvement efforts.
What GAO Found:
USAID has made some progress to improve financial management,
primarily in achieving audit opinions on its financial statements.
Through the rigors of the financial statement audit process and the
requirements of the Federal Financial Management Improvement Act of
1996 (FFMIA), USAID has gained a better understanding of its financial
management weaknesses. However, pervasive internal control weaknesses
continue to prevent USAID management from achieving the objective of
the CFO Act, which is to have timely, accurate financial information
for day-to-day decision making.
USAID‘s inadequate accounting systems make it difficult for the agency
to accurately account for activity costs and measure its program
results. Compounding USAID‘s systems difficulties has been the lack of
adequate financial management personnel. Since the early 1990s, we
have reported that USAID has made limited progress in addressing its
human capital management issues.
While some improvements have been made over the past several years,
significant challenges remain. Transforming USAID‘s financial and
business environment into an efficient and effective operation that is
capable of providing timely and accurate information will require a
sustained effort. USAID has acknowledged the challenges it faces to
reform its financial management problems and has initiatives underway
to improve its systems, processes, and internal controls. USAID has
also recognized the need for a specific human capital action plan that
addresses financial management personnel shortfalls.
www.gao.gov/cgi-bin/getrpt?GAO-03-1170T.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Gregory D. Kutz at
(202) 512-9505 or kutzg@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I appreciate the opportunity to appear before you today to testify on
the U.S. Agency for International Development (USAID). USAID's
financial management challenges have been the subject of prior
oversight hearings by this Subcommittee's predecessor. GAO has long
reported[Footnote 1] that USAID faces a number of performance and
accountability challenges that affect its ability to implement its
foreign economic and humanitarian assistance programs. These major
challenges include human capital, performance measurement, information
technology, and financial management. Today our testimony will focus on
the financial management challenges at USAID.
USAID serves a critical role by providing nonmilitary international aid
to further U.S. interests abroad. For fiscal year 2003, USAID received
about $12 billion in total program funding that is spent in six
principle areas: economic growth and development, population health and
nutrition, environment, democracy and governance, education and
training, and humanitarian assistance. USAID carries out its assistance
role primarily through grants, contracts, and loan guarantees to
foreign governments and to humanitarian organizations. With current
rebuilding efforts in Iraq and Afghanistan and increased efforts
towards HIV/AIDS relief, the amounts of funds flowing through USAID
have increased significantly. USAID's role is critical to the success
of these rebuilding efforts.
My statement today will provide an overview of USAID's progress in
addressing its financial management challenges. Effective financial
management as envisioned by the Chief Financial Officers Act of
1990[Footnote 2] (CFO Act) is an important factor to the achievement of
USAID's mission. USAID has made some progress, primarily in achieving
audit opinions on its financial statements. However, pervasive internal
control weaknesses continue to prevent USAID management from achieving
the primary objective of the CFO Act--which is to have relevant,
timely, and accurate financial information for day-to-day decision
making. As a result, much of the progress USAID achieved in getting
improved opinions has been based on heroic efforts rather than systems
that routinely generate timely and reliable financial information.
USAID has a number of initiatives underway intended to improve its
financial management, including the implementation of a new financial
management system. Our analysis is based on USAID Inspector General
(IG) reports and limited meetings with USAID management and the IG.
USAID is one of the federal agencies subject to the CFO Act as expanded
by the Government Management Reform Act of 1994[Footnote 3] and the
Federal Financial Management Improvement Act of 1996[Footnote 4]
(FFMIA). The CFO Act envisions that agencies have financial management
leadership, systems, and practices in place to provide complete,
consistent, reliable, and timely information to agency management and
other decision makers. Through the rigors of the financial statement
audit process and the requirements of FFMIA, agencies such as USAID
have gained a better understanding of their financial management
weaknesses and the impetus to resolve problems caused by those
weaknesses. At the same time, agencies are slowly making progress in
addressing their problems. However, while most agencies are receiving
"clean" audit opinions on their financial statements, remaining
weaknesses in internal controls and the continued widespread
noncompliance with FFMIA show that there is still a long way to go to
reach the end game--that is, having systems, processes, and controls
that routinely generate reliable, useful, and timely information for
managers and other decision makers. In addition, reaching this "end
game" should provide management, the Congress, and taxpayers with
reasonable assurance that fraud, waste, and abuse are minimized.
