Compact of Free Association
Single Audits Demonstrate Accountability Problems over Compact Funds Gao ID: GAO-04-7 October 7, 2003In 1986, the United States entered into a Compact of Free Association (Compact) that provided about $2.1 billion in U.S. assistance from 1987 through 2003 to the Pacific Island nations of the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI). GAO has issued a number of reports raising concerns about the effectiveness of this assistance. GAO was asked to review possible FSM and RMI misuse of Compact funds. We reviewed single audits for 1996 through 2000 and this report summarizes the audit results.
GAO's review of 30 single audit reports for the FSM, 4 FSM states, and the RMI for the years 1996 through 2000 identified pervasive and persistent noncompliance with Compact requirements and financial statement-related audit findings. These single audit reports identified 458 audit findings relevant to the Compact. Significant numbers of these audit findings occurred during each year of the 5-year period and at each of the auditees. In addition, successive single audits identified recurring audit findings over the 5-year period despite corrective action plans prepared by the auditees. While none of the audit findings specifically discussed misuse of Compact funds, they did describe noncompliance with Compact requirements and financial management problems in areas that GAO considers highly susceptible to misuse, such as poor control over cash and equipment. When considered in conjunction with the qualified opinions or disclaimers of opinion on the financial statements in all 30 reports and for 60 percent of the Schedules of Expenditure of Federal Awards required by the Single Audit Act, the audit findings reveal one thing: overall poor accountability of Compact funds. In responding to GAO's previous reviews of the original Compact, Interior officials expressed concerns about the U.S. government's limited ability to enforce accountability over Compact funds due to certain provisions of the Compact and the related fiscal procedures agreement (FPA). Recently, an Interior official noted that departmental officials have been frustrated with the lack of tools to administer or track federal assistance in a manner that could reasonably ensure that such assistance is having its intended effect. GAO found that the amended Compacts and related FPAs, which are scheduled to become effective upon legislative approval in the three countries, include many strengthened reporting and monitoring measures that could improve accountability, if diligently implemented. For example, funds could be withheld for noncompliance with Compact terms and conditions. In addition, joint economic committees and an Interior oversight team will focus on monitoring and overseeing Compact funds.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-7, Compact of Free Association: Single Audits Demonstrate Accountability Problems over Compact Funds
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Report to Congressional Requesters:
October 2003:
COMPACT OF FREE ASSOCIATION:
Single Audits Demonstrate Accountability Problems over Compact Funds:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-7] GAO-04-7:
GAO Highlights:
Highlights of GAO-04-7, a report to congressional requesters
Why GAO Did This Study:
In 1986, the United States entered into a Compact of Free Association
(Compact) that provided about $2.1 billion in U.S. assistance from
1987 through 2003 to the Pacific Island nations of the Federated
States of Micronesia (FSM) and the Republic of the Marshall Islands
(RMI). GAO has issued a number of reports raising concerns about the
effectiveness of this assistance. GAO was asked to review possible FSM
and RMI misuse of Compact funds. We reviewed single audits for 1996
through 2000 and this report summarizes the audit results.
What GAO Found:
GAO‘s review of 30 single audit reports for the FSM, 4 FSM states, and
the RMI for the years 1996 through 2000 identified pervasive and
persistent noncompliance with Compact requirements and financial
statement-related audit findings. These single audit reports
identified 458 audit findings relevant to the Compact. Significant
numbers of these audit findings occurred during each year of the 5-
year period and at each of the auditees. In addition, successive
single audits identified recurring audit findings over the 5-year
period despite corrective action plans prepared by the auditees. While
none of the audit findings specifically discussed misuse of Compact
funds, they did describe noncompliance with Compact requirements and
financial management problems in areas that GAO considers highly
susceptible to misuse, such as poor control over cash and equipment.
When considered in conjunction with the qualified opinions or
disclaimers of opinion on the financial statements in all 30 reports
and for 60 percent of the Schedules of Expenditure of Federal Awards
required by the Single Audit Act, the audit findings reveal one thing:
overall poor accountability of Compact funds.
In responding to GAO‘s previous reviews of the original Compact,
Interior officials expressed concerns about the U.S. gGovernment‘s
limited ability to enforce accountability over Compact funds due to
certain provisions of the Compact and the related fiscal procedures
agreement (FPA). Recently, an Interior official noted that
departmental officials have been frustrated with the lack of tools to
administer or track federal assistance in a manner that could
reasonably ensure that such assistance is having its intended effect.
GAO found that the amended Compacts and related FPAs, which are
scheduled to become effective upon legislative approval in the three
countries, include many strengthened reporting and monitoring measures
that could improve accountability, if diligently implemented. For
example, funds could be withheld for noncompliance with Compact terms
and conditions. In addition, joint economic management committees and
an Interior oversight team will focus on monitoring and overseeing
Compact funds.
What GAO Recommends:
GAO recommends that the Secretary of the Interior delegate
responsibility to and hold the Office of Insular Affairs accountable
responsiblefor monitoring and reporting on FSM and RMI actions to
address Compact-related single audit findings and initiating
appropriate actions , such as withholding U.S. assistance when the FSM
FMI or the RMI FSM do not implement appropriate and adequate actions
to correct Compact-related single audit findings in a timely manner.
In commenting on this report, the Office of Insular Affairs of the
Department of the Interior, FSM, and RMI agreed with our findings or
conclusions and recommendations. They also cited the amended Compacts
as mechanisms that should result in improved financial management over
Compact assistance.
