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

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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.
			  
			  Interiorï¿½s 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 Areasï¿½ 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 [email protected] , or David
           Gootnick, Director, International Affairs and Trade at
           (202)512-4128 or [email protected] .

           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 2000ï¿½2005
			  
			  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 [email protected]
			  
			  David Gootnick at (202) 512- 3149 or [email protected]
			  
			  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
[email protected].

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
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