United Nations: Oil for Food Program Audits (15-FEB-05, 	 
GAO-05-346T).							 
                                                                 
The Oil for Food program was established by the United Nations	 
and Iraq in 1996 to address concerns about the humanitarian	 
situation after international sanctions were imposed in 1990. The
program allowed the Iraqi government to use the proceeds of its  
oil sales to pay for food, medicine, and infrastructure 	 
maintenance. Allegations of fraud and corruption have plagued the
Oil for Food program. As we have testified and others have	 
reported, the former regime gained illicit revenues through	 
smuggling and through illegal surcharges and commissions on Oil  
for Food contracts. The United Nations' Independent Inquiry	 
Committee was established in April 2004 to investigate		 
allegations of corruption and misconduct within the Oil for Food 
program and its overall management of the humanitarian program.  
In January 2005, the Committee publicly released 58 internal	 
audit reports conducted by the United Nations' Office of Internal
Oversight Services (OIOS). GAO (1) provides information on OIOS' 
background, structure, and resources; (2) highlights the findings
of the internal audit reports; and (3) discusses limitations on  
the audits' coverage.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-346T					        
    ACCNO:   A17777						        
  TITLE:     United Nations: Oil for Food Program Audits	      
     DATE:   02/15/2005 
  SUBJECT:   Audit reports					 
	     Commodities exchanges				 
	     Food relief programs				 
	     Foreign aid programs				 
	     Fraud						 
	     Internal audits					 
	     International cooperation				 
	     International food programs			 
	     International organizations			 
	     Program abuses					 
	     Program evaluation 				 
	     Program management 				 
	     Sanctions						 
	     Smuggling						 
	     Foreign governments				 
	     International trade regulation			 
	     Regulatory agencies				 
	     Monitoring 					 
	     Iraq						 
	     United Nations Oil for Food Program		 

******************************************************************
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GAO-05-346T

United States Government Accountability Office

GAO Testimony

Before the Permanent Subcommittee on Investigations, Committee on Homeland
Security and Governmental Affairs, U.S. Senate

For Release on Delivery

Expected at 9:30 a.m. EST UNITED NATIONS

Tuesday, February 15, 2005

                          Oil for Food Program Audits

Statement of Joseph A. Christoff, Director International Affairs and Trade

GAO-05-346T

Highlights of GAO-05-346T, a testimony before the Permanent Subcommittee
on Investigations, Committee on Homeland Security and Governmental
Affairs, U.S. Senate.

The Oil for Food program was established by the United Nations and Iraq in
1996 to address concerns about the humanitarian situation after
international sanctions were imposed in 1990. The program allowed the
Iraqi government to use the proceeds of its oil sales to pay for food,
medicine, and infrastructure maintenance.

Allegations of fraud and corruption have plagued the Oil for Food program.
As we have testified and others have reported, the former regime gained
illicit revenues through smuggling and through illegal surcharges and
commissions on Oil for Food contracts. The United Nations' Independent
Inquiry Committee was established in April 2004 to investigate allegations
of corruption and misconduct within the Oil for Food program and its
overall management of the humanitarian program. In January 2005, the
Committee publicly released 58 internal audit reports conducted by the
United Nations' Office of Internal Oversight Services (OIOS).

GAO (1) provides information on OIOS' background, structure, and
resources; (2) highlights the findings of the internal audit reports; and
(3) discusses limitations on the audits' coverage.

www.gao.gov/cgi-bin/getrpt?GAO-05-346T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Joseph Christoff at (202)
512-8979 or [email protected].

Tuesday, February 15, 2005

UNITED NATIONS

Oil for Food Program Audits

Before the United Nations established OIOS, the United States and other
member states had criticized its lack of internal oversight mechanisms. In
1993, the United States proposed the establishment of an inspector general
position within the United Nations and withheld U.S. funds until such an
office was established. In 1994, the General Assembly created OIOS and
tasked it with conducting audits, investigations, inspections, and
evaluations of U.N. programs and funds. OIOS has generally provided audit
reports to the head of the U.N. agency or program subject to the audit but
also provided certain reports of interest to the General Assembly.
However, this limited distribution hampered member states' efforts to
oversee important U.N. programs. In December 2004, the General Assembly
directed OIOS to publish the titles and summaries of all audit reports and
provide member states with access to these reports on request.

