    U.S. Insular Areas: Economic, Fiscal, and Financial
    Accountability Challenges (12-DEC-06, GAO-07-119).

    The U.S. insular areas of American Samoa, the Commonwealth of the
    Northern Mariana Islands (CNMI), Guam, and the U.S. Virgin
    Islands (USVI), face long-standing economic, fiscal, and
    financial accountability challenges. GAO was requested to
    identify and report on the (1) economic challenges facing each
    government, including the effect of changing tax and trade laws
    on their economies; (2) fiscal condition of each government; and
    (3) financial accountability of each government, including
    compliance with the Single Audit Act, which applies to nonfederal
    entities that receive $500,000 or more a year in federal funding.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-119
        ACCNO:   A64126
      TITLE:     U.S. Insular Areas: Economic, Fiscal, and Financial
    Accountability Challenges
         DATE:   12/12/2006
      SUBJECT:   Accountability
    	     Auditing standards
    	     Economic analysis
    	     Economic development
    	     Federal funds
    	     Financial analysis
    	     Financial management systems
    	     Grant monitoring
    	     Internal controls
    	     Risk assessment
    	     Schedule slippages
    	     Strategic planning
    	     Tax law
    	     Trade agreements
    	     Policies and procedures
    	     Corrective action
    	     American Samoa
    	     Guam
    	     Northern Mariana Islands
    	     Virgin Islands

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    GAO-07-119

         * [1]Results in Brief
         * [2]Background
         * [3]Scope and Methodology
         * [4]Narrow Economic Base and Intrinsic and External Factors Limi

              * [5]American Samoa

                   * [6]Trade Law Changes
                   * [7]Tax Law Changes

              * [8]CNMI

                   * [9]Trade Law Changes
                   * [10]Other Events

              * [11]Guam

                   * [12]Factors Affecting Tourism
                   * [13]Military Decisions

              * [14]USVI

                   * [15]U.S. Tax Law Changes
                   * [16]Tourism Trends and Other Factors

              * [17]Programs to Promote Economic Development in the Insular Area

         * [18]Weakened Fiscal Condition in Three Insular Areas

              * [19]American Samoa
              * [20]CNMI
              * [21]Guam
              * [22]USVI

         * [23]Financial Accountability Remains Weak in the U.S. Insular Ar

              * [24]Single Audit Reports for Fiscal Years 2001-2004 Were Not Iss
              * [25]Audit Opinions on Financial Statements and Compliance Were D

                   * [26]Opinions on the Insular Areas' Financial Statements
                   * [27]Opinions on Insular Areas' Compliance with Requirements
                     for

              * [28]Number and Significance of Reported Internal Control Weaknes

                   * [29]Material Weaknesses and Reportable Conditions in
                     Internal Co
                   * [30]Material Weaknesses and Reportable Conditions in
                     Compliance
                   * [31]American Samoa
                   * [32]CNMI
                   * [33]Guam
                   * [34]USVI
                   * [35]High-Risk Designations and Receiverships
                   * [36]American Samoa
                   * [37]CNMI
                   * [38]Guam
                   * [39]USVI

              * [40]Efforts to Assist the Insular Areas in Improving Financial A

                   * [41]Interior's OIA and Federal IGs
                   * [42]Local Authorities
                   * [43]Interagency Coordination

              * [44]Insular Areas' Corrective Action Plans

                   * [45]American Samoa
                   * [46]CNMI
                   * [47]Guam
                   * [48]USVI

         * [49]Conclusions
         * [50]Recommendations for Executive Action
         * [51]Agency Comments and Our Evaluation
         * [52]American Samoa
         * [53]CNMI
         * [54]Guam
         * [55]USVI

              * [56]American Samoa
              * [57]CNMI
              * [58]Guam
              * [59]USVI

         * [60]GAO Contacts
         * [61]Staff Acknowledgments
         * [62]GAO's Mission
         * [63]Obtaining Copies of GAO Reports and Testimony

              * [64]Order by Mail or Phone

         * [65]To Report Fraud, Waste, and Abuse in Federal Programs
         * [66]Congressional Relations
         * [67]Public Affairs

    Report to the Committee on Energy and Natural Resources, U.S. Senate

    United States Government Accountability Office

    GAO

    December 2006

    U.S. INSULAR AREAS

    Economic, Fiscal, and Financial Accountability Challenges

    GAO-07-119

    Contents

    Letter 1

    Results in Brief 2
    Background 4
    Scope and Methodology 10
    Narrow Economic Base and Intrinsic and External Factors Limit Economic
    Progress in the U.S. Insular Areas 12
    Weakened Fiscal Condition in Three Insular Areas 23
    Financial Accountability Remains Weak in the U.S. Insular Areas 30
    Conclusions 57
    Recommendations for Executive Action 58
    Agency Comments and Our Evaluation 58
    Appendix I Matters Leading to Qualified Audit Opinions 62
    Appendix II Internal Control Weaknesses and Compliance with Requirements
    Applicable to Major Federal Programs 70
    Appendix III DOI Inspector General Reports on Four Insular Areas for
    Calendar Years 2000--2005 74
    Appendix IV Comments from the Department of the Interior 78
    Appendix V GAO Contacts and Staff Acknowledgments 83

    Tables

    Table 1: Demographic and Economic Characteristics of American Samoa, CNMI,
    Guam, and USVI, 2000 6
    Table 2: Political Characteristics of American Samoa, CNMI, Guam, and USVI
    7
    Table 3: Federal Grant Expenditures of the Insular Areas for Fiscal Year
    2004 9
    Table 4: Fiscal Condition by Year--American Samoa 24
    Table 5: Fiscal Condition by Year--CNMI 26
    Table 6: Fiscal Condition by Year--Guam 27
    Table 7: Fiscal Condition by Year--USVI 29
    Table 8: Single Audit Act Report Submissions, Fiscal Years 1997 through
    2004 31
    Table 9: Financial Statement Audit Opinions for Fiscal Years 1997 through
    2004 33
    Table 10: Opinions Rendered on Compliance with Requirements for Major
    Federal Programs for Fiscal Years 1997 through 2004 36
    Table 11: Reported Weaknesses in Internal Control over Financial Reporting
    Identified in the Auditors' Reports for Fiscal Year 2004 37
    Table 12: Material Weaknesses and Reportable Conditions Relating to
    Compliance with Requirements for Major Federal Programs for Fiscal Year
    2004 40
    Table 13: OIA Funding for Technical Assistance from the USDA Graduate
    School 51
    Table 14: American Samoa--Matters Leading to Qualified Audit Opinions on
    the Financial Statements for Fiscal Years 2001 through 2004 62
    Table 15: CNMI--Matters Leading to Qualified Audit Opinions on the
    Financial Statements for Fiscal Years 2001 through 2004 64
    Table 16: Guam--Matters Leading to the Qualified Audit Opinions on the
    Financial Statements for Fiscal Years 2001 through 2004 66
    Table 17: USVI--Matters Leading to the Qualified Audit Opinions on the
    Financial Statements for Fiscal Years 2001 through 2004 68
    Table 18: American Samoa--Reported Weaknesses Identified in the Auditors'
    Reports for Fiscal Years 2001 through 2004 70
    Table 19: CNMI--Reported Weaknesses Identified in the Auditors' Reports
    for Fiscal Years 2001 through 2004 71
    Table 20: Guam--Reported Weaknesses Identified in the Auditor's Reports
    for Fiscal Years 2001 through 2004 72
    Table 21: USVI--Reported Weaknesses Identified in the Auditors' Reports
    for Fiscal Years 2001 through 2004 73

    Figure

    Figure 1: Map Showing Location of Four U.S. Insular Areas 5

    Abbreviations

    ACC Annual Contributions Contract ACF Administration of Children and
    Families AJCA American Jobs Creation Act APIPA Association of Pacific
    Islands Public Auditors ATPA Andean Trade Preference Act CDC Centers for
    Disease Control and Prevention CHC Commonwealth Health Center CNMI
    Commonwealth of the Northern Mariana Islands DOD Department of Defense DOI
    Department of the Interior DOL Department of Labor DOT Department of
    Transportation EDC Economic Development Commission EMO Emergency
    Management Office FAC Federal Audit Clearinghouse FMCSA Federal Motor
    Carrier Safety Administration FMS Financial Management System FNS Food and
    Nutrition Service GAAP Generally Accepted Accounting Principles GASB
    Governmental Accounting Standards Board GDP Gross Domestic Product GHURA
    Guam Housing and Urban Renewal Authority HHS Department of Health and
    Human Services HUD Department of Housing and Urban Development IG
    Inspector General IGFOA Island Government Finance Officers Association
    IGIA Interagency Group on Insular Areas JAL Japan Airlines MCSAP Motor
    Carrier Safety Assistance Program MOU Memorandum of Understanding NAFTA
    North American Free Trade Agreement OIA Office of Insular Affairs OMB
    Office of Management and Budget P&S Division of Procurement and Supply
    PHAS Public Housing Assessment System PITI Pacific Islands Training
    Initiative SAMHSA Substance Abuse and Mental Health Services
    Administration SARS Severe Acute Respiratory Syndrome SEMAP Section Eight
    Management Assessment Program U.S. United States USDA Department of
    Agriculture USVI U.S. Virgin Islands VIHA Virgin Islands Housing Authority
    VIHFA Virgin Islands Housing Finance Authority VITI Virgin Islands
    Training Initiative WIC Women, Infants, and Children WTO World Trade
    Organization

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
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    separately.

    United States Government Accountability Office

    Washington, DC 20548

    December 12, 2006 December 12, 2006

    The Honorable Pete V. Domenici Chairman The Honorable Jeff Bingaman
    Ranking Member Committee on Energy and Natural Resources United States
    Senate The Honorable Pete V. Domenici Chairman The Honorable Jeff Bingaman
    Ranking Member Committee on Energy and Natural Resources United States
    Senate

    The U.S. insular areas^1 of American Samoa, Commonwealth of the Northern
    Mariana Islands (CNMI), Guam, and the United States Virgin Islands (USVI)
    face key economic, fiscal, and financial accountability challenges. The
    three Pacific insular areas--American Samoa, CNMI, and Guam--are between
    4,100 and 6,000 miles from the U.S. mainland. The fourth insular area, the
    USVI, is located in the Caribbean Sea about 1,000 miles southeast of
    Miami. All four governments face common challenges to strengthening their
    economy, fiscal condition, and financial accountability. As you requested,
    we are reporting on the (1) economic challenges facing each government,
    including the effect of changing tax and trade laws on their economies;
    (2) fiscal condition of each government; and (3) financial accountability,
    including compliance with the Single Audit Act, as amended (Single Audit
    Act).^212The U.S. insular areas of American Samoa, Commonwealth of the
    Northern Mariana Islands (CNMI), Guam, and the United States Virgin
    Islands (USVI) face key economic, fiscal, and financial accountability
    challenges. The three Pacific insular areas--American Samoa, CNMI, and
    Guam--are between 4,100 and 6,000 miles from the U.S. mainland. The fourth
    insular area, the USVI, is located in the Caribbean Sea about 1,000 miles
    southeast of Miami. All four governments face common challenges to
    strengthening their economy, fiscal condition, and financial
    accountability. As you requested, we are reporting on the (1) economic
    challenges facing each government, including the effect of changing tax
    and trade laws on their economies; (2) fiscal condition of each
    government; and (3) financial accountability, including compliance with
    the Single Audit Act, as amended (Single Audit Act).

    The economic and fiscal conditions of these insular areas are affected by
    destructive climatic events such as typhoons, cyclones, and hurricanes, as
    well as their economies' general dependence on a few key industries and
    their governments' reliance on federal grants to provide basic services to
    their citizens. In addition, although progress has been made in improving
    financial accountability, the insular area governments continue to have
    serious internal control and accountability problems that increase their
    risk of fraud, waste, abuse, and mismanagement. The economic and fiscal
    conditions of these insular areas are affected by destructive climatic
    events such as typhoons, cyclones, and hurricanes, as well as their
    economies' general dependence on a few key industries and their
    governments' reliance on federal grants to provide basic services to their
    citizens. In addition, although progress has been made in improving
    financial accountability, the insular area governments continue to have
    serious internal control and accountability problems that increase their
    risk of fraud, waste, abuse, and mismanagement.

    ^1These four insular areas are the subject of this report. Not included in
    the scope of this report are Puerto Rico and nine smaller insular areas of
    the United States, Navassa Island in the Caribbean Sea, and Baker Island,
    Howland Island, Kingman Reef, Jarvis Island, Johnston Atoll, Midway Atoll,
    Palmyra Atoll, and Wake Island in the Pacific Ocean.

    ^231 U.S.C. Chp. 75.

    Results in Brief

    The governments of the insular areas of American Samoa, CNMI, Guam, and
    USVI face serious economic, fiscal, and financial accountability
    challenges. The insular area governments' abilities to strengthen their
    economies have been constrained by their lack of diversification in
    industries, scarce natural resources, small domestic markets, limited
    infrastructure, and shortages of skilled labor. The few key industries in
    each area were established partially due to favorable U.S. federal
    government trade and tax policies and are vulnerable to changes in these
    policies that would restrict such benefits. These key industries are also
    affected by various other external factors, such as fluctuations in the
    economies of the nearby countries; events such as the effect of the
    September 11, 2001, terrorist attacks in the United States on tourism in
    these areas; and U.S. Department of Defense (DOD) decisions to expand or
    reduce the number of troops at military bases, specifically on Guam. To
    help diversify and strengthen their economies, the Department of the
    Interior's (DOI) Office of Insular Affairs (OIA)^3 has in the last 3 years
    sponsored conferences in the United States and business opportunities
    missions in the insular areas to attract American businesses to these
    insular areas. However, the effectiveness of these conferences and
    business opportunities missions is uncertain due to the lack of formal
    evaluation of these efforts.

    The governments of CNMI, Guam, and USVI experienced worsening fiscal
    conditions during fiscal years 2001 to 2004,^4 while in American Samoa the
    picture was mixed, with increases in government funds and assets during
    fiscal years 2001 through 2003 but a decrease in government funds by the
    end of fiscal year 2004. In CNMI and Guam, the fund balance^5 of total
    governmental funds declined as government spending rose. In CNMI, net
    assets^6 declined for fiscal years 2001-2004, and in Guam, net assets
    declined for fiscal years 2001-2003. The USVI government maintained
    positive balances of total government funds and reduced its negative
    balance of net assets by increased borrowing during the period. American
    Samoa's increase in government funds for fiscal years 2002 and 2003 was
    due to 2 years of strong surpluses of revenues over expenditures, stemming
    from an insurance settlement of claims from Hurricane Val, which hit the
    insular area in 1991. The audited financial statements used to analyze the
    fiscal condition of the four insular areas are subject to limitations
    cited by their auditors, which are discussed in the financial
    accountability section of this report.

    ^3OIA's mission is to promote sound financial management processes, boost
    economic development, and increase the federal government's responsiveness
    to the unique needs of the insular areas.

    ^4The most recent year for which audited financial statements were
    available for all four insular areas was fiscal year 2004.

    ^5Fund balance is the difference between assets and liabilities reported
    in the governmental fund. A fund is a separate self-balancing set of
    accounts used to account for resources that are segregated for specific
    purposes in accordance with special regulations, restrictions, or
    limitations.

    The governments of the four insular areas have long-standing financial
    accountability problems, including the late submission of the reports
    required by the Single Audit Act, the inability to achieve unqualified
    ("clean") audit opinions on their financial statements, and numerous
    material weaknesses in internal control over financial reporting and
    compliance with laws and regulations governing federal grant awards.
    Several federal agencies have designated the insular areas as high-risk
    grantees due to their failure to submit the single audit reports by the
    statutory deadline and serious ongoing audit findings. The findings in the
    single audit reports clearly show that the insular area governments lacked
    effective internal controls to provide reasonable assurance that
    transactions are properly recorded; assets are safeguarded from fraud,
    waste, abuse, and mismanagement; and federal funds are expended in
    accordance with grant requirements. As a result, there is limited
    accountability over federal grants to the insular areas. Increased
    coordination between OIA officials and federal grant-making agencies on
    issues of common concern related to the insular area governments--such as
    late single audit reports, high-risk designations, and deficiencies in
    financial management systems and practices--would increase the
    effectiveness of their efforts.

    Multiple federal offices oversee the insular areas' efforts to improve
    their financial accountability, including the OIA and DOI's Office of the
    Inspector General (IG), as well as inspectors general from other federal
    agencies that provide grants. OIA provides funding for technical
    assistance provided by the Graduate School of the Department of
    Agriculture (USDA) to the insular area governments as well as direct
    grants to these governments to obtain technical assistance. The insular
    areas also have local auditing authorities that provide oversight over the
    governments' activities. While multiple entities oversee the insular
    areas' efforts to improve their financial accountability, there appears to
    be limited coordination of financial assistance programs and grants
    management across the many federal grant-making agencies.

    ^6Net assets are the remaining amount after liabilities have been
    subtracted from assets. Revenues are changes in resources that increase
    net assets whereas expenses are changes in resources that reduce net
    assets. Financial statements describe how assets, liabilities, and net
    assets change over the course of a reporting period, such as a fiscal
    year.

    To help the insular area governments improve their financial
    accountability, we are making recommendations for increased coordination
    between OIA and other federal grant-making agencies on issues of common
    concern related to the insular areas, and the implementation by OIA of
    formal, periodic evaluations of the effectiveness of its efforts to
    improve the economy of the insular areas. We are also making
    recommendations for OIA to (1) monitor the insular areas' progress in
    improving financial accountability by setting a time frame for the
    governments to achieve clean audit opinions and (2) implement a framework
    for site visits to help ensure that monitoring objectives are achieved.

    We received written comments from DOI on a draft of this report. DOI
    agreed with our conclusions and recommendations and stated that the four
    recommendations are consistent with OIA's top priorities and ongoing
    activities. The focus of our draft report, according to DOI's comments,
    reflects OIA's top two priorities for the insular areas--private sector
    economic development and accountability. DOI officials stated that
    progress is not easily achieved for these two priorities. DOI also
    provided examples of its current activities that it believes are directed
    at making the improvements that were the focus of our recommendations. We
    have reprinted DOI's comments, with our responses, in appendix IV.

    Background

    The U.S. insular areas of American Samoa, CNMI, and Guam are located in
    the Pacific Ocean, between 4,100 and 6,000 miles from the U.S. mainland.
    USVI is located about 1,000 miles southeast of Miami in the Caribbean Sea,
    as shown in figure 1.

    Figure 1: Map Showing Location of Four U.S. Insular Areas

    According to U.S. Census Bureau data for 2000, the population of the U.S.
    insular areas ranges from about 57,000 in American Samoa, to about 155,000
    in Guam. Residents born in CNMI, Guam, and USVI are citizens of the United
    States. Residents born in American Samoa are nationals^7 of the United
    States, but may become naturalized U.S. citizens. The population of both
    American Samoa and CNMI, which control their own immigration, included
    significant percentages of people who were foreign nationals.

    According to U.S. Census Bureau data for 2000, median household incomes in
    the four insular areas ranged from less than half of the U.S. median
    household income of almost $41,000 for American Samoa to nearly equal for
    Guam, as shown in table 1. The percentage of individuals in poverty ranged
    from a low in Guam of 23 to a high in American Samoa of 61. Guam's 23
    percent is nearly twice the rate of the continental U.S. rate of 12
    percent.

    ^7A U.S. national is either a citizen or someone who "owes permanent
    allegiance to the United States." 8 U.S.C. S 1101 (a) (21), (22).
    Citizenship is derived either from the Fourteenth Amendment to the
    Constitution ("All persons born or naturalized in the United States, and
    subject to the jurisdiction thereof, are citizens of the United States")
    or from a specific statute that confers citizenship on the inhabitants of
    an area that, although not a state, is under the sovereignty of the United
    States. No such legislation conferring citizenship has been enacted for
    American Samoa.

    Table 1: Demographic and Economic Characteristics of American Samoa, CNMI,
    Guam, and USVI, 2000

                        American Samoa          CNMI     Guam    Virgin Islands^a
    Population               57,291        69,221  154,805             108,612
    Percentage who
    were non-U.S.
    citizens or
    nationals                  35.3          56.5     18.1                12.0
    Median household
    income                  $18,219       $22,898  $39,317             $24,704
    Per capita
    income                   $4,357        $9,151  $12,722             $13,139
    Percentage of
    individuals in
    poverty                    61.0          46.0     23.0                32.5
    Economic base     Manufacturing Manufacturing Military            Tourism,
                                 (tuna    (apparel),   bases,  manufacturing (oil
                           processing)       tourism  tourism          refining),
                                                              business/ financial
                                                                         services
    Employment
    (percentage)
    Government                 29.9          11.7     26.5                24.5
    Manufacturing              35.3          40.7      2.0                 5.9
    Tourism^b                   3.7          13.6     18.0                15.8

    Source: U.S. Census Bureau, "Population and Housing Profile: 2000" and GAO
    analysis.

    aThe USVI Bureau of Economic Research reports per capita personal income
    of $16,567 in 2000; the share of government in total employment
    (nonagricultural) is estimated at approximately 30 percent; and the share
    of tourism at around 20 percent. See U.S. Virgin Islands Annual Economic
    and Tourism Indicators available at
    [68]http://www.usviber.org/publications.html .

    b"Tourism" corresponds to the U.S. Census Bureau category "Arts,
    entertainment, recreation, accommodation and food services." This category
    is presented as a proxy for tourism's role in the insular area economies.