In the federal government, many of the clean opinions in fiscal year
2002 were achieved as a result of time-consuming, ad hoc programming
and analysis of data produced by inadequate systems that are not
integrated and often require significant audit adjustments. Such time-
consuming procedures, which often represent "heroic efforts," prevent
financial management staff from doing other financial-related work such
as financial analyses, which could directly support strategic decision
making and ultimately improve overall business performance. In
contrast, for most private sector corporations, the clean opinion
confirms the fact that management has timely, reliable information to
manage daily operations in:
a competitive environment. In our Executive Guide: Creating Value
Through World-class Financial Management,[Footnote 5] we identified the
success factors, practices, and outcomes associated with world-class
financial management efforts. We found that many leading finance
organizations have a goal to reduce the time spent on routine
accounting activities, such as financial statement preparation, so that
financial management staff can spend more time on activities such as
business performance analysis or cost analysis. These organizations
also had clear, strong executive leadership, that when combined with
factors such as effective organizational alignment, strategic human
capital management, and end-to-end business process improvement, were
critical for ensuring their financial management staff delivered the
kind of analysis and forward-looking information needed to effectively
manage their programs. As discussed in the executive guide, to reap the
full benefit of a modern, integrated financial management system, USAID
must go beyond obtaining an unqualified audit opinion toward (1)
routinely generating reliable cost and performance information and
analysis, (2) undertaking other value-added activities that support
strategic decision making and mission performance, and (3) building a
finance team that supports the agency's mission and goals.
Progress Towards Financial Management Reform:
In May 2001, the Subcommittee's predecessor held a hearing[Footnote 6]
on USAID financial management. Using that hearing as a baseline, we
evaluated, using primarily USAID IG reports, the progress made to
improve USAID's financial management systems, processes, and human
capital (people) in the past 2 years. At the time of the May 2001
hearing, USAID was one of three federal agencies subject to the CFO Act
that had such significant problems that they were unable to produce
financial statements that auditors could express an opinion on. The
hearing focused on actions needed to resolve USAID's financial
management issues. At that time, the Acting Assistant Administrator for
the Bureau of Management told the Subcommittee that actions to correct
reported material weaknesses in financial management were completed or
in process and that all reported weaknesses would be resolved by 2002.
While USAID has made progress in its financial management since that
hearing, it has not achieved the success that it had expected. Rather,
its progress relates primarily to improved opinions on USAID's
financial statements. Table 1 below shows that USAID has been able to
achieve improved opinions on its financial statements over the past 3
years.
Table 1: Audit Opinions on USAID's Financial Statements in Fiscal Years
2000 Through 2002:
Financial statements: Balance sheet; Type of opinion: Fiscal year 2000:
Disclaimer[A]; Type of opinion: Fiscal year 2001: Qualified[B]; Type of
opinion: Fiscal year 2002: Unqualified[C].
Financial statements: Statement of net costs; Type of opinion: Fiscal
year 2000: Disclaimer; Type of opinion: Fiscal year 2001: Disclaimer;
Type of opinion: Fiscal year 2002: Qualified.
Financial statements: Statement of changes in net position; Type of
opinion: Fiscal year 2000: Disclaimer; Type of opinion: Fiscal year
2001: Qualified; Type of opinion: Fiscal year 2002: Unqualified.
Financial statements: Statement of budgetary resources; Type of
opinion: Fiscal year 2000: Disclaimer; Type of opinion: Fiscal year
2001: Qualified; Type of opinion: Fiscal year 2002: Unqualified.
Financial statements: Statement of financing; Type of opinion: Fiscal
year 2000: Disclaimer; Type of opinion: Fiscal year 2001: Disclaimer;
Type of opinion: Fiscal year 2002: Unqualified.
Source: USAID Inspector General reports.
[A] A disclaimer of opinion means that the auditor does not express an
opinion on the financial statements. A disclaimer is appropriate when
the audit scope is not sufficient enough to enable the auditor to
express an opinion or when there are material uncertainties involving
scope limitations.
[B] A qualified opinion means that, except for the effects of the
matter to which the qualification relates, the auditor concludes that
the financial statements are presented fairly, in all material
respects, in accordance with generally accepted accounting principles.
[C] An unqualified, or clean, opinion means that the auditor concludes
that the financial statements are presented fairly, in all material
respects, in accordance with generally accepted accounting principles.