The audit reports released in January 2005 found deficiencies in the
management of the Oil for Food program and made numerous recommendations.
We identified 702 findings in these reports. Most reports focused on U.N.
activities in northern Iraq, the operations of the U.N. Compensation
Commission, and the implementation of U.N. inspection contracts. In the
north, OIOS audits found problems with coordination, planning,
procurement, asset management, and cash management. For example, U.N.
agencies had purchased diesel generators in an area where diesel fuel was
not readily available and constructed a health facility subject to
frequent flooding. An audit of U.N.-Habitat found $1.6 million in excess
construction material on hand after most projects were complete. OIOS
audits of the U.N. Compensation Commission found poor internal controls
and recommended downward adjustments totaling more than $500 million. The
United Nations asserted that OIOS had limited audit authority over the
Commission. Finally, OIOS audits of the contractors inspecting Iraq's oil
exports and commodity imports found procurement irregularities and limited
U.N. oversight.

OIOS' audits and summary reports revealed deficiencies in the management
and internal controls of the Oil for Food program. However, OIOS did not
examine certain headquarters functions-particularly OIP's oversight of the
contracts for central and southern Iraq that accounted for 59 percent or
almost $40 billion in Oil for Food proceeds. The Independent Inquiry
Committee noted several factors that limited OIOS' scope and authority.
First, OIOS did not believe it had purview over the humanitarian contracts
because the sanctions committee approved the contracts. Second, the U.N.
Office of the Iraq Program steered OIOS toward programs in the field
rather than at headquarters. Third, the Office of the Iraq Program refused
to fund an OIOS risk assessment of its program management division.
Finally, U.N. management and the Office of the Iraq Program prevented OIOS
from reporting its audit results directly to the Security Council.

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss our review of the internal audit
reports of the United Nations (U.N.) Oil for Food program.

Allegations of fraud and corruption have plagued the Oil for Food program.
As we have testified and others have reported, the former regime gained
illicit revenues through smuggling oil and obtaining illegal surcharges
and commissions on Oil for Food contracts. The United Nations' Independent
Inquiry Committee was established in April 2004 to investigate allegations
of mismanagement and misconduct within the Oil for Food program. In
January 2005, the Committee released 58 internal audit reports on the Oil
for Food program conducted by the United Nations' Office of Internal
Oversight Services (OIOS). On February 3, 2005, the Committee issued an
interim report on the procurement of U.N. contractors, recipients of oil
allocations, OIOS structure and activities, and U.N. management of Oil for
Food administrative expenses.1

Today, I will (1) provide information on OIOS' background, structure, and
resources; (2) highlight the findings of the internal audit reports; and
(3) discuss limitations on the audits' coverage.

To address these objectives, we analyzed the internal audit reports to
determine the reports' audit coverage, findings, recommendations,
disposition of recommendations, and potential cost savings. We catalogued
the findings to determine common themes related to the management of the
Oil for Food program. We also reviewed the February 2005 Independent
Inquiry Committee report. Appendix I contains an explanation of our scope
and methodology.

We conducted this review in January and February 2005 in accordance with
generally accepted government auditing standards.

Summary Before the United Nations established OIOS, the United States and
other member states had criticized its lack of internal oversight
mechanisms. In 1993, the United States proposed the establishment of an
inspector general position within the United Nations and withheld U.S.
funds until such an

1Independent Inquiry Committee into the United Nations Oil-for-Food
Programme, Interim Report (New York: Feb. 3, 2005).

office was established. In 1994, the General Assembly created OIOS and
tasked it with conducting audits, investigations, inspections, and
evaluations of U.N. programs and funds. OIOS has generally provided audit
reports to the head of the U.N. agency or program subject to the audit.
OIOS also provided certain reports of interest to the General Assembly.
However, this limited distribution hampered member states' efforts to
oversee important U.N. programs. In December 2004, the General Assembly
directed OIOS to publish the titles and summaries of all audit reports and
provide member states with access to these reports on request.

The audit reports released in January 2005 found deficiencies in the
management of the Oil for Food program and made numerous recommendations
to correct these deficiencies. We identified 702 findings contained in the
reports. Most reports focused on U.N. activities in northern Iraq, the
operations of the U.N. Compensation Commission, and the implementation of
U.N. inspection contracts. In the north, OIOS audits found problems with
coordination, planning, procurement, asset management, and cash
management. For example, U.N. agencies had purchased diesel generators in
an area where diesel fuel was not readily available and constructed a
health facility subject to frequent flooding. An audit of U.N.-Habitat
found $1.6 million in excess construction material on hand after most
projects were complete. OIOS audits of the U.N. Compensation Commission
found poor internal controls to prevent employee fraud, collusion, and
illegal activities. In its 2004 assessment of claims for war damages, OIOS
recommended downward adjustments totaling more than $500 million. The
U.N.'s Office of Legal Affairs stated that OIOS' audit authority did not
extend to reviewing the Commission's decisions. Finally, OIOS audits of
the contractors inspecting Iraq's oil exports and commodity imports found
procurement irregularities and limited U.N. oversight.