www.gao.gov/cgi-bin/getrpt?GAO-04-7.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact McCoy Williams at
(202) 512-6906 or williamsm1@gao.gov or Susan Westin at (202) 512-4128
or westins@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Objectives, Scope, and Methodology:
Pervasive Audit Findings Demonstrate Poor Accountability over Compact
Funds:
Amended Compact Agreements Contain Improved Accountability Measures:
Conclusions:
Recommendations for Executive Action:
Government and Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Comments from the Federated States of Micronesia:
Appendix II: Comments from the Republic of the Marshall Islands:
Appendix III: Comments from the Department of the Interior:
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Figures:
Figure 1: Number of Audit Findings Reported Annually from 1996 through
2000:
Figure 2: Auditee Findings as a Percentage of Total Findings:
Figure 3: Percentage of Corrective Action Plans Developed for Audit
Findings:
Figure 4: Percentage of 1996 through 2000 Single Audit Findings That
Recurred 3 or More Years:
Abbreviations:
CAP: corrective action plan:
FPA: fiscal procedures agreement:
FSM: Federated States of Micronesia:
OMB: Office of Management and Budget:
RMI: Republic of the Marshall Islands:
U.N.: United Nations:
Letter October 7, 2003:
The Honorable Tom Lantos:
Ranking Minority Member:
Committee on International Relations:
House of Representatives:
The Honorable James A. Leach:
Chairman:
The Honorable Eni Faleomaveaga:
Ranking Minority Member:
Subcommittee on Asia and the Pacific:
Committee on International Relations:
House of Representatives:
The Honorable Doug Bereuter:
House of Representatives:
In 1986, the United States entered into a Compact of Free Association
(Compact) with the Pacific Island nations of the Federated States of
Micronesia (FSM) and the Republic of the Marshall Islands (RMI).
Through the Compact, the United States has provided about $2.1 billion
in assistance to these nations in the form of direct funding and
federal services and programs. Further, the Compact established U.S.
defense rights and obligations in the region and allowed for migration
from both nations to the United States. The Compact provisions that
address economic assistance were scheduled to expire in 2001; however,
they remained in effect while the United States negotiated amended
Compacts with each nation.
Over the last several years, we issued reports that raised concerns
about the effectiveness of the FSM and the RMI use of and
accountability over U.S. assistance provided under the
Compact.[Footnote 1] In commenting on the accountability issues raised
in our 2000 report, officials at the Department of the Interior, the
agency responsible for overseeing the assistance program, pointed out
the limited ability of the United States to enforce accountability over
Compact funds because basic elements of federal grant management were
lacking. They also noted that additional personnel and funding could
have been committed to Compact oversight, but the United States would
still have had almost no ability to influence fiscal decisions made by
the FSM and the RMI. In recent testimony, an official from the Office
of Insular Affairs, Department of the Interior, noted that the
department was hampered by the fact that the Compact provided for
large, loosely defined grants with no express enforcement mechanisms to
ensure the efficient and effective expenditure of funds. This official
also stated that departmental officials "have been greatly frustrated
with the lack of tools to properly administer or track Federal
assistance in a manner that could reasonably ensure that such
assistance is having its intended effect."[Footnote 2]
In conjunction with our monitoring and reporting on Compact
renegotiation efforts, you asked us to review possible FSM or RMI
misuse of Compact funds. The annual single audits of the FSM and the
RMI, which are required by the fiscal procedures agreement (FPA) for
implementing the Compact, are a potential source of this
information.[Footnote 3] While the single audit reports do not
specifically use the phrase "misuse of Compact funds," many of the
problems they identify are in areas that are susceptible to the misuse
of funds.
We obtained the 30 single audit reports for the years 1996 through 2000
for the national government of the FSM; the FSM state governments of
Chuuk, Kosrae, Pohnpei, and Yap; and the national government of the
RMI. We reviewed and summarized the audit findings contained in these
reports, the most recently completed reports available at the start of
our review, to identify instances of possible misuse of Compact funds.
On February 12, March 12, and March 13, 2003, we briefed your staffs on
our results. This report summarizes our briefing results regarding the
single audit reports. In addition, it provides information on the
enhanced accountability measures that are built into the amended or
renegotiated Compacts. The amended Compacts[Footnote 4] and related
FPAs, which are scheduled to become effective upon legislative approval
in the United States, the FSM, and the RMI, include many strengthened
reporting and monitoring measures that could improve accountability, if
diligently implemented.[Footnote 5] (Further details on our scope and
methodology are provided later in this report.):
Results in Brief:
Single audits are intended to promote sound financial management,
including effective internal control over federal awards. Our review of
30 single audit reports for the FSM, the four FSM states, and the RMI
for the years 1996 through 2000 identified pervasive and persistent
compliance-and financial statement-related audit findings. More
specifically, the audit reports contained about 90 audit findings for
each year of the 5-year period that we reviewed and a significant
number of audit findings for each of the auditees. In total, they
contained 458 audit findings. Further, these reports showed recurring
audit findings over the 5-year period despite the fact that the
corrective action plans prepared by the FSM, the four FSM states, and
the RMI indicated more timely completion of actions to address these
findings.
None of the audit report discussions of the 458 audit findings
specifically cited misuse of Compact funds. However, they did discuss
noncompliance with Compact requirements and financial management
problems in areas that we consider highly susceptible to such misuse.
For example, one finding noted that differences between the cash
balance shown in the entity's financial records and the bank records
amounted to over $150,000. Further, the independent auditors issued
qualified opinions or disclaimers of opinion on the entitywide
financial statements in all 30 reports and for about 60 percent of the
Schedules of Expenditures of Federal Awards required by the Single
Audit Act.[Footnote 6] These opinions were frequently issued because
the audited entity did not provide the auditor with all required
financial reports and/or other financial records. Taken together, the
audit findings of and the financial statement opinions rendered by the
auditors demonstrate that the FSM, the 4 FSM states, and the RMI did
not provide reasonable accountability over Compact funds and assurance
that these funds were used as intended.
The amended Compacts and related FPAs, which are scheduled to become
effective upon legislative approval in all three countries, include
many accountability provisions that would strengthen reporting and
monitoring, if diligently implemented. If so implemented, they would
address most of the recommendations that we made in past reports
regarding assistance accountability, fiscal control and accounting
procedures, and standards for financial management systems. For
example, under the amended Compacts, the annual reporting and
consultation requirements would be expanded; funds could be withheld
for noncompliance with Compact terms and conditions; and the FPAs call
for the establishment of a joint economic management committee for each
nation. These committees will consist of three members appointed by the
United States, including the chairman, and two members appointed by FSM
or RMI and will have significant oversight and monitoring
responsibilities. In addition, Interior officials have stated that they
are in the process of assembling a Compact oversight team of full-time
employees that will focus exclusively on monitoring and oversight of
Compact financial assistance. The successful implementation of these
strengthened reporting and monitoring measures will require a sustained
commitment and appropriate resources from the United States, the FSM
and the RMI.