[End of table]
Fiscal year 2001 marked the first time that the USAID IG was able to
express an opinion on three of USAID's financial statements--the
Balance Sheet, Statement of Changes in Net Position, and Statement of
Budgetary Resources. However, as noted above, the opinions were
qualified and achieved through extensive efforts to overcome material
internal control weaknesses. Further, the IG remained unable to express
an opinion on USAID's Statement of Net Cost and Statement of Financing.
Fiscal year 2002 marked additional improvements in the opinions on
USAID's financial statements. All but one of USAID's financial
statements received unqualified opinions. The Statement of Net Cost
received a qualified opinion. The IG reported that "—on the Statement
of Net Cost, the opinion was achieved only through extensive effort to
overcome material weaknesses in internal control" and "[a]lthough these
efforts resulted in auditable information, [they] did not provide
timely information to USAID management to make cost and budgetary
decisions throughout the year."[Footnote 7]
Compounding USAID's systems difficulties has been the lack of adequate
financial management personnel. Since the early 1990s, we have reported
that USAID has made limited progress in addressing its human capital
management issues. A major concern is that USAID has not established a
comprehensive workforce plan that is integrated with the agency's
strategic objectives and ensures that the agency has skills and
competencies necessary to meet its emerging foreign assistance
challenges. While a viable financial management system is needed, and
offers the capacity to achieve reliable data, it is not the entire
answer for improving USAID's financial management information.
Qualified personnel must be in place to implement and operate these
systems.
In addition to the improved opinions for fiscal year 2002, the IG
reported that while USAID had made improvements in its processes and
procedures, a substantial number of material weaknesses,[Footnote 8]
reportable conditions,[Footnote 9] and noncompliance with laws and
regulations[Footnote 10] remain. The report also noted that USAID's
financial management systems do not meet federal financial system
requirements. Table 2 shows that while USAID's opinions on its
financial statements improved, reported material weaknesses,
reportable conditions, and noncompliance increased.
Table 2: Weaknesses Reported by the USAID Inspector General in Fiscal
Years 2000 Through 2002:
Reported material weaknesses:
Reconciling fund balance with Treasury; Fiscal year: 2000: No;
Fiscal year: 2001: No; Fiscal year: 2002: Yes.
Recognizing, recording, and reporting accounts receivable; Fiscal year:
2000: Yes; Fiscal year: 2001: No; Fiscal year: 2002: Yes.
Calculating and reporting accounts payable; Fiscal year: 2000: Yes;
Fiscal year: 2001: No; Fiscal year: 2002: Yes.
Recording and classifying advances to grantees and related expenses;
Fiscal year: 2000: Yes; Fiscal year: 2001: Yes; Fiscal year: 2002: Yes.
Computer security deficiencies; Fiscal year: 2000: Yes; Fiscal year:
2001: Yes; Fiscal year: 2002: Reported as a Compliance with Laws and
Regulations Condition.
Process for preparing the Management's Discussion and Analysis needs
improvement; Fiscal year: 2000: Yes; Fiscal year: 2001: No; Fiscal
year: 2002: Now a Reportable Condition.
Allocating program expenses on its Statement of Net Costs; Fiscal year:
2000: No; Fiscal year: 2001: No; Fiscal year: 2002: Yes.
Reviewing, analyzing, and deobligating unliquidated obligations;
Fiscal year: 2000: No; Fiscal year: 2001: Yes; Fiscal year: 2002: Yes.
Calculating credit program allowances; Fiscal year: 2000: No; Fiscal
year: 2001: No; Fiscal year: 2002: Yes.
Reportable conditions:
Reconciling fund balance with Treasury; Fiscal year: 2000: Yes; Fiscal
year: 2001: No; Fiscal year: 2002: No.
Calculating and reporting accounts payable; Fiscal year: 2000: No;
Fiscal year: 2001: Yes; Fiscal year: 2002: No.
Recognizing, recording, and reporting accounts receivable; Fiscal year:
2000: No; Fiscal year: 2001: Yes; Fiscal year: 2002: No.
Establish monthly closing procedures; Fiscal year: 2000: No; Fiscal
year: 2001: No; Fiscal year: 2002: Yes.
Improve controls and management of property at overseas missions;
Fiscal year: 2000: No; Fiscal year: 2001: No; Fiscal year: 2002: Yes.
Process for preparing the Management's Discussion and Analysis needs
improvement; Fiscal year: 2000: No; Fiscal year: 2001: Yes; Fiscal year:
2002: Yes.