OIOS' audits and summary reports revealed deficiencies in the management
and internal controls of the Oil for Food program. However, OIOS did not
examine certain headquarters functions-particularly the Office of the Iraq
Program's oversight of the contracts for central and southern Iraq that
accounted for 59 percent or almost $40 billion in Oil for Food proceeds.
The Independent Inquiry Committee noted several factors that limited OIOS'
scope and authority. First, OIOS did not believe it had purview over the
humanitarian contracts because the sanctions committee approved the
contracts. Second, the U.N. Office of the Iraq Program steered OIOS toward
programs in the field rather than at headquarters. Third, the Office of
the Iraq Program refused to fund an OIOS risk

Background

assessment of its program management division. Finally, U.N. management
and the Office of the Iraq Program prevented the internal auditors from
reporting their audit results directly to the Security Council.

In 1996, the United Nations and Iraq established the Oil for Food program
to address growing concerns about the humanitarian situation in Iraq after
international sanctions were imposed in 1990. The program's intent was to
allow the Iraqi government to use the proceeds of its oil sales to pay for
food, medicine, and infrastructure maintenance, and at the same time
prevent the regime from obtaining goods for military purposes. From 1997
through 2002, Iraq sold more than $67 billion in oil through the program
and issued $38 billion in letters of credit to purchase commodities.

The Oil for Food program initially permitted Iraq to sell up to $1 billion
worth of oil every 90 days to pay for humanitarian goods. Subsequent U.N.
resolutions increased the amount of oil that could be sold and expanded
the humanitarian goods that could be imported. In 1999, the Security
Council removed all restrictions on the amount of oil Iraq could sell to
purchase civilian goods. The United Nations and the Security Council
monitored and screened contracts that the Iraqi government signed with
commodity suppliers and oil purchasers, and Iraq's oil revenue was placed
in a U.N.-controlled escrow account. In May 2003, U.N. resolution 1483
requested the U.N. Secretary General to transfer the Oil for Food program
to the Coalition Provisional Authority by November 2003. The United
Nations allocated 59 percent of the oil revenue for the 15 central and
southern governorates, which were controlled by the central government; 13
percent for the 3 northern Kurdish governorates; 25 percent for a war
reparations fund for victims of the Iraq invasion of Kuwait in 1990; and 3
percent for U.N. administrative costs, including the costs of weapons
inspectors.

In central and southern Iraq, the Iraqi government used the proceeds from
its oil sales to purchase food, medicines, and infrastructure supplies and
equipment. The Iraqi government negotiated directly with suppliers and
distributed food in accordance with its Public Distribution System, a food
ration basket for all Iraqis. In northern Iraq, nine U.N. agencies
implemented the program, primarily through constructing or rehabilitating

schools, health clinics, power generation facilities, and houses.2 Local
authorities submitted project proposals to the United Nations to consider
and implement. The Iraqi government in Baghdad procured bulk food and
medicines for the northern region, but the World Food Program and the
World Health Organization were responsible for ensuring the delivery of
these items.

From 1997 to 2002, the Oil for Food program was responsible for more than
$67 billion of Iraq's oil revenue. Through a large portion of this
revenue, the United Nations provided food, medicine, and services to 24
million people and helped the Iraqi government supply goods to 24 economic
sectors. In February 2002, the United Nations reported that the Oil for
Food program had considerable success in sectors such as agriculture,
food, health, and nutrition by arresting the decline in living conditions
and improving the nutritional status of the average Iraqi citizen.

Prior to the creation of OIOS, the United States and other member states
had expressed concern about the ability of the United Nations to conduct
internal oversight. In 1994, the General Assembly established OIOS to
conduct audits, evaluations, inspections, and investigations of U.N.
programs and funds. Its mandate reflects many characteristics of U.S.
inspector general offices in purpose, authority, and budget. Since its
inception, OIOS has submitted its audit reports to the head of the unit
being audited for action and only forwarded to the Secretary General those
reports in which program officials disagreed with audit recommendations.
It also provided certain reports to the General Assembly. However, in
December 2004, the General Assembly passed a resolution requiring OIOS to
publish the titles and summaries of all audit reports and provide member
states with access to these reports on request.