To help promote compliance with Compact requirements and sound
financial management, we are recommending that the Secretary of the
Interior delegate this responsibility to the Office of Insular Affairs
and hold appropriate officials in that office accountable for (1)
ensuring the adequacy of staff dedicated to Compact oversight and
monitoring activities, (2) monitoring FSM and RMI progress in
correcting Compact-related single audit report findings, (3) reporting
on the FSM and the RMI actions to address Compact-related compliance
and financial statement findings identified in single audit reports to
the Secretary of the Interior or other appropriate high-level Interior
official, (4) initiating appropriate actions if the FSM or the RMI do
not implement timely and adequate actions to correct Compact-related
single audit findings, and (5) investigating single audit findings that
indicate possible violations of grant conditions or misuse of funds and
taking appropriate actions when such problems are verified.
The Department of the Interior and the RMI concurred with the findings
cited. The FSM noted that the report was constructive and useful as it
continues to prepare for the implementation of the amended Compact and
its related agreements. The FSM and RMI also provided technical
comments and other information on current actions to address the
financial management issues that the report raised.
Background:
In 1947, the United Nations (U.N.) created the Trust Territory of the
Pacific Islands. The United States entered into a trusteeship with the
U.N. Security Council and became the administering authority of the
current islands of the FSM and the RMI. The United States administered
the islands under this trusteeship until 1986, when it entered into a
Compact of Free Association with the FSM and the RMI, both of which are
located in the Pacific Ocean.
The original Compact represented both a continuation of U.S. rights and
obligations first embodied in the U.N. trusteeship agreement and a new
phase in the unique and special relationship that had existed between
the United States and these island nations. It also provided a
framework for the United States to work toward achieving its three main
goals of (1) securing self-government for the FSM and the RMI,[Footnote
7] (2) assisting the FSM and the RMI in their efforts to advance
economic development and self-sufficiency, and (3) ensuring certain
national security rights for all of the parties.
The Department of the Interior's Office of Insular Affairs was
responsible for disbursing and monitoring Compact funds. For the 15-
year period from 1987 through 2001, it provided funding at levels that
decreased every 5 years. For 2002 and 2003, while negotiations to renew
the expiring Compact provisions were ongoing, funding levels increased
to equal an average of the funding provided during the previous 15
years. For 1987 through 2003, total U.S. assistance to the FSM and the
RMI to support economic development is estimated, based on Interior
data, to be about $2.1 billion.
In addition, the Compact identified several services that U.S. agencies
would supply to the FSM and the RMI and further stated that these
agencies could provide direct program assistance as authorized by the
Congress. This assistance included grants, loans, and technical
assistance that, for fiscal years 1987 through 2001, totaled about $700
million from 19 U.S. agencies. The Department of the Interior was
responsible for supervising, coordinating, and monitoring program
assistance, while the Department of State was responsible for directing
and coordinating all U.S. government employees in foreign countries,
except those under the command of U.S. area military commanders.
In 2000, we reported that one tool that should be used for ensuring
accountability over Compact assistance was the annual audits required
by the Compact. FPAs for implementing the Compact required that
financial and compliance audits be conducted in accordance with the
provisions of the Single Audit Act.[Footnote 8] This act is intended
to, among other things, promote sound financial management, including
effective internal controls, with respect to the use of federal awards.
Entities that expend $300,000 or more in federal awards in a year are
required to comply with act's requirements. Further, the act requires
entities to (1) maintain internal control over federal programs, (2)
comply with laws, regulations, and the provisions of contracts or grant
agreements, (3) prepare appropriate financial statements, including a
Schedule of Expenditures of Federal Awards, (4) ensure that the
required audits are properly performed and submitted when due, and (5)
follow up and take corrective actions on audit findings. Deloitte
Touche Tohmatsu, an independent public accounting firm, conducted the
30 single audits that we reviewed for the FSM; the 4 FSM states of
Chuuk, Kosrae, Pohnpei, and Yap; and the RMI.
Objectives, Scope, and Methodology:
Our objective was to review possible FSM and RMI misuse of Compact
funds. One source of this type of information is the annual single
audits that the fiscal procedures agreement for the implementation of
the Compact requires the FSM and the RMI to obtain.
We obtained the single audit reports for the years 1996 through 2000,
the most recent single audit reports available at the time of our
review, for the national government of the FSM; the FSM state
governments of Chuuk, Kosrae, Pohnpei and Yap; and the national
government of the RMI. In total, this amounted to 30 single audit
reports representing 5 years, a period that we considered sufficient
for identifying misuse of funds and common or persistent compliance and
financial management problems involving Compact funds. While these
reports did not specifically identify any findings as instances of
misuse of Compact funds, they did identify problems that could leave
Compact funds susceptible to misuse, including poor control over cash
and equipment.
We reviewed each report to identify and categorize the audit findings
relevant to the Compact, paying particular attention to those involving
assets or other financial accounts (i.e., cash and equipment) that we
considered particularly susceptible to misuse. (We did not
independently assess the quality of these audits or the reliability of
the audit finding information. However, based on the fact that the
audited entities developed corrective action plans for about 93 percent
of the findings contained in the audit reports, we concluded that the
audit findings provide an accurate representation of the problems
reported.) We also reviewed the reports to identify auditee responses
to the audit findings and their corrective action plans. These plans
indicate auditee agreement or disagreement with the audit findings and
the actions they planned to take or had taken to fix the findings. In
addition, we reviewed the audit findings to determine if they recurred
in successive single audits over the 5-year period. We completed our
review of each single audit report by identifying and categorizing the
auditor's opinions on the financial statements and the Schedules of
Expenditures of Federal Awards.
In responding to our previous review of the Compact program, Interior
officials expressed concerns about the U.S. government's limited
ability to enforce accountability over Compact funds due to certain
provisions of the original Compact and the related FPA. In light of
these concerns, we reviewed the amended Compacts and related FPAs to
determine if they included measures that could increase accountability
over Compact funds. In addition, we supplemented our review of these
documents with a discussion about the amended Compacts with Interior
officials to determine if the new provisions addressed their prior
concerns about limited actions available to them for holding the FSM
and the RMI accountable.
