Inter-American Foundation: Better Compliance With Some Key Procedures
Needed (Letter Report, 09/28/2000, GAO/NSIAD-00-235).

Pursuant to a congressional request, GAO provided information on the:
(1) Inter-American Foundation's key procedures for selecting
organizations to receive grants, monitoring grantee organizations'
compliance with grant agreements, and auditing grantees' use of funds;
(2) extent to which the Foundation complied with these procedures; and
(3) extent to which the Foundation provides grants to organizations that
also receive financial support from the Agency for International
Development.

GAO noted that: (1) the Inter-American Foundation has established
several key procedures to assure that it awards grants to appropriate
organizations and that grantees observe the terms of grant agreements;
(2) GAO's analysis showed that the Foundation's compliance with its key
procedures has been mixed; (3) the Foundation fully complied with
procedures requiring the submission of financial disclosure reports, the
performance of internal reviews of new proposals, and the disbursement
of funds only after the review of required financial and progress
reports; (4) however, GAO found compliance problems in the following
areas; (5) for only 10 percent of the grants GAO reviewed did the
Foundation's staff meet its requirements to make annual monitoring
visits to grantee organizations and document the results; (6) further,
it met its requirement to visit embassies and document the results for
only 63 percent of the time its staff made country visits; (7)
Foundation contractors submitted required monitoring reports for only 50
percent of the grants in GAO's sample; (8) in 25 percent of the grants
in GAO's sample were financial audit reports submitted within a
reasonable time frame; (9) GAO could not assess the extent of the
Foundation's compliance with its requirement to visit potential grantee
organizations before the award of a grant because the grants in GAO's
sample were approved before the Foundation required staff to document
their visits; (10) the underlying cause for the low compliance with some
established procedures was the Foundation's lack of management controls
and oversight to ensure that procedures were being followed; (11) the
Foundation has recently taken some steps to address these issues; (12)
although the Foundation and the Agency for International Development
generally operate in the same countries in Latin America and the
Caribbean, and both agencies fund microenterprise development projects,
they do not, with very few exceptions, fund the same organizations; (13)
the Foundation typically awards grants to small, grassroots
organizations, while the Agency for International Development focuses on
supporting larger, well-established international organizations whose
resources reach large groups of individuals; and (14) since fiscal year
1998, the Foundation's criterion for grant selection is to award grants
to organizations that have not received support from the Agency for
International Development.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-235
     TITLE:  Inter-American Foundation: Better Compliance With Some Key
	     Procedures Needed
      DATE:  09/28/2000
   SUBJECT:  Internal controls
	     Foreign economic assistance
	     Economic development
	     Foreign governments
	     Grant monitoring
	     Auditing procedures
IDENTIFIER:  Social Progress Trust Fund

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GAO/NSIAD-00-235

Report to the Chairman, Committee on Foreign Relations, U. S. Senate

September 2000 INTER- AMERICAN FOUNDATION

Better Compliance With Some Key Procedures Needed

GAO/NSIAD-00-235

Letter 3 Appendixes Appendix I: Comments From the Inter- American Foundation
26

Appendix II: Comments From the Department of State 35 Appendix III: GAO
Contacts and Staff Acknowledgments 37

Figures Figure 1: Program Profile of IAF Grants Awarded, Fiscal Year 1999 7
Figure 2: IAF Grant Selection Procedures 10

Figure 3: IAF Grant Auditing and Monitoring Procedures 11 Figure 4: Number
of Months Between the IAF's First Disbursement

of Funds and Receipt of First Audit Report 17

Abbreviations

IAF Inter- American Foundation USAID U. S. Agency for International
Development

National Security and International Affairs Division

Lett er

B- 286177 September 28, 2000 The Honorable Jesse Helms Chairman, Committee
on Foreign Relations United States Senate

Dear Mr. Chairman: In 1969, Congress created the Inter- American Foundation,
a government corporation, as an experimental agency to support grassroots
development in Latin America and the Caribbean. A nine- member board of
directors

appointed by the President and confirmed by the Senate governs 1 the
Foundation. In creating the Foundation, the United States broadened its
foreign assistance strategy by channeling financial resources to the poor
through nongovernmental organizations rather than solely through
governmental entities. Since that time, other government- related entities
and governmental agencies, such as the U. S. Agency for International
Development, have started programs that also provide assistance through

nongovernmental organizations directly to the poor. The Foundation has
awarded over 4,250 grants, totaling about $500 million, since its inception
to support activities such as agriculture and community development,
microenterprise 2 development, and

education and research. The Foundation's policy is to award grants only to
organizations that have not engaged in any type of illegal, political, or
other activity or behavior that would make them unsuitable to receive a
grant from the U. S. government. Due to a range of concerns about the
Foundation's activities and management practices, Congress reduced
appropriations to the Foundation from an average of the $21 million it
received during the last 4 years to $5 million in fiscal year 2000.

As a part of the ongoing debate on the continuing relevance and funding
level for the Foundation and its management practices, you raised concerns
about how the Foundation awards, monitors, and administers its 1 Currently,
six of the nine board positions are vacant. 2 Microenterprises are firms
with 10 or fewer employees, including the microentrepreneur and any family
workers.

grants and whether it duplicates efforts of the U. S. Agency for
International Development. As agreed with your office, this report (1)
describes the Foundation's procedures for selecting organizations to receive
grants, monitoring grantee organizations' compliance with grant agreements,
and auditing grantees' use of funds; (2) analyzes the extent of the
Foundation's compliance with these procedures; and (3) discusses the extent
to which the Foundation provides grants to organizations that also receive
financial support from the U. S. Agency for International Development.