  OIOS History, Organization, and Resources

    Events Leading to the Creation of OIOS

Before the OIOS was created in July 1994, the United States and other U.N.
member states, the U.S. Congress, and the Government Accountability Office
(GAO) had expressed concern about the United Nations' management of its
resources and had criticized the inadequacies of its

2The Food and Agricultural Organization; International Telecommunications
Union; U.N. Development Program; U.N. Children's Fund; U.N. Educational,
Scientific, and Cultural Organization; U.N.-Habitat; U.N. Office for
Project Services; World Health Organization; and World Food Program.

internal oversight mechanisms. In response, the Secretary General
established the Office for Inspections and Investigations in August 1993
under the leadership of an Assistant Secretary General. However, member
states-primarily the United States-wanted a more autonomous oversight body
with greater authority.

In November 1993, the U.S. Permanent Representative to the United Nations
proposed the establishment of an "office of inspector general" to the
General Assembly. The office would be headed by an "inspector general"
who, although an integral part of the Secretariat, would carry out his/her
responsibilities independently of the Secretariat and all U.N. governing
bodies. According to the proposal, the office would support member states
and the Secretary General by providing independent advice based on an
examination of all activities carried out at all U.N. headquarters and
field locations financed by the regular budget, peacekeeping budgets, and
voluntary contributions. At the same time, the new office would have
external reporting responsibilities.

In April 1994, Congress enacted Public Law 103-236, which required certain
funds to be withheld from the United Nations until the President certified
that it had established an independent office of inspector general to
conduct and supervise objective audits, investigations, and inspections.
The legislation stated, among other things, that the inspector general
should have access to all records, documents, and offices related to U.N.
programs and operations. The legislation also called for the United
Nations to have procedures to (1) ensure compliance with the inspector
general office's recommendations and (2) protect the identity of, and
prevent reprisals against, any staff members making a complaint,
disclosing information, or cooperating in any investigation or inspection
by the inspector general's office.

After a series of negotiations among member states, including the United
States, a compromise was reached. The General Assembly, in July 1994,
approved a resolution creating OIOS within the U.N. Secretariat. OIOS'
mandate reflects many of the characteristics of U.S. inspector general
offices in purpose, authority, and budget. For example, OIOS staff have
access to all records, documents, or other material assets necessary to
fulfill their responsibilities.

OIOS' reporting mandate calls for it to submit reports to the Secretary
General and the General Assembly. Since its inception, OIOS has generally
submitted its reports to the head of the unit audited. If program
officials disagreed with the report's recommendations, the report was
submitted to

the Secretary General. However, beginning in 1997, OIOS began listing all
its reports in its annual reports to the General Assembly and briefing
representatives of member states interested in a particular report. It
also provided certain reports of interest to the General Assembly. Further
transparency over OIOS audit reports occurred in December 2004 when the
General Assembly approved a resolution calling for OIOS to include in its
annual and semi-annual reports the titles and brief summaries of all OIOS
reports issued during the reporting period. OIOS was also directed to
provide member states with access to original versions of OIOS reports

3

upon request.

    OIOS Organization and Staffing

As of June 2004, OIOS had 180 posts, including 124 professional staff and
56 general service staff. Staff work in four operational divisions:
Internal Audit Divisions I and II; the Monitoring, Evaluation, and
Consulting Division; and the Investigations Division. The 58 audit reports
released on January 9, 2005, reflect the work of Internal Audit Division
I, which contained a separate unit for Iraq-related work. For 2004, OIOS'
resources totaled $23.5 million.

OIOS generally conducts four types of activities: audits, evaluations,
inspections, and investigations. Audits determine if internal controls
provide reasonable assurance of the integrity of financial and operational
information and whether rules are followed and resources are safeguarded.
Audits also identify ways to improve the efficient use of resources and
the effectiveness of program management. OIOS' internal audit divisions
adhere to the Standards for the Professional Practice of Internal Auditing
in the United Nations.4 These standards regulate issues related to
independence, objectivity, proficiency, management, and the code of ethics
and rules of conduct for auditors.