Interior's Compact-related expenditures represented about 80 percent of
the total expenditures of U.S. assistance made by the FSM, the 4 FSM
states, and the RMI during the 5-year period. Because of the relatively
small amount of funding from other federal agencies at these
recipients, we did not discuss finding resolution with representatives
of those agencies.
We conducted our audit from August 2002 through May 2003 in accordance
with generally accepted government auditing standards. We requested
written comments on a draft of this report from the governments of the
FSM and the RMI and the Secretary of the Interior. Their comments are
discussed in the section entitled Government and Agency Comments and
Our Evaluation and are reprinted in appendixes I, II, and III. Further,
we considered all comments and made changes to the report, as
appropriate.
Pervasive Audit Findings Demonstrate Poor Accountability over Compact
Funds:
Single audits of the FSM, the four FSM states, and the RMI identified
pervasive audit findings involving noncompliance with Compact
requirements and financial statement problems in areas that we consider
highly susceptible to misuse. In addition, the independent auditor
performing the single audits issued qualified opinions or disclaimers
of opinion on the financial statements in all 30 single audit reports
reviewed and for 60 percent of the Schedules of Expenditures of Federal
Awards. Taken together, these findings and opinions demonstrate that
the FSM, the four FSM states, and the RMI did not provide reasonable
accountability over Compact funds and assurance that these funds were
used for their intended purposes.
Single Audit Reports Identify Pervasive Audit Findings Involving
Compact Funds:
The 30 single audit reports that we examined contained about 90 audit
findings for each year of the 5-year period covered by our review. In
total, they contained 458 audit findings relevant to Compact funds and
significant numbers of findings for each of the auditees for which we
reviewed single audit reports. Further, successive single audits during
the 5-year period contained recurring audit findings despite corrective
action time frames established by the auditees and our conclusion that
few of the findings involved significant issues, such as implementing
an accounting system, that could be expected to require more than 2
years to correct.
Figure 1 shows the number of audit findings reported annually from 1996
through 2000. It demonstrates that the auditors performing the 30
single audits in our review identified a significant number of audit
findings both in total and in each year of the 5-year period of our
review.
Figure 1: Number of Audit Findings Reported Annually from 1996 through
2000:
[See PDF for image]
[End of figure]
In addition, the 30 audit reports identified a significant number of
audit findings for each of the auditees. Figure 2 shows the percentages
of the 458 audit findings related to Compact funds for each auditee.
Figure 2: Auditee Findings as a Percentage of Total Findings:
[See PDF for image]
[End of figure]
Office of Management and Budget (OMB) Circular No. A-133, Audits of
States, Local Governments, and Non-Profit Organizations, establishes
policies for federal agency use in implementing the Single Audit Act,
as amended, and provides an administrative foundation for consistent
and uniform audit requirements for nonfederal entities that administer
federal awards. In part, the circular requires the auditee to follow up
and take corrective actions on audit findings identified by the single
audits. It clarifies this requirement by stating that, at the
completion of the single audit, the auditee shall prepare a corrective
action plan (CAP) to address each audit finding included in the current
year auditor's report. If the auditee does not agree with the audit
findings or believes corrective action is not required, the CAP is to
include an explanation of and justification for this position. Based on
our review of the audit reports, the FSM, the four FSM states, and the
RMI generally fulfilled their responsibility to either prepare a CAP or
indicate their disagreement with the audit finding and provide reasons
for their disagreement. As figure 3 shows, they prepared CAPs for 93
percent of the audit findings identified by the single audits in our
review and indicated their disagreement and reasons for this
disagreement for 5 percent of the findings.
Figure 3: Percentage of Corrective Action Plans Developed for Audit
Findings:
[See PDF for image]
[End of figure]
Our review of these CAPs showed that about 33 percent (138) included
anticipated completion dates, and, of these plans, only 4 percent (16)
indicated that the planned corrective actions would require more than 2
years to complete. Based on a review of the CAPs that did not include
anticipated completion dates (287), we concluded that, with a few
exceptions,[Footnote 9] the problems addressed by these plans could be
corrected within a year. For example, Financial Status Reports
submitted to the grantor agencies for fiscal year 2000 were not
available during the single audit of the RMI. The auditors recommended
that an adequate filing system, including the maintenance of Financial
Status Reports, be maintained for all federal awards. The CAP called
for the Ministry of Finance to ensure that an adequate filing system
was in place and to review status reports periodically.
Further analysis of the findings revealed that successive single audits
identified recurring audit findings over the 5-year period despite the
time frames identified in the auditee-prepared CAPs or our estimate of
the amount of time corrective action should take. As figure 4 shows,
many audit findings that were identified in more than one single audit
report recurred in 3 or more years over the 5-year period. The
percentage of each auditee's single audit findings that recurred 3 or
more years over the 5-year period of our review ranged from RMI's high
of 69 percent to a low of 17 percent for the FSM.
Figure 4: Percentage of 1996 through 2000 Single Audit Findings That
Recurred 3 or More Years:
[See PDF for image]
[End of figure]
Compliance and Financial Statement Problems Persisted over Compact
Funds:
The auditors categorized the audit findings related to the Compact into
three areas--federal award findings, local findings, and financial
statement findings. Upon further review, we determined that 117 audit
findings that the auditors categorized as federal award findings or
local findings discussed problems related to compliance with Compact
requirements, and the remaining 341 discussed financial statement
problems. The auditors who performed these single audits qualified or
disclaimed their opinion on all of the financial statements and about
60 percent of the Schedules of Expenditures of Federal Awards generally
because the auditees did not provide them with all needed financial
statements or documentation to support transactions recorded in their
books. Taken together, the compliance and financial statement findings
and audit opinions demonstrate poor accountability over Compact funds
and an inability on the part of the entities involved to provide
assurances that all program funds are used as intended. They highlight
the need for a stronger control environment and greater efforts to
implement control activities that strengthen accountability and help
ensure that Compact funds are used for program purposes.
Compliance requirements for federal assistance set forth what is to be
done, who is to do it, the purpose to be achieved, the population to be
served, and how much can be spent in certain areas. OMB's Single Audit
Act guidance includes 15 compliance categories[Footnote 10] used by
auditors to report on compliance-related findings. Our analysis of the
compliance categories the auditors cited for the Compact-related audit
findings showed that over half of the audit findings related to two
categories--allowable costs/cost principles and equipment and real
property management. The first category, allowable costs/cost
principles, specifies the allowability of costs under federal awards.