Compliance with laws and regulations:
Chief Financial Officers Act of 1990; Fiscal year: 2000: Yes; Fiscal
year: 2001: No; Fiscal year: 2002: .
Federal Financial Management Improvement Act of 1996; Fiscal year:
2000: Yes; Fiscal year: 2001: Yes; Fiscal year: 2002: Yes.
Computer Security Act of 1987; Fiscal year: 2000: Yes; Fiscal year:
2001: Yes; Fiscal year: 2002: Yes.
Debt Collection and Improvement Act of 1996; Fiscal year: 2000: No;
Fiscal year: 2001: No; Fiscal year: 2002: Yes.
Source: USAID Inspector General reports.
[End of table]
The increase in reported material weaknesses, reportable conditions,
and noncompliance is, in part, due to the full scope audits that were
not possible in prior years. As financial information improved over the
years, it has assisted the USAID IG in identifying additional internal
control and system weaknesses. Identifying these additional weaknesses
is constructive in that they highlight areas that management needs to
address in order to improve the overall operations of the agency and
provide accurate, timely, and reliable information to management and
the Congress.
Several of the weaknesses reported by the USAID IG are chronic in
nature and resolution has been a challenge. For example, similar to the
USAID fiscal year 2002 material weakness, in 1993 we reported[Footnote
11] that USAID did not promptly and accurately report disbursements. At
that time, USAID could not ensure that disbursements were made only
against valid, preestablished obligations and that its recorded
unliquidated obligations balances were valid. Additionally, we reported
USAID did not have effective control and accountability over its
property.
The chronic nature of the reported weaknesses at USAID reflect
challenges with people (human capital), processes, and financial
management systems. USAID management represented to us that, over time,
they have lost a significant number of staff in this area and face
challenges recruiting and retaining financial management staff.
Further, according to IG representatives, many of the individuals that
financial managers must depend on to provide the data that are used for
financial reports are not answerable to the financial managers and
often do not have the background or training necessary to report the
data accurately. Also contributing to the challenge are USAID's
nonintegrated systems that require data reentry, supplementary
accounting records, and lengthy and burdensome reconciliation
processes.
Financial Management Reform Will Require a Long-term Commitment:
Transforming USAID's financial and business management environment into
an efficient and effective operation that is capable of providing
management and the Congress with relevant, timely, and accurate
information on the results of operation will require a sustained
effort. Improved financial systems and properly trained financial
management personnel are key elements of this transformation. While
these challenges are difficult, they are not insurmountable. Without
sustained leadership and oversight by senior management, the likelihood
of success is diminished.
In its fiscal year 2002 Performance and Accountability Report, USAID
noted that it was in the process of implementing an agencywide
financial management system. USAID reported that the system has been
successfully implemented in Washington. In June 2003, USAID awarded a
contract for the implementation of the system overseas. According to
USAID officials, they anticipate this effort to be completed by fiscal
year 2006. While we are encouraged by USAID's progress toward
implementing an integrated system, it should be noted that this is the
second attempt in the past 10 years to implement an agencywide
integrated financial management system. To provide reasonable assurance
that the current effort is successful, top management must be actively
involved in the oversight of the current project. Management must have
performance metrics in place to ensure the modernization effort is
accomplished on time, within budget, and provides the planned and
needed capabilities.
In this regard, in fiscal year 2002, USAID redesigned its overall
governance structure for the acquisition and management of information
technology. Specifically, USAID created the Business Transformation
Executive Committee, chaired by the Deputy Administrator and with
membership including key senior management. The committee's purpose is
to provide USAID-wide leadership for initiatives and investments to
transform USAID business systems and organizational performance. The
committee's roles and responsibilities include:
* Guiding business transformation efforts and ensuring broad-based
cooperation, ownership, and accountability for results.
* Initiating, reviewing, approving, monitoring, coordinating, and
evaluating projects and investments.
* Ensuring that investments are focused on highest pay-off performance
improvement opportunities aligned with USAID's programmatic and budget
priorities.
Active, substantive oversight by this committee over USAID's
information technology investments, including its agencywide
integrated financial management system initiative, will be needed for
business reform efforts to succeed.