Inspections address mandates, management issues, or areas of high risk,
make recommendations, and are generally submitted through the Secretary
General to the General Assembly. Evaluations assess the relevance,
efficiency, effectiveness, and impact of a program's outputs and

3"Review of the Implementation of General Assembly resolutions 48/218B and
54/244," A/59/649, para.1(c) (Dec. 22, 2004).

4As promulgated by the Institute of Internal Auditors and adopted by the
Representatives of Internal Audit Services of the United Nations
Organizations and Multilateral Financial Institution.

activities against its objectives. These reports are addressed to the
intergovernmental body-normally the Committee for Program and Coordination
or the General Assembly-that requested the evaluation.

Investigations staff follow up on reports of possible violations of rules
or regulations, mismanagement, misconduct, waste of resources, or abuses
of authority. OIOS also monitors program performance and prepares the
Program Performance Report of the Secretary General, which is submitted to
the General Assembly every 2 years.

The complexity and diversity of the U.N. Oil for Food program and
associated risks called for adequate oversight coverage. In 2000, OIOS
established the Iraq Program Audit Section within the Internal Audit
Division. The Independent Inquiry Committee report stated that the number
of auditors assigned to Oil for Food audits increased from 2 in 1996 to 6
in 2002 and 2003. OIOS' audit responsibilities extended to the following
entities involved in Iraq operations:

o  Office of the Iraq Program (OIP) in New York;

o  U.N. Office of the Humanitarian Coordinator in Iraq;

o  U.N. Compensation Commission (UNCC);

o  U.N. Monitoring, Verification, and Inspection Commission;

o  U.N. Human Settlement Program (U.N.-Habitat) Settlement Rehabilitation
Program in northern Iraq;5

o  U.N. Guards Contingent in Iraq; and

o  U.N. Department of Management.

5OIOS provided audit coverage for U.N.-Habitat; the other 8 U.N. agencies
implementing programs in northern Iraq were audited internally by their
respective departments.

  Audits Show Recurring Management Weaknesses

The OIOS audits revealed a number of deficiencies in the management of the
Oil for Food program and its assets and made numerous recommendations to
correct these deficiencies. The audits focused primarily on Oil for Food
activities in northern Iraq and at the U.N. Compensation Commission. OIOS
also conducted audits of the three U.N. contracts for inspecting
commodities coming into Iraq and for independent experts to monitor Iraq's
oil exports.6

We identified a total of 702 findings contained in the reports across
numerous programs and sectors. Weaknesses and irregularities were common
in planning and coordination, procurement, and asset and cash management.
Appendix I contains the summary data of our analysis and a description of
our scope and methodology. Our summary below focuses on key findings for
the areas that received the most audit coverage- activities in northern
Iraq and the U.N. Compensation Commission. We also highlight findings from
the audits of the inspections contracts.

    U.N. Oil for Food Program in Northern Iraq

The OIOS audits that reviewed U.N. activities in northern Iraq found
problems with planning and coordination, procurement, and asset and cash
management.

In 2004, OIOS reported that U.N.-Habitat had not adequately coordinated
with other U.N. agencies in providing essential services for its housing
projects. For example, U.N.-Habitat provided high-capacity generators but
had not contacted the U.N. Development Program-the entity responsible for
the power sector-to provide electric power connections. OIOS also found
that about 3,200 houses were unoccupied for extended periods due to a lack
of coordination with agencies providing complementary services.

An August 2000 report noted a lack of planning that resulted in the
questionable viability of some Oil for Food projects in northern Iraq. For
example, six diesel generators were procured in an area where diesel fuel
was not readily available. In addition, local authorities would not accept
a newly constructed health facility subject to flooding. A December 2000
report also noted that highways and a sports stadium were built in

6Of the 58 reports, 26 reported on activities related to the program
northern Iraq, 19 audited the UNCC, 6 addressed liquidation issues, 3
audited the contracts for inspecting oil exports and goods coming into
Iraq, and 2 reviewed the U.N. Treasury's management of funds. The
Independent Inquiry Committee also released 2 summary reports, one of
which had been drafted by OIOS but not issued.

violation of criteria established by the Security Council and the Iraqi
government.

In November 2002, OIOS reported that almost $38 million in procurement of
equipment for the U.N.-Habitat program was not based on a needs
assessment. As a result, 51 generators went unused from September 2000 to
March 2002, and 12 generators meant for project-related activities were
converted to office use. In addition, OIOS reported that 11 purchase
orders totaling almost $14 million showed no documentary evidence
supporting the requisitions.