For example, expenditures for 17 types of projects or activities were
allowable under the original Compact capital account, including
construction or major repair of capital infrastructure, public and
private sector projects, training activities, and debt service. The
second category, equipment and real property management, specifies how
federal award recipients should use, manage, and dispose of equipment
and real property.
The following examples illustrate the types of audit findings that the
auditors categorized into the 15 areas.
* Kosrae advanced $93,000 in Compact Health and Medical Program funds
to off-island health providers for medical referrals. The advances were
immediately expensed without reference to the specific medical expenses
actually incurred. This is an example of a compliance finding related
to allowable costs/cost principles.
* Kosrae incurred over $274,000 in expenditures of Compact Capital
funds that lacked proper supporting vendor's invoices. This is an
example of a compliance finding related to allowable costs/cost
principles.
* Chuuk transferred about $169,000 in Compact Capital funds to entities
(subrecipients) that have not been audited or reviewed for compliance
with Compact requirements. This is an example of a compliance finding
related to subrecipient monitoring.
As mentioned earlier, the auditors performing the single audits also
categorized findings as financial statement findings. The audit
findings for this category related to the reliability of financial
reporting and involved recording, processing, summarizing, and
reporting financial data. Unlike the findings that related to
compliance with Compact requirements, the auditors did not tie the
financial statement findings to the categories contained in the Single
Audit Act guidance. Our review of these findings identified 101
financial statement findings involving problems with assets or accounts
that we consider susceptible to misuse. The following examples
illustrate financial statement findings related to assets or accounts
that we consider susceptible to misuse.
* Yap's three major bank accounts (general checking, savings, and
payroll) were not reconciled to bank records at the end of fiscal year
1999. Differences between the amounts shown for these cash accounts in
Yap's books and the bank records amounted to over $150,000. The
auditors identified this lack of bank reconciliations as an internal
control weakness in Yap's single audit reports for the years 1995
through 1999. A record being out of balance is a risk factor auditors
use to identify the possibility of fraud. This is an example of a cash
problem.
* The RMI had not conducted a physical inventory or updated property
records for equipment and real property. As of September 30, 2000, RMI
reported that its equipment was worth about $11 million, but the
auditor could not substantiate this amount due to inadequate records.
The auditor identified a lack of updated property records for the
General Fixed Asset Group in single audit reports for the years 1988
through 2000. Missing documents, such as the property records for
equipment in this example, are a risk factor used by auditors to
identify the possibility of fraud. This is an example of an equipment
problem.
The 30 single audit reports included auditor opinions or disclaimers of
opinion on the financial statements and Schedules of Expenditures of
Federal Awards for the FSM, the four FSM states, and the RMI. The
financial statements reflect a federal award recipient's financial
position, results of operations or changes in net assets, and, where
appropriate, cash flows for the year. The Schedules of Expenditures of
Federal Awards show the amount of expenditures for each federal award
program during the year. If the auditors are not able to perform all of
the procedures necessary to complete an audit, they consider the audit
scope to be limited or restricted. Scope limitations may result from
the timing of the audit work, the inability to obtain sufficient
evidence, or inadequate accounting records. If the audit scope is
limited, the auditors must make a professional judgment about whether
to qualify or disclaim an opinion. A qualified opinion states that,
except for the matter to which the qualification relates, the financial
statements are fairly presented in accordance with generally accepted
accounting principles. In a disclaimer of opinion, the scope limitation
is serious enough that the auditor does not express an opinion.
The auditor's opinions on the financial statements and Schedules of
Expenditures of Federal Awards for the 30 single audits in our review
reveal overall poor financial management. The auditors performing these
single audits qualified or disclaimed their opinions on all of the
financial statements and about 60 percent of the Schedules of
Expenditures of Federal Awards generally because they were unable to
obtain sufficient evidence or adequate accounting records. For example,
the auditor qualified its opinion on the FSM's financial statements for
the year 2000 because of the auditor's inability to ensure the
propriety of receivables from other governments and missing financial
statements for a component unit. In another example, the auditor did
not express an opinion on Chuuk's financial statements for the year
1999 because of inadequacies in the accounting records and internal
controls, incomplete financial statements for component units, and its
inability to obtain audited financial statements supporting
investments.
The significant number of audit findings involving FSM and RMI
noncompliance with Compact requirements and weaknesses in their
financial management systems, along with auditor qualified opinions or
disclaimers of opinion on financial statements, echo the control and
accountability issues that we identified in our earlier reports on
Compact assistance. Further, the pervasive and recurring nature of the
compliance and financial statement problems highlights (1) the need for
stronger control environments that will help ensure that Compact funds
are used for program purposes and (2) the limited progress made during
the 5-year period of our review in establishing accountability in the
FSM, the four FSM states, and the RMI that would provide reasonable
assurance that Compact funds are used for their intended purposes.
Amended Compact Agreements Contain Improved Accountability Measures:
In responding to our previous reviews of the original Compact program,
Interior officials expressed concerns about the U.S. government's
limited ability to enforce accountability over Compact funds due to
certain provisions of the original Compact and the related FPA.
According to these officials, administrators have been reluctant to
commit oversight resources to the Compact when no enforcement
mechanisms exist due to these provisions. The United States and the FSM
signed an amended Compact in May 2003. The United States and the RMI
signed an amended Compact in April 2003. These amended Compacts are
awaiting legislative approval in the United States, the FSM, and the
RMI. They contain strengthened reporting and monitoring measures over
the original Compact that could improve accountability over Compact
assistance, if diligently implemented.