To assess compliance with the Foundation's procedures, we examined program
and financial data for a random sample of 50 of the 86 Foundation grants
that were completed and terminated in fiscal year 1999.

Results in Brief The Inter- American Foundation has established several key
procedures to assure that it awards grants to appropriate organizations and
that grantees

observe the terms of grant agreements. These procedures include (1) the
submission of annual financial disclosure reports from staff, officers, and
members of the board of directors to assure the Foundation's activities are

free of conflicts of interest; (2) internal reviews by Foundation staff and
senior officers to assess the merits of new grant proposals; (3) visits to
potential grantee organizations in the country of the grantee organization

to obtain information on potential grantees before the Foundation awards its
grants; (4) annual oversight staff visits to grantee organizations to
monitor implementation of grants and visits to embassies to share
information concerning grantee activities; (5) periodic visits to grantee
organizations by Foundation contractors to monitor grants and submission of
reports on program results; (6) receipt of required financial and progress
reports from grantee organizations before disbursing funds; and

(7) regularly scheduled audits by independent auditors to assess the
grantees' use of U. S. resources.

Our analysis showed that the Foundation's compliance with its key procedures
has been mixed. The Foundation fully complied with procedures requiring the
submission of financial disclosure reports, the performance of internal
reviews of new proposals, and the disbursement of funds only after the
review of required financial and progress reports. However, we found
compliance problems in the following areas. For only

10 percent of the grants we reviewed did the Foundation's staff meet its
requirements to make annual monitoring visits to grantee organizations and
document the results. Further, it met its requirement to visit embassies and
document the results for only 63 percent of the time its staff made

country visits. In addition, Foundation contractors submitted required
monitoring reports for only 50 percent of the grants in our sample. Finally,
in only 25 percent of the grants in our sample were financial audit reports
submitted within a reasonable time frame. We could not assess the extent of
the Foundation's compliance with its requirement to visit potential grantee
organizations before the award of a grant because the grants in our

sample were approved before the Foundation required staff to document their
visits. The underlying cause for the low compliance with some established
procedures was the Foundation's lack of management controls and oversight to
ensure that procedures were being followed. The Foundation has recently
taken some steps to address these issues. For example, in July 2000, it
expanded the role of its internal auditor to monitor the effectiveness of
the Foundation's operations, policies, and procedures. However, although
this step may help the Foundation to identify and correct compliance
problems after they occur, the Foundation has not developed specific
mechanisms to provide reminders or incentives for staff to comply with
required procedures as they carry out their duties.

Although the Foundation and the U. S. Agency for International Development
generally operate in the same countries in Latin America and the Caribbean,
and both agencies fund microenterprise development projects, they do not,
with very few exceptions, fund the same organizations. The Foundation
typically awards grants to small, grassroots organizations, while the U. S.
Agency for International Development focuses on supporting larger, well-
established international organizations whose resources reach large groups
of individuals. Since fiscal year 1998,

the Foundation's criterion for grant selection is to award grants to
organizations that have not received support from the U. S. Agency for
International Development. We are recommending that the President of the
Inter- American Foundation develop a management control mechanism to
facilitate compliance with key procedures designed to assure that
appropriate organizations receive

grants and grant activities are carried out as intended. In commenting on a
draft of this report, the Department of State said the Foundation has
recognized most of the deficiencies we cited and had taken steps to remedy
them. The Inter- American Foundation stated that the report
disproportionately emphasizes the Foundation's shortcomings at a time when
its efforts to improve management and oversight are just becoming evident.
We disagree with the Foundation's comments and believe that our work
reflects improvements made by the Foundation as

well as areas needing improvement. The Foundation also stated that the
report overstates the extent of its noncompliance with certain key auditing
and monitoring requirements, because we assessed grant performance

using Foundation policies that had not yet taken effect. We disagree with
the Foundation's comments. In reviewing the 50 grants, we recognized that
the Foundation's policies changed over the life of the grants and took care
to apply the appropriate policies in each area we assessed.

Background Congress created the Inter- American Foundation (IAF) in 1969 to
expand economic opportunities to the poor not reached by U. S.

government- to- government programs in Latin America and the Caribbean. The
IAF funds projects that support self- help, participatory, local development
initiatives from nongovernmental, private, and nonprofit organizations and
provides grants to the organizations directly. The average size of the
grants awarded in fiscal year 1999 was about $186,000; the

largest was about $458,000. Grants generally last 2 to 3 years. 3 Food
production and agricultural projects comprise 42 percent of IAF grants
awarded in 1999. One such grant provided about $190,000 to an organization
in Peru to help 300 farmers improve their farming techniques

and learn how to process oregano. The next largest category in 1999 was
microenterprise development, making up 34 percent of IAF grants. For
example, one fiscal year 1999 project provided $190, 000 to establish two
loan funds to support income- generating activities carried out by
indigenous women in Mexico. Specifically, the loans will assist the Mexican
women to develop and implement marketing strategies in order to sell their
local crafts both domestically and internationally. Figure 1 provides a

profile of IAF grants awarded in fiscal year 1999 by type of activity. 3
Prior to 1997, IAF routinely amended existing grants, which extended the
duration of the grant for several years. This is no longer a common
practice.