    While the United States exercises sovereignty over the insular areas, each
    administers its local government functions through popularly elected
    governors. As shown in table 2, American Samoa and CNMI are self-governed
    under locally adopted constitutions. Guam and USVI have not adopted local
    constitutions and remain under organic acts^8 approved by Congress.
    Because each of the insular areas is an unincorporated territory,^9 its
    residents--although they have many of the rights of citizens of the 50
    states--cannot vote in national elections and do not have voting
    representation in the final approval of legislation by the full Congress.

    Table 2: Political Characteristics of American Samoa, CNMI, Guam, and USVI

                Relationship to Constitutional  Citizenship Representation in
                United States   development     status      Congress
    American Unorganized     Has a           U.S.        Nonvoting delegate to
    Samoa    territory^a     constitution.   nationals   House of
                                                            Representatives^b
    CNMI     Commonwealth^c  Has a           U.S.        Resident
                                constitution.   citizens    representative^d
    Guam     Organized       Does not have a U.S.        Nonvoting delegate to
                territory^e     constitution.   citizens    House of
                                                            Representatives^b
    U.S.     Organized       Does not have a U.S.        Nonvoting delegate to
    Virgin   territory^e     constitution.   citizens    House of
    Islands                                              Representatives^b

    Source: Congressional Research Service, CRS Report for Congress: U.S.
    Insular Areas and Their Political Development (Washington, D.C.: Library
    of Congress, 1996).

    aAn unorganized territory is an unincorporated U.S. insular area for which
    the U.S. Congress has not enacted an organic act.

    bThe nonvoting delegates for American Samoa, Guam, and USVI may vote in
    committees and party caucuses but not on the House floor.

    cA commonwealth is an organized U.S. insular area that has established a
    more highly developed relationship--usually embodied in a written mutual
    agreement--with the federal government. The agreement between CNMI and the
    U.S. government was enacted by Pub. L. No. 94-241.

    dCNMI's elected "Resident Representative to the United States," unlike the
    delegates from American Samoa, Guam, and USVI, is not a member of
    Congress.

    eAn organized territory is a U.S. insular area for which Congress has
    enacted an organic act. Guam and USVI are organized under, respectively,
    48 USC SS1421 et. seq. and 48 USC SS 1541 et. seq.

    The insular areas receive substantial amounts in federal grants from a
    variety of federal agencies, as shown in table 3. Recipients that expend
    $500,000 or more a year^10 in federal awards under more than one federal
    program are required by the Single Audit Act to undergo a single audit.
    Single audits are audits of the recipient organization--the government in
    the case of the insular areas--that focus on the recipient's internal
    controls and its compliance with laws and regulations governing federal
    awards.^11 As nonfederal entities expending more than $500,000 a year in
    federal awards, the insular areas are required to submit single audit
    reports^12 each year to comply with the Single Audit Act. One of the
    objectives of the act is to promote sound financial management, including
    effective internal controls,^13 with respect to federal awards
    administered by nonfederal entities. Single audits also provide key
    information about the federal grantee's financial management and
    reporting.

    ^8Organic acts are federal laws that serve as the constitution or basic
    charter of the territory, thereby conferring the powers of government upon
    a territory. The organic acts of the insular areas usually include a bill
    of rights and provide for the establishment of the insular areas'
    tripartite government.

    ^9An unincorporated territory is a U.S. territory or insular area to which
    Congress has determined that only selected parts of the U.S. Constitution
    apply.

    ^10For fiscal years ending before December 31, 2003, the threshold that
    triggered the requirement for a single audit was expenditures of $300,000
    or more in federal awards a year.

    Recipient organizations are required by the act to submit their single
    audits reports to the Federal Audit Clearinghouse (FAC).^14 The single
    audit reporting package sent to the FAC includes (1) the auditor's
    reports; (2) the entity's audited financial statements and related notes;
    (3) the schedule of expenditures of federal awards, related notes, and the
    auditor's report on the schedule; (4) a schedule of findings and
    questioned costs; (5) reports on internal controls over financial
    reporting, and compliance with laws and regulations; and (6) a summary
    schedule of prior audit findings. The reporting package also includes
    corrective actions for findings identified for the current year as well as
    unresolved findings from prior fiscal years. Table 3 below shows the total
    amount of federal funds provided to each insular area and the largest five
    federal grant agencies for each insular area.

    ^11Office of Management and Budget (OMB) Circular No. A-133, Audits of
    States, Local Governments, and Non-Profit Organizations, establishes
    policies for federal agencies to use in implementing the Single Audit Act
    and provides an administrative foundation for consistent and uniform audit
    requirements for nonfederal entities administering federal awards.

    ^12The single audit replaces multiple grant audits with one audit of an
    entity as a whole.

    ^13Internal control is an integral component of an organization's
    management that provides reasonable assurance that the following
    objectives are being achieved--effectiveness and efficiency of operations,
    reliability of financial reporting, and compliance with applicable laws
    and regulations. Internal control also serves as the first line of defense
    in safeguarding assets and preventing and detecting errors and fraud.

    ^14The Single Audit Act Amendments of 1996 resulted in the establishment
    of an automated database of single audit information at the Federal Audit
    Clearinghouse (FAC), the organization designated by the Office of
    Management and Budget to receive single audit reports from federal award
    recipients.

    Table 3: Federal Grant Expenditures of the Insular Areas for Fiscal Year
    2004

                               Total
                             federal
                         expenditure
    U.S. insular area      amount
    and largest       (dollars in
    grantor agencies    millions)
    American Samoa         $140.2

          o Department
          of the
          Interior
          o Department
          of Education
          o Department
          of Agriculture
          o Department
          of
          Transportation
          o Department
          of Health and
          Human Services
    CNMI                    $62.3

          o Department
          of the                     Guam              $163.4
          Interior
          o Department                  o Department
          of Agriculture                of Agriculture
          o Department                  o Department          USVI            $158.4
          of Homeland                   of Health and
          Security                      Human Services           o Department
          o Department                  o Department             of Health
          of Health and                 of Homeland              and Human
          Human Services                Security                 Services
          o Department                  o Department             o Department
          of the                        of                       of Education
          Treasury                      Transportation           o Department
                                        o Department             of
                                        of the                   Agriculture
                                        Interior                 (nonmonetary
                                                                 programs)
                                                                 o Department
                                                                 of Labor
                                                                 o Department
                                                                 of
                                                                 Agriculture
                                                                 (monetary
                                                                 programs)

    Source: Schedule of Expenditures of Federal Awards, Single Audit Reports
    for fiscal year 2004 for each of the four insular areas.

    The Secretary of the Interior has administrative responsibility over the
    insular areas for all matters that do not fall within the program
    responsibility of another federal department or agency. DOI's OIA and IG
    carry out the Secretary's responsibilities. OIA was established to foster
    the efficiency and effectiveness of the insular area governments and to
    provide technical and financial assistance. In this role, OIA coordinates
    activities with other federal agencies in the development and
    implementation of programs and policies pertaining to the insular areas.
    DOI's IG has the authority to audit all insular area accounts pertaining
    to revenue and receipts and all expenditures; may report all findings of
    government failures to collect amounts owed; and may report improper and
    illegal expenses to the Secretary.^15 DOI's IG has issued many audit
    reports covering issues on individual insular areas. See appendix III for
    a list of reports on the insular areas issued by the DOI IG between
    calendar years 2000 and 2005.

    Scope and Methodology

    To identify the economic challenges the insular areas face, we reviewed
    relevant literature dealing with economic conditions in the insular areas,
    including the potential impact of recent changes in tax and trade laws. We
    also interviewed officials at OIA and specialists at the U.S. Census
    Bureau and analyzed various documents and studies from these agencies,
    including estimates of gross domestic product (GDP). We reviewed analyses
    prepared by the U.S. Department of Labor (DOL) of the tuna industry in
    American Samoa and gathered military personnel data from DOD. In addition,
    we obtained economic data from insular area officials, such as CNMI plant
    closings, employment statistics, and tourism indicators.

    We studied the fiscal condition of each of the insular area governments by
    identifying and analyzing the revenues, expenditures, government fund
    balances, and net assets data, as reported in their single audit reports
    issued for fiscal years 2001 through 2004. We used benchmark estimates of
    2002 GDP, prepared by the U.S. Census Bureau for each of the insular
    areas, to calculate revenues and expenditures as a percentage of GDP.
    After our work was completed, American Samoa, CNMI, and Guam issued their
    single audit reports for fiscal year 2005. We did not update our
    information on the insular areas' fiscal conditions because the USVI
    single audit report for fiscal year 2005 had not been issued.

    We reviewed the financial accountability of the insular area governments
    by (1) determining the timeliness of submission of the single audit
    reports, (2) analyzing the contents of the single audit reports issued for
    fiscal years 2001-2004,^16 (3) identifying those insular area governments
    designated as high-risk grantees through U.S. federal agency contacts, (4)
    obtaining information about OIA's efforts to help the insular areas
    improve financial management, and (5) identifying the relevant auditing
    organizations at the federal and local levels. We determined the
    timeliness of submission of the single audit reports using the FAC's "Form
    Date," which is the most recent date that a required SF-SAC data
    collection form^17 or a revised form was received by the FAC. We did note
    that the "Form Date" is updated if revised SF-FACs for that same fiscal
    year are subsequently filed. Our review of the contents of the single
    audit reports identified the auditors' opinions on the financial
    statements, matters cited by the auditors in their qualified opinions, the
    numbers and nature of material weaknesses and reportable conditions
    reported by the auditors, and the status of corrective actions. We
    interviewed OIA officials to identify their role in assisting the insular
    area governments in efforts to improve financial accountability, including
    training and technical assistance funded by OIA and provided by the USDA's
    Graduate School. To identify the federal and local auditing authorities
    with oversight over the four insular area governments, we reviewed the
    information on the authorities' Web sites and reports that had been
    recently issued.

    ^15Pub. L. No. 97-357, 96 Stat. 1705 (Oct. 19, 1982).

    ^16Reports for these fiscal years were generally available to be
    downloaded from the FAC.

    Because high-risk designations are made at the individual agency or
    program level, and this information is not consolidated at the federal
    government level, we contacted officials at the largest five federal grant
    agencies for each insular area to determine whether they had designated
    any of these four insular area governments or agencies of these
    governments as high-risk grantees, and whether special conditions had been
    placed on them. We used the schedules of expenditures of federal awards
    included in the fiscal year 2004 single audit reports to identify the
    largest five federal grant agencies for each insular area.

    We conducted our work from September 2005 through August 2006 in
    accordance with U.S. generally accepted government auditing standards.

    ^17The insular area governments submit a data collection form (SF-SAC)
    that includes information about the auditee, its federal programs, and the
    results of the audit.

    Narrow Economic Base and Intrinsic and External Factors Limit Economic Progress
    in the U.S. Insular Areas

    Several factors common to all four U.S. insular areas constrain their
    economic potential. These factors include lack of diversification, scarce
    natural resources, small domestic markets, limited infrastructure, and
    shortages of skilled labor. The labor markets of all four insular areas
    face competition with U.S. mainland wage levels because natives from the
    insular areas are free to migrate to the United States.^18 Therefore, the
    insular areas' private and public sectors face chronic difficulties
    retaining well-trained and highly educated workers. Two of the insular
    areas, American Samoa and CNMI, control their own immigration and have
    developed industries that depend on foreign labor paid a minimum wage
    below that of the United States. Although geographic isolation is
    frequently mentioned as a factor restraining economic progress in the
    insular areas, it does not appear to apply to CNMI, Guam, or USVI. CNMI
    and Guam are well positioned to integrate with the regional economies of
    East Asia; and USVI is surrounded by the Caribbean Basin countries and the
    United States. On the other hand, American Samoa is more geographically
    isolated, with Australia, more than 2,000 miles away, and New Zealand,
    1,600 miles away, as the closest large economies.

    Although the type of industries and extent of dependence varies, the local
    economies of the insular areas rely on one or two primary industries. The
    result of this dependence is economies that are vulnerable to changes in
    international trade agreements, tax laws, and other external events. For
    example, American Samoa's private sector is largely based on two tuna
    canneries. Although these tuna canneries have been an integral part of
    American Samoa's private sector for decades, they are likely to face
    increased foreign competition from existing and pending trade agreements
    established to advance free trade, which could have a serious negative
    effect on them. Similarly, CNMI's economy is highly dependent on the
    garment manufacturing industry, which is facing the challenge of remaining
    internationally competitive against low-wage nations given recent changes
    in trade agreements. Guam's economy depends on two main sectors--tourism
    and the provision of services to the U.S. military. Guam's tourism sector
    is currently stable, but has been affected by several external events,
    such as the terrorist attacks on the United States on September 11, 2001,
    and the Severe Acute Respiratory Syndrome (SARS) epidemic. The stability
    of the sector that provides services to the U.S. military is tied to
    Guam's status as a strategic U.S. military base. USVI has a more diverse
    economy than American Samoa, CNMI, or Guam, with several sources of
    revenue--primarily tourism, petroleum refining, and international business
    and financial services. However, USVI's tourist sector, like that of CNMI
    and Guam, has experienced volatility due to the terrorist attacks on the
    United States on September 11, 2001, and the impact of hurricanes. USVI is
    also facing challenges resulting from recent tax law changes that could
    cause a reduction in U.S. businesses operating in the insular area.

    ^18For example, U.S. Census Bureau data show that in 2000 there were over
    55,000 people in the United States who reported ancestry from Guam and
    CNMI, as compared to about 81,000 native born residents in Guam and 25,000
    in CNMI. There were also over 85,000 Samoans in the United States--from
    American Samoa, Western Samoa, and elsewhere--compared to 32,500 born and
    living in American Samoa.

    American Samoa

    American Samoa's economy depends primarily on the tuna canning
    industry.^19 The industry is the insular area's largest source of income
    and, with the government sector, one of its two largest sources of
    employment. According to DOL, the two tuna canneries in the insular area
    employ about one-third of the workforce, with another one-third employed
    by other businesses, many of which support the tuna industry. The
    government sector in American Samoa accounts for about 20 percent of the
    insular area's GDP and employs around one-third of its labor force.^20
    Noncitizens make up a large portion of the canneries' employees, about 80
    percent in 2000.^21 Several changes in federal trade and tax law may
    adversely affect the American Samoa tuna industry, in turn affecting the
    insular area's economy and government.

      Trade Law Changes

    Since the 1950s, tuna canned in American Samoa has been permitted to enter
    the United States duty free. However, changes scheduled to take effect in
    existing free trade agreements, as well as several pending agreements, are
    likely to increase competition for the tuna canneries in American Samoa.
    For example, according to a DOL study,^22 the elimination of tuna tariffs
    in 2008 for Mexico under the North American Free Trade Agreement (NAFTA)
    could, in concert with other factors, result in Mexico's becoming a major
    exporter of canned tuna to the United States. Likewise, the Andean Trade
    Preference Act (ATPA), as amended in 2002,^23 allows the U.S. President to
    exempt Bolivia, Colombia, Ecuador, and Peru from paying U.S. tariffs on
    shipments of pouched tuna, which is expected to gain market share in the
    United States.^24 According to DOL, Congress may choose to gradually
    eliminate tariffs on canned tuna for these countries in the future. In
    that case, Ecuador--ATPA's major tuna exporter--could become, like Mexico,
    a significant supplier of canned tuna to the United States.^25 In
    addition, the U.S.-Thailand Free Trade Agreement now being negotiated
    could further challenge the American Samoa tuna industry if it grants
    Thailand--the biggest exporter of tuna to the United States--the right to
    ship canned tuna to the United States duty free.

    ^19According to DOI officials, the tuna industry generated directly or
    indirectly about 85 percent of the territory's private sector activity in
    2004. A DOL study indicates that the two canneries, owned by Starkist and
    Chicken of the Sea, supply more than 60 percent of the canned tuna
    consumed in the United States. For details, see
    http://www.dol.gov/esa/whd/AS.

    ^20M. Rubin, Final Trip Report on Benchmark Estimates of 2002 Gross
    Domestic Product in American Samoa (Washington, D.C.: U.S. Census Bureau,
    2005).

    ^21Impact of Rapid Population Growth in American Samoa: A Call for Action,
    May 2000, by the Governor's Task Force on Population Growth, Pago Pago,
    American Samoa.

      Tax Law Changes

    The canneries in American Samoa have benefited from possession tax credits
    under section 936 of the Internal Revenue Code,^26 which is designed to
    encourage U.S. corporations to invest in the U.S. insular areas and create
    jobs by reducing the federal taxes on income earned by qualifying U.S.
    corporations.^27 However, the credit expired for taxable years beginning
    after December 31, 2005. Although the House passed legislation to extend
    the credit for American Samoa for 1 year,^28 the provision was removed in
    conference and was not included in the final version of the bill, which
    was signed by the President on May 17, 2006.^29 According to the DOL
    study,^30 the loss of the federal income tax credit will reduce the
    canneries' after-tax profitability and could prompt them to move to
    countries with a lower minimum wage.^31 The economic and social impact
    associated with a significant downturn in its major industry may be severe
    in American Samoa because the large foreign workforce has relatively
    strong roots in the insular area and, as a result, may remain in the
    insular area even if unemployed.^32

    22Department of Labor, American Samoa Economic Report 2005, Section VI,
    "Economic Factors for Consideration that May Favor Minimum Wage
    Increases," http: www.dol.gov/esa/whd/AS/sec6.htm.

    ^2319 U.S.C. SS 3201, 3202(b)(1), 3203(b)(3),(4).

    ^24According to DOL, pouched tuna, an alternative new technology in tuna
    packaging, is becoming popular among consumers. American Samoa Economic
    Report 2005, Section III, "The Tuna Processing Industry."

    ^25American Samoa Economic Report 2005, Section VI, "Economic Factors for
    Consideration That May Favor Minimum Wage Increases." The U.S. Census
    Bureau estimates that the majority of profits generated by the tuna
    canneries are repatriated. Income payments going abroad represent almost
    25 percent of GDP.

    ^2626 U.S.C. S 936. The possessions tax credits originated in the 1920s as
    a tax incentive for businesses in the U.S. possessions.

    ^27According to an Interior official, the canneries also benefit from
    several local tax exemptions and subsidies related to water and rent that,
    combined with duty-free access to the United States, provide other
    important advantages to the canneries. However, the value of these
    exemptions and subsidies is not publicly available.

    CNMI

    The CNMI economy depends on two industries, garment manufacturing and
    tourism, for its employment, production, and exports. These two industries
    rely heavily on a noncitizen workforce that represents more than three
    quarters of the labor pool.^33 The garment industry, for example, uses
    textiles and labor imported mostly from China. Garment manufacturing and
    tourism account for about 85 percent of CNMI's total economic activity and
    96 percent of its exports.^34 Recent estimates of CNMI's GDP suggest that,
    in 2002, the garment industry contributed to roughly 40 percent of CNMI's
    GDP and 47 percent of payroll.^35 The rapid growth of tourism between 1988
    and 1996, with visitor arrivals rising from over 245,000 to over 735,000,
    an average annual increase of 14.7 percent, fueled economic expansion.
    However, recent alterations in trade law have increased foreign
    competition for CNMI's garment industry and caused its exports to fall,
    while other external events have negatively impacted its tourism sector.

    ^28H.R. 4297, 109th Cong. S 111 (2005).

    ^29Pub. L. No. 109-222, 120 Stat. 345 (May 17, 2006). On December 7, 2006,
    the House introduced another measure extending possession tax credits for
    American Samoa's canneries for 2 years. H.R. 6408, 109th Cong. S 119
    (2006). This language of section 119 was subsequently rolled into H.R.
    6111, which ultimately passed the House and Senate, and was sent to the
    President for signature on December 9, 2006. As of the date of this
    report, no action had been taken by the President.

    ^30American Samoa Economic Report 2005, Section VI, "Economic Factors for
    Consideration That May Favor Minimum Wage Increases."

    ^31Although the minimum wage in American Samoa is below that of the
    contiguous United States ($3.26 per hour versus $5.15), the lower labor
    rates in countries such as the Philippines and Thailand--about $.67 and
    $.66, respectively--makes such locations attractive to corporations
    seeking lower labor costs.

    ^32As in CNMI, a large number of noncitizens live and work in American
    Samoa, representing over 35 percent of the population, according to the
    2000 U.S. Census. However, unlike the situation in CNMI, about half of
    American Samoa's foreigners have been living on the island for a
    relatively long time, with the other half entering after 1990. Western
    Samoans represent the majority of noncitizens. Also, many American Samoans
    emigrate to the United States.

    ^33The 2000 U.S. Census shows that noncitizens, predominantly Chinese and
    Filipinos, make up over half of CNMI's population. Almost all of these
    temporary foreign workers came to CNMI after 1990.