According to Interior officials, the FPA in effect during the period of
our review created a financial management regimen unique in federal
practice. They explained that it was negotiated to give the FSM and the
RMI governments clear control over Compact funding and to limit the
U.S. government's authority to intervene in spending decisions and,
most important, to withhold payments if the terms and conditions of
funding were violated. More specifically, these officials explained
that the expiring FPAs lacked basic elements of federal grant
management practice similar to those in OMB Circular A-102, Grants and
Cooperative Agreements with State and Local Governments, which requires
standard procurement practices and cost principles. They elaborated
that, when coupled with the full faith and credit provisions of the
Compact,[Footnote 11] this lack of standards limited the U.S.
government's response to mismanagement. In summing up, they stated that
while additional personnel and funding could have been committed to
Compact oversight, the United States would still have had almost no
ability to influence fiscal decisions made by the FSM or the RMI.
The amended Compacts could potentially cost the U.S. government about
$6.6 billion in new assistance. Of this amount, $3.5 billion would
cover payments over a 20-year period (2004-23), while $3.1 billion
represents payments for U.S. military access to the Kwajalein Atoll in
the RMI for the years 2024 through 2086. The amended Compacts contain
strengthened reporting and monitoring measures that could improve
accountability over Compact assistance, if diligently implemented. In
addition, the Department of the Interior has taken actions to increase
resources dedicated to monitoring and oversight of Compact funds.
The following are amended Compact and related FPA measures that
represent changes from the prior Compact and FPAs.
* In 2000, we reported that Compact funds were placed in a general
government fund and commingled with other revenues and, therefore,
could not be further tracked. In addition, some Compact assistance was
only traced at a high level with few details readily available
regarding final use. The amended Compacts and FPAs include requirements
that should address these accountability concerns. Specifically, they
require fiscal control and accounting procedures sufficient to permit
(1) preparation of required reports and (2) tracing of funds to a level
of expenditures adequate to establish that such funds have been used in
compliance with applicable requirements. Further, the amended Compacts
specify standards for the financial management systems used by the FSM
and the RMI. For example, these systems should maintain effective
controls to safeguard assets and ensure that they are used solely for
authorized purposes.
* The new FPAs would establish a joint economic management committee
for the FSM and the RMI that would meet at least once a year. The
committee would be composed of three U.S. appointed members, including
the chairman, and two members appointed, as appropriate, by either the
FSM or the RMI. The committee's duties would include (1) reviewing
planning documents and evaluating island government progress to foster
economic advancement and budgetary self-reliance, (2) consulting with
program and service providers and other bilateral and multilateral
partners to coordinate or monitor the use of development assistance,
(3) reviewing audits, (4) reviewing performance outcomes in relation to
the previous year's grant funding level, terms, and conditions, and (5)
reviewing and approving grant allocations (which would be binding) and
performance objectives for the upcoming year.
* Grant conditions normally applicable to U.S. state and local
governments would apply to each grant. General terms and conditions for
the grants would include conformance to plans, strategies, budgets,
project specifications, architectural and engineering specifications,
and performance standards. Specific postaward requirements address
financial administration by establishing, for example, (1) improved
financial reporting, accounting records, internal controls, and budget
controls, (2) appropriate use of real property and equipment, and (3)
competitive and well-documented procurement.
* The United States could withhold payments if either the FSM or the
RMI fails to comply with grant terms and conditions. The amount
withheld would be proportional to the breach of the term or condition.
In addition, funds could be withheld if the FSM or RMI governments do
not cooperate in U.S. investigations of whether Compact funds have been
used for purposes other than those set forth in the amended Compacts.
* The new FPAs include numerous reporting requirements for the two
countries. For example, each country must prepare strategic planning
documents that are updated regularly, annual budgets that propose
sector expenditures and performance measures, annual reports to the
U.S. President regarding the use of assistance, quarterly and annual
financial reports, and quarterly grant performance reports.
The successful implementation of the new accountability provisions will
require a sustained commitment by the three governments to fulfilling
their new roles and responsibilities. Appropriate resources from the
United States, the FSM, and the RMI represent one form of this
commitment. While the amended Compacts do not address staffing issues,
officials from Interior's Office of Insular Affairs have informed us
that they intend to post six staff in a new Honolulu office: a health
grant specialist, an education grant specialist, an accountant, an
economist, an auditor, and an office assistant. Interior can also
contract with the Army Corps of Engineers for engineering assistance,
when necessary. These Honolulu-based staff may spend about half of
their time in the FSM and the RMI. Further, an Interior official noted
that his office has brought one new staff member on board in
Washington, D.C. and intends to post one person to work in the RMI (one
staff member already works in the FSM). We have not conducted an
assessment of Interior's staffing plan and rationale and cannot comment
on the adequacy of the plan or whether it represents sufficient
resources in the right locations.
Conclusions:
The 30 single audit reports demonstrate a lack of or poor
accountability over U.S. Compact assistance that has totaled an
estimated $2.1 billion since 1987. The large number and recurring
nature of the findings involving noncompliance with Compact
requirements or financial management weaknesses, along with the
preponderance of auditor's qualified opinions or disclaimers of opinion
on FSM and RMI financial statements, clearly indicate the need for
improved FSM and RMI management of U.S. assistance and greater U.S.
oversight and monitoring of the use of this assistance. Changes are
needed especially considering the fact that the amended Compacts with
these nations could potentially cost the U.S. government about $3.5
billion in new assistance over the next 20 years.
Under the original Compact, the Department of the Interior was
responsible for supervising, coordinating, and monitoring the program
assistance provided. Interior officials expressed frustration with the
lack of tools available to them to administer or track this assistance
in a manner that could reasonably ensure that such assistance was
having its intended effect. The amended Compacts strengthen reporting
and monitoring measures that could improve accountability over
assistance, if diligently implemented. These measures include
strengthened fiscal control and accounting procedures requirements,
expanded annual reporting and consultation requirements, and the
ability to withhold funds for noncompliance with grant terms and
conditions. The successful implementation of the new accountability
provisions will require appropriate resources and sustained commitment
from the United States, the FSM, and the RMI. The joint economic
committees called for in the Compact with each nation and Interior's
planned increase in staff associated with Compact oversight and
monitoring functions should play key roles in improving accountability
over Compact funds.