In 2002, OIOS found that the U.N-Habitat program lacked a proper asset
inventory system and that no policies and procedures governing asset
management were evident. As a result, the value of assets was not readily
available. In one case, $1.6 million in excess construction material
remained after most projects were complete.

OIOS also reported that a lack of effective cash management policies meant
that project funds were misused or put at risk. In a March 2000 audit,
OIOS reported that the U.N. Development Program's country office used
$500,000 in project funds for office expenses without authorization or
proper documentation. A February 2002 audit found that the office in Erbil
put at risk $600,000 to $800,000 in cash due to a lack of cash management
policies.

U.N. Compensation Commission

The U.N. Compensation Commission (UNCC), a subsidiary unit of the Security
Council, was established in 1991 to process claims and provide
compensation for losses resulting from Iraq's invasion and occupation of
Kuwait. Compensation is payable from a special fund that initially
received 30 percent of the proceeds from Iraqi oil sales. The claims are
resolved by panels, each of which is made up of three commissioners who
are experts in law, accounting, loss adjustment, assessment of
environmental damage, and engineering, according to UNCC.

The UNCC received more than 2.6 million claims for death, injury, loss of
or damage to property, commercial claims, and claims for environmental
damage resulting from Iraq's invasion of Kuwait in 1991. As of December
2004, all but about 25,000 of these claims had been resolved, and almost
$19 billion had been paid in compensation, according to UNCC.

In a July 2002 risk assessment of UNCC, OIOS found that controls to
prevent employee fraud were marginal, operations required close

monitoring to prevent possible collusion, possibilities existed for
illegal activities, and payment processing controls were inadequate. The
report concluded that the overcompensation of claims and irregular or
fraudulent activities could lead to significant financial risks.

OIOS audits identified weaknesses in UNCC's management of claims
processing and payments resulting in recommended downward adjustments of
more than $500 million. For example, in a September 2002 audit, OIOS found
potential overpayments of $419 million in compensation awarded to Kuwait.
OIOS identified duplicate payments, calculation errors, insufficient
evidence to support losses, and inconsistent application of claims
methodology.

In a December 2004 audit, OIOS found that using the exchange rate against
the U.S. dollar on the date of the claimed loss, rather than the date of
payment as consistent with U.N. financial rules and regulations, had
resulted in substantial overpayments. OIOS estimated that the likely
overpayments were about $510 million.

Previously in 2002, UNCC had challenged OIOS' audit authority. In a legal
opinion on OIOS' authority requested by UNCC, the U.N. Office of Legal
Affairs noted that the audit authority extended to computing the amounts
of compensation but did not extend to reviewing those aspects of the
panels' work that constitute a legal process. However, OIOS disputed the
legal opinion, noting that its mandate was to review and appraise the use
of financial resources of the United Nations. OIOS believed that the
opinion would effectively restrict any meaningful audit of the claims
process.

As a result of the legal opinion, UNCC did not respond to many OIOS
observations and recommendations, considering them beyond the scope of an
audit. According to OIOS, UNCC accepted about $3.3 million of the more
than $500 million in recommended claims reductions. On the audit of $419
million in potential overpayments to Kuwait, OIOS noted that it received
the workpapers to conduct the audit 8 days after the award was made.

Contracts to Inspect Oil To help ensure that the proceeds of Iraq's oil
sales were used for Exports and Commodity humanitarian and administrative
purposes, the United Nations contracted Deliveries with companies to
monitor Iraq's oil exports and commodity imports.

OIOS audits of these contracts revealed procurement problems and poor

contract management and oversight by OIP.

The United Nations contracted with Saybolt Eastern Hemisphere B.V. to
oversee the export of oil and oil products from Iraq through approved
export points. At the time of the audit report in July 2002, the estimated
total value of the contract was $21.3 million, with an annual contract
value of $5.3 million. OIOS found that OIP had made no inspection visits
to Iraq and posted no contract management staff in Iraq. However, OIP had
certified that Saybolt's compliance with the contract was satisfactory and
approved extensions to the contract. In addition, OIOS estimated that the
United Nations paid $1 million more than was necessary because equipment
costs were already built into the inspectors' daily fee structure. OIOS
asserted that these costs should have been charged as a one-time
expenditure. OIOS recommended that OIP recover the $1 million paid for
equipment and that future contracts provide for equipment purchases as
one-time expenditures. OIP did not respond to the auditors' first
recommendation and did not agree with the second recommendation.