      Trade Law Changes

    Several recent developments in international trade law have affected
    CNMI's garment industry. Historically, while other garment exports faced
    quotas and duties in shipping to the U.S. market, CNMI's garment industry
    benefited from quota-free and duty-free access to U.S. markets for
    shipments of goods in which 50 percent of the value was added in CNMI.^36
    Recently, however, U.S. agreements with other textile-producing countries
    have liberalized the textile and apparel trade. For example, in January
    2005, in accordance with one of the 1994 World Trade Organization (WTO)
    Uruguay Round agreements, the United States eliminated quotas on textile
    and apparel imports from other textile-producing countries, leaving CNMI's
    apparel industry to operate under stiffer competition, especially from
    low-wage countries such as China.^37 With its trade advantage lessened,
    CNMI's garment industry has shrunk. According to a DOI official, more than
    3,800 garment jobs were lost between April 2004 and the end of July 2006,
    with 10 out of 27 garment factories closing.^38 U.S. Department of
    Commerce data show that the value of CNMI shipments of garments to the
    United States dropped by more than 16 percent between 2004 and 2005, from
    about $807 million to $677 million, and down from a peak of $1 billion in
    1999-2000. In the first 7 months of 2006, garment exports to the United
    States dropped by more than 27 percent compared to the same period in
    2005, with sales declining from $419 million to $305 million. Given that
    the taxes and fees from the garment industry account for about 35 to 40
    percent of the insular area's revenues, these developments will likely
    have significant financial and economic impacts, according to OIA
    officials.

    ^34An Economic Study for the Commonwealth of the Northern Mariana Islands,
    Business Development Center, Northern Marianas College, with funding
    provided by the Office of Insular Affairs, U.S. Department of the
    Interior, October 1999.

    ^35See M. Rubin and S. Sawaya, Final Trip Report on Benchmark Estimates of
    2002 Gross Domestic Product in the Commonwealth of the Northern Mariana
    Islands (Washington, D.C.: U.S. Census Bureau, 2005). Many businesses,
    including the garment factories, are owned and operated by foreigners. As
    in American Samoa, profits generated by foreign-owned businesses are often
    repatriated.

    ^36According to the U.S. Harmonized Tariff Schedule, certain items of
    which at least 50 percent of the value was added in a U.S. possession are
    eligible for duty-free shipment to the United States.

    ^37GAO, U.S.-China Trade: Textile Safeguard Procedures Should be Improved,
    [69]GAO-05-296 (Washington, D.C.: Apr. 4, 2005.)

      Other Events

    Various external events have affected CNMI's tourism industry in recent
    years. Due to CNMI's proximity to Asia, Asian economic trends have a
    direct impact on CNMI's economy. For example, tourism in CNMI experienced
    a sharp decline in the late 1990s with the Asian financial crisis.
    According to the Marianas Visitors Authority, total visitor arrivals
    dropped from a peak of 736,117 in 1996 to 501,788 in 1999. After a modest
    recovery in 2000, tourism faltered again with the September 11, 2001,
    terrorist attacks on the United States, bringing the number of visitors to
    444,284 in 2001. In 2003, according to CNMI officials, tourism
    slowed--with a double-digit decline in arrivals for several months--in
    reaction to the SARS epidemic, which originated in Asia, and the war in
    Iraq. At the same time, CNMI has experienced an influx of Chinese tourists
    in recent years, with the potential to reenergize the industry. The
    Chinese share of visitors increased significantly from 0.4 percent in 1997
    to 6.5 percent in 2005. CNMI officials are optimistic that the trend will
    continue in the future, especially on the island of Tinian, which already
    has gambling and hotel facilities owned and operated by Chinese interests
    from Hong Kong.

    Tourism in CNMI is also subject to changes in airline practices. For
    example, Japan Airlines (JAL) withdrew its direct flights between Tokyo
    and Saipan in October 2005, raising concerns because roughly 30 percent of
    all tourists and 40 percent of Japanese tourists arrive in CNMI on JAL
    flights, according to CNMI and DOI officials. The Marianas Visitors
    Authority's June 2006 data show that the downward trend in Japanese
    arrivals is not being offset by the growth in other tourism markets such
    as China and South Korea, with the total number of foreign visitors
    dropping from 43,115 in June 2005 to 38,510 a year later.^39 A mitigating
    factor is Northwest Airlines' new daily nonstop flights between Osaka and
    Saipan, which are expected to replace about 40 percent of the seats lost
    from JAL's action.^40

    38The burden of this job loss on the government may be mitigated to some
    extent by the fact that garment industry workers are almost exclusively
    foreigners on temporary guest visas. Also, data we obtained from the U.S.
    Census Bureau indicate that foreign workers send much of their earnings
    back to their countries of origin in the form of remittances; the
    remainder, which is spent on local goods and services, is relatively
    small, and as a result, has limited effect on local economic activity.
    Remittances were estimated at about $80 million for 2002, roughly 10
    percent of GDP, and at over $100 million in 2005.

    Guam

    Guam's economy is dominated by two sectors--tourism and government.
    Tourism provided about 65 percent of business activity in 2004, according
    to the Guam Economic Development and Commerce Authority Administrator. A
    2002 U.S. Census Bureau study indicates that the government sector of Guam
    represented more than 36 percent of the island's GDP.^41 The U.S. military
    accounted for more than 40 percent of total government expenditures and
    about 90 percent of U.S. federal expenditures in Guam.

    Although Guam's tourism sector is currently stable, it has been affected
    by several external events since the late 1990s. The government sector,
    which is projected to grow in the near future, has historically been
    sensitive to significant changes in the U.S. military presence.

      Factors Affecting Tourism

    Guam's tourism sector is vulnerable to external events. In 1997-1998, the
    Asian financial crisis and a severe typhoon slowed tourist arrivals.
    According to the Guam Visitors Bureau data, tourist arrivals dropped by
    almost 18 percent from 1.38 million in 1997 to 1.14 million the following
    year.^42 After a modest recovery in 1999-2000, the terrorist attacks on
    the United States in September 2001, two more typhoons in 2002, and the
    SARS epidemic in 2003 caused further setbacks in the tourism sector.^43
    However, in 2004, with the economic recovery in Japan and a resulting
    increase in Japanese tourists--which make up the bulk of foreign
    visitors--tourism on the island increased to about 100,000 arrivals per
    month, according to Guam's Visitors Bureau.

    ^39China Southern Airlines' August 2006 decision to suspend its flights
    from Guangzhou City in China to Saipan in September because of low load
    factor, high fuel costs, and low yield in fares is likely to slow the
    growth of Chinese visitors and hinder CNMI's efforts to attract more
    tourists from China.

    ^40Northwest Airlines has flights from Nagoya, Japan to Saipan as well,
    and is planning to add flights between Tokyo and Saipan.

    ^41M. Rubin and S. Sawaya, Final Trip Report on Benchmark Estimates of
    2002 Gross Domestic Product in Guam (Washington, D.C.: U.S. Census Bureau,
    2005).

    ^42 [70]http://www.visitguam.org/members/?pg=research .

      Military Decisions

    Although the number of active-duty military personnel in Guam is currently
    increasing, the island's economy is vulnerable to policy changes regarding
    the U.S. military presence. Even though military personnel in Guam
    remained relatively stable from 1978 to 1992, averaging around 8,400, it
    declined by about 60 percent between 1992 and 2002, according to DOD. A
    2003 economic report^44 states that this decline in the numbers of
    military personnel may have contributed to Guam's GDP shrinking by as much
    as 25 to 35 percent over the same period. Military spending, aimed
    primarily at repairing aging facilities and those damaged by typhoons,
    rose in 2004. In addition, DOD, in October 2005, announced its plans to
    transfer 7,000 Marines from Okinawa, Japan, to Guam over the next 6 years,
    a move that would more than triple the number of military personnel and
    raise the amount of DOD's spending in the insular area.

    USVI

    With several sources of revenue, primarily tourism, petroleum refining,
    and international business and financial services, USVI has a more
    diversified economy than American Samoa, CNMI, or Guam.^45 Tourism
    accounts for more than one half of USVI's income and, according to 2002
    data from the USVI Bureau of Economic Research, over 20 percent of USVI
    employment.^46 Exports of refined petroleum, reaching $4.8 billion in
    2003, made up almost 90 percent of USVI's total exports.^47 Companies
    selling international services benefit from a special tax incentive
    program established by the USVI government in 2001. They accounted for
    about 29 percent of all USVI corporate and individual income receipts in
    2003, but less than 2 percent of USVI employment.^48

    43The number of visitors declined from 1,286,807 in 2000 to 1,159,071 in
    2001; 1,058,704 in 2002; and 909,506 in 2003.

    ^44Guam Economic Report 2003, Bank of Hawaii and East-West Center,
    available at
    [71]http://www.eastwestcenter.org/stored/pdfs/OsmanGuamEconomicReport2003.pdf
    . The report indicates that total payroll employment decreased from around
    70,000 to 56,000 between 1992-2002, with most of the losses taking place
    in the private sector and national defense.

    ^45Rum distillation is another source of income for USVI. The watch
    industry, once relatively important for the USVI economy, has been
    declining over the past 10 years. Watch exports decreased from over
    1,000,000 before 1997 to about 320,000 in 2004, with shipments going down
    further in 2005, according to the USVI Bureau of Economic Research.

    ^46The USVI Bureau of Economic Research 2002 data report 8,910 total
    tourism-related jobs in the following four categories: hotels and other
    lodging places; gift shops; eating and drinking places; and transportation
    by air. Nonagricultural wage and salary employment in 2002 was 43,129.

    While it is diversified, USVI's economy faces several challenges. First,
    recent U.S. tax law changes may negatively affect businesses operating in
    the insular area. Second, the tourism sector, which experienced several
    setbacks in 2001 through 2004, may be experiencing increased volatility as
    a result of local tourism trends and other factors.

      U.S. Tax Law Changes

    As a result of tax changes that ensued from the American Jobs Creation Act
    of 2004 (AJCA),^49 a growing number of U.S. businesses are projected to
    suspend operations in USVI, thus reducing local government revenues and
    jobs. U.S. businesses operating in USVI calculate their income under a
    coordinated U.S. and USVI income tax policy, but pay their taxes
    exclusively to the USVI government, if certain requirements are met. These
    coordinated rules allow the USVI government to reduce the amount of taxes
    payable to the USVI government provided the businesses are bona fide USVI
    residents whose income is derived from sources within USVI or is
    effectively connected with the conduct of a trade or business in USVI. For
    example, qualifying businesses receive a 90 percent exemption from USVI
    income taxes and a 100 percent exemption from property and gross receipts
    taxes under this program operated by USVI's Economic Development
    Commission (EDC). Such provisions are designed to encourage economic
    development in the insular area. Effective January 2005, however, AJCA
    imposed stricter requirements on U.S. businesses for establishing
    residency and limited the types of income eligible for the program's tax
    exemptions, which will likely reduce the tax incentives for U.S.
    businesses operating in USVI.^50

    47The USVI Economic Review and Industry Outlook indicates that refined
    petroleum exports grew to $6.7 billion in 2004.

    ^48This may be due to the fact that to qualify for tax benefits,
    businesses need to employ only 10 USVI residents. Eligible businesses in
    the service category (category IIA or Designated Services Businesses
    (DSBs)) include business investment managers and advisors, research and
    development, business and management consultants, software developers,
    e-commerce, call centers, high technology, international public relations
    firms, international trading and distributions, and other businesses
    serving clients outside of USVI.

    ^49Pub. L. No. 108-357, 118 Stat. 1418 (Oct. 22, 2004).

      Tourism Trends and Other Factors

    Security concerns and natural disasters have affected USVI's tourism
    industry in the past 5 years. The total number of visitors to USVI
    declined after the terrorist attacks of September 11, 2001, on the United
    States, although in 2004 a record number of tourists--2.6 million--visited
    the islands, according to the USVI Bureau of Economic Research.
    Three-quarters of these visitors in 2004 were cruise passengers and
    one-quarter were overnight visitors. According to an OIA official, cruise
    ship visitors are increasingly affected by problems associated with crime,
    especially in St. Croix. Finally, the danger of hurricanes threatens
    USVI's tourist industry each year, imposing significant costs.^51

    Programs to Promote Economic Development in the Insular Areas

    In the last few years, DOI has organized a number of initiatives, such as
    conferences in the United States and business opportunity missions to the
    four insular areas, to attract American businesses to these insular
    areas.^52 The main goal of these efforts is to facilitate interaction and
    the exchange of information between U.S. firms and top government and
    business officials from the insular areas, and to spur new investment in a
    variety of industries. OIA recognizes that the natural economic partners
    of the Pacific insular areas are neighboring Asian and Pacific countries.
    However, OIA does not have a foreign affairs component that could actively
    promote economic relations between the insular areas and foreign countries
    in the region. Further, OIA believes it needs to promote partnership with
    U.S.-based firms before foreign ones.

    In 2003, a 1-day Secretary's Investment Development Conference in
    Washington, D.C. attracted approximately 500 participants, while the
    second 2-day Secretary's Conference on Business Opportunities in the
    Islands in 2004 drew over 1,200 participants to Los Angeles. The 2004
    conference had 248 attendees from the four insular areas. About half of
    the participants from USVI, Guam, and American Samoa came from government.
    More than 80 percent of CNMI's participants were from government. The
    largest number of participants from the U.S. mainland came from California
    and Hawaii with a large majority from the private sector, but 26 other
    states and the District of Columbia were also represented. Individuals
    from the People's Republic of China, the Philippines, and Australia took
    part as well.^53 In addition to the conferences, OIA organized three trade
    missions in the past year.^54 Between 11 and 14 U.S. companies, both small
    and large, participated in each of these missions.

    ^50The U.S. Congress passed AJCA partly in response to reported abuses of
    the EDC program as a tax shelter or evasion scheme. While the aim of the
    act was to eliminate loopholes that some businesses had exploited, USVI
    authorities are concerned that AJCA is also driving away legitimate
    companies, undermining their effort to attract U.S. firms providing
    international services.

    ^51DOI reports that the combined economic costs to USVI of Hurricanes Hugo
    in 1989 and Marilyn in 1995 ranged from $3 to $4 billion. FEMA and the
    U.S. Small Business Administration are reported to have provided grants
    and loans of more than $200 million.

    ^52DOI organized one trade mission to Guam, Palau, and CNMI in 2005; one
    to American Samoa and one to USVI in 2006.

    OIA notes that many mission participants from the mainland did return to
    the insular areas for follow-up visits. According to OIA, several projects
    and business deals resulted from contacts made at conferences and
    missions. For example, OIA indicates that a California-based company is
    developing a nurse-training facility in CNMI and an entrepreneur from
    southern California started a software company in American Samoa.
    Innovative projects such as setting up a production/mass mailing facility
    in CNMI aimed at the Japanese market are reported to be underway. Although
    the list does not include new large business enterprises with significant
    employment impact, it appears that OIA's initiatives have brought new
    firms and jobs to the insular areas, albeit on a modest scale. While some
    of these business activities may have taken place anyway, the OIA
    conferences and missions seem to have helped create linkages and joint
    projects between the business communities in the mainland and in the
    insular areas. Some of the new firms may just be displacing local ones or
    are interested in selling products and services rather than investing;
    however, others are likely to benefit the insular areas' economies by
    building local capacity and increasing competition and productivity if
    investments are realized. Many business deals are apparently still in the
    planning stages, with companies expressing interest, holding talks, and
    doing preliminary work.

    ^53The data come from preregistered participants. A third Conference on
    Business Opportunities in the Islands took place on November 13-14, 2006
    in Hawaii.

    ^54Other agencies, such as the Department of Commerce, the Overseas
    Private Investment Corporation, and the Small Business Administration
    provided managerial and organizational support for these missions.

    Whether and to what extent OIA's conferences and missions have contributed
    to stronger economies in the insular areas is difficult to discern because
    OIA does not carry out formal impact evaluations of its conferences and
    missions. It does obtain some feedback through informal surveys conducted
    with participants. But OIA would benefit from an in-depth analysis of how
    effective its initiatives are in attracting investment to the islands.
    Further, OIA could, by learning the extent to which U.S. firms are
    partnering with foreign investors already operating in the insular areas,
    discover further opportunities for partnership. For example, many
    Asian-owned businesses are currently contributing entrepreneurial skills
    and capital: many garment factories in CNMI and one of the two canneries
    in American Samoa are Asian-owned. Much of the insular areas' economic
    development may be dependent on relationships with Asian companies, yet
    OIA does not actively seek to reach firms outside of the U.S. mainland.

    Weakened Fiscal Condition in Three Insular Areas

    With the exception of American Samoa, the fiscal condition of the insular
    area governments steadily weakened from fiscal year 2001 through fiscal
    year 2004, the most recent year for which audited financial statements
    were available for all four insular areas. In CNMI and Guam, the fund
    balance of total governmental funds declined as government spending rose
    faster than revenues. CNMI's net assets at fiscal year-end declined for
    fiscal years 2001-2004. The USVI government maintained positive balances
    of total government funds and reduced its negative balance of net assets
    by increased borrowing during the period. American Samoa showed an
    increase in government funds until fiscal year 2004, due to 2 years of
    strong surpluses of revenues over expenditures, stemming from an insurance
    settlement of claims from Hurricane Val, which hit the insular area in
    1991. In fiscal year 2004, the increases in government funds reversed,
    although it is not yet known if this is a new trend. American Samoa's net
    assets increased during the entire 4 fiscal years.

    American Samoa

    For fiscal years 2001 through 2003, American Samoa's fund balance of total
    governmental funds increased steadily from a deficit of $23.1 million at
    the beginning of fiscal year 2001 to a positive $43.2 million at the end
    of fiscal year 2003 before dropping to $37.8 million in fiscal year 2004.
    From 2001 to 2003, total annual revenues rose by over $15 million, while
    annual spending fell by almost $12 million, contributing to significant
    surpluses for fiscal years 2002 and 2003. However, included in the
    revenues for 2002 and 2003 were proceeds attributable to an insurance
    settlement of claims from Hurricane Val. Without the receipt of these
    insurance proceeds, American Samoa's spending would have exceeded its
    revenues for those years. In fiscal year 2004, the increases in government
    funds apparently reversed, although it is not yet known if this is a new
    trend. For fiscal year 2004, revenue fell $9 million while spending
    increased $22 million.

    As shown in table 4, net assets almost tripled to $211 million during
    fiscal years 2001 through 2004. In fiscal year 2002, American Samoa's
    government revenues, including the U.S. federal government's
    contributions, were higher as a share of GDP, 38 percent, than the
    revenues of any of the other three insular areas. The U.S. federal
    government also contributed a higher proportion of these revenues-- 60
    percent in fiscal year 2004.

    Table 4: Fiscal Condition by Year--American Samoa

                                               American Samoa
    Data                  2001  2002            2003          2004
    Population                 57,529         57,716        57,844      57,902
    Own source revenue     92,595,156    116,164,151   100,406,184  74,916,915
    Federal
    contributions          89,621,049     95,366,789    97,530,861 113,960,653
    Total revenues       $182,216,205   $211,530,940  $197,937,045 188,877,568
    Total expenditures    182,410,239    180,541,130   170,748,872 192,421,535
    Revenues less
    expenditures
    [surplus/(deficit)]     (194,034)     30,989,810    27,188,173 (3,543,967)
    Total net other
    financing^a             4,953,273        734,881     2,196,503 (2,371,449)
    Special adjustment                               (1,381,333)^b   505,552^b
    Governmental funds
    beginning of year
    balanced             (23,141,403) (16,491,517)^c    15,233,174  43,236,519
    Governmental funds
    end of year balance  (18,382,164)     15,233,174    43,236,520  37,826,655
    Net assets, end of
    year^e                 74,580,312    141,209,273   200,835,235 211,696,176
    Change in net assets           --     66,628,961    59,625,962  10,860,941
    Calculations
    Federal
    contributions as a
    percent of revenues          49.2           45.1          49.3        60.3
    Government revenue
    per capita                 $3,167         $3,665        $3,422      $3,262
    Government
    expenditures per
    capita                      3,171          3,128         2,952      $3,323
    Government revenue
    as percent of GDP^f            --            .38            --          --
    Government
    expenditures as
    percent of GDP                 --            .32            --          --

    Source: GAO analysis of Single Audit Reports covering Fiscal Years 2001,
    2002, 2003, and 2004; The estimate of GDP, in the amount of $558,755,669,
    came from Final Trip Report on Benchmark Estimates of 2002 Gross Domestic
    Product in American Samoa, U.S. Census Bureau, Nov. 29, 2005.

    aOther financing includes loan proceeds and transfers in and out from
    other funds.

    bAdjustments made to reflect changes in reserve for inventory.

    cThe end of year fund balance for the prior fiscal year may not agree with
    the beginning of year fund balance for the succeeding fiscal year due to
    amounts being restated in subsequent financial statements. We could not
    readily identify explanations for these restatements because comparative
    information was not always available or disclosures were not made in
    subsequent financial statements.

    dGovernmental funds finance most of the basic services provided by the
    government.

    eNet assets are capital assets and other assets, such as cash and
    receivables, less liabilities.

    fGDP estimates are not available for 2001, 2003, and 2004.