Recommendations for Executive Action:
To help promote compliance with Compact requirements and sound
financial management, the Secretary of the Interior should delegate
responsibility to the Office of Insular Affairs and hold appropriate
officials in that office accountable for:
* ensuring the adequacy of staff dedicated to Compact oversight and
monitoring,
* monitoring FSM and RMI progress in addressing Compact-related single
audit report findings,
* reporting on the FSM and RMI actions to correct Compact-related
compliance and financial management findings identified in single audit
reports to the Secretary of the Interior or other appropriate high-
level Interior official,
* initiating appropriate actions when the FSM or the RMI do not
undertake adequate actions to address Compact-related single audit
findings in a timely manner, and:
* investigating single audit findings that indicate possible violations
of grant conditions or misuse of funds and taking appropriate actions
when such problems are verified.
Government and Agency Comments and Our Evaluation:
In commenting on this report, the Office of Insular Affairs of the
Department of the Interior, FSM, and RMI agreed with our findings or
conclusions and recommendations. They also cited the amended Compacts
as mechanisms that should result in improved financial management over
Compact assistance. The FSM and RMI also provided technical comments
and information on current actions to address financial management
issues. We considered all comments and made changes to the report, as
appropriate.
The FSM comments noted that it found the report constructive and useful
as it continues to prepare for the implementation of the amended
Compact and its related agreements. The comments (reprinted in app. I)
recognized that, although FSM has worked hard to develop a consistent
approach to satisfy the Compact and FPA requirements, significant work
remains to be done to improve and strengthen accountability in all
aspects throughout the nation. Further, FSM agreed that it must
continue to improve internal financial control through upgrading the
current financial management system, providing for capacity building,
and retaining its most productive and experienced employees. Finally,
it noted that the amended Compact and related fiscal procedures
agreement include requirements that will address all of the
accountability concerns expressed in the report.
RMI's comments (reprinted in app. II) stated that it concurred with the
report's findings and noted that the report will be useful since it
gives a summary of the financial and management situation of the RMI
between 1996 and 2000. RMI noted that its problems stem partly from the
fact that it has not had a global system for following up on audits
that would apply throughout all ministries of the government as well as
other entities that receive Compact grant assistance. RMI stated that
it has made progress recently by upgrading its information system and
strengthening its internal control procedures and noted that it will
add personnel to the budget, procurement, and supply areas.
In its comments (reprinted in app. III), the Office of Insular Affairs
of the Department of the Interior agreed with the conclusions and
recommendations in the report. The Office also noted that it looks
forward to discharging its responsibilities under the amended Compacts
and that it is confident that it will now have the tools needed to
properly protect the American taxpayer's investment in the freely
associated states.
:
As agreed with your offices, unless you publicly announce its contents
earlier, we will not distribute this report until 30 days after its
date. At that time, we will send copies to the Secretary of the
Interior, the President of the Federated States of Micronesia, the
President of the Republic of the Marshall Islands, and appropriate
congressional committees. Copies will also be made available to others
on request. This report will also be available at no charge on GAO's
Web site at [Hyperlink, http://www.gao.gov] http://www.gao.gov.
For future contacts regarding this report, please call McCoy Williams
at (202) 512-6906 or Susan S. Westin at (202) 512-4128. Staff contacts
and other key contributors to this report are listed in appendix IV.
McCoy Williams:
Director:
Financial Management and Assurance:
Susan S. Westin:
Managing Director:
International Affairs and Trade:
Signed by McCoy Williams and Susan S. Westin:
[End of section]
Appendixes:
Appendix I: Comments from the Federated States of Micronesia:
[See PDF for image]
[End of figure]
[End of section]
Appendix II: Comments from the Republic of the Marshall Islands:
EMBASSY OF THE REPUBLIC OF THE MARSHALL ISLANDS
2433 Massachusetts Avenue, N.W,
Washington, D.C. 20008
Tel. # (202) 234-5414 Fax # (202) 232-3236:
October 2, 2003:
Mr. McCoy Williams:
Director, Financial Management and Assurance:
U.S. General Accounting Office, Room 5089
441 G Street, NW:
Washington, D.C. 20548-0001:
Dear Mr. Williams:
First, thank you for the opportunity to comment on the drafts of your
reports. On behalf of the Government of the Republic of the Marshall
Islands (RMI), I am pleased to forward to you comments on your most
recent draft report entitled Compact of Free Association: Single Audits
Demonstrate Accountability Problems Over Compact Funds.
I hope you will take time to consider the reactions of the RMI
Government in the final version of your report. If you have any
questions about the content of the RMI Government's response, please
feel free to contact me at anytime.
With Best Regards:
Signed by:
Banny deBrum:
Ambassador to the United States:
RMI RESPONSE TO DRAFT GAO REPORT ENTITLED "COMPACT OF FREE ASSOCIATION:
SINGLE AUDITS DEMONSTRATE ACCOUNTABLITIY PROBLEMS OVER COMPACT FUNDS":
The RMI government has reviewed the draft GAO report on the findings of
possible misuse of federal grants allocated to the RMI under the
Compact of Free Association. Funding from the U.S. government is
authorized and implemented under Section 211 of the Compact of Free
Association, approved under U.S. Public Law 99-239.
The RMI is committed to being accountable to its constituency in the
spirit of good governance. It is the desire of the RMI government to
serve as a model democratic nation, with accountability and
transparency as its underlying principles.
The RMI concurs with the findings of the GAO in respect to problems
resulting from a lack of follow-up on audit findings for government
operations over the period 1996-2000. This problem stems partly from
the fact that the RMI has not had a "global" system for following up on
audits that would apply throughout all ministries of the government as
well as other entities that receive Compact grant assistance. As a
result, certain ministries, instrumentalities of the government, and
other entities receiving Compact assistance have made substantial
efforts to respond to and correct problems revealed by audits, while
others have done little or nothing in the past.
In addition, there has been little or no sanction under either domestic
or the original Compact provisions for not correcting audit
deficiencies after such deficiencies have been reported. This problem
is now being affirmatively addressed in the RMI's Appropriation act for
FY 2004, which will provide that entities that have been determined by
the Auditor General to be "unauditable" will not be permitted to
receive funding until such problems are remedied. Although only a first
step, this measure is independent of anything required in the Compact,
as Amended, or the new Fiscal Procedures Agreement.
While the Compact, as Amended, provides for closer monitoring of the
use of Compact grant funds than has been done in the past, the RMI
believes that domestic revenues must also be brought under stricter
accountability requirements so we do not end up with two different
systems and accountability standards for Compact funding and other
revenues of the RMI Government.
