Financial Management: Sustained Effort Needed to Resolve	 
Long-Standing Problems at U.S. Agency for International 	 
Development (24-SEP-03, GAO-03-1170T).				 
                                                                 
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 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.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-1170T					        
    ACCNO:   A08540						        
  TITLE:     Financial Management: Sustained Effort Needed to Resolve 
Long-Standing Problems at U.S. Agency for International 	 
Development							 
     DATE:   09/24/2003 
  SUBJECT:   Accountability					 
	     Federal agency accounting systems			 
	     Financial management				 
	     Financial statement audits 			 
	     Human resources utilization			 
	     Information technology				 
	     Internal controls					 
	     Performance measures				 

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GAO-03-1170T

                                       A

Test i mony 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. FINANCIAL Wednesday,
September 24, 2003 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

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 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 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

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).

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 3 and the Federal
Financial Management Improvement Act of 1996 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

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).

a competitive environment. In our Executive Guide: Creating Value Through
World- class Financial Management, 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-
toend business process improvement, were critical for ensuring their
financial management staff delivered the kind of analysis and
forwardlooking 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 valueadded
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

In May 2001, the Subcommittee*s predecessor held a hearing 6 on USAID
Financial Management

financial management. Using that hearing as a baseline, we evaluated,
using primarily USAID IG reports, the progress made to improve USAID*s
Reform

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

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? 107 th
Cong., 1 st Sess., May 8, 2001.

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.

Tabl e 1: Audit Opinions on USAID*s Financial Statements in Fiscal Years
2000 Through 2002 Type of opinion Fiscal year

Fiscal year Fiscal year Financial statements 2000 2001 2002

Balance sheet Disclaimer a Qualified b Unqualified c Statement of net
costs Disclaimer Disclaimer Qualified Statement of changes in net position
Disclaimer Qualified Unqualified Statement of budgetary resources
Disclaimer Qualified Unqualified Statement of financing Disclaimer
Disclaimer 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.

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.* 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, 8 reportable conditions, 9 and
noncompliance with laws and regulations 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. 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.

Tabl e 2: Weaknesses Reported by the USAID Inspector General in Fiscal
Years 2000 Through 2002 Fiscal year 2000 2001 2002 Reported material
weaknesses

Reconciling fund balance with Treasury X Recognizing, recording, and
reporting accounts

X X receivable Calculating and reporting accounts payable X X

Recording and classifying advances to grantees X X X and related expenses
Computer security deficiencies X X Reported as a

Compliance with Laws and Regulations Condition

Process for preparing the Management's X Now a Reportable Discussion and
Analysis needs improvement Condition Allocating program expenses on its
Statement of X Net Costs Reviewing, analyzing, and deobligating

X X unliquidated obligations Calculating credit program allowances X

Reportable conditions

Reconciling fund balance with Treasury X Calculating and reporting
accounts payable X Recognizing, recording, and reporting accounts

X receivable Establish monthly closing procedures X

Improve controls and management of property at X overseas missions Process
for preparing the Management's

X X Discussion and Analysis needs improvement Compliance with laws and
regulations

Chief Financial Officers Act of 1990 X Federal Financial Management
Improvement Act X X X of 1996 Computer Security Act of 1987 X X X

Debt Collection and Improvement Act of 1996 X Source: USAID Inspector
General reports.

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 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.

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).

Financial Management Transforming USAID*s financial and business
management environment

Reform Will Require a into an efficient and effective operation that is
capable of providing

management and the Congress with relevant, timely, and accurate Long- term

information on the results of operation will require a sustained effort.
Commitment

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

For further information about this testimony, please contact Gregory D.
Acknowledgments Kutz at (202) 512- 9095 or kutzg@ gao. gov or John Kelly
at (202) 512- 6926 or kellyj@ gao. gov. Other key contributors to this
testimony include Stephen Donahue, Dianne Guensberg, and Darby Smith.

(192107)

GAO United States General Accounting Office

A

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 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.

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.

Highlights of GAO- 03- 1170T, a testimony before the Subcommittee on
Government Efficiency and Financial Management, Committee on Government
Reform, House of Representatives September 24, 2003

FINANCIAL MANAGEMENT Sustained Effort Needed to Resolve Long- Standing
Problems at U. S. Agency for International Development

Page 1 GAO- 03- 1170T USAID Financial Management

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Page 10 GAO- 03- 1170T USAID Financial Management

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