The first contract for inspecting imported commodities was with Lloyds'
Register Inspection Ltd.; the initial 6-month contract was for $4.5
million, and the total value of the contract increased to more than $25
million by July 1999. Lloyds' agents were to monitor, verify, inspect,
test, and authenticate humanitarian supplies imported into Iraq at three
entry points.

In July 1999, OIOS found deficiencies in OIP's oversight of Lloyds'
contract. OIP had certified Lloyd's invoices for payment without any
onsite verification or inspection reports. OIOS reported that Lloyds' used
suppliers' manifests to authenticate the weight of bulk cargo and did not
independently test the quality of medicines and vaccines supplied. In
responding to the audit's findings, OIP rejected the call for on-site
inspections and stated that any dissatisfaction with Lloyds' services
should come from the suppliers or their home countries.

OIP awarded a new contract to Cotecna Inspection S.A. Similar to Lloyd's,
Cotecna was to verify that the description, value, quantity, and quality
of supplies arriving in Iraq were in accordance with the criteria
established by the sanctions committee. In April 2003, OIOS cited concerns
about procurement issues and amendments and extensions to Cotecna's
original $4.9 million contract. Specifically, OIOS found that, 4 days
after the contract was signed, OIP increased Cotecna's contract by
$356,000. The amendment included additional costs for communication
equipment and operations that OIOS asserted were included in the original
contract. OIP agreed to amend future contracts to ensure that procurement
documents include all requirements, thus eliminating the need to amend
contracts.

  Various Factors Affected Audit Coverage and Effectiveness

OIOS' audits and summary reports revealed a number of deficiencies in the
management and internal controls of the Oil for Food program, particularly
in northern Iraq. The reports also identified problems in UNCC's claims
processing resulting in significant overpayments. However, OIOS did not
examine certain headquarters functions responsible for overseeing the
humanitarian commodity contracts for central and southern Iraq.
Limitations on OIOS' resources and reporting hampered its coverage of the
Oil for Food program and its effectiveness as an oversight tool.

OIOS did not examine certain headquarters functions-particularly OIP's
oversight of the contracts for central and southern Iraq that accounted
for 59 percent or almost $40 billion in Oil for Food proceeds. The Iraqi
government used these funds to purchase goods and equipment for central
and southern Iraq and food and medical supplies for the entire country. As
we reported in 2004, the Iraqi government's ability to negotiate contracts
directly with the suppliers of commodities was an important factor in
enabling Iraq to levy illegal commissions.7

OIP was responsible for examining contracts for price and value at its New
York headquarters. In addition, the U.N. sanctions committee reviewed
contracts primarily to remove dual-use items that Iraq could use in its
weapons programs. However, it remains unclear which U.N. entity reviewed
Iraq contracts for price reasonableness.

OIOS did not assess the humanitarian contracts or OIP's roles and
responsibilities and its relationship with the sanctions committee. OIOS
believed that these contracts were outside its purview because the
sanctions committee was responsible for their approval. OIP management
also steered OIOS toward program activities in Iraq rather than
headquarters functions where OIP reviewed the humanitarian contracts.

Even when OIOS requested funds to conduct an assessment of OIP operations,
the funds were denied. For example, in May 2002, OIP's executive director
did not approve a request to conduct a risk assessment of OIP's Program
Management Division, citing financial reasons. The Committee also noted
that the practice of allowing the heads of programs

7U.S. General Accounting Office, United Nations: Observations on the Oil
for Food Program and Areas for Further Investigation, GAO-04-953T
(Washington, D.C.: July 8, 2004).

the right to fund internal audit activities leads to excluding high-risk
areas from internal audit examination. The Committee therefore recommended
that the Internal Audit Division's budgets and staffing levels for all
activities be submitted directly to the General Assembly.

In addition, OIOS assigned only 2 to 6 auditors to cover the Oil for Food
program. The Committee found that this level of staffing was low compared
to OIOS' oversight of peacekeeping operations. In addition, the U.N. Board
of Auditors indicated that 12 auditors were needed for every $1 billion in
U.N. expenditures. The Committee concluded that the Oil for Food program
should therefore have had more than 160 auditors at its height in 2000.
However, the Committee found no instances in which OIOS communicated broad
concerns about insufficient staff levels to U.N. management.

OIOS also encountered problems in its efforts to widen the distribution of
its reporting beyond the head of the agency audited. In August 2000, OIOS
proposed to send its reports to the Security Council. However, the
Committee reported that the OIP director opposed this proposal, stating
that it would compromise the division of responsibility between internal
and external audit. In addition, the U.N. Deputy Secretary General denied
the request and OIOS subsequently abandoned any efforts to report directly
to the Security Council.