In the Compact, as Amended, both the RMI and the U.S. have agreed to
detailed financial and management procedures and consultations that
will assist the RMI in being more accountable to its people. These
mechanisms can be found in the Fiscal Procedures Agreement (FPA), and
they include the Medium Term Budget and Investment Framework (MTBIF)
and the Joint Economic Management and Financial Accountability
Committee (JEMFAC) that will review audit findings in the future.
The GAO report states that the RMI does not comply with the quarterly
reports requirement of its federal programs. The RMI would point out
that this is an overly broad
statement and that it has been able to make timely reports for most,
but not all federal programs in accordance with those programs
requirements.
The GAO notes that one improvement that will improve the accountability
situation in the RMI is the Ministry of Finance (MOF) implementing a
new filing system to keep better track of the government's documents.
This is just one new mechanism that MOF has put into place, and there
are other new measures that the GAO fails to mention.
Much progress has been made recently, specifically the upgrading of the
information system and strengthening of the internal control
procedures, which will address most of the on-going audit findings.
Furthermore, additional personnel (budget, procurement and supply) will
soon be added to better monitor and ensure internal and external
compliance.
The RMI is also exploring other avenues to improve its accountability
capacity. The RMI is committed to upgrade its fiscal operation and work
closely with its DOI partners. From time to time, the RMI seeks the
assistance of DOI, particularly the Technical Assistance Division, to
resolve remaining audit findings. Thus the task ahead should be
mutually beneficial for the RMI and the U.S. governments in combined
efforts to achieve greater transparency and accountability.
The RMI appreciates the fact that the GAO conducted this study. This
study will be useful to the RMI as it gives it a summary of the
financial and management situation of the RMI between 1996 and 2000.
[End of section]
Appendix III: Comments from the Department of the Interior:
United States Department of the Interior:
OFFICE OF INSULAR AFFAIRS
1849 C Street, NW Washington, D.C. 20240:
Deputy Assistant Secretary:
Mr. McCoy Williams:
Director, Financial Management and Assurance United States General
Accounting Office Washington, DC 20548:
Dear Mr. Williams:
I have reviewed the draft report entitled "Compact Of Free Association:
Single Audits Demonstrate Accountability Problems over Compact Funds",
dated October 2003. I agree with the conclusions and recommendations of
the report.
The report found that the proposed amendments to the Compacts of Free
Association and the related fiscal procedures agreements should, if
implemented properly, address the need to properly administer and
oversee federal assistance. The Department of the Interior's extensive
preparations to implement the amended Compact are already well
underway, even though the amendments have yet to be approved as of this
writing. We look forward to discharging our responsibilities under the
amended Compacts, and are confident that we will finally have the tools
that we need to properly protect the American taxpayer's investment in
the freely associated states.
Thank you for the opportunity to comment on the above report.
Sincerely:
Signed by:
David B. Cohen:
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Tom Broderick, (202) 512-8705 or [Hyperlink, broderickt@gao.gov]
broderickt@gao.gov Emil Friberg, Jr., (202) 512-8990 or [Hyperlink,
friberge@gao.gov] friberge@gao.gov:
Acknowledgments:
In addition to the contacts named above, Perry Datwyler and Leslie
Holen made key contributions to this report.
(195008):
FOOTNOTES
[1] U.S. General Accounting Office, Foreign Assistance: Effectiveness
and Accountability Problems Common in U.S. Programs to Assist Two
Micronesian Nations, GAO-02-70 (Washington, D.C.: Jan. 22, 2002);
Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little
Impact on Economic Development, GAO/NSIAD-00-216 (Washington, D.C.:
Sept. 22, 2000); and Foreign Relations: Better Accountability Needed
Over U.S. Assistance to Micronesia and the Marshall Islands, GAO/RCED-
00-67 (Washington, D.C.: May 31, 2000).
[2] Statement of David B. Cohen, Deputy Assistant Secretary of the
Interior for Insular Affairs, before the Subcommittee on Asia and the
Pacific, House Committee on International Relations, June 18, 2003.
[3] The FPA provides for a financial and compliance audit within the
meaning of the Single Audit Act. See 31 U.S.C. Chapter 75.
[4] According to a Department of State official, while the original
Compact was one document that applied to both the FSM and the RMI, an
amended Compact has been prepared for each nation.
[5] Although the three governments have signed the amended Compacts,
the Compacts have not been approved by the legislature of any country.
Therefore, in this report, we describe the amended Compacts'
requirements and potential impact conditionally, recognizing that the
Compacts have not yet been enacted. The total possible cost to renew
expiring assistance in fiscal year 2004 U.S. dollars would be $3.8
billion on the basis of the Congressional Budget Office's forecasted
inflation rate.
[6] An audit of these schedules as part of the single audit is required
by the Single Audit Act, as amended, 31 U.S.C. 7502(e)(2).
[7] The FSM and RMI are now independent nations and are members of
international organizations such as the U.N.
[8] The Single Audit Act of 1984 was substantially amended by the
Single Audit Act Amendments of 1996, which is codified in Chapter 75 of
Title 31, United States Code.
[9] We identified 11 CAPs that we believe could require significant
amounts of time to correct. For example, 3 CAPs called for accounting
system upgrades and another 2 called for accounting systems. In another
2 instances, FSM states prepared plans that required legal opinions
from the FSM national government in order to resolve the problems.
[10] The 15 areas are (1) activities allowed or unallowed, (2)
allowable costs/cost principles, (3) cash management, (4) Davis-Bacon
Act, (5) eligibility, (6) equipment and real property management, (7)
matching, level of effort, and earmarking, (8) period of availability
of federal funds, (9) procurement, (10) program income, (11) real
property acquisition and relocation assistance, (12) reporting, (13)
subrecipient monitoring, (14) special tests and provisions, and (15)
none.
[11] "Except as otherwise provided, approval of the Compact by the
Government of the United States shall constitute a pledge of the full
faith and credit of the United States for the full payment of the sums
and amounts specified in Articles I and III of this Title. The
obligations of the United States under Article I and III of this Title
shall be enforceable in the United States Claims Court." Compact of
Free Association, section 236 (Jan. 14, 1986).
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