Figure 1: Program Profile of IAF Grants Awarded, Fiscal Year 1999

Education/ training Environmental Community services

6% 7%

11% 42%

Agriculture/ food production 34%

Microenterprise development

Source: The Inter- American Foundation. IAF is funded by congressional
appropriations and the Social Progress Trust Fund. The Social Progress Trust
Fund is administered by the Inter- American Development Bank and consists of
repayment of loans originally made by the U. S. government to various Latin
American and Caribbean governments. These funds are available in the
national currencies of 15 4 countries in which the Foundation operates and
may be spent only in those countries. The current agreement between the
Foundation and the Inter- American Development Bank provided a total of $44
million over a 5- year period from the Social Progress Trust Fund for
Foundation projects. When this agreement expires at the end of 2000, the
Foundation will no longer have access to funds from the Social Progress
Trust Fund.

4 The countries are Argentina, Bolivia, Brazil, Colombia, Costa Rica,
Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama,
Paraguay, Peru, and Venezuela.

In 1998, IAF was informed of the involvement of three grantees in
inappropriate or illegal activities. In May 1996 and again in July 1997, an
IAF grantee organization issued public statements threatening the safety and
well- being of an American citizen. By the time IAF was made aware of

the threats in January 1998, as a result of congressional contact, the grant
had expired and had not been renewed. Similarly, in February 1997, two IAF
grantee organizations receiving IAF funds at that time supported the
kidnapping of two American citizens and others in Ecuador. The

kidnapping victims were eventually released unharmed. IAF did not know about
the kidnapping incident until February 1998 when IAF officials contacted the
U. S. embassy in Ecuador while investigating the prior incident. By that
time, one of the organization's grants had expired, and IAF terminated the
other organization's grant in April 1998, according to IAF documents. As a
result of these two incidences, IAF revised its policy for selecting grantee
organizations to preclude organizations with broad- based memberships that
might potentially engage in political activities.

Key Elements of Grant The Foundation's procedures for awarding grants and
for monitoring

Selection, Monitoring, grantee organizations' compliance with the grant
agreements are outlined

in its program operations guide. We identified several aspects of the and
Auditng

Foundation's procedures that are important for assuring that appropriate
Procedures organizations received grants, which include

annual submission of financial disclosure forms by officers, the board of
directors, and all employees involved in awarding grants or contracts to
assure that IAF's activities are free of conflicts of interest; internal
reviews of grant proposals by staff and senior officers to identify
proposals that best meet the Foundation's funding policy; and staff visits
to potential grantee organizations before grant approval to

assess the merits of the proposal and the capacity of the organization to
carry out the proposed activities. The Foundation's procedures for
monitoring grantee performance and use of funds are also included in its
program operations guide. We identified several aspects of the Foundation's
procedures that are important for effective oversight of grant activities,
such as review, before funds are disbursed, of financial reports and
progress

reports from the grantee organization that describe difficulties grantees
encounter during grant implementation and their efforts to resolve them;

visits, at least annually, to monitor the grantee organization's
implementation of grants to determine if grant activities are carried out
properly and effectively and to the U. S. embassy during each country visit
to update embassy officials on grant activities and obtain their feedback,
and document the results; and visits by contractors hired by IAF who are
located in the country of the

grantee organization to monitor the progress of grant activities, verify and
complete program results data, and submit monitoring reports on the results.
Since December 1997, IAF requires the contractors to submit reports that
describe program results twice a year.

In addition, IAF requires audits, conducted by local independent accounting
firms, to determine whether the grantee is effectively obtaining,
controlling, and using U. S. funds in accordance with the grant agreement.
The requirements and frequency for the financial audits are indicated in the
grant agreement between IAF and the grantee organization. The audits are to
be performed 6 months after the first disbursement of funds, every 18 months
thereafter, and at the completion of the grant. The Foundation's internal
auditor reviews each audit report submitted by the accounting firms and is
responsible for taking action to resolve any discrepancies. Figures 2 and 3
illustrate the grant selection (including coordination), monitoring, and
auditing processes.

Figure 2: IAF Grant Selection Procedures

IAF solicits IAF IAF screens

screens IAF IAF reps reps visit

visit IAF IAF teams

teams Program Program Director

Director IAF solicits

IAF IAF receives receives

and and

organizations organizations

review review proposals proposals

reviews reviews

proposals proposals from from

grant proposals pre- selects

in country that pass

proposals organizations

organizations grant proposals

pre- selects in country

that pass proposals

proposals proposals

of of grant grant

field field review review

in in detail detail

Vice Vice President President

IAF IAF President

IAF IAF

IAF for for Programs

Programs IAF

IAF President IAF

IAF IAF

recommends General General Counsel

Counsel reviews reviews and

and notifies notifies board

board notifies notifies embassy

embassy notifies notifies embassy

embassy recommends

reviews reviews

approves approves

and and Congress Congress of of

of of

of of

proposals proposals for for

proposals proposals

approved grants approved grants

active grants approval

approval proposals

proposals approved grants

approved grants active grants

IAF IAF solicits solicits

comments comments from from

U. U. S. S. embassy embassy

on on

proposed proposed grant grant

New step starting with fiscal year 2000 grants.

Source: Inter- American Foundation.