    The financial data in table 4 were extracted from American Samoa's audited
    financial statements, which received qualified opinions from the outside
    auditors. Therefore, these figures are subject to the limitations cited by
    the auditors in their opinions and to the material internal control
    weaknesses identified. These limitations and other accountability issues
    are discussed in a separate section of this report. Also, restatements of
    the financial statements may occur, so the numbers shown in table 4 may be
    different in subsequently issued single audit reports.

    CNMI

    CNMI's total government funds balance declined from a positive $3.5
    million at the beginning of 2001 to a deficit of $49.2 million by the end
    of 2004 as total government spending rose more rapidly than revenues,
    which, as shown in table 5, caused a decline in the government's total net
    assets over the period. CNMI is distinct among the four insular areas in
    that it has been stable in terms of revenue per capita, although spending
    per capita has fluctuated. Like USVI, it receives a significantly lower
    proportion of its revenues from the federal government than do American
    Samoa or Guam.

    Table 5: Fiscal Condition by Year--CNMI

                                Commonwealth of the Northern Mariana Islands
    Data                   2001  2002         2003                        2004
    Population                 71,868       74,003       76,129         78,252
    Own source revenue    227,709,651  215,650,986  225,412,808    235,754,891
    Federal
    contributions          49,348,134   71,964,627   57,560,034     63,006,595
    Total revenues       $277,057,785 $287,615,613 $282,972,842   $298,761,486
    Total expenditures    258,177,431  314,985,333  303,986,379    352,488,419
    Revenues less
    expenditures
    [surplus/(deficit)]    18,880,354 (27,369,720) (21,013,537)   (53,726,933)
    Total net other
    financing^a             6,511,003    3,510,667            0     39,493,350
    Governmental funds
    beginning year
    balance^c               3,540,878 19,609,305^b  (4,249,748) (35,011,807)^b
    Governmental funds
    end of year balance    17,219,852  (4,249,748) (25,263,285)   (49,245,390)
    Net assets, end of
    year^d                 40,575,181 30,760,955^e   15,596,170   (18,656,437)
    Change in net assets           --  (9,814,226) (15,164,785)   (34,252,607)
    Calculations
    Federal
    contributions as a
    percent of revenues          17.8         25.0         20.3           21.1
    Government revenue
    per capita                 $3,855       $3,887       $3,717         $3,818
    Government
    expenditures per
    capita                      3,592        4,256        3,993          4.505
    Government revenue
    as percent of GDP^f            --          .30           --             --
    Government
    expenditures as
    percent of GDP                 --          .33           --             --

    Source: GAO analysis of Single Audit Reports covering Fiscal Years 2001,
    2002, 2003, and 2004; The estimate of GDP, in the amount of $946,854,877,
    came from Final Trip Report on Benchmark Estimates of 2002 Gross Domestic
    Product in the Commonwealth of the Northern Mariana Islands, U.S. Census
    Bureau, Feb. 11, 2005.

    aOther financing includes transfers in and out from other funds.

    bThe end of year fund balance for the prior fiscal year may not agree with
    the beginning of year fund balance for the succeeding fiscal year due to
    amounts being restated in subsequent financial statements. We could not
    readily identify explanations for these restatements because comparative
    information was not always available or disclosures were not made in
    subsequent financial statements.

    cGovernmental funds finance most of the basic services provided by the
    government.

    dNet assets are capital assets and other assets, such as cash and
    receivables, less liabilities.

    eAmount reported is the restated amount from 2003 Single Audit Report,
    corrected because of excluded and misstated amounts.

    fGDP estimates are not available for 2001, 2003, and 2004.

    The financial data in table 5 were taken from the audited financial
    statements, which received qualified opinions from the outside auditors.
    Therefore, these figures are subject to the limitations cited by the
    auditors in their opinions and to the material internal control weaknesses
    identified. These limitations and other accountability issues are
    discussed in a separate section of this report. Also, restatements of the
    financial statements may occur, so the numbers shown in table 5 may be
    different in subsequently issued single audit reports.

    Guam

    Guam's total government funds balance declined from a positive of $74.4
    million at the beginning of 2001 to a deficit of $198.7 million by the end
    of 2004 as total government spending rose more rapidly than revenues.
    Guam's reported net assets at fiscal year-end also fell from the amount
    shown in fiscal year 2001, as shown in table 6. (The substantial drop in
    net assets for fiscal year 2002 reflected a correction of previously
    misstated amounts.) During fiscal year 2004, net assets increased, after
    decreases in fiscal years 2002 and 2003. The federal government has
    contributed a smaller proportion of Guam's total revenues than it has for
    American Samoa, but larger proportions than for CNMI and USVI.

    Table 6: Fiscal Condition by Year--Guam

                                                        Guam
    Data                          2001        2002          2003                         2004
    Population                             158,330       161,057        163,593       166,090
    Own source revenue                 478,700,351   331,879,876    441,437,973   438,980,593
    Federal
    contributions                      138,623,945   156,342,400    216,567,613   219,041,228
    Total revenues                    $617,324,296  $488,222,276   $658,005,586  $658,021,821
    Total expenditures                 571,537,586   604,745,053    703,708,399   685,336,581
    Revenues less
    expenditures
    [surplus/(deficit)]                 45,786,710 (116,522,777)   (45,702,813)  (27,314,760)
    Total net other
    financing^a                       (42,753,202)  (12,792,574)    (1,736,294)   (3,066,133)
    Special adjustment  (50,000,000)^b 23,887,350b
    Governmental funds
    beginning of year
    balance^d                           74,424,223  78,493,488^c (94,284,682)^c (192,180,886)
    Governmental funds
    end of year balance                 77,457,731  (50,821,863)  (191,723,789) (198,674,429)
    Net assets, end of
    year^e                             386,002,829 137,005,745^f     39,397,026    88,491,287
    Change in net
    assets                                      -- (248,997,084)   (97,608,719)    49,094,261
    Calculations
    Federal
    contributions as a
    percent of revenues                       22.5          32.0           32.9          33.3
    Government revenue
    per capita                              $3,899        $3,031         $4,022        $3,962
    Government
    expenditures per
    capita                                   3,610         3,755          4,302         4,126
    Government revenue
    as percent of GDP^g                         --           .14             --            --
    Government
    expenditures as
    percent of GDP                              --           .18             --            --

    Source: GAO analysis of Single Audit Reports covering Fiscal Years 2001,
    2002, 2003, and 2004; The estimate of GDP, in the amount of
    $3,427,882,005, came from Final Trip Report on Benchmark Estimates of 2002
    Gross Domestic Product in Guam, U.S. Census Bureau, March 10, 2005.

    aOther financing includes transfers in and out from other funds.

    bSpecial adjustments made for fiscal year 2003 to reflect earned income
    tax credit refunds and overprovisioning for tax refunds and gain from tax
    drawback settlement in fiscal year 2004.

    cThe end of year fund balance for the prior fiscal year may not agree with
    the beginning of year fund balance for the succeeding fiscal year due to
    amounts being restated in subsequent financial statements. We could not
    readily identify explanations for these restatements because comparative
    information was not always available or disclosures were not made in
    subsequent financial statements.

    dGovernmental funds finance most of the basic services provided by the
    government.

    eNet assets are capital assets and other assets, such as cash and
    receivables, less liabilities.

    fAmount reported is the restated amount from 2003 Single Audit Report,
    corrected because of excluded and misstated amounts.

    gGDP estimates are not available for 2001, 2003, and 2004.

    The financial data in table 6 were taken from the audited financial
    statements, which received qualified opinions from the outside auditors.
    Therefore, these figures are subject to the limitations cited by the
    auditors in their opinions and to the material internal control weaknesses
    identified. These limitations and other accountability issues are
    discussed in a separate section of this report. Also, restatements of the
    financial statements may occur, so the numbers shown in table 6 may be
    different in subsequently issued single audit reports. For example, the
    figures shown for net assets as of the end of fiscal year 2004 and the
    change in net assets were restated in comparative information provided for
    fiscal year 2004 in Guam's fiscal year 2005 single audit report.^55

    USVI

    USVI's balance of total government funds remained positive throughout the
    period and grew from $215.5 million at the beginning of 2001 to $463.7
    million at the end of 2004. However, this growth was made possible only
    through increased government borrowing. Spending grew more rapidly than
    revenues during this period and exceeded revenues by $99.1 million in
    2004. Although USVI's negative net assets figures appear to have improved
    over the period, the trend is due to the recording of assets not
    previously recorded. At the end of fiscal year 2004, USVI still had a
    significant negative value for net government assets, as shown in table 7.

    ^55The amount for net assets as of the end of fiscal year 2004 was
    reported in the fiscal year 2004 single audit report as $47,193,817, and
    the change in net assets figure was $7,796,791.

    Table 7: Fiscal Condition by Year--USVI

                                                    USVI
    Data                   2001  2002          2003                        2004
    Population                108,749       108,810       108,814       108,775
    Own source revenue    628,466,000   608,535,000   653,573,000   738,388,000
    Federal
    contributions         146,137,000   151,322,000   163,859,000   160,671,000
    Total revenues       $774,603,000  $759,857,000  $817,432,000   899,059,000
    Total expenditures    673,254,000   865,733,000   870,807,000   998,122,000
    Revenues less
    expenditures
    [surplus/(deficit)]   101,349,000 (105,876,000)  (53,375,000)  (99,063,000)
    Total net other
    financing^a          (63,579,000)    22,267,000   120,982,000   271,245,000
    Governmental funds
    beginning year
    balance^c             215,547,000 307,532,000^b   223,923,000   291,530,000
    Governmental funds
    end of year balance   253,317,000   223,923,000   291,530,000   463,712,000
    Net assets, end of
    year^d              (394,436,000) (431,586,000) (300,083,000) (272,303,000)
    Change in net
    assets                         --  (37,150,000)   131,503,000    27,780,000
    Calculations
    Federal
    contributions as a
    percent of revenues          18.9          19.9          20.0          17.9
    Government revenue
    per capita                 $7,123        $6,983        $7,512        $8,265
    Government
    expenditures per
    capita                      6,191         7.956         8,003         9,176
    Government revenue
    as percent of GDP^e            --           .27            --            --
    Government
    expenditures as
    percent of GDP                 --           .31            --            --

    Source: GAO analysis of Single Audit Reports covering Fiscal Years 2001,
    2002, 2003, and 2004; The estimate of GDP, in the amount of
    $2,809,187,000, came from Final Trip Report on Benchmark Estimates of 2002
    Gross Domestic Product in the U.S. Virgin Islands, U.S. Census Bureau,
    June 1, 2005.

    aOther financing includes: bond anticipation note issued, bonds issued,
    premium on bonds issued, and transfers in and out from other funds.

    bThe end of year fund balance for the prior fiscal year may not agree with
    the beginning of year fund balance for the succeeding fiscal year due to
    amounts being restated in subsequent financial statements. We could not
    readily identify explanations for these restatements because comparative
    information was not always available or disclosures were not made in
    subsequent financial statements.

    cGovernmental funds finance most of the basic services provided by the
    government.

    dNet assets are capital assets and other assets, such as cash and
    receivables, less liabilities.

    eGDP estimates are not available for 2001, 2003, and 2004.

    The financial data in table 7 were taken from the audited financial
    statements, which received qualified opinions from the outside auditors.
    Therefore, these figures are subject to the limitations cited by the
    auditors in their opinions and to the material internal control weaknesses
    identified. These limitations and other accountability issues are
    discussed in a separate section of this report. Also, restatements of the
    financial statements may occur, so the numbers shown in table 7 may be
    different in subsequently issued single audit reports.

    Financial Accountability Remains Weak in the U.S. Insular Areas

    The governments of the four U.S. insular areas have had long-standing
    financial accountability problems, including the late issuance of the
    reports required by the Single Audit Act, inability to achieve unqualified
    ("clean") audit opinions on their financial statements, and numerous
    material weaknesses in internal controls over financial operations and
    compliance with laws and regulations governing federal grant awards. The
    findings in the single audit reports clearly point out that the insular
    area governments have lacked effective internal controls to provide
    reasonable assurance that transactions are properly recorded; assets are
    safeguarded from fraud, waste, abuse, and mismanagement; and federal funds
    are being expended in accordance with grant requirements. As a result,
    there has been limited accountability over the use of federal funds.
    Multiple agencies oversee the insular areas' efforts to improve their
    financial accountability and several federal agencies have designated the
    insular areas as high-risk under the Grants Management Common Rule.^56
    Under the rule, federal grant awarding agencies may designate a grantee as
    high-risk if the grantee has a history of unsatisfactory performance, is
    not financially stable, has an inadequate management system, has not
    conformed to the terms and conditions of previous awards, or is otherwise
    not properly managing federal funds. OIA and DOI's IG, other federal
    inspectors general, and local auditing authorities provide oversight and
    assistance to the insular area governments.

    ^56The Grants Management Common Rule was established in 1987 under
    presidential direction to adopt governmentwide terms and conditions for
    grants to state and local governments. Federal departments incorporate the
    Grants Management Common Rule in their own agency regulations. Among the
    many provisions in the regulations, the Grants Management Common Rule
    provides authority to designate a grantee as high-risk.

    Single Audit Reports for Fiscal Years 2001-2004 Were Not Issued on Time

    For fiscal years 1997 through 2004, the insular areas did not submit their
    single audit reports to the FAC by the due date, which is generally no
    later than 9 months after the fiscal year end.^57 As shown in table 8,
    American Samoa and Guam have improved on the timeliness of their audit
    reports since 1997. Although they were still unable to submit their single
    audit reports on time for fiscal year 2004, the last year of the review
    period for all four areas, American Samoa and Guam both submitted their
    fiscal year 2005 single audit reports to the FAC by the June 30, 2006, due
    date. The timeliness of CNMI^58 and USVI governments' single audit
    submissions did not improve for fiscal years 1997 through 2004. However,
    CNMI submitted its fiscal year 2005 single audit report to the FAC less
    than 1 month late. As of September 27, 2006, the USVI government had not
    submitted its fiscal year 2005 single audit report to the FAC.

    Table 8: Single Audit Act Report Submissions, Fiscal Years 1997 through
    2004

                                   Number of months late^a
    Fiscal year-end American Samoa^b CNMI^b Guam^b              USVI
    09/30/1997                        71     14  13 Not applicable^c
    09/30/1998                        51      2   2               13
    09/30/1999                        43      4   6               13
    09/30/2000                        31     16   8                8
    09/30/2001                        25     11   9                6
    09/30/2002                        23     13   1               12
    09/30/2003                        14     12   5               11
    09/30/2004                         8     22   1               12

    Source: Single Audit Act, Federal Audit Clearinghouse, and GAO analysis.

    aCalculated based on the submission form date. The numbers of months late
    were computed without regard to extensions granted to the insular area
    governments or the August 2002 memorandum of agreement between OIA and
    American Samoa.

    ^57Under the Single Audit Act, the single audit reporting package is
    generally required to be submitted to the FAC either 30 days after the
    receipt of the auditor's report or 9 months after the end of the period
    under audit. The audited entity, upon hiring the auditor, negotiates a due
    date for the audit within 9 months after the close of the entity's fiscal
    year. The entity must have time to read the report and prepare the
    corrective action plan that is required to be in the reporting package.

    ^58DOI granted CNMI an extension until February 28, 2006, for submitting
    its fiscal year 2004 single audit report.

    bThe Form Dates for submission of the fiscal year 2005 single audit
    reports were June 30, 2006, for American Samoa and Guam, and July 19,
    2006, for CNMI.

    cFor fiscal year 1997, USVI contracted for certain agreed-upon procedures
    in lieu of the required single audit.

    Single audits are a key control for the oversight and monitoring of the
    insular area governments' use of federal awards. The late submission of
    single audit reports means that federal government agencies have
    information on the insular area governments' accountability over federal
    funds that is not up to date and whose usefulness is therefore limited.

    Audit Opinions on Financial Statements and Compliance Were Disclaimed or
    Qualified

    Auditors are required by OMB Circular No. A-133 to provide opinions (or
    disclaimers of opinion, as appropriate) as to whether the (1) financial
    statements are presented fairly in all material respects in conformity
    with generally accepted accounting principles (GAAP)^59 and (2) auditee
    complied with laws, regulations, and the provisions of contracts or grant
    agreements which could have a direct and material effect on each major
    federal program.

    When reporting on the fairness of the presentation of financial
    statements, auditors can issue an unqualified opinion, a qualified
    opinion, an adverse opinion, or a disclaimer of opinion. Auditors express
    an unqualified ("clean") opinion on financial statements when they have
    determined, based on sufficient review work, that the financial statements
    are presented fairly in all material respects, in accordance with GAAP.^60
    Auditors render a qualified opinion when they identify one or more
    specific matters that impact the fair presentation of the financial
    statements. The effect of a specific matter on the auditors' qualified
    opinion can be significant enough to reduce the usefulness of the
    financial statements. Adverse opinions are expressed on financial
    statements when the auditors have sufficiently definitive data to conclude
    that the financial statements are not fairly presented in conformity with
    GAAP. A disclaimer of opinion states that the auditor does not express an
    opinion on the financial statements. Auditors may decline to express an
    opinion due to scope or data limitations when they are unable to conclude
    about the fairness of the financial statements in conformity with GAAP.

    ^59Generally accepted accounting principles are the conventions, rules,
    and procedures that provide the norm for fair presentation of financial
    statements.

    ^60Accounting information is material when an omission or misstatement of
    accounting information would, in the light of surrounding circumstances,
    make it probable that the judgment of a reasonable person, relying on the
    information, would have changed or been influenced by the omission or
    misstatement.

    In accordance with OMB Circular No. A-133, auditors are required to
    determine and express an opinion as to whether the auditee has complied
    with laws, regulations, and the provisions of contracts or grant
    agreements that may have a direct and material effect on each of its major
    federal programs. Auditors are to identify the applicable compliance
    requirements to be tested and reported on in a single audit. OMB's
    Compliance Supplement lists and describes the 14 types of compliance
    requirements and related audit objectives and suggested audit procedures
    that auditors should consider in single audits conducted in accordance
    with OMB Circular No. A-133.^61

      Opinions on the Insular Areas' Financial Statements

    The four insular area governments have been unable to achieve unqualified
    ("clean") audit opinions on their financial statements, receiving either
    disclaimers or qualified opinions on the financial statements issued for
    fiscal years 1997 through 2004 as shown in table 9.

    Table 9: Financial Statement Audit Opinions for Fiscal Years 1997 through
    2004

                                          Type of opinion
    Fiscal year American Samoa CNMI Guam      USVI
    1997        Disclaimer          Qualified Qualified Not applicable^a
    1998        Disclaimer          Qualified Qualified Qualified
    1999        Disclaimer          Qualified Qualified Qualified
    2000        Disclaimer          Qualified Qualified Qualified
    2001        Qualified           Qualified Qualified Qualified
    2002        Qualified           Qualified Qualified Qualified
    2003        Qualified           Qualified Qualified Qualified^b Disclaimer
    2004        Qualified           Qualified Qualified Qualified^b Disclaimer

    Source: SF-FAC forms and single audit reports for the insular areas from
    the FAC database.

    Note: American Samoa, CNMI, and Guam have submitted their fiscal year 2005
    single audit reports and all three received qualified opinions on their
    financial statements.

    ^61The 14 types 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, suspension and debarment; (10) program income;
    (11) real property acquisition and relocation assistance; (12) reporting,
    (13) subrecipient monitoring; and (14) special tests and provisions.

    aFor fiscal year 1997, USVI contracted certain agreed-upon procedures in
    lieu of the required single audit.

    bAuditors are permitted to express multiple opinions in a single audit;
    opinions are rendered based on opinion units. Generally, the opinion units
    in a government's basic financial statements include the governmental
    activities, business-type activities, aggregate discretely presented
    component units, and the major governmental and enterprise funds. For
    fiscal year 2003, the USVI government received unqualified opinions on its
    Public Financing Authority debt service fund and West Indian Company
    enterprise fund; qualified opinions on its governmental activities,
    discretely presented component units, general fund, unemployment insurance
    enterprise fund, and aggregate remaining fund information; and a
    disclaimer on its business-type activities. The opinions rendered on
    USVI's fiscal year 2004 financial statements were the same as in fiscal
    year 2003 with the addition of an unqualified opinion on the Public
    Financing Authority capital projects fund.

    American Samoa has made progress in reducing the number of matters that
    caused the auditors to render qualified opinions on the financial
    statements, but, for fiscal year 2004, the auditors could not obtain
    sufficient information about the following items in the American Samoan
    primary government:^62 (1) the amount of funds owed to or from the other
    funds--pooled cash;^63 (2) the physical inventory records; and (3) the
    accuracy of the beginning fund balances. The auditors also could not
    obtain the information needed to attest to the fairness of the information
    presented for the discretely presented component units.^64 Specifically,
    the auditors could not obtain the information needed concerning (1) the
    cost of property, plant, and equipment in accordance with U.S. generally
    accepted accounting principles and the operating revenues of the American
    Samoa Telecommunication Authority and (2) the financial position and
    activity of the American Samoa Medical Center Authority - Lyndon B.
    Johnson Tropical Medical Center.