Conclusion The internal audits provide important information on the
management of the Oil for Food program, particularly in the north, and on
the management of the commission that compensates claims for war damages
with proceeds from Iraq's oil sales-two areas that have received little
public attention. The reports also broaden the findings of the Independent
Inquiry Committee's report, particularly with respect to the inadequacies
in the award of the oil and customs inspections contracts. However, many
unanswered questions remain about the management and failings of the Oil
for Food program, particularly the oversight roles of OIP and the Security
Council's sanctions committee.

Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions you or the other Subcommittee members may have.

Appendix I: Summary of OIOS Audit Findings and Recommendations

We reviewed the 58 reports released by the Independent Inquiry Committee
to determine the scope of the audits and the issues addressed in the
reports' findings and recommendations. We created a data base of
information from 50 reports to identify the program elements that the
audits reviewed, the findings of each audit, and the recommendations for
improvement.1 To identify audit scope, we identified the extent to which
the audits addressed Oil for Food headquarters operations, U.N.
Secretariat Treasury operations in New York, U.N. operations in the
northern Iraq, and the U.N. Compensation Commission for disbursing claims
for damage caused by the 1991 Persian Gulf War. To determine the range of
issues addressed by the audits, we identified the kinds of issues raised
by the findings and determined that the audits addressed the following
issues: (1) procurement and contract management and oversight; (2)
financial management, including financial controls, management of funds,
and procedures for payments; (3) asset management, including inventory,
and the management of fixed assets such as vehicles, buildings, and
supplies; (4) personnel and staffing; (5) project planning, coordination,
and oversight; (6) security; and (7) information technology. We
established a protocol to identify findings for data input, and we
identified specific recommendations in the audit reports. To ensure
consistency of data input, a data base manager reviewed all input, and all
data input was independently validated. Table 1 presents the summary of
overall findings and recommendations in OIOS reports. Table 2 presents
these findings by area of U.N. operation.

1We did not include in the data base information from the six audits that
addressed the liquidation and shutdown of the Oil for Food program in
2003. These reports focused on the termination rather than the operations
of the Oil for Food program. We also did not include information from the
two summary reports because they included discussions of findings
documented in previous audits. However, we reviewed these reports to help
identify overall areas of concern and lessons learned, and we incorporated
information and observations from the summary reports into our statement.

Table 1: Number of Findings and Recommendations in 50 U.N. OIOS Reports by
Finding Subject

                                     Finding subject Findings Recommendations 
                                    Asset management       34 
                                Financial management      226             212 
                              Information technology       26 
               Planning, coordination, and oversight       66 
                 Procurement/contract management and      219             212 
                                           oversight          
                              Personnel and staffing       79 
                                            Security       52 
                                               Total      702             667 

Source: GAO analysis of 50 OIOS reports on various Oil for Food program
and UNCC activities.

Table 2: Number of Findings and Recommendations in 50 U.N. OIOS Reports
for Selected Oil for Food Program and Related Activities

           Activities                Finding subject Findings Recommendations 
                   UN               Asset management                      2 2 
         headquarters           Financial management                      4 4 
                              Information technology                        0 
                      Planning, coordination, and                           9 
                      oversight                      

Procurement/contract management and 54 oversight

Personnel and staffing 2

Security 0

                                                         Subtotal  71      69 
            Northern Iraq                        Asset management  29      27 
                                             Financial management  93      93 
                                           Information technology   9       9 
                            Planning, coordination, and oversight  53      51 
                              Procurement/contract management and   153   150 
                                                        oversight       
                                           Personnel and staffing  41      39 
                                                         Security  52      52 
                                                         Subtotal   430   421 
                 Treasury                        Asset management   1       1 
                                             Financial management  27      27 
                                           Information technology   2       2 

              Activities Finding subject Findings Recommendations

Planning, coordination, and oversight 1 0

Procurement/contract management and 0 0 oversight

Personnel and staffing 1

Security 0

Subtotal 32

UNCC Asset management 2

Financial management 102

Information technology 15

Planning, coordination, and oversight 3

Procurement/contract management and 12
oversight

Personnel and staffing 35

Security 0

Subtotal 169

Source: GAO analysis of 50 OIOS reports on various Oil for Food program
and UNCC activities.

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