Figure 3: IAF Grant Auditing and Monitoring Procedures

Grantee IAF

IAF Staff and IAF Internal

Independent Organization

Contractor Management

Auditor Auditor

Submits Submits

Reviews progress

progress Visits Visits grantee

grantee Review

Review Reviews

Audits Audits grantee grantee

and financial organization

reports financial

financial organization and financial

organization reports

reports reports

organization reports

reports Orders

Orders Requests

Observes Observes

Approve Approve

independent independent

Prepares Prepares and and

Requests grant

grant disbursement

disbursement audit audit of

of submits

submits funds

funds activities

of funds grant

audit reports activities

of funds grant

audit reports transactions

transactions Visit Visit grantee

grantee Carries out

Verifies and organizations

organizations Reviews

Reviews Carries out

Verifies and to to assess

assess and

and grant

grant completes

completes compliance with

summarizes activities

activities results results data

data compliance with

summarizes goals goals and

and audit audit report

report objectives

objectives Submits

Visit Visit U. U. S. S.

Submits Embassy Embassy to

to Resolves

Resolves monitoring

monitoring exchange

discrepancies reports

reports exchange

discrepancies information

information Document

Document results

results of of trips

trips

Source: Inter- American Foundation.

Compliance With Key Our analysis of 50 randomly selected grants that
terminated in fiscal year

Procedures Has Been 1999 as well as discussions with IAF, State, and U. S.
Agency for International Development (USAID) officials found that IAF's
compliance

Mixed with its key monitoring and auditing procedures was mixed. We found
full compliance with procedures for identifying potential conflicts of
interest,

conducting required internal reviews of grant proposals, and disbursing
funds after reviewing and analyzing the required reports. However, we could
not test compliance with IAF's requirement that staff visit potential
grantee organizations because the grants in our sample were approved

before IAF staff were required to document these visits. We found that IAF
did not always comply with its requirements to visit grantee organizations
and U. S. embassies during grant implementation and document the results and
obtain reports from contractors hired to monitor programs. In addition, we
found that independent auditors that IAF hired did not

perform independent audits of the grants in a timely manner. We further
found that the Foundation did not have a management control mechanism to
better facilitate compliance with key procedures designed so that only
appropriate organizations receive grants and that grant activities are
carried out as intended. To help address this situation, IAF has expanded
the role of its internal auditor to monitor the effectiveness of the
Foundation's operations, policies, and procedures.

IAF Complied With Conflict IAF complied with the requirements in three of
the seven areas that we of Interest and Other examined. To assure that its
activities are free from conflicts of interest,

Internal Review and IAF requires that certain individuals file financial
disclosure reports Monitoring Procedures

annually. This requirement applies to all employees involved in contracting
services, procuring goods, administering and monitoring grants, auditing any
nonfederal entity, and engaging in other activities and actions that
directly affect the economic interest of any nonfederal entity. In fiscal
year 1999, 45 individuals, including staff, officers, and board members,
were

required to file the reports. We compared a list of those required to file
disclosure reports to the actual reports filed in fiscal year 1999. Reports
were filed for all but two of the individuals on the list. Both individuals
resigned in 1999. An IAF official stated that these individuals had filed
disclosure forms in the past. IAF procedures call for staff to prescreen
proposals to assess the merits of the grant and the suitability of the
organization to receive U. S. government funds. In addition, staff and
senior officials, including the Vice President, the General Counsel, and the
President, perform in- depth reviews of the

proposals that pass the prescreening process and are required to sign
tracking documents indicating that the reviews have taken place. Our
analysis showed that the review documents contained all the appropriate
signatures for 100 percent of the grants in our sample. In addition, IAF's
procedures require that staff review financial and progress reports from the
grantee organization before each grant disbursement is approved. We found
IAF staff complied with this requirement for all 50 grants in our sample.

Extent of IAF Visits to We could not assess the extent of the Foundation's
compliance with its Grantees Is Uncertain

requirement to visit potential grantee organizations before awarding grants
because the grants in our sample were approved before the Foundation
required staff to document their visits. IAF officials explained that
although these visits were not documented, staff always visited potential
grantee organizations prior to grant approval. To improve accountability in
this area, since 1998 IAF has required its employees to submit reports
documenting the required visits to potential grantee organizations. In these

reports, staff are to document meetings and contacts and discuss the merits
of the proposals and the capacity of the organizations to carry out proposed
activities. To ensure that the reports are submitted, IAF initiated a new
practice in June 2000 that requires staff to submit the trip reports before
their travel vouchers are approved.

In addition, in April 1999, to avoid incidents similar to those that
occurred in Ecuador in 1997, 5 the board of directors, in dialogue with
congressional committees, instructed IAF management to improve their grant
selection

procedures by developing a process to better consult with State and U. S.
embassy officials about proposed grantees. At that time, discussions between
IAF and embassy staff were informal, and IAF officially notified

the embassy of the grants after they were approved. In response to the
board's instructions, the Foundation added a new step to its grant selection
procedures. Starting with grants approved in fiscal year 2000, staff are to
submit summaries of the grant proposals selected for in- depth reviews to
the U. S. embassy in the country of the grantee organization for review and
comment before the grants are approved. The purpose of the coordination
procedures is to obtain information on (1) whether the potential grantee

5 Two IAF grantee organizations supported the kidnapping of Americans who
were subsequently released unharmed. IAF withdrew its support from the
active organization.

organization has engaged in any type of illegal, political, or other
activity or behavior that would make it unsuitable to receive a grant from
the U. S. government and (2) whether the general objectives of the proposed
project are compatible with U. S. foreign policy interests. The U. S.
embassies have established internal procedures to implement the new
requirements. In August 1999, State and USAID sent directives to all
diplomatic posts in Latin America and the Caribbean informing them of IAF's
new coordination requirement and directing them to establish implementing
procedures. State and USAID instructed the embassies to develop procedures
that provided for a lead office to send the grant

proposal summaries to other sections of the embassy as appropriate, review
the proposals, and draft a response from the Ambassador.