    CNMI has also made progress in addressing the matters that resulted in the
    qualified opinions on its financial statements for fiscal years 2001
    through 2003. However, the auditors identified the following issues in
    fiscal year 2004 as matters leading to the qualified audit opinion: (1)
    inadequacies in the accounting records regarding taxes receivable and
    receivables from agencies, advances, accounts payable, tax rebates
    payable, other liabilities and accruals, amounts owed to component units,
    and the reserve for continuing appropriations and (2) inadequacies in
    accounting records and internal controls regarding the capital assets of
    the Northern Marianas College, and in accounting records and internal
    controls in inventory, federal agencies receivables, utility plant,
    accounts payable, and obligations under capital lease of the Commonwealth
    Utilities Corporation.

    ^62The primary government is the state or local government. Primary
    governments have separately elected governing bodies and are legally
    separate and fiscally independent of other state and local governments.

    ^63All cash not legally required to be in separate accounts is pooled to
    provide greater internal control over cash, and to maximize the amount
    available for investment, thereby increasing investment revenues.

    ^64A discretely presented component unit is an organization that is not
    part of the primary government but for which the nature and significance
    of their relationship with a primary government are such that excluding
    the organization would cause the reporting entity's statements to be
    misleading or incomplete.

    Guam has made progress in reducing the number of matters associated with
    the auditors' qualified opinions rendered on the government's financial
    statements for fiscal years 2001 through 2004. The auditors cited the
    following matters associated with its qualified opinion for fiscal year
    2004: (1) inability to access tax-related balances, (2) lack of audited
    financial statements for Guam Memorial Hospital Authority, and (3) lack of
    audited financial statements for the Guam Visitors Bureau.

    Although USVI has made progress in addressing some of the matters that
    were previously cited as leading to the auditors' qualified opinions, the
    auditors have identified new matters for fiscal year 2004. The auditor's
    qualified opinion on the general fund, governmental activities, and
    discretely presented component units was due to the following: (1) lack of
    accounting records for corporate income tax receivables for tax year 2002
    in the general fund and governmental activities, (2) failure to record a
    provision for landfill closure and postclosure costs in governmental
    activities, and (3) inability to determine whether capital assets and land
    held for sale by the Virgin Islands Housing Authority (VIHA) and the
    Virgin Islands Housing Finance Authority (VIHFA) were fairly stated. The
    auditors issued a disclaimer on the USVI government's business-type
    activities because (1) the financial statements as of September 30, 2003,
    did not include a receivable for unemployment insurance contributions due
    to inadequate records;^65 and (2) liability for Workers' Compensation
    claims was not included.

      Opinions on Insular Areas' Compliance with Requirements for Major Federal
      Programs

    Auditors for the four insular areas rendered qualified opinions,
    disclaimers, or adverse opinions on the insular area governments'
    compliance with the requirements for each major federal award program.
    When auditors identify instances of noncompliance, they are required to
    report whether the noncompliance could have a direct and material effect
    on a major federal program.^66 The audit opinions rendered on the insular
    area governments' compliance with the requirements for major federal
    programs for the fiscal years under review are shown in table 10.

    ^65The receivable for unemployment insurance contributions as of September
    30, 2003, is needed because it affects the determination of revenue and
    changes in net assets for the year ended September 30, 2004.

    Table 10: Opinions Rendered on Compliance with Requirements for Major
    Federal Programs for Fiscal Years 1997 through 2004

                                          Type of opinion
    Fiscal year American Samoa CNMI Guam      USVI
    1997        Disclaimer          Qualified Qualified Not applicable^a
    1998        Disclaimer          Qualified Qualified Not provided
    1999        Disclaimer          Qualified Qualified Qualified
    2000        Disclaimer          Qualified Qualified Unqualified
    2001        Disclaimer          Qualified Qualified Qualified
    2002        Disclaimer          Qualified Qualified Qualified Adverse^b
    2003        Disclaimer          Qualified Qualified Qualified Adverse
    2004        Disclaimer          Qualified Qualified Unqualified Qualified
                                                           Adverse

    Source: SF-FACs and single audit reports from the Federal Audit
    Clearinghouse database.

    aFor fiscal year 1997, USVI contracted for certain agreed-upon procedures
    to be done in lieu of the required single audit.

    bFor fiscal years 2002, 2003, and 2004, auditors for the USVI government
    issued adverse opinions on compliance with requirements for some
    programs,while rendering qualified opinions for the reports as a whole. An
    adverse opinion, in this context, means that the USVI government did not
    comply in all material respects with the compliance requirements described
    in OMB Circular No. A-133.

    ^66OMB Circular No. A-133 requires auditors to report on compliance that
    includes an opinion (or disclaimer of opinion) as to whether the entity
    being audited complied with laws, regulations, and provisions of contracts
    or grant agreements which could have a direct and material effect on the
    federal program.

    Number and Significance of Reported Internal Control Weaknesses Indicate
    Inadequate Internal Control over Financial Reporting and Inadequate Compliance
    with Requirements for Major Federal Programs

    The large number and the significance of reported internal control
    weaknesses raise serious questions about the integrity and reliability of
    the insular area governments' financial statements and their compliance
    with requirements of major federal programs. The auditors, in their
    reports on internal control over financial reporting and on compliance
    with federal requirements for major federal programs, disclosed many
    internal control weaknesses.

      Material Weaknesses and Reportable Conditions in Internal Control over
      Financial Reporting

    The insular area governments' 29 reported internal control material
    weaknesses and reportable conditions for fiscal year 2004 indicate a lack
    of sound internal control over financial reporting needed to provide
    adequate assurance that transactions are properly recorded, assets are
    properly safeguarded, and controls are adequate to prevent or detect
    fraud, waste, abuse, and mismanagement. Reportable conditions over
    financial reporting are matters that come to an auditors' attention
    related to significant deficiencies in the design or operation of internal
    controls that could adversely affect the entity's ability to produce
    financial statements that fairly represent the entity's financial
    condition. Material weaknesses in financial reporting are reportable
    conditions in which the design or operation of internal controls does not
    reduce to a relatively low level the risk that misstatements caused by
    error or fraud--material in relation to the financial statements being
    audited--may occur and not be detected in a timely period by employees in
    the normal course of performing their duties. Table 11 shows the number of
    material weaknesses and reportable conditions for each of the four insular
    areas, for fiscal year 2004.

    Table 11: Reported Weaknesses in Internal Control over Financial Reporting
    Identified in the Auditors' Reports for Fiscal Year 2004

    Internal control over financial
    reporting                              American Samoa CNMI Guam USVI Total
    Material weaknesses                                 6    8    4    3    21
    Reportable conditions                               0    5    3    0     8
    Total reported weaknesses                           6   13    7    3    29

    Source: Single audit reports for the four insular areas for fiscal year
    2004.

    The reported internal control weaknesses revealed serious deficiencies in
    internal controls over financial reporting. For example, auditors for the
    American Samoa government reported for fiscal years 2001 through 2004 that
    accountants and clerks doing the general accounting were not adequately
    trained and supervised. The auditors also reported that account
    reconciliations, journal entries, and other basic transactions were not
    adequately performed and summarized, a material weakness that casts doubt
    on the integrity and reliability of the financial information presented in
    the single audit report. Another internal control weakness reported by the
    auditors was that the government records had not been maintained in an
    organized manner due to a lack of formal procedures for the maintenance
    and storage of records. Due to this material internal control weakness,
    documentation may be misplaced, lost, or destroyed without being detected.

    One of the internal control weaknesses that the auditors reported for
    CNMI's government for fiscal year 2004 involved liabilities recorded in
    the General Fund. Due to the lack of detailed subsidiary ledgers, the
    auditors could not determine the propriety of these account balances, and
    whether the negative balances in the accounts, as in prior years, also
    included prepaid items. The recording of prepaid items as expenditures
    will cause expenditures to be overstated and the related liabilities to be
    understated. One of the control activities^67 mentioned in GAO's Standards
    for Internal Control in the Federal Government^68 is accurate and timely
    recording of transactions and events. This control activity is applicable
    to the entire process or life cycle of a transaction or event from the
    initiation and authorization of a transaction through its final
    classification in summary records. CNMI's auditors also reported as an
    internal control weakness, in at least two of its single audit reports, a
    Commonwealth Health Center (CHC) receivable balance that represented
    accounts outstanding in excess of 120 days due to inadequate billing and
    collection procedures. According to the auditors, the effect of this
    weakness was a possible misstatement of CHC's receivable balances,
    partially mitigated by a corresponding uncollectible account balance of
    the same amount. The auditors recommended that the uncollectible accounts
    be written off, and that the CHC implement procedures for processing all
    billings on a timely basis and for following up on aged accounts.

    ^67Internal control activities help ensure that management's directives
    are carried out and should be effective and efficient in accomplishing
    control objectives.

    ^68GAO, Standards for Internal Control in the Federal Government,
    [72]GAO/AIMD-00-21 .3.1 (Washington, D.C.: November 1999).

    In Guam, the lack of required physical inventories of government equipment
    and the lack of uniform maintenance procedures to keep equipment in good
    condition were cited as material weaknesses by auditors for fiscal years
    2003 and 2004. The auditors also stated that the government of Guam did
    not perform a comprehensive inventory of its capital assets, including
    infrastructure.^69 According to Guam's single audit report for fiscal year
    2004, the government was working to tag all of its equipment with bar code
    property identification labels so that it would be able to conduct a
    physical inventory. Another internal control weakness was reported in the
    accounts payable-trade account: accounts payable that had aged 2 or more
    years remained in the accounts payable listing while more current balances
    were liquidated. Moreover, the auditors reported that all nine of the
    general ledger liability accounts tested included invalid accruals. The
    auditors attributed these problems--which could result in a potential
    misstatement of accounts payable--to poor internal control over the filing
    of supporting documentation of recorded transactions. Unreconciled
    differences in the combined cash balances for some governmental funds for
    fiscal year 2004 were reported by the auditors. The auditors attributed
    these differences to the lack of timeliness of the performance of bank
    reconciliations, which does not appear to have been monitored--the effect
    being a misstatement of cash balances. GAO's Standards for Internal
    Control in the Federal Government highlights reconciliation as a key
    control activity.

    Auditors for USVI reported that the reconciliations of all USVI government
    bank accounts as of September 30, 2003 (fiscal 2003 year-end) were not
    completed until June 2004. The auditors stated that performing timely and
    accurate reconciliation of bank accounts is a key control over cash
    receipts and disbursements, and that the lack of timely reconciliation of
    all bank accounts may result in errors or irregularities in cash
    transactions to not be promptly detected. USVI's auditors attributed the
    failure to prepare timely bank reconciliations to a lack of established
    procedures. Auditors also reported this material weakness in the single
    audit report for fiscal year 2004 for USVI and stated that the
    reconciliations of all USVI government bank accounts as of September 30,
    2004, were not completed until July and August of 2005. Auditors also
    found weaknesses in the government's ability to quantify and record
    certain key financial activity, such as a workers' compensation claims
    liability, due to the lack of complete and accurate financial data. During
    2004, as in previous years, the government experienced delays in its
    year-end closing process and in the preparation of complete and accurate
    financial statements in accordance with GAAP. In numerous year-end closing
    entries that, in some instances, represented corrections to routine
    transactions that occurred throughout the year, auditors found their
    nature, timing, and extent indicative of weaknesses in controls over
    financial reporting.

    ^69A detailed inventory of capital assets is needed to conform to the
    financial presentation required by Statement No. 34 of the Governmental
    Accounting Standards Board (GASB). Statement No. 34, Basic Financial
    Statements--and Management's Discussion and Analysis--for State and Local
    Governments, establishes new requirements for the annual financial reports
    of state and local governments. One of the new requirements is that state
    and local governments report infrastructure and depreciate their capital
    assets.

      Material Weaknesses and Reportable Conditions in Compliance with Requirements
      for Major Federal Programs

    Auditors reported material weaknesses and reportable conditions in the
    insular area governments' compliance with requirements for major federal
    programs and the internal controls intended to ensure compliance with
    these requirements. In the context of compliance, reportable conditions
    are matters that come to an auditor's attention related to significant
    deficiencies in the design or operation of internal controls over
    compliance that could adversely affect the entity's ability to operate a
    major federal program within the applicable requirements of laws,
    regulations, contracts, and grants. Material weaknesses in this context
    are reportable conditions in which internal controls do not reduce to a
    relatively low level the risk of noncompliance with applicable
    requirements of laws, regulations, contracts, and grants that would be
    material to the major federal program being audited and undetected in a
    timely way by employees in the normal course of performing their duties.

    Table 12: Material Weaknesses and Reportable Conditions Relating to
    Compliance with Requirements for Major Federal Programs for Fiscal Year
    2004

    Internal control over compliance with
    major- program requirements           American Samoa CNMI Guam USVI Totals
    Material weaknesses                                9    2    8   28     47
    Reportable conditions                             13   31   17    3     64
    Total findings                                    22   33   25   31    111

    Source: Single audit reports for the four insular areas for fiscal year
    2004.

      American Samoa

    As shown in table 12, auditors reported nine material weaknesses in
    compliance with requirements for major federal programs for the American
    Samoa government for fiscal year 2004. One of these weaknesses involved a
    receiving report that showed that an item purchased with 2004 grant funds
    was not received until August 31, 2005, the end of the 2005 grant year.
    The effect of this delay was that the government received and expended
    from the 2004 grant, but did not complete the transaction and receive the
    goods from the vendor until 1 year later. The auditors attributed this
    weakness to the vendor's requirement of advance payment for this purchase
    and lack of follow up to determine whether the goods that had been paid
    for had been delivered. For fiscal year 2004, another reported internal
    control weakness in compliance with requirements for major federal
    programs involved delays in the completion of the single audit, which did
    not occur within 9 months of the fiscal year end, as required by the
    Single Audit Act. The auditors stated that the cause of the missed single
    audit due date was (1) a failure of the accounting system and (2) the lack
    of trained, qualified, and competent personnel. These two factors resulted
    in a delay in closing the accounting records.

      CNMI

    One of the two internal control weaknesses affecting compliance with major
    federal programs reported for CNMI's government for fiscal year 2004 was
    the failure to record expenditures for the Medical Assistance Program when
    they were incurred. In one instance, the auditor identified expenditures
    for billings from service providers for services rendered in previous
    years. The auditors attributed this weakness to the lack of policies and
    procedures regarding the timely recognition of expenditures at the time
    services are rendered. The effect of this weakness is that expenditures
    reported to the grantor agency, the U.S. Department of Health and Human
    Services (HHS), are based on the paid date and not, as required, the
    service date. In addition, actual expenditures incurred during the year
    are not properly accrued and therefore, current year expenditures and
    unrecorded liabilities are understated. The other internal control
    weakness related to the lack of adherence to established policies and
    procedures regarding physical inventory counts of property and equipment
    and the lack of reconciliation between the Division of Procurement and
    Supply's (P&S) master listing and the listings of several CNMI divisions
    and offices. For example, CNMI's Emergency Management Office (EMO)
    provided a list of equipment acquired with Office of Domestic Preparedness
    grants, but the listing did not include the serial number or other
    identification of the equipment or its condition. Moreover, a physical
    inventory was not conducted in the past 2 years by either the EMO or P&S.
    As a result, CNMI's government was not in compliance with federal property
    standards and its own property management policies and procedures.

      Guam

    In prior-year single audits and the fiscal year 2004 report, Guam's
    auditors stated that the government was in noncompliance with applicable
    procurement requirements. The auditor noted, in the fiscal year 2004
    report, that there was insufficient documentation on file supporting the
    procurement for four of seven transactions tested related to a DOL grant.
    For two additional transactions, Guam's Chief Procurement Officer
    determined that the lease of space from a vendor was an unauthorized
    procurement because the lease agreement had expired. The method of
    procurement, selection of contract type, contractor selection or
    rejection, and the basis for the contract price are to be included in the
    procurement records, according to applicable procurement requirements. The
    auditor attributed this weakness to a lack of internal control over
    compliance with applicable procurement requirements. Noncompliance with
    applicable procurement requirements was also noted for transactions
    related to U.S. Environmental Protection Agency and HHS grants. The
    auditors also reported that the government of Guam may have been
    noncompliant with earmarking requirements associated with an HHS block
    grant for maternal and child health services. According to federal law, 30
    percent of the total grant payments must be used for preventive and
    primary care services for children, 30 percent must be used for services
    for children with special health care needs, and not more than 10 percent
    of the allotted funds can be used by a grantee for administrative
    expenses. The government of Guam did not provide the auditors with
    documents that demonstrated compliance with these requirements for its
    2004 Maternal and Child Health Services Block Grant. The auditors reported
    that they could not determine whether the government of Guam was in
    compliance with these earmarking requirements due to weak internal control
    over recordkeeping.

      USVI

    Auditors reported that for fiscal years 2003 and 2004, the USVI government
    failed to provide accurate, current, and complete disclosure of
    financially assisted activities as required by U.S. Department of
    Agriculture (USDA) grants. In one instance, auditors found that financial
    reports prepared by the USVI Department of Health for the Women, Infants,
    and Children (WIC) Program did not reconcile with the USVI government's
    financial management system (FMS). The auditors identified the cause of
    this weakness to be due to current procedures, which do not require a
    reconciliation of WIC Program records with the FMS. This lack of
    reconciliation could result in incorrectly posted transactions going
    undetected and uncorrected and therefore also incorrect financial
    information being reported to USDA. The lack of reconciliation between the
    government's records and its FMS was also noted as a weakness related to a
    DOL grant for unemployment insurance. In its fiscal year 2004 single audit
    report, the auditors noted that the USVI Department of Education did not
    fully comply with 12 of the 18 requirements for the second year of the
    compliance agreement with the U.S. Department of Education. For example,
    the auditors reported that the inventory management system, which was to
    be fully implemented by December 31, 2004, was not implemented by that
    date. According to the auditors, failure to fully comply with the
    compliance agreement by the specified deadlines was due to a lack of the
    necessary resources.

      High-Risk Designations and Receiverships

    The late submission of single audit reports combined with ongoing,
    significant audit findings, have been key reasons for the designation of
    the insular area governments as high-risk grantees by several federal
    agencies. Under the Grants Management Common Rule, federal awarding
    agencies may designate a grantee as high-risk if the grantee has a history
    of unsatisfactory performance, is not financially stable, has an
    inadequate management system, has not conformed to the terms and
    conditions of previous awards, or is otherwise not properly managing
    federal funds. Federal agencies that designate a grantee as high-risk may
    impose special conditions including (1) issuing funds on a reimbursement
    basis; (2) withholding authority to proceed to the next phase until
    receipt of evidence of acceptable performance within a given funding
    period; (3) requiring additional, more detailed financial reports; (4)
    requiring the grantee to obtain technical or management assistance; or (5)
    establishing additional prior approvals for expenditures of federal funds.
    Agencies, in carrying out their regulations associated with the Grants
    Management Common Rule, can place special conditions either at the
    agencywide level or at the individual program level.

      American Samoa

    OIA designated the government of American Samoa as a high-risk grantee in
    June 2005, as GAO had recommended in its report on American Samoa's
    accountability for key federal grants.^70 In making this designation, OIA
    recognized that the government of American Samoa had made significant
    progress in improving its financial accountability, and stated that the
    high-risk designation was to encourage other federal agencies to support
    American Samoa's fiscal reform process. OIA placed several special
    conditions on the American Samoan government, including the completion of
    single audits by the statutory deadline and having balanced budgets for 2
    consecutive years--without considering nonrecurring windfalls such as
    insurance settlements.

    ^70GAO, American Samoa: Accountability for Key Federal Grants Needs
    Improvement, [73]GAO-05-41 (Washington, D.C.: Dec. 17, 2004).

    The American Samoa government or its agencies have also been designated as
    high-risk by the departments or components of USDA, Education, HHS, and
    the U.S. Department of Transportation (DOT). USDA's Food and Nutrition
    Service (FNS) has also designated American Samoa as a high-risk grantee.
    According to a USDA official, GAO's prior recommendation that DOI
    designate American Samoa as a high-risk grantee influenced the FNS
    decision in February 2006 to designate American Samoa as a high-risk
    grantee for three of its programs. Some of the reasons cited by FNS
    officials for the high-risk designation include delinquent audits,
    noncompliance with laws and regulations, failure to resolve audit findings
    or to follow up on review findings, incurring unallowable or questionable
    costs, and weak systems for monitoring the programs and managing program
    data. In a letter to the Governor of American Samoa, FNS officials also
    stated that they were concerned that other serious problems might exist
    but had not been identified due to weaknesses and inadequate controls
    described in the letter. FNS officials further stated that the additional
    requirements associated with a high-risk designation would help to
    determine whether other serious but unidentified problems exist.