In addition to improved business systems, it is critical that USAID
have sustained financial management leadership and the requisite
personnel and skill set to operate the system in an efficient and
effective manner once it is in place. We have reported for years and
USAID acknowledges that human capital is one of the management
challenges that must be overcome. As previously noted, since the early
1990s we have reported that USAID has made limited progress in
addressing its human capital management issues. Within the area of
financial management, progress in this area has also been slow, with no
specific plan of action on how to address shortages of trained
financial managers. USAID represented to us that as part of its
agencywide human capital strategy, it plans to specifically address its
financial management personnel challenges.
In addition to addressing systems and human capital challenges, USAID
is working to improve its processes and internal controls. Effective
processes and internal controls are necessary to ensure that whatever
systems are in place are fully utilized and that its operations are as
efficient and effective as possible. USAID is working to eliminate the
material weaknesses, reportable conditions, and noncompliance reported
by the USAID IG in fiscal year 2002. For fiscal year 2003, the
Administrator of USAID and the IG agreed to work together to provide
for the issuance of audited financial statements by November 15, 2003,
in line with the Office of Management and Budget's accelerated
timetable for reporting. To meet this tight timeframe, the CFO must
provide timely and reliable information that can withstand the test of
audit with little to no needed adjustment. However, given the continued
financial management system, process, and human capital challenges,
meeting this goal will be difficult.
Conclusion:
USAID appears to be making a serious attempt to reform its financial
management, as evidenced by initiatives to improve its human capital,
internal controls, and business systems. However, progress to date is
most evident in the improvement in the opinions on its financial
statements, which reflect USAID's ability to generate reliable
information one time a year, rather than routinely for purposes of
management decision making. Through fiscal year 2002 these improved
opinions reflect a significant "heroic" effort to overcome human
capital, internal control, and systems problems. Although these
improved opinions represent progress, the measures of fundamental
reform will be the ability of USAID to provide relevant, timely,
reliable financial information and sound internal controls to enable it
to operate in an efficient and effective manner.
:
Mr. Chairman, this concludes my statement. I would be pleased to answer
any questions you or other members of the Subcommittee may have at this
time.
Contacts and Acknowledgments:
For further information about this testimony, please contact Gregory D.
Kutz at (202) 512-9095 or [Hyperlink, kutzg@gao.gov] kutzg@gao.gov or
John Kelly at (202) 512-6926 or [Hyperlink, kellyj@gao.gov]
kellyj@gao.gov. Other key contributors to this testimony include
Stephen Donahue, Dianne Guensberg, and Darby Smith.
(192107):
FOOTNOTES
[1] U.S. General Accounting Office, Major Management Challenges and
Program Risks: U.S. Agency for International Development, GAO-03-111
(Washington, D.C.: January 2003).
[2] Pub. L. No. 101-576, 104 Stat. 2838 (1990).
[3] Pub. L. No. 103-356, title IV, 108 Stat. 3412 (1994).
[4] Pub. L. No. 104-208, div. A, sec. 101(f), title VIII, 110 Stat.
3009-389 (1996).
[5] U.S. General Accounting Office, Executive Guide: Creating Value
Through World-class Financial Management, GAO/AIMD-00-134 (Washington,
D.C.: April 2000).
[6] House Committee on Government Reform, Subcommittee on Government
Efficiency, Financial Management and Intergovernmental Relations, The
U.S. Agency for International Development: What Must Be Done to Resolve
USAID's Longstanding Financial Management Problems? 107TH Cong., 1ST
Sess., May 8, 2001.
[7] USAID Office of Inspector General, Report on USAID's Consolidated
Financial Statements, Internal Controls, and Compliance for the Fiscal
Year 2002, Audit Report No. 0-000-03-001-C (Washington, D.C.: Jan. 24,
2003).
[8] A material weakness is a condition that precludes the entity's
internal control from providing reasonable assurance that
misstatements, losses, or noncompliance material in relation to the
financial statements or to stewardship information would be prevented
or detected on a timely basis.
[9] Reportable conditions are matters coming to the auditor's attention
that, in the auditor's judgment, should be communicated because they
could adversely affect the entity's ability to record, process,
summarize, and report financial data consistent with the assertions by
management in the financial statements.
[10] The auditor determined that the agency was not in compliance with
selected provisions of applicable laws and regulations that could have
a direct and material effect on amounts reported in the financial
statements.
[11] U.S. General Accounting Office, Financial Management: Inadequate
Accounting and System Project Controls at AID, GAO/AFMD-93-19
(Washington D.C.: May 24, 1993).