In June 2000, we contacted the U. S. embassies in the 10 countries in which
the IAF will fund new grants in fiscal year 2000 to determine if they had
established procedures to implement the new coordination requirements. All
of the embassies we contacted except for the posts in Bogota, Colombia, and
Caracas, Venezuela, had received the guidance and had

established implementing procedures. These embassies were subsequently
notified of IAF's new coordination requirements. The embassy officials we
contacted said they had discussed proposed activities with IAF officials but
thus far had received few proposals to review. As of June 2000, IAF had sent
summaries of 17 grant proposals to embassies for review and received
responses for 10 of the proposals.

Field Visits During We found that staff did not comply with the Foundation's
requirement for Implementation Not

visiting the grantee organizations annually during grant implementation
Conducted as Frequently as and documenting the results for 45, or 90
percent, of the grants in our Required

sample of 50 grants. Before 1998, IAF required staff to visit the grantee
organizations, but it did not require them to document the visits. Because
of this situation, we could not determine whether staff performed the
monitoring visits during most of the time the grants in our sample were
active. At the beginning of 1998, according to IAF's Acting President, the

Foundation's policies were revised to require staff to prepare a trip report
for each country that is visited. The report is to document the grantees,
beneficiaries, and others contacted and comment on the grantee's progress in
meeting the objectives of the grant. We reviewed the Foundation's trip
reports covering 1998 and 1999 for the countries in which the grantee
organizations were located. Analysis of

these reports revealed that IAF representatives met the requirement to
conduct annual visits and document the results for only 5 grants, or 10
percent of the grants, in our sample. IAF was unable to provide
documentation to show that staff met the requirement to visit the grantee
organizations once a year for the remaining grants in our sample. An IAF
official stated that despite the information shown in the trip reports, it
is unlikely that Foundation staff would not have visited a grantee
organization at least once during a 2- year period. He stated that IAF has
reemphasized the importance of the field visits to staff. For example, in
1999 IAF issued written monitoring guidelines to the staff and made

monitoring responsibilities a major element of their performance appraisals.

In addition, since 1997, IAF has required its staff to visit the U. S.
embassy in the country of the grantee organization during every visit to the
country. Our analysis of the trip reports for 1998 and 1999 showed no
documentation of IAF staff visits to the embassies in 37 percent of the time
when they made country visits. An IAF official explained that it is a matter
of policy that Foundation employees visit the embassy each time they visit a
country. The official attributed the problem to staff not consistently
documenting all organizations they visited in the reports and stated that
IAF needs to improve its documentation practices. He further stated that in
1998, IAF officials sent a memo to staff that oversee the grants reminding

them of the Foundation's long- standing policy requiring meetings with U. S.
embassy officials on all country visits.

Monitoring Reports Not Our analysis of IAF grant files showed that IAF
contractors had not Submitted as Often as submitted the required numbers of
monitoring reports for 23, or 46 percent,

Required of the grants that we reviewed. The contractors submitted the
required

number of reports for 25, or 50 percent, of the grants. 6 For one grant in
our sample, no reports were provided because IAF did not have a contractor
in the country during the period under review. For another grant, no report
was provided because the contractor was not able to visit the project due to
the damage caused by Hurricane Mitch. According to IAF, prior to December
16, 1997, the contractor's statement of work specified the

number of reports required. Beginning after December 16, 1997, IAF required
the contractors to submit two reports a year.

6 These rates can be projected to the population of grants terminating in
1999 with margin of error of ï¿½ 10 percentage points.

An IAF official explained that in some cases the contractors might have
discussed the program results with Foundation staff via telephone, even
though there were no reports in the files. The IAF official acknowledged
that reports are required and stated that because of budgetary and policy
considerations, IAF is reducing the number of its grants; therefore, the

workload for the Foundation employees and contractors will be more
manageable in the future. Independent Audits Not We found that many of the
audits to assess grantee organizations' use of Timely, and Some Unused funds
and compliance with the grant agreement were performed late and Grant Funds
Have Not Been

that audit discrepancies remain unresolved. IAF requires an audit covering
Returned the first 6 months of grant activity, and, although IAF procedures
do not specify when the auditor should submit the audit report to the
Foundation,

IAF's internal auditor stated that 9 months from the first disbursement is a
reasonable time to receive the first report. Figure 4 shows the number of
months between IAF's first disbursement of funds and receipt of the audit
report.

Figure 4: Number of Months Between the IAF's First Disbursement of Funds and
Receipt of First Audit Report

Number of grants 14

13 12 12

10 10

8 8

6 4

3 2 2

0 7 to 9 10 to 12 13 to 18 19 to 24 25 to 43 Not yet completed Number of
months

Source: GAO analysis of sample of 50 IAF grants (two grants were for less
than $35,000 for which no audit is required). We found that 36 of 48, or 75
percent, of the grants in our sample requiring audits were not received
within 9 months after the first disbursement of funds. The graph shows a
range of 7 to 43 months between the date of first disbursement and the time
IAF received the first audit report.