    While the U.S. Department of Education initially designated American Samoa
    as a high-risk grantee in 2003 due to the lack of timely and complete
    single audits, American Samoa has now submitted its single audits through
    fiscal year 2005. The American Samoan government remains a high-risk
    grantee for the U.S. Department of Education due to continuing concerns
    about weaknesses and internal control issues identified in the single
    audits. One of HHS's operating divisions, the Substance Abuse and Mental
    Health Services Administration (SAMHSA), designated American Samoa as a
    high-risk grantee due to the government's delinquent single audits.^71 The
    insular area remains a high-risk grantee of SAMHSA, due to several older
    audits that were late and audit issues identified in submitted single
    audit reports. SAMHSA also designated American Samoa's Department of Human
    and Social Services as a high-risk grantee due to the lack of compliance
    of its financial management system with federal regulations. DOT's Federal
    Motor Carrier Safety Administration (FMCSA) has considered American Samoa
    to be a high-risk grantee for its Motor Carrier Safety Assistance Program
    (MCSAP) due to past performance problems, although no formal designation
    was made in writing and no special conditions were imposed. DOT officials
    provided an example of a past performance problem for American Samoa: the
    insular area justified purchase of a vehicle for MCSAP purposes, but the
    vehicle was provided to the Governor's office. Instead of a formal
    high-risk designation, FMCSA provided additional oversight and required
    American Samoa to submit additional supporting documentation for all
    progress and final vouchers. American Samoa cooperated voluntarily by
    submitting the documentation and accepting the disallowed costs.

    ^71In a letter dated November 24, 1999, a SAMHSA grants officer stated
    that American Samoa would remain in the high-risk status until its
    delinquent audit reports had been submitted and accepted. At that time,
    the fiscal year 1995 financial statements had been submitted, but not the
    single audit reports for fiscal years 1995, 1996, 1997, and 1998.

      CNMI

    The U.S. Department of Education designated CNMI as a high-risk grantee in
    2003 because CNMI's Department of Education was unable to provide timely
    and complete single audits for 4 consecutive years. In September 2004, the
    U.S. Department of Education removed the high-risk designation based on
    site visits and the completion of the fiscal year 2003 single audit for
    CNMI with few audit findings.

      Guam

    Guam was designated as a high-risk grantee by the U.S. Department of
    Education in 2003 because Guam's Public School System was unable to
    provide timely and complete single audits for 5 consecutive years. As of
    October 27, 2006, Guam remained as a high-risk grantee for the U.S.
    Department of Education. Additional special conditions have been placed by
    U.S. Department of Education officials on its grants to Guam requiring
    them to demonstrate improved management stability and effective fiscal
    controls. DOT's FMCSA has considered Guam to be a high-risk grantee for
    its MCSAP due to past performance problems, although no formal designation
    was made in writing and no special conditions were imposed. DOT officials
    provided an example of a past performance problem for Guam--two vehicle
    inspectors paid by MSCAP funds were accepting payments for themselves in
    exchange for inspection decals. Instead of a formal high-risk designation,
    FMCSA provided additional oversight and required Guam to submit an action
    plan detailing corrective actions. The government of Guam cooperated
    voluntarily by submitting the action plan and proof that the inspectors'
    employment had been terminated.

    The U.S. Department of Housing and Urban Development (HUD) has designated
    the Guam Housing and Urban Renewal Authority (GHURA) as a high risk agency
    because of its poor performance under both the Public Housing Assessment
    System (PHAS) and Section Eight Management Assessment Program (SEMAP).
    HUD's Real Estate Assessment Center sent staff to Guam in 2006 to perform
    a quality assurance review of the auditor and a report of its review is
    expected soon. A memorandum of agreement is being developed to set targets
    and strategies for improving GHUR's performance.

      USVI

    The U.S. Department of Education, HHS, and HUD have designated the USVI
    government (or its components) as a high-risk grantee. The USVI government
    was designated as a high-risk grantee by the U.S. Department of Education
    in 1999. Although USVI was already designated as a high-risk grantee, the
    U.S. Department of Education entered into a comprehensive 3-year
    compliance agreement with USVI on September 23, 2002, due to serious and
    recurring deficiencies in USVI's administration of the U.S. Department of
    Education programs. In fiscal year 2005, U.S. Department of Education
    officials determined that the USVI government would be unable to meet all
    of the terms of the compliance agreement by its expiration on September
    23, 2005.^72 In a letter dated June 17, 2005, U.S. Department of Education
    notified the USVI government that, in accordance with the terms of the
    compliance agreement, it would apply special conditions to its grant
    awards, requiring the USVI government to procure the services of a
    third-party fiduciary to perform the financial management duties for all
    U.S. Department of Education grant awards made to USVI. As of August 25,
    2006, all contract terms between the USVI government and the recommended
    third party fiduciary had been settled, the contract had been signed, and
    the fiduciary has begun work.

    The Centers for Disease Control and Prevention (CDC), a component of HHS,
    designated USVI's Department of Health as a high-risk grantee in January
    2006 due to the lack of compliance with financial management standards.
    According to the letter to USVI's Department of Health, one of the
    criteria for removing the high-risk designation is the establishment of
    appropriate internal controls to safeguard federal funds. The
    Administration of Children and Families (ACF), another component of HHS,
    placed USVI's Department of Human Services as a high-risk grantee in April
    1997 for delinquent single audits. According to an April 9, 1997, letter,
    the USVI government had not submitted single audits, other than one
    received for the 2-year period beginning October 1, 1988, and ending
    September 30, 1990. Subsequent updates to the high-risk listing have
    referred to the USVI government's chronically late single audits.

    ^72Department of Education, Office of Inspector General, The Virgin
    Islands Is at Risk of Not Meeting the Goals of the September 2002
    Compliance Agreement, ED-OIG/A02-D0028 (New York Audit Region: Feb. 15,
    2005).

    In August 2003, HUD designated the Virgin Islands Housing Authority
    (VIHA)^73 as a high-risk grantee, and shortly thereafter placed VIHA into
    receivership. VIHA had been under examination for several years due to its
    failure to submit balanced budgets, a violation of HUD financial reporting
    requirements, and the general deterioration of management operations.
    VIHA's Board of Directors was unable to provide adequate oversight of
    housing authority programs, including the Section 8 program. VIHA also had
    failed to submit timely audited financial statements for fiscal years 2001
    and 2002. VIHA's failure to submit timely verifiable financial information
    had adversely affected HUD's ability to verify that federal funds were
    being used properly and in accordance with program requirements and
    regulations. A preliminary review done by HUD indicated that VIHA was
    operating under a budget deficit of approximately $3.5 million. Moreover,
    HUD officials discovered that VIHA was improperly funding a Virgin Islands
    government nursing home for elderly residents in one of its public housing
    developments. VIHA was also cited for providing rent rebates of $3 million
    annually to public housing residents in violation of HUD regulations. In
    its audits of VIHA's fiscal year 2001 and 2002 single audits, the
    independent public auditor found that VIHA had serious deficiencies in
    financial reporting, financial analysis, and financial management systems.
    For example, the auditor noted that VIHA maintained incompatible
    accounting systems that precluded effective recording and reporting
    processes. Therefore, VIHA's accounting records did not reflect an
    accurate or complete accounting of the financial position and, in
    addition, VIHA was unable to track and identify expenditures of federal
    funds. According to HUD officials, serious fiscal irregularities and
    ineffective VIHA Board leadership, factors such as VIHA staff with
    insufficient skills, VIHA's inability to adequately manage programs, and
    its failure to improve and correct other operational problems, all pointed
    to a breakdown in the management of VIHA.

    On August 1, 2003, HUD notified VIHA that it was in substantial default of
    Section 15 under the Annual Contributions Contract (ACC)^74 for failure to
    produce reliable financial statements. Violations of Section 15 (A) of the
    ACC were based on the numerous deficiencies noted in the authority's books
    and records identified by VIHA's independent auditors and late submission
    of financial reports. All of these actions identified VIHA as a high-risk
    agency. On August 20, 2003, HUD imposed an administrative receivership,
    assuming VIHA's decision-making authority and management by sending in a
    recovery team to stabilize the authority's operations. As of August 15,
    2006, VIHA was still in receivership. While HUD officials told us that no
    special conditions have been placed on VIHA, HUD will look for the
    following actions to be completed before ending the receivership:

    ^73The Virgin Islands Housing Authority (VIHA) is a public housing
    corporation established in 1949 with the responsibility for planning,
    financing, constructing, maintaining, and managing public housing
    development within the territorial boundaries of the U.S. Virgin Islands
    (St. Thomas, St. John, and St. Croix).

    ^74Annual contributions contracts, made between HUD and a housing
    authority, specify what the authority must do to receive funding from HUD
    during the contract year. HUD may declare a housing authority in
    substantial default or in breach of its annual contributions contract with
    HUD.

               o improvement in Public Housing Assessment System (PHAS) scores
               for a sustained period in the areas in which the authority was
               failing;

               o evidence that VIHA has put in place an advisory board to begin
               taking management control of the authority;

               o evidence that key personnel have been hired, such as an
               executive director, chief financial officer, and managers in areas
               such as procurement, maintenance, construction/development,
               information technology, occupancy, and resident services;

               o evidence that the VIHA has established policies and procedures
               that conform to HUD requirements, staff has been trained in these
               policies and procedures, and these policies and procedures are
               being followed;

               o timely and accurate submission of required HUD reports; and

               o unqualified audit opinion on both the financial statements and
               compliance with OMB Circular No. A-133 for major programs.

               HUD is currently evaluating the conditions at VIHA and expects new
               PHAS scores in early 2007. All recent required HUD reports have
               been submitted by VIHA in a timely and accurate manner. In 2006,
               VIHA revised its procurement policy and, according to HUD
               officials, implemented the new policy successfully. VIHA has also
               instituted new financial internal controls and procedures to
               correct the financial oversight deficiencies that have been noted
               in the past. VIHA received an unqualified financial audit for
               fiscal year ending December 31, 2005. In November 2006, VIHA hired
               a new Chief Financial Officer with a background in housing
               authority finance. HUD and VIHA are considering hiring additional
               experienced permanent staff for the housing authority in 2007.
               Also, HUD and VIHA are currently evaluating additional changes to
               various policies and procedures in order to improve oversight and
               efficiency throughout the housing authority.

    			  Efforts to Assist the Insular Areas in Improving Financial
    			  Accountability

               DOI's OIA and IG, other federal inspectors general, and local
               auditing authorities assist or oversee the insular areas' efforts
               to improve their financial accountability.^75 OIA monitors the
               progress of completion and issuance of the single audit reports as
               well as providing general technical assistance funds to provide
               training for insular area employees and funds to enhance financial
               management systems and processes. DOI's IG has audit oversight
               responsibilities for federal funds in the insular areas.^76 In
               addition, the IG evaluates the effectiveness of OIA programs. Each
               insular area's cognizant agency^77 for the single audit monitors
               the submissions of the insular area government's single audit
               report for the insular area and considers extensions requested for
               submitting the report. The insular areas' cognizant agencies for
               fiscal years 2001-2005 were DOI for American Samoa and CNMI, HHS
               for Guam, and USDA for USVI. According to an OMB official, DOI
               will be the cognizant agency for all four insular areas for the
               fiscal year 2006-2010 single audits. When the single audit report
               is completed, the Office of Inspector General of the cognizant
               agency reviews the report to determine whether it meets applicable
               reporting standards and the requirements of OMB Circular No. A-133
               for implementing the Single Audit Act. The inspectors general of
               other federal grant-making agencies perform audits of the insular
               area governments' implementation of federal programs to assess
               whether federal funds are used for intended purposes and
               effectively and efficiently. Local auditing authorities audit,
               assess, and analyze the insular area governments' activities for
               improving accountability, effectiveness, and efficiency of
               government operations. Interagency groups, such as IGIA, and other
               less formal groups also have worked to improve the financial
               accountability of the insular areas.

    			  Interior�s OIA and Federal IGs

               A key part of OIA's mission is to promote sound financial
               management processes in the insular area governments. To
               accomplish this mission, OIA has increased its focus on bringing
               the insular area governments into compliance with the Single Audit
               Act. For example, OIA created an incentive for the insular areas
               to comply with the act by stating that an insular area cannot
               receive capital funding unless its government is in compliance
               with the act or has presented a plan, approved by OIA that is
               designed to bring the government into compliance by a certain
               date. In addition, OIA provides general technical assistance funds
               for training and other direct assistance, such as grants, to help
               the insular area governments comply with the act and to improve
               their financial management systems and environments.

               The Graduate School of the USDA has been working with OIA for over
               a decade through its Pacific Islands and Virgin Islands Training
               Initiatives (PITI and VITI) to provide training and technical
               assistance.^78 In fiscal year 2004, OIA began a joint program with
               the Graduate School to address the long-standing problem of audit
               findings and resolutions that had not been addressed by the
               insular area governments. The USDA Graduate School also works with
               the Island Government Finance Officers Association (IGFOA)^79 to
               promote improved financial management in the insular areas. Table
               13 shows OIA funding of USDA Graduate School activities.

               Table 13: OIA Funding for Technical Assistance from the USDA
               Graduate School

    			  Fiscal year      PITI/VITI (dollars in millions)
    2001                                        $1.3
    2002                                         1.3
    2003                                         1.3
    2004                                         1.3
    2005                                         1.5
    2006                                         1.5
    2007 (projected)                             1.5

               Source: OIA officials.

               In addition to funding the training and other services provided by
               the USDA Graduate School, OIA makes direct grants using its
               general technical assistance funds. Some of these grants are
               targeted at the resolution of specific financial management and
               reporting problems.

               OIA has staff members in headquarters and field representatives in
               American Samoa and CNMI who make site visits to the insular areas.
               According to an OIA official, the office does not use a standard
               framework to write up the results of these site visits, although
               staff members do make notes while they are visiting the insular
               area. Establishing a routine procedure of writing up the results
               of site visits in a standard framework would help ensure that (1)
               all staff members making site visits are consistent in their focus
               on overall accountability objectives and (2) OIA staff has a
               mechanism for recording and following up on the unique situations
               facing each of the insular area governments.

               DOI's IG performs the functions and duties that were once the
               responsibility of government comptrollers for the four insular
               areas. In this role, the IG has audit oversight responsibilities
               for the insular areas. It is also responsible for reviewing and
               following up on single audits for American Samoa and CNMI due to
               its role as the cognizant agency for the two insular areas for the
               single audits for fiscal years 2001-2005. For fiscal years
               2006-2010, DOI's IG will be responsible for reviewing and
               following up on the single audits for all four insular areas
               because DOI will be the cognizant agency for all four. The IG also
               evaluates the effectiveness of OIA's programs and has issued three
               reports in 2002 and 2003 that addressed the use of federal funds
               in the four insular areas. One of the reports, dated March 1,
               2002,^80 identified what the IG believed to be the top management
               challenges for the U.S. insular areas and compact states.^81 The
               report included assessments for each of the insular areas
               regarding the following four challenges: (1) overall financial
               management, (2) internal audit capabilities, (3) audit resolution
               issues, and (4) areas for improvement. In its evaluation report of
               oversight and follow up on audit findings and recommendations
               related to the insular area governments' use of federal funds
               provided by DOI,^82 the IG stated that the single audit report
               findings were not sufficiently addressed, due to a lack of federal
               control over the funds and DOI's lack of adequate audit follow-up
               procedures. Noting OIA's lack of enforcement authority over
               subsidies and entitlement-type funding, the IG stated that OIA
               should increase its oversight of these findings by encouraging the
               insular areas to address them and to monitor the implementation of
               corrective actions. In September 2003,^83 the IG issued a report
               about grants OIA administers for the insular areas. The IG
               reported that OIA had properly processed awards and distributed
               grant funds, but needed to improve the control process used to
               monitor grants.

               In accordance with the Reports Consolidation Act of 2000,^84 DOI's
               IG also submits annual summaries of issues that it has determined
               to be the most significant management and performance challenges
               facing the department. One of the challenges the IG listed, in
               DOI's fiscal year 2005 performance and accountability report,
               related to the insular areas.^85 The IG noted in describing this
               challenge that these governments have long-standing financial and
               program management deficiencies. The IG has also issued many audit
               reports covering issues on individual insular areas. Since January
               2000, it has issued 2 audit reports on American Samoa, 1 on CNMI,
               8 on Guam, and 29 relating to the government of USVI.^86 The
               citations for these reports are in appendix III.

               Inspectors general of other federal agencies that provide grants
               also conduct audits and evaluations on issues related to the
               insular areas' use of awarded funds. The U.S. Department of
               Education's IG has recently issued several reports--including
               reports on the USVI government's administration of funds under
               Title IV of the Higher Education Act and grant funds for the
               Infants and Toddlers program--as well as the previously mentioned
               report on the USVI government's lack of progress in meeting the
               terms of the compliance agreement.

    			  Local Authorities

               In addition to U.S. federal government audit organizations, each
               of the four insular areas has its own local auditing authorities.
               The USVI has its Office of Inspector General; Guam and CNMI, the
               Offices of the Public Auditor; and American Samoa, the Territorial
               Audit Office.^87 All four of these audit authorities have the
               authority to review their governments' use of federal grant funds.
               These audit authorities also determine whether government
               operations are efficient and effective and government assets are
               properly safeguarded and protected from fraud, waste, abuse, and
               mismanagement.

               All of these local audit authorities are members of the
               Association of Pacific Islands Public Auditors (APIPA), formed in
               January 1988 through a memorandum of understanding (MOU) executed
               by the heads of the audit organizations of five Pacific island
               nations.^88 APIPA was formed to achieve several objectives,
               including (1) the establishment of an organized body to promote
               efficiency and accountability in the use of public resources of
               emerging nations of the Pacific and (2) sponsorship of auditing
               and accounting training workshops. APIPA has an annual conference
               to provide continuing education for its members.

    			  Interagency Coordination

               While multiple entities oversee the insular areas' efforts to
               improve their financial accountability, in 1999 and 2003 the White
               House recognized the need to improve coordination of federal
               programs as they relate to insular areas and established the
               Interagency Group on Insular Areas (IGIA)^89 consisting of
               representatives from several federal agencies. This group is
               responsible for identifying issues that affect the insular areas
               and for making recommendations to the President and other
               appropriate officials regarding these issues. Executive agencies
               were to coordinate significant decisions or activities relating to
               the insular areas with the IGIA. The most recent meeting of the
               IGIA was in February 2006 to discuss ongoing issues, such as
               fiscal management, and work done during 2005 in the areas of
               economic and tax policy, infrastructure financing, and healthcare.
               We were unable to obtain information concerning the outcome of
               IGIA efforts. Furthermore, there appears to be limited joint
               monitoring or coordination of financial assistance programs and
               grants management across the many federal grant-making agencies as
               evident from discussions held with agency officials we contacted.
               With increased coordination, the federal agencies could
               collectively share key information, such as high-risk
               designations, and work with the insular area governments to
               substantially improve their financial accountability.

    			  Insular Areas� Corrective Action Plans

               Under the Single Audit Act and OMB Circular No. A-133, auditees,
               when the audit is completed, are to prepare corrective action
               plans to address each audit finding in the current year's single
               audit report. Corrective actions are defined in OMB Circular No.
               A-133 as action taken by the auditee that (1) corrects identified
               deficiencies, (2) produces recommended improvements, or (3)
               demonstrates that audit findings are invalid or do not warrant
               action by the auditee.^90 The corrective action plan should
               provide the names of the contact persons responsible for
               corrective actions, the corrective actions planned, and the
               anticipated completion date.

    			  American Samoa

               In its corrective action plan for fiscal year 2004, American Samoa
               government managers acknowledged the auditor's finding that there
               were significant failures in the operation of the internal control
               structure related to general accounting and grants administration.
               Management commented in its corrective action plan that 7 years
               had passed since the implementation of the new computer system and
               the hiring of new staff. According to the corrective action plan,
               new internal control policies and procedures have been
               implemented. In this same corrective action plan, American Samoa
               government managers stated that they disagree with the finding
               that government records have not been maintained in an organized
               manner due to the lack of formal procedures regarding the
               maintenance and storage of records. According to the plan, the
               American Samoan government has made progress in the Grants
               Division by assigning grants analysts to specific departments to
               work with the grants program administrator to ensure that
               expenditures are allowable under the program.

    			  CNMI

               In its corrective action plan for fiscal year 2004, CNMI officials
               responded to the auditor's finding that due to the lack of
               detailed subsidiary ledgers, the auditors could not determine the
               propriety of two liability account balances and whether the
               negative balances in the accounts, as in prior years, also
               included prepaid items. CNMI government officials stated that the
               negative balances may not have been properly closed for prepaid
               items. According to the corrective action plan, balances are being
               reviewed and adjusted as needed and new procedures for receiving
               procurements were implemented, and reconciliation procedures will
               be developed. In its corrective action plan for the Commonwealth
               Health Center's (CHC) receivable balance with accounts outstanding
               in excess of 120 days, management stated that they agreed with the
               findings, but management also asserted that it had made major
               progress in correcting the problems. According to management, the
               cause of the problem is a combination of the inefficiency of the
               present computer billing system, an inadequate number of staff in
               the Billing and Collection Office, nonpayment of bills by the
               Government Health Insurance program, and the inclusion of Medicaid
               expenditures beyond the annual cap as receivables.