Moreover, as of June 13, 2000, IAF had not received reports for 38 grants
that ended between 1995 and 1999. The total amount of funds that have not
been audited is about $3.7 million. IAF officials acknowledged that these
audits have been untimely. They attributed the lateness to past vacancies in
the internal auditor position, miscommunication between the independent
auditors and the Foundation, and the lack of preparedness of the grantee

organization. According to one official, the internal auditor position has
been vacant three times since about 1996. He stated that the position is

now filled and, because of the reduction in the number of grants, the
auditor will have time to make sure the audits are completed on time.

Our analysis showed that IAF had not obtained the return of about $130, 000
in unused grant funds that remained at the termination of five grants in our
sample. About $74,000, or 57 percent of this amount, has not been collected

because of a dispute between IAF and the grantee organizations over the
calculation and use of exchange rates. At the time, according to IAF, the
Foundation did not have established procedures for determining which
exchange rate to use. IAF now has such procedures. In addition, about
$54,000 of the uncollected funds are unused funds from a grantee

organization that IAF has been unable to locate since the grant terminated.
The remaining approximately $1,800 consists of unused grant funds
temporarily frozen by the Ecuadorian government in the grantee
organization's bank accounts because of a banking crisis. IAF's internal
auditor is still trying to resolve these discrepancies.

Expanded Role for IAF's In July 2000, to assure compliance with procedures,
IAF expanded the role Auditor

of its internal auditor to monitor the effectiveness of the Foundation's
operations, policies, and procedures. Previously, the auditor's sole role
was to manage and review the audits of the Foundation's grants. To
accomplish

this task, as of July 2000, the auditor will report directly to the Office
of the President rather than the Office of Financial Management. The
Foundation's Acting President stated that the auditor would have the time to
perform internal reviews as well as handle his other duties because the
number of active grants has decreased.

IAF and USAID Although IAF and USAID fund some similar types of activities
and operate Generally Fund

in some of the same countries, they generally do not fund the same
organizations. Both agencies provide grants to organizations to increase
Different Organizations

the availability of financial services, such as microenterprise loans, to
the poor. For example, in fiscal year 1999, a typical IAF project in El
Salvador provided about $297,000 over 2 years to an organization to
establish 24 credit funds. About $8 million, or 34 percent, of IAF's program
were for microenterprise projects in fiscal year 1999. Similarly, a typical
USAID

microenterprise project in El Salvador provided about $566, 000 to an
organization to improve the quality of financial services to poor clients by
developing a consortium of nongovernmental organizations to provide
financial and nonfinancial services to more than 15, 000 clients. The vast
majority of USAID's microenterprise grants involve financial services

programs. In fiscal year 1999, both agencies funded projects in Bolivia,
Brazil, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua,
Panama, and Peru.

IAF's current policy for selecting grantee organizations is to provide
grants to organizations that are not funded by USAID. According to an IAF
official, the Foundation's policy for approving grants has evolved over
time, and at one time IAF was encouraged to co- fund organizations with
USAID. However, during fiscal year 1998, IAF's board of directors stressed
the need for IAF to distinguish itself from other development agencies. To
accomplish this task, the board suggested that the Foundation seek to
support organizations that have not received previous USAID funding and

that are unlikely to be funded by USAID. In fiscal year 1999, the search for
new potential grantees that had not received previous IAF funding or support
from other U. S. government foreign assistance programs became a

primary focus of the Foundation. IAF has provided grants to a few
organizations in fiscal years 1998 and 1999 that also received support from
USAID. A comparison of about 200 IAF grants approved beginning fiscal year
1998 to a list of organizations involved in USAID's microenterprise program
yielded 6 IAF grantee organizations that were also funded by USAID. Most of
these organizations

received support from USAID indirectly through another organization. For
example, in 1998, IAF awarded a grant of about $310,000 over 3 years to a
nonprofit development association in Nicaragua to provide local, small-
scale businesses with loans and training to improve their workplaces and
strengthen their business skills and income- generating enterprises. Through
the Public Law 480 title III program, 7 USAID donated agricultural
commodities valued at about $100,000 from June 1996 to September 1999 to the
Nicaraguan government. The donated commodities were sold on the

domestic market, and the revenue generated from the sale was used to finance
a microenterprise credit fund for the same nonprofit association for which
IAF awarded a grant. According to IAF's Acting President, the Foundation's
policy of not awarding grants to organizations funded by USAID applies to
organizations that receive funds directly, rather than indirectly, from
USAID.

7 Under this food assistance program, support, sometimes in the form of
commodities or technical assistance, is provided through another
organization or through the host country government.

The IAF official stated that IAF has sometimes awarded grants to
organizations also supported by USAID because of special circumstances in
the country of the grant. For example, in fiscal year 1999 IAF awarded a
grant of about $458,000 to an organization in Nicaragua to help the people
in the western region of that country recover from the damage caused by
Hurricane Mitch by establishing a local- development small loan fund. This
organization also received about $171,000 under USAID's program for rapid
reconstruction and sustainable recovery in Hurricane Mitch- affected areas
of Nicaragua.

Although IAF and USAID awarded grants to a few of the same organizations,
and fund similar microenterprise projects and work in some of the same
countries, IAF and USAID officials stated that they do not consider their
programs to be duplicative. IAF tends to support small, local grassroots
organizations that are not generally reached by most other U. S. government
entities, including USAID. For example, one USAID official overseas stated
that many of the organizations that IAF usually works with would not qualify
for USAID support, because they are too small to have

the accountability systems USAID requires. Other USAID officials stated that
they have sometimes referred organizations not eligible for USAID grants to
IAF. USAID generally works with larger organizations, such as the World
Council of Credit Unions and Catholic Relief Services. Most are umbrella
organizations that funnel USAID assistance to member organizations. In
contrast, IAF deals directly with the small groups that are

members of the umbrella organizations. The agencies' approaches to
developing projects and policies for selecting organizations also differ.
IAF solicits proposals from local, grassroots organizations that identify
local problems and design their own projects to solve those problems. It
does not identify broad development needs for a country or design projects
to meet those needs. In addition, IAF does not maintain a permanent presence
overseas. In contrast, USAID identifies development needs, designs programs,
and maintains a permanent

presence overseas. While IAF stresses local development and gives preference
in awarding grants to organizations to which it has not previously awarded a
grant, USAID requires the organizations that it supports to have established
performance records or be headed by experienced management teams. It also
emphasizes large- scale projects

that reach large populations.

Conclusions The Inter- American Foundation has complied with its procedures
for requiring the submission of financial disclosure reports, performing
internal reviews of new proposals, and disbursing funds only after it
reviews required financial and progress reports from the grantee

organization. It has also improved its grant selection procedures by
developing a process to better consult with State and U. S. embassy
officials about proposed grantees. Nevertheless, the Foundation does not
have a mechanism in place for assuring that key procedures are implemented.
Specifically, mechanisms are lacking to facilitate compliance with
procedures for (1) documenting staff visits to monitor grantees and to

embassies to share information concerning the grantees, (2) submitting
contractor monitoring reports, and (3) receiving audit reports on a timely
basis. Without such compliance, IAF does not have assurance that appropriate
organizations are selected to receive grants and that grant activities are
carried out as intended. IAF's recent decision to expand the

role of the internal auditor should help. However, assessing compliance
after the fact is not enough to ensure that the procedures are actually
followed.

Recommendation for In order to effectively oversee and monitor grantee
activities, we

Executive Action recommend that the President of the Inter- American
Foundation, with the

board of directors' approval, develop a management control mechanism to
provide oversight of compliance with monitoring and auditing procedures
designed to ensure that the appropriate organizations receive grants and
grant activities are carried out as intended.

Agency Comments and We received written comments from the Inter- American
Foundation and

Our Evaluation the Department of State. These are reprinted in appendixes I
and II. State

commented that the Foundation has recognized most of the deficiencies cited
in our draft report and has taken additional steps to remedy them,
particularly in ensuring that the Foundation maintains close contact with U.
S. embassies in the countries of the grantee organizations. We agree that
the Foundation has taken steps to improve its oversight of grantees, as
evidenced by its establishment of several new procedures during the past few
years. However, we believe that our analysis demonstrates that further steps
are needed to assure greater compliance with grant monitoring and

auditing procedures.

The Foundation stated that the draft report disproportionately emphasizes
the Foundation's shortcomings at a time when its efforts to improve
management and oversight are just becoming evident. We do not agree with

the Foundation's statements and believe that the draft is both balanced and
accurate. The draft report (1) describes steps the Foundation is taking to
better consult with State and U. S. embassy officials about proposed
grantees and its recent decision to expand the role of its internal auditor
to assess compliance with its requirements, (2) discusses areas of
compliance, and (3) presents areas where better compliance is needed.

The Foundation also stated that our report overstates the extent of
noncompliance with its requirements for (1) documenting staff visits to
grantees, (2) obtaining contractor monitoring reports, and (3) receiving

audit reports on a timely basis. The Foundation stated that we did not use
the appropriate policy for determining compliance in these areas. We
disagree with the Foundation's view and believe our report accurately
reflects the extent of noncompliance. In reviewing the 50 grants, we
recognized that the Foundation's policies changed over the life of the
grants and took care to apply the appropriate policies in each area we
assessed. Where the Foundation's policies were not formally issued or
clearly documented, we relied on statements made by Foundation officials to
determine the policy in place and the effective date of the policy. We
afforded the Foundation with opportunities to provide additional
documentation in each instance of noncompliance and where it did we

incorporated the changes to our analysis prior to sending the draft report
to the Foundation and State for comment. Specifically, we disagree with the
Foundation's statement that we used the wrong effective date for the policy
requiring staff to document visits to grantee organizations and, as a
result, overstated the extent of noncompliance. We were told by the Acting
President that the policy to document visits took effect at the beginning of
1998. During the course of

our review, the Foundation provided us several draft policy documents with
varying effective dates for when the requirement was to start. In its
comments on our report draft, the Foundation stated that its requirement for
staff to document visits took effect in June 1998, however, the

Foundation did not provide us any formal documentation to this effect. Even
if we used June 1, 1998, rather than January 1998, as the starting date of
the policy and eliminated grants expiring within 1 year from our sample,

only 6 of 17 remaining grants would have met the requirement. In assessing
the extent to which contractors submitted required monitoring reports, we
used either the specific requirements which were included in the scopes of

work in some contracts, or the Foundation's general policy which required
all contractors to submit reports twice a year beginning after December 16,
1997. Finally, in absence of specific policies for assessing compliance with
audit requirements, we used 10 months as the standard in our analysis even

though the Foundation's internal auditor stated that 9 months following the
first disbursement of funds was a reasonable timeframe for expecting results
to be submitted. State and the Foundation stated that our report found no
overlap or duplication in missions between the Foundation and the U. S.
Agency for

International Development. However, our work focused on whether the
Foundation and USAID awarded grants to the same organizations in the past
and on the types of entities that each organization funds. We did not
examine whether or not there is overlap between the missions of the Inter-
American Foundation and USAID.

See appendix I for GAO's detailed response to the Foundation's comments.
Scope and To describe IAF's procedures for selecting organizations to
receive grants, Methodology

monitoring grantee organizations' compliance with grant agreements, and
auditing grantees' use of funds, we examined IAF documents such as the
Foundation's program office operations guide, audit guidelines, policy
memorandums, minutes of meetings of the board of directors, and cables to
the U. S. embassies between 1999 and 2000. We discussed the procedures and
any planned improvements with senior officials at IAF, State, and

USAID in Washington, D. C. We also contacted State and USAID officials at
the U. S. embassy in Brasilia, Brazil; Bogota, Colombia; Santo Domingo,
Dominican Republic; San Salvador, El Salvador; Guatemala City, Guatemala;
Mexico City, Mexico; Managua, Nicaragua; Panama City, Panama; Lima, Peru;
and Caracas, Venezuela, to discuss the extent of coordination with IAF. In
addition, we contacted the current members of IAF's board of directors to
discuss the board's role and responsibilities.

To analyze whether the Foundation complied with its procedures, we randomly
sampled and reviewed the program, financial, and audit files for 50 of the
86 grants that terminated in fiscal year 1999. With the exception of the
monitoring reports from the contractors and the audit reports from the
independent auditors, the required documentation in the files was in
English. We used the services of a GAO employee fluent in Spanish to review
the monitoring reports and other documents. We used a data collection
instrument that incorporated IAF's procedures in effect during

the life of the grants. The population was limited to terminated grants
because some of the requirements are not accomplished until the grant has
been completed. Selecting ongoing grants would have resulted in missing data
for many of the requirements. The sampling strategy resulted in population
estimates with a precision of ï¿½ 10 percentage points.

To discuss the extent to which IAF awards grants to organizations that are
also supported by USAID, we compared an IAF list of about 200 grants
approved in fiscal years 1998 and 1999 to a list of organizations that
participated in USAID's microenterprise program during those same years. We
also discussed the policies IAF and USAID use to select grantee

organizations with officials from both agencies. We performed our work from
January 2000 through August 2000 in accordance with generally accepted
government auditing standards. We are sending copies to David Valenzuela,
Acting President, Inter- American Foundation; the Honorable Madeleine K.
Albright, the

Secretary of State; the Honorable J. Brady Anderson, Administrator, U. S.
Agency for International Development; and interested congressional
committees. We will also make copies available to others upon request.
Please contact me at (202) 512- 4128 if you or any members of your staff
have any questions concerning this report. Other GAO contacts and staff
acknowledgments are listed in appendix III.

Sincerely yours, Benjamin F. Nelson Director, International Relations

and Trade Issues

Comments From the Inter- American

Appendi x I

Foundation Note: GAO comments supplementing those in the report text appear
at the end of this appendix.

See p. 23. See p. 22. See comment 1.

See comment 2. See comment 3. See comment 4.

See comment 4. See comment 5.

See comment 6.

See comment 7. See comment 8. See comment 9.

See comment 9. See comment 9.

The following are GAO's comments on the Inter- American Foundation's letter
dated September 7, 2000.

GAO Comments 1. The Foundation commented that none of our reviewers had
Spanish capability, although most reports and material in the files are in
Spanish. While the monitoring reports submitted by the contractors and the
audit reports submitted by the independent auditors were in Spanish, the
required documentation of Foundation compliance with procedures was in
English. A GAO staff member fluent in Spanish reviewed the monitoring
reports and other documentation in the files.

We have revised our methodology section to reflect this review. The
Foundation also faulted us for not making field visits. However, field
visits were not necessary to assess compliance with the Foundation's
internal procedures for administering and monitoring grant activities
because these procedures require staff to place in the Foundation's grant
files documentation showing compliance with Foundation

procedures. 2. We disagree with the Foundation's statement that we did not
use the

appropriate effective date for the policy to document staff visits to
grantee organizations. We relied on statements made by the Acting President
that the policy took effect at the beginning of 1998, because during the
course of our review, the Foundation provided several policy documents in
draft with varying effective dates. In its comments to a draft of our
report, the Foundation stated that its requirement for staff

to document visits took effect June 1, 1998; however, the Foundation did not
provide formal written documentation of this requirement. As a result, we
believe our analysis is correct as presented in the report. It should be
noted that even if we used June 1, 1998, as the starting date for the
requirement to document visits and eliminated the grants expiring within 1
year from our sample, only 6 of 17 remaining grants would have met the
requirement.

The Foundation also stated that two grants in our sample expired in 1997. We
disagree with this comment. We selected our sample from a list that was
provided by the Foundation of grants that terminated in fiscal year 1999.

For the grants in our sample where the Foundation did not have trip reports
that documented the visit to the grantee, we requested other forms of
documentation showing that the Foundation staff visited the

grantee organization. In a couple of instances, the Foundation provided
documentation, such as travel vouchers or notes, and we reflected the
changes in our analysis. However, for most instances, the Foundation was not
able to document required visits to grantees, and therefore we did not
revise our report.

3. The Foundation stated that GAO did not apply the appropriate criteria for
assessing whether contractors submitted monitoring reports for the grants in
our sample. Specifically, the Foundation stated that the

contractors for the El Salvador grants in our sample were not required to
submit monitoring reports