    			  Guam

               In its corrective action plan for fiscal year 2004, government of
               Guam officials responded to the auditor's finding of the lack of
               the required physical inventories of equipment by reporting that
               GASB No. 34, Basic Financial Statements and Management's
               Discussion and Analysis for State and Local Governments, was being
               adopted using a two-stage approach. The first stage is to record
               all capital assets such as buildings and infrastructure. The
               second stage is to compile all fixed asset records. For the
               findings related to noncompliance with procurement requirements,
               the government of Guam stated that GSA will continue to improve
               the processes and to uphold the integrity of the procurement
               activities of the government.

    			  USVI

               In response to the auditors' repeated findings about single audit
               compliance, the USVI government stated that it is committed to
               completing and submitting its single audit reports within 9 months
               after the end of the fiscal year in accordance with federal laws
               and regulations. However, the government plans to request and
               obtain a written extension from its cognizant agency if the audit
               cannot be completed within the 9-month deadline. For fiscal years
               2003 and 2004, the auditor recommended that the USVI Department of
               Finance develop procedures to accelerate the bank reconciliation
               process and establish procedures that include the review and
               approval of the reconciliations by a member of management. The
               government responded that it will hire employees to assist with
               the reconciliation process, and it will change its policies and
               procedures for recording and handling deposits. At the 2006 IGFOA
               Conference held in May 2006, USVI government officials reported
               that with the implementation of a new Enterprise Resource Planning
               System, they expect timely reporting, reconciliations, information
               to decision makers, and completion of single audits, as well as a
               reduction or elimination of audit findings.

    			  Conclusions

               American Samoa, CNMI, Guam, and USVI face daunting economic,
               fiscal, and financial accountability challenges. The viability of
               their economies depends on a few key industries. While Guam will
               benefit from DOD's decision to reassign troops from Japan to Guam,
               changes in treaties, tax laws, and other external events have or
               will likely negatively affect the other insular areas' key
               industries. OIA has a number of initiatives underway to promote
               economic development in the insular areas. OIA's efforts in
               helping create linkages between the business communities in the
               U.S. states and the insular areas are key to helping meet some of
               these challenges. Nevertheless, the islands would benefit from
               formal periodic OIA evaluation of its conferences and
               business-opportunity missions, including assessments of the cost
               and benefit of its activities and the extent to which these
               efforts are creating partnerships with the economies of other
               nations.

               A healthy private sector can improve the insular areas' fiscal
               condition by increasing local tax revenues. The fiscal condition
               of three of the four insular areas generally worsened during
               fiscal years 2001 to 2004, with the fourth--American
               Samoa--showing a more stable trend than the other insular areas.

               Efforts to meet formidable fiscal challenges and build strong
               economies in the insular areas are hindered by delayed and
               incomplete financial reporting that does not provide officials
               with the timely and complete information they need for effective
               decision making. Questions about the reliability and completeness
               of the reporting have prevented auditors from issuing unqualified,
               or "clean," opinions on the island governments' financial
               statements. Auditors also identified many weaknesses likely to
               have a material, detrimental effect on the insular area
               governments' accountability over federal funds in their reviews of
               internal controls over financial reporting and compliance with
               major federal grant requirements.

               OIA officials monitor the insular area governments' progress in
               submitting single audit reports, and OIA provides funding to
               improve financial management. Other agencies that provide funding
               for the insular areas provide their own oversight, such as their
               monitoring of entities with high-risk designations. Yet, progress
               has been slow and inconsistent, leaving the insular areas in
               current economic, fiscal, and financial difficulty. The benefit to
               the insular areas of past and current assistance is unclear, as is
               the way toward prosperity and fiscal stability. Federal agencies
               and the insular area governments have sponsored and participated
               in conferences, training sessions, and other programs to improve
               accountability, but knowing what has and hasn't been effective and
               drawing the right lessons from this experience is hampered by a
               lack of formal evaluation and data collection, the diffusion of
               responsibility with little coordination between agencies, and no
               central access to information. The conscientious yet disparate
               efforts of many federal agencies now individually engaged in
               improving the insular areas' economic development, fiscal
               stability, and financial accountability could make more efficient
               use of government and human resources. In a planned and
               well-coordinated effort, and with feedback mechanisms for
               continuing improvement of that effort, federal agencies can help
               the insular areas achieve the economic, fiscal, and financial
               conditions expected by nationals and citizens of a developed
               nation.

    			  Recommendations for Executive Action

               We recommend that the Secretary of the Interior direct the Deputy
               Assistant Secretary for Insular Affairs to:

               o Increase coordination activities with officials from other
               federal grant-making agencies on issues of common concern relating
               to the insular area governments, such as late single audit
               reports, high-risk designations, and deficiencies in financial
               management systems and practices.

               o Conduct formal periodic evaluation of OIA's conferences and
               business opportunities missions, assessing their impact on
               creating private sector jobs and increasing insular area income.

               o Develop a framework for OIA employees to use in conducting site
               visits to help ensure objectives are achieved, to assure that
               relevant information is shared with the responsible officials, and
               to allow more efficient and effective monitoring of issues.

               o Develop and implement procedures for formal evaluations of
               progress made by the insular areas to resolve accountability
               findings and set a time frame for achieving clean audit opinions.

    			  Agency Comments and Our Evaluation

               We received written comments on a draft of this report from DOI.
               In commenting on a draft of this report, DOI officials agreed with
               our conclusions and recommendations, stating that our
               recommendations are consistent with OIA's top priorities and
               ongoing activities. DOI's specific comments on each recommendation
               are summarized below.

               DOI officials agreed with our recommendation to increase
               coordination with officials from other federal grant-making
               agencies on issues of common concern. While DOI officials noted
               that it currently has processes to promote coordination with other
               federal agencies, additional coordination efforts are underway.
               Specifically, DOI officials stated that in fiscal year 2005, OIA
               began preparations for a conference to be held in June 2007 that
               will bring together officials from the federal grantor agencies
               and the insular areas, to coordinate efforts to address issues
               related to material findings identified in single audit reports
               and other financial management issues, including high-risk
               designations. We encourage OIA to utilize the planned conference
               to address accountability issues of common concern and use the
               results of the conference as a basis for regularly scheduled
               ongoing monitoring and followup on these issues.

               DOI officials commented that they agree with our recommendation
               that OIA conduct periodic evaluation of its conferences and
               business opportunities missions because such evaluation of all
               federal activities is worthwhile. DOI officials added that while
               these conferences and missions are the primary activities through
               which OIA pursues its top priority for the insular areas, the
               costs associated with these activities are only a fraction of a
               percent of OIA's budget. Nevertheless, OIA supports evaluating
               these activities.

               DOI officials agreed with our recommendation that a framework be
               developed for OIA employees to use in conducting site visits to
               ensure objectives are achieved, assure that relevant information
               is shared with responsible officials, and to allow more effective
               monitoring of issues. In its comments, DOI officials referred to a
               form in its Financial Assistance Manual, that was modified during
               fiscal year 2006, to better ensure that the required grant and
               project information is included in the project file after each
               site visit. While inclusion of this information for individual
               grants or projects should be valuable, our recommendation
               envisions developing a broader framework that would include
               information beyond that dealing with individual OIA grants or
               projects to include information about each of the insular areas'
               financial accountability environments. The information to be
               collected in this broader framework would include the status of
               required single audit reports, the progress of actions to resolve
               reported internal control weaknesses, and current needs for
               technical assistance, capacity building, and staff level
               expertise. This information should also be integrated into a
               comprehensive monitoring process.

               DOI officials also agreed with our recommendation that OIA develop
               and implement procedures for formal evaluations of progress made
               by the insular areas to resolve accountability findings and set a
               time frame for achieving clean audit opinions. In its comments,
               DOI officials noted that it has a formal process for monitoring
               and tracking the insular areas' resolution of audit findings in
               place. DOI officials also indicated that they will consider
               establishing a timetable for achieving unqualified ("clean") audit
               opinions after the insular areas have had sufficient time to fully
               implement corrective actions to resolve material findings
               identified in the fiscal year 2004 and 2005 single audits. While
               these actions directed at improved monitoring and resolution of
               audit findings are a step in the right direction, they do not
               specifically address the broader accountability issues highlighted
               in our draft report. In this regard, the inability of the insular
               areas to achieve unqualified audit opinions over a number of years
               indicates the need for more attention and formal evaluation of
               progress toward to resolving accountability problems as called for
               by our recommendation in this area.

               In addition to providing copies of this report to your office, we
               will send copies of this report to other appropriate committees.
               We will also provide copies of this report to interested
               Congressional Committees and to the Secretary of the Interior as
               well as to the governors and delegates of the insular areas. We
               will also make copies available to other interested parties upon
               request. In addition, the report will be available at no charge on
               the GAO Web site at http://www.gao.gov .

               If you or your staff have any questions regarding this report,
               please contact Jeanette Franzel, Director, Financial Management
               and Assurance at (202)512-9471 or Franzelj@gao.gov , or David
               Gootnick, Director, International Affairs and Trade at
               (202)512-4128 or gootnickd@gao.gov .

               Contact points for our Offices of Congressional Relations and
               Public Affairs may be found on the last page of this report. GAO
               staff that made major contributions to this report are listed in
               appendix V.

               Jeanette Franzel
    			  Director
    			  Financial Management and Assurance

               David Gootnick
    			  Director
    			  International Affairs and Trade

    			  Appendix I: Matters Leading to Qualified Audit Opinions

               Table 14: American Samoa--Matters Leading to Qualified Audit
               Opinions on the Financial Statements for Fiscal Years 2001 through
               2004

    			                                                   Fiscal year
    Description of matter                                  2001 2002 2003 2004
    Unable to verify the accuracy of the due to/from other  X    X    X    X
    funds--pooled cash due to the lack of reliance on the
    internal control system.
    Unable to verify the amount due from other governments  X
    and advances from grantors of the Special Revenue Fund
    due to the condition of the insular area's records.
    Unable to confirm the $182,320 due from American Samoa  X
    Medical Center Authority--Lyndon B. Johnson Tropical
    Medical Center (Medical Center) since another auditor
    disclaimed their opinion on the Medical Center.
    Unable to verify the accuracy of the physical           X    X    X    X
    inventory records.
    Unable to ensure the physical presence and cost of      X
    recorded fixed assets and the records were incomplete.
    Unable to obtain sufficient audit evidence to           X
    determine if bank overdrafts represented held checks
    (accounts payable) or actual overdrafts. No
    adjustments had been made to accounts payable.
    Unable to obtain and test detailed schedules of the     X    X    X    X
    immigration deposits.
    Unable to obtain from the Territory's Attorney General  X         X
    an adequate discussion, evaluation, or estimation of
    pending or threatened litigation.
    Unable to obtain from the Attorney General any          X    X    X
    information on settlement negotiations with its former
    workers' compensation carrier.
    Sufficient auditing procedures could not be performed   X
    on the compensated balances recorded as of September
    30, 2001.
    In accordance with GASB 33, the insular area didn't     X
    restate the beginning fund balance of the general fund
    for amounts that would have been deferred as of
    September 30, 2000.
    Unable to be satisfied as to the amounts due from       X
    other governments and advances from grantors of the
    Special Revenue Fund as of September 30, 2001, due to
    the conditions of the American Samoa Community College
    records.
    Unable to satisfy the validity of the amounts due from       X
    taxpayers due to the state of the insular area's
    records.
    Accuracy of the beginning fund balance due to noted          X    X
    evidence of a failure of identified controls in
    preventing or detecting misstatements of accounting
    information and a lack of appropriate management
    oversight and review and approval of transactions.
    The insular area did not record a liability for                   X
    workers' compensation claims that occurred prior to
    9/30/2003.
    Auditors disclaimed an opinion on the American Samoa    X    X
    Telecommunication Authority because the entity did not
    maintain accurate inventory records and was unable to
    reconcile the general ledger to the physical
    inventory, cost of PP&E was no longer available, and
    the account receivable subsidiary records include
    sufficient discrepancies causing the system to be
    unreliable.
    In the opinion of the American Samoa Telecommunication            X    X
    Authority's auditor, PP&E not recorded at cost to
    conform with U.S. GAAP and the lack of evidence
    available to test the beginning of the year accounts
    receivable balance caused the auditors to be unable to
    form an opinion on the amount of operating revenues.
    Auditors disclaimed an opinion on the American Samoa    X    X
    Medical Center Authority--Lyndon B. Johnson Tropical
    Medical Center because the entity could not locate
    documentation supporting accounting records and
    auditors were unable to satisfy themselves regarding
    inventory quantities.
    The financial statements of the Medical Center were               X    X
    not audited.

               Sources: American Samoa Single Audit Reports for fiscal years 2001
               through 2004.

               Table 15: CNMI--Matters Leading to Qualified Audit Opinions on the
               Financial Statements for Fiscal Years 2001 through 2004

    			                                                               Fiscal years
    Description of matter                                  2001 2002 2003 2004
    Inability to obtain response from CNMI's Attorney       X         X
    General regarding litigation, claims, and assessments.
    Inability to determine the propriety of fixed assets    X
    and fund equity of the General Fixed Assets Account
    Group.
    Omission of the Northern Marianas College from the      X
    university and college fund type--Higher Education
    Fund.
    Omission of the Public School System from the           X
    component unit--School District.
    Omission of the Commonwealth Government Employees       X
    Credit Union from the component unit--Governmental
    Fund.
    Lack of recognition of certain tax revenues as          X
    nonexchange transactions.
    The propriety of receivables from federal agencies for  X
    the Fiduciary Fund Type--Agency Fund; and other
    receivables and accounts payable of the Northern
    Mariana Islands Government Health and Life Insurance
    Trust Fund. Unable to express an opinion on the
    General Long-Term Debt Account Group.
    Omission of the Commonwealth Utilities Corporation      X    X
    from the component units--Proprietary Funds.
    Inability to determine the propriety of receivables     X    X    X    X
    from federal and other agencies, advances, other
    liabilities and accruals, and reserve for continuing
    appropriations and their effect on the determination
    of revenues and expenditures for all governmental fund
    types.
    Inability to determine if the due to component units         X    X    X
    was fairly stated for all government funds due to
    inadequacies in the accounting records.
    Inadequacies in the accounting records regarding                  X    X
    accounts payable.
    Inability to determine the propriety of inventory and        X
    capital assets of the Northern Marianas College.
    Inability to determine the propriety of taxes                X    X    X
    receivable.
    Inability to determine the propriety of inventory, due            X
    from grantor agencies, utility plant and obligations
    under capital lease of the Commonwealth Utilities
    Corporation.
    Inadequacies in the accounting records regarding tax                   X
    rebates payable.
    Inadequacies in the accounting records regarding                       X
    capital assets of the Northern Marianas College and
    inventory, federal agencies receivables, utility
    plant, accounts payable, and obligations under capital
    lease of the Commonwealth Utilities Corporation.

               Sources: CNMI Single Audit Reports for fiscal years 2001 through
               2004.

               Table 16: Guam--Matters Leading to the Qualified Audit Opinions on
               the Financial Statements for Fiscal Years 2001 through 2004

    			                                                               Fiscal years
    Description of matter                                  2001 2002 2003 2004
    Inability to access tax-related records or perform      X    X    X    X
    procedures as to the effectiveness of the systems
    tax-related balances.
    Incomplete inclusion of the Guam Department of          X    X
    Education within the general fund due to
    nonavailability of information from the Department.
    Incomplete presentation of the General Fixed Assets     X    X
    Account Group or incomplete presentation of capital
    assets.
    Accounting records inadequate to support capital                  X
    assets amounts, net of accumulated depreciation.
    Incomplete presentation of the General Long-Term Debt   X
    Account Group.
    Lack of audited financial statements for the Tourist    X    X
    Attraction Fund, Territorial Highway Fund, the Port
    Authority of Guam, and the Guam Waterworks Authority.
    Lack of audited financial statements for or omission    X    X
    of the Guam Telephone Authority.
    Lack of audited financial statements for or omission    X    X    X    X
    of the Guam Memorial Hospital Authority.
    Omission of the Pension Trust Fund or lack of audited   X    X    X
    financial statements for the Government of Guam
    Retirement Fund.
    Omission of the Guam Council on the Arts and            X
    Humanities Agency, a Special Revenue Fund.
    Lack of audited financial statements for or omission    X    X    X
    of the Guam Community College.
    Lack of audited financial statements for or omission    X    X    X    X
    of the Guam Visitors Bureau.
    Omission of the Guam Rental Corporation.                     X
    Lack of audited financial statements for or omission         X    X
    of the Guam Housing Corporation.
    Lack of audited financial statements for the Guam                 X
    Economic Development and Commerce Authority.
    Inability to determine propriety of the General Fund    X    X
    continuing appropriations balance.
    Inability to determine propriety of the inventory       X
    balance for the State Agency Surplus, an Internal
    Service Fund--Proprietary Fund Type.
    Receivables recorded in the Solid Waste Management           X
    Fund and in the Federal Grant Assistance Fund were
    unsubstantiated.
    Absence of an accrual for the closure and postclosure        X    X
    costs of a solid waste landfill.
    Inability to determine the propriety of capital assets            X
    and related amounts for accumulated depreciation and
    depreciation expense.

               Sources: Guam Single Audit Reports for fiscal years 2001 through
               2004.

               Table 17: USVI--Matters Leading to the Qualified Audit Opinions on
               the Financial Statements for Fiscal Years 2001 through 2004

    			                                                               Fiscal years
    Description of matter                                  2001 2002 2003 2004
    Not recording a provision for landfill closure and      X    X    X    X
    postclosure costs in governmental activities or
    general long-term debt account group or the effect of
    the exclusion of a provision on beginning net assets.
    Unable to obtain sufficient evidence that land held     X    X    X
    for sale (amounting to about $25 million) was fairly
    stated.
    Virgin Islands Lottery had not been audited for              X
    business-type activities.
    Omission of financial data of the Roy L. Schneider      X
    Hospital in the public benefit corporations column.
    Unable to determine the amount of cash on deposit       X
    with, and due from, the U.S. Virgin Islands Department
    of Finance as of September 30, 2001.
    Auditors of the Juan F. Luis Hospital were unable to    X
    satisfy themselves about management's contention that
    the preautonomy accounts payable not recorded as a
    liability as of September 30, 2001, were the
    responsibility of the government.
    Omission of the general fixed assets account group.     X
    Not maintaining accounting records for income tax            X
    receivables stated at $87 million.
    Auditor of the VI Government Hospital and Health             X
    Facilities Corporation (Roy L. Schneider Hospital) was
    unable to satisfy themselves as to the propriety of
    certain transactions recorded in the statement of net
    assets.
    Auditor of the VI Housing Authority (VIHA) and VI            X    X
    Housing Finance Authority (VIHFA) financial
    statements, a discretely presented component unit, was
    unable to obtain sufficient evidence as to the
    propriety of the revenue and expenses reported by
    VIHA, or to determine whether capital assets were
    fairly stated.
    VIHA did not report an equity interest in a joint                 X
    venture because it had not been able to determine its
    carrying value.
    Unable to determine the extent to which the                  X    X    X
    unemployment insurance fund (a major fund) may have
    been affected by the exclusion of a receivable for
    unemployment insurance contributions due to inadequate
    records.
    Not maintaining accounting records for corporate                  X
    income tax receivables related to tax year 2002 in the
    general fund and governmental activities.
    Unable to determine the extent to which the revenue,                   X
    change in fund balance/net assets of the general fund
    and the governmental activities may have been affected
    by the exclusion of a receivable for corporate income
    taxes pertaining to tax year 2002 in the beginning net
    assets due to inadequate records.
    Government Employees' Retirement System (GERS), a                 X    X
    fiduciary component unit (pension trust fund), is not
    recording contributions pursuant to the Early
    Retirement Act of 1994, had asset valuation issues,
    and adjustments that may have been necessary to
    reflect certain balances with the USVI government's
    Department of Finance.
    Unable to determine the effects of adjustments that                    X
    might have been necessary if the other auditors had
    obtained sufficient audit evidence as to whether
    capital assets and land held for sale were fairly
    stated in the financial statements of VIHA and VIHFA,
    respectively.
    Omission of a liability for workers' compensation                      X
    claims from the basic financial statements.

               Sources: USVI Single Audit Reports for fiscal years 2001 through
               2004.

    			  Appendix II: Internal Control Weaknesses and Compliance with
    			  Requirements Applicable to Major Federal Programs

    			  American Samoa

               The American Samoan government has seen decreases in the number of
               material weaknesses and reportable conditions that auditors
               reported for internal control over financial reporting. The
               following table shows the numbers of material weaknesses and
               reportable conditions reported for internal control over reporting
               and compliance with requirements applicable to each major federal
               program, for fiscal years 2001-2004.

               Table 18: American Samoa--Reported Weaknesses Identified in the
               Auditors' Reports for Fiscal Years 2001 through 2004

                                                             Compliance with
                                                        requirements applicable to
                                                        each major federal program
                Internal control over financial          and on internal control
                  reporting in accordance with           over compliance with OMB
                 government auditing standards          Circular No. A-133 (report
                (report on financial statements)            on federal award)
                                         Total                              Total
                                        number                             number
    Fiscal     Material Reportable       of     Material   Reportable       of
    year   weaknesses^a conditions findings weaknesses^b conditions^c findings
    2001              8          0            8       11            6       17
    2002              6          0            6       13            9       22
    2003              6          0            6       14           10       24
    2004              6          0            6        9           13       22

               Sources: American Samoa Single Audit Reports for Fiscal Years 2001
               through 2004.

               Note: The numbers of total findings can be equated with the total
               number of reportable conditions. To compute the numbers of
               reportable conditions that were not material weaknesses, we
               subtracted the number of material weaknesses from the total
               findings.

               aMaterial weaknesses in internal control over financial reporting
               are reportable conditions in which the design or operation of
               internal controls does not reduce to a relatively low level the
               risk that misstatements caused by error or fraud--material in
               relation to the financial statements being audited--may occur and
               not be detected in a timely period by employees in the normal
               course of performing their duties.

               bMaterial weaknesses in this context are reportable conditions in
               which internal controls do not reduce to a relatively low level
               the risk of noncompliance with applicable requirements of laws,
               regulations, contracts, and grants that would be material to the
               major federal program being audited and undetected in a timely way
               by employees in the normal course of performing their duties.

               cReportable conditions in this context are matters that come to an
               auditor's attention related to significant deficiencies in the
               design or operation of internal controls over compliance that
               could adversely affect the entity's ability to operate a major
               federal program within the applicable requirements of laws,
               regulations, contracts, and grants.

    			  CNMI

               In examining the internal controls the government of CNMI uses to
               provide reasonable assurance that it is properly recording
               financial transactions and safeguarding public funds, the auditors
               found 10 or more problems significant enough to warrant reporting.
               Most of these problems were material weaknesses in internal
               control over financial reporting. As shown in table 19, the
               auditors also reported numerous problems in compliance with the
               requirements for major federal programs.

               Table 19: CNMI--Reported Weaknesses Identified in the Auditors'
               Reports for Fiscal Years 2001 through 2004

                                                              Compliance with
                                                                requirements
                                                             applicable to each
                                                           major federal program
                                                            and internal control
              Internal Control over financial reporting     over compliance with
               in accordance with government auditing      OMB Circular No. A-133
                   standards (report on financial            (report on federal
                             statements)                          awards)
    Fiscal     Material   Reportable           Material  Reportable
    year     weaknesses   conditions  Total  weaknesses  conditions Total
    2001             10                   0       10         4          13 17
    2002              9                   1       10         2          14 16
    2003             10                   2       12         1          15 16
    2004              8                   5       13         2          31 33

               Sources: CNMI Single Audit Reports for Fiscal Years 2001 through
               2004.

               Note: The numbers of total findings can be equated with the total
               number of reportable conditions. To compute the numbers of
               reportable conditions that were not material weaknesses, we
               subtracted the number of material weaknesses from the total
               findings.

    			  Guam

               The numerous material weaknesses reported by Guam's auditors
               reveal the lack of sound internal controls needed to ensure that
               (1) transactions are properly recorded, (2) assets are adequately
               safeguarded, and (3) federal funds are administered in accordance
               with the applicable requirements of laws, regulations, contracts,
               and grants. Table 20 shows the total number of findings from the
               financial statement audit as reported by the auditors on
               compliance with (1) internal controls over financial reporting and
               (2) with requirements applicable to each major federal program.

               Table 20: Guam--Reported Weaknesses Identified in the Auditor's
               Reports for Fiscal Years 2001 through 2004

                                                              Compliance with
                                                          requirements applicable
                                                           to each major federal
                                                          program and on internal
                  Internal control over financial         control over compliance
              reporting in accordance with government      with OMB Circular No.
              auditing standards (report on financial        A-133 (report on
                            statements)                       federal awards)
                                                                           Total
    Fiscal                               Total                         number
                  Material   Reportable number of   Material Reportable       of
    year     weaknesses   conditions  findings Weaknesses conditions findings
    2001             21           59            80     23         43       66
    2002             41           56            97     30         14       44
    2003              8           11            19      7         16       23
    2004              4            3             7      8         17       25

               Sources: Guam Single Audit Reports for Fiscal Years 2001 through
               2004.

               Note: The number of total findings can be equated with the total
               number of reportable conditions. To compute the numbers of
               reportable conditions that were not material weaknesses, we
               subtracted the number of material weaknesses from the total
               findings.

    			  USVI

               USVI audit findings (material weaknesses and reportable
               conditions) for both internal controls over financial reporting
               and compliance with requirements for major federal programs ranged
               from a total of 31 to 61 for fiscal years 2001 through 2003, as
               shown in table 21.

               Table 21: USVI--Reported Weaknesses Identified in the Auditors'
               Reports for Fiscal Years 2001 through 2004

                                                             Compliance with
                                                         requirements applicable
                                                          to each major federal
                                                         program and on internal
                 Internal control over financial         control over compliance
                  reporting in accordance with            with OMB Circular No.
              government auditing standards (report     A-133 (report on federal
                    on financial statements)                     awards)
                                          Total
                                         number                            Total
    Fiscal     Material  Reportable       of   Material Reportable  number of
    year     weaknesses  conditions findings weaknesses conditions   findings
    2001              2           0            2     41         20         61
    2002              2           0            2     38          9         47
    2003              3           0            3     43         10         53
    2004              3           0            3     28          3         31

               Sources: USVI Single Audit Reports for Fiscal Years 2001 through
               2004.

               Note: The numbers of total findings can be equated with the total
               number of reportable conditions. To compute the numbers of
               reportable conditions that were not material weaknesses, we
               subtracted the number of material weaknesses from the total
               findings.

    			  Appendix III: DOI Inspector General Reports on Four Insular Areas
    			  for Calendar Years 2000�2005

    			  American Samoa

               Audit Report, Assessment and Collection of Taxes, American Samoa
               Government. No. 2002-I-0003. Guam: November 15, 2001.

               Audit Report, U.S. Fish and Wildlife Service Federal Assistance
               Grants Administered by the American Samoa Government, Department
               of Marine and Wildlife Resources, from October 1, 2001, through
               September 30, 2003. No. R-GR-FWS-0013-2004. Reston, Va.: March 31,
               2005.

    			  CNMI

               Audit Report, Saipan Harbor Improvement Project, Commonwealth
               Ports Authority, Commonwealth of the Northern Mariana Islands. No.
               2003-I-0073. Washington, D.C.: September 30, 2003.

    			  Guam

               Audit Report, U.S. Department of Defense Contract Funds,
               Department of Education, Government of Guam. No. 00-I-172.
               Washington, D.C.: January 10, 2000.

               Survey Report, Guam U.S. Passport Office, Government of Guam. No.
               00-I-332. Washington, D.C.: April 14, 2000.

               Audit Report, Loan Programs, Guam Economic Development Authority,
               Government of Guam. No. 01-I-417. Guam: September 21, 2001.

               Audit Report, Qualifying Certificate Program, Guam Economic
               Development Authority, Government of Guam. No. 01-I-419. Guam:
               September 30, 2001.

               Audit Report, Bond Services, Lease Operations and Trust Fund
               Activities, Guam Economic Development Authority, Government of
               Guam. No. 2002-I-0016. Guam: March 28, 2002.

               Audit Report, Management of Federal Grants, Department of Mental
               Health and Substance Abuse, Government of Guam. No. 2002-I-0036.
               Guam: August 19, 2002.

               Audit Report, Guam Waterworks Authority, Government of Guam. No.
               2003-I-0072. Washington, D.C.: September 30, 2003.

               Audit Report, U.S. Fish and Wildlife Service Federal Assistance
               Grants Administered by the Government of Guam, Department of
               Agriculture, Division of Aquatic and Wildlife Resources from
               October 1, 1999, to September 30, 2000. No. R-GR-FWS-0029-2004.
               Reston, Va.: March 4, 2004.

    			  USVI

               Audit Report, Internal Controls over Cashier Operations,
               Government of the Virgin Islands. No. 00-I-166. Washington, D.C.:
               January 3, 2000.

               Audit Report, Administration of Federal Grants, University of the
               Virgin Islands. No. 00-I-216. Washington, D.C.: February 16, 2000.

               Audit Report, Head Start Program Grants, Department of Human
               Services, Government of the Virgin Islands. No. 00-I-499.
               Washington, D.C.: June 14, 2000.

               Audit Report, Low Income Housing Program Grants, Virgin Islands
               Housing Authority. No. 00-I-625. Washington, D.C.: August 24,
               2000.

               Audit Report, Environmental Protection Agency Grants, Department
               of Public Works, Government of the Virgin Islands. No. 00-I-696.
               Washington, D.C.: September 2000.

               Audit Report, Administrative Functions, Legislature of the Virgin
               Islands. No. 01-I-107. Washington, D.C.: December 29, 2000.

               Audit Report, Administration and Collection of Excise Taxes,
               Bureau of Internal Revenue, Government of the Virgin Islands. No.
               01-I-291. Washington, D.C.: March 30, 2001.

               Audit Report, Billing and Collection Functions, Virgin Islands
               Port Authority, Government of the Virgin Islands. No. 01-I-303.
               Washington, D.C.: March 30, 2001.

               Audit Report, Virgin Islands Lottery, Government of the Virgin
               Islands. No. 01-I-290. Washington, D.C.: May 11, 2001.

               Audit Report, Payroll Operations, Department of Education,
               Government of the Virgin Islands. No. 01-I-330. Washington, D.C.:
               May 14, 2001.

               Audit Report, Virgin Islands Fire Service, Government of the
               Virgin Islands. No. 2002-I-0001. (Virgin Islands: October 30,
               2001).

               Audit Report, Job Training Partnership Act Programs, Department of
               Labor, Government of the Virgin Islands. No. 2002-I-0002. (Virgin
               Islands: November 7, 2001).

               Audit Report, Virgin Islands Housing Finance Authority, Government
               of the Virgin Islands. No. 2002-I-0009. Virgin Islands: December
               31, 2001.

               Audit Report, Administrative Functions, Virgin Islands Police
               Department, Government of the Virgin Islands. No. 2002-I-0010.
               Virgin Islands: February 13, 2002.

               Audit Report, Federal Highway Grants, Department of Public Works,
               Government of the Virgin Islands. No. 2002-I-0042. Virgin Islands:
               August 16, 2002.

               Audit Report, Grants for the Construction of Health Care
               Facilities, Department of Health, Government of the Virgin
               Islands. No. 2002-I-0043. Virgin Islands: September 20, 2002.

               Audit Report, Professional Service Contracts, Government of the
               Virgin Islands. No. 2002-I-0046. Virgin Islands: September 30,
               2002.

               Audit Report, Public Finance Authority, Government of the Virgin
               Islands. No. 2003-I-0002. Washington, D.C.: November 22, 2002.

               Audit Report, Compliance with the Memorandum of Understanding
               Between the Governor of the Virgin Islands and the Secretary of
               the Interior. No. 2003-I-0003. Virgin Islands: November 27, 2002.

               Audit Report, Grant for Solid Waste and Wastewater Disposal
               Projects, Department of Public Works, Government of the Virgin
               Islands. No. 2003-I-0012. Herndon, Va.: March 31, 2003.

               Audit Report, Grant for Hazard Mitigation Projects, Virgin Islands
               Police Department, Government of the Virgin Islands. No.
               2003-I-0031. Herndon, Va.: March 31, 2003.

               Audit Report, Grant for Hurricane Recovery Projects, Government of
               the Virgin Islands. No. 2003-I-0032. Herndon, Va.: March 31, 2003.

               Audit Report, Follow-up of Recommendations Relating to Internal
               Revenue Taxes, Bureau of Internal Revenue, Government of the
               Virgin Islands. No. 2003-I-0059. Herndon, Va.: August 29, 2003.

               Audit Report, Emergency Services Surcharge Collections by
               Innovative Telephone Corporation on Behalf of the Government of
               the Virgin Islands. No. 2003-I-0067. Herndon, Va.: September 26,
               2003.

               Audit Report, Use of Official Credit Cards, Government of the
               Virgin Islands. No. V-IN-VIS-0104-2003. Herndon, Va.: August 27,
               2004.

               Audit Report, Financial Arrangements Between the Government of the
               Virgin Islands and Financial Institutions. No. V-IN-VIS-0069-2004.
               Herndon, Va.: September 30, 2004.

               Audit Report, Procurement Practices, Virgin Islands Port
               Authority, Government of the Virgin Islands. No.
               V-IN-VIS-0001-2004. Washington, D.C.: March 28, 2005.

               Audit Report, Grants for Waste Disposal Projects, Department of
               Public Works, Government of the Virgin Islands. No.
               V-IN-VIS-0072-2004. Washington, D.C.: May 11, 2005.

               Audit Report, Indirect Cost Fund, Government of the Virgin
               Islands. No. V-IN-VIS-0110-2003. Washington, D.C.: June 22, 2005.

    			  Appendix IV: Comments from the Department of the Interior

    			  Appendix V: GAO Contacts and Staff Acknowledgments

    			  GAO Contacts

               Jeanette Franzel at (202) 512-9471 or FranzelJ@gao.gov

    			  David Gootnick at (202) 512- 3149 or GootnickD@gao.gov

    			  Staff Acknowledgments

               The following individuals made important contributions to this
               report: Norma Samuel, Emil Friberg, Jr., James Wozny, Maxine
               Hattery, Gina Ross, Sandra Silzer, Seyda Wentworth, and Elwood
               White.

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    ^75Although the insular areas receive grants from many federal agencies,
    one of the grant-making agencies is designated as the cognizant agency for
    purposes of the Single Audit Act. The cognizant agencies have specific
    responsibilities under OMB Circular No. A-133. The cognizant agency is
    usually the agency that provides the predominant amount of funding.

    ^76Pub. L. No. 97-357, 96 Stat. 1705 (Oct. 19, 1982). The 1982 Act
    transferred the functions, powers, and duties once vested in the
    government comptroller for Guam (for the islands of Guam and CNMI), Virgin
    Islands, and American Samoa to the Inspector General, Department of the
    Interior, for the purpose of establishing an organization which will
    maintain a satisfactory level of independent audit oversight of the
    respective territory government.

    ^77All federal awarding agencies are responsible for ensuring that single
    audit reports are completed, are in accordance with OMB Circular No.
    A-133, and are received in a timely manner. Cognizant agencies, among
    other duties, have the additional responsibilities of coordinating
    management decisions for audit findings that affect the audit programs of
    more than one agency and considering auditee requests for extensions to
    the due dates of the reports.

    ^78The Pacific Islands Training Initiative (PITI) was established in 1991
    through an Interagency Agreement between the Graduate School, USDA's
    International Institute, and OIA.

    ^79OIA and financial management officials from the insular areas formed
    IGFOA in 1999 to promote improved financial management in the insular
    areas. All four insular areas belong to the IGFOA and the organization
    holds two conferences each year--one conference is held in one of the
    insular areas and the other is held right after the Government Finance
    Officers Association's annual meeting in the United States.

    ^80Office of Inspector General, U.S. Department of the Interior,
    Management Challenges for Insular Area Governments: An Opportunity for
    Improvement, No. 2002-I-0017 (Washington, D.C.: March 2002).

    ^81The compact states are the Republic of the Marshall Islands, Republic
    of Palau, and the Federated States of Micronesia.

    ^82Office of Inspector General, U.S. Department of the Interior,
    Evaluation Report, Oversight and Follow-up on Audit Findings and
    Recommendations, Pertaining to the Insular Area Governments' Use of
    Federal Funding, No. 2003-I-0011 (Arlington, Va.: Feb. 28, 2003).

    ^83Office of the Inspector General, U.S. Department of the Interior,
    Report on Grants Administered by the Office of Insular Affairs, No.
    2003-I-0071 (Herndon, Va.: Sept. 30, 2003).

    ^84Pub. L. No. 106-531, 114 Stat. 2537 (Nov. 22, 2000).

    ^85These annual summaries of the top challenges facing DOI are published
    in the department's performance and accountability report.

    ^86These numbers exclude the IG's semiannual reports that present the
    results and accomplishments of the Office for the previous 6 months and
    may include information about the four insular areas. Also excluded are
    advisory reports and financial audits of the Department of the Interior.

    ^87As of August 10, 2006, the Territorial Auditor position, the head of
    the Office, remained unfilled.

    ^88The founding parties to the 1988 MOU were the Public Auditor of the
    Federated States of Micronesia, the Public Auditor of the Republic of
    Palau, the Public Auditor of the Commonwealth of the Northern Mariana
    Islands, the Territorial Auditor of American Samoa, and the Auditor
    General of the Republic of the Marshall Islands. APIPA has expanded to
    include Public Auditors from Pohnpei, Yap, Chuuk, Kosrae, Guam, Western
    Samoa, and USVI.

    ^89The IGIA, established in 1999 and reestablished in 2003, is charged
    with working with the Secretary of the Interior to identify insular area
    issues and to make recommendations to the President concerning federal
    government policies and programs. Federal agencies are to coordinate
    significant decisions and activities affecting the insular areas with the
    IGIA.

    ^90If the auditee does not agree with the audit findings or believes
    corrective actions are not required, the corrective action plan in the
    single audit should include an explanation and specific reasons of why the
    plan is not required.

    (194562)

    www.gao.gov/cgi-bin/getrpt?GAO-07-119 .

    To view the full product, including the scope
    and methodology, click on the link above.

    For more information, contact Jeanette Franzel at (202) 512-9471 or
    franzelj@gao.gov.

    Highlights of [84]GAO-07-119 , a report to Committee on Energy and Natural
    Resources, U.S. Senate

    December 2006

    U.S. INSULAR AREAS

    Economic, Fiscal, and Financial Accountability Challenges

    The U.S. insular areas of American Samoa, the Commonwealth of the Northern
    Mariana Islands (CNMI), Guam, and the U.S. Virgin Islands (USVI), face
    long-standing economic, fiscal, and financial accountability challenges.
    GAO was requested to identify and report on the (1) economic challenges
    facing each government, including the effect of changing tax and trade
    laws on their economies; (2) fiscal condition of each government; and (3)
    financial accountability of each government, including compliance with the
    Single Audit Act, which applies to nonfederal entities that receive
    $500,000 or more a year  in federal funding.

    [85]What GAO Recommends

    The Secretary of the Interior should direct the Deputy Assistant Secretary
    for Insular Affairs to (1) coordinate with other federal grant-making
    agencies on issues related to the insular area governments; (2) conduct
    periodic evaluations of the Department of the Interior's Office of Insular
    Affairs conferences and business-opportunities missions; (3) develop a
    framework for conducting site visits to help ensure objectives are
    achieved, information is shared, and monitoring is more efficient and
    effective; and (4) implement procedures for evaluation of progress made by
    the insular areas in resolving audit findings and set a time frame for
    achieving clean audit opinions. DOI agreed with GAO's recommendations.

    The governments of the U.S. insular areas of American Samoa, the
    Commonwealth of the Northern Mariana Islands, Guam, and the U.S. Virgin
    Islands face serious economic, fiscal, and financial accountability
    challenges. The economic challenges stem from dependence on a few key
    industries, scarce natural resources, small domestic markets, limited
    infrastructure, shortages of skilled labor, and reliance on federal grants
    to fund basic services. To help diversify and strengthen their economies,
    OIA sponsors conferences and missions to the areas to attract U.S.
    businesses; however, there has been little formal evaluation of these
    efforts.

    After fiscal year 2001, government spending in the CNMI, Guam, and USVI
    exceeded revenues through fiscal year 2004 (the most recent year for which
    there is complete data on all four areas). As a result, their fiscal
    conditions weakened further during this period. CNMI and USVI ended fiscal
    year 2004 with negative net government assets. For American Samoa the
    picture was mixed, with more stability than the other areas in the period
    2001 through 2003, but a downturn in the balance of governmental funds by
    the end of fiscal year 2004.

    Efforts to meet formidable fiscal challenges and build strong economies
    are hindered by delayed and incomplete financial reporting that does not
    provide timely and complete information to management and oversight
    officials for decision making. The insular area governments have had
    long-standing financial accountability problems, including the late
    submission of required single audits, the receipt of disclaimer or
    qualified audit opinions, and the reporting of many serious internal
    control weaknesses. These problems have resulted in numerous federal
    agencies designating these governments as "high-risk" grantees. The
    Department of the Interior and the federal agencies are working to help
    these governments improve their financial accountability, but greater
    coordination among the agencies would increase the effectiveness of their
    efforts.

    Map Showing Location of Four U.S. Insular Areas

    References

    Visible links
      68. http://www.usviber.org/publications.html
      69. http://www.gao.gov/cgi-bin/getrpt?GAO-05-296
      70. http://www.visitguam.org/members/?pg=research
      71. http://www.eastwestcenter.org/stored/pdfs/OsmanGuamEconomicReport2003.pdf
      72. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21
      73. http://www.gao.gov/cgi-bin/getrpt?GAO-05-41
      83. http://www.gao.gov/cgi-bin/getrpt?GAO-07-119
      84. http://www.gao.gov/cgi-bin/getrpt?GAO-07-119
    *** End of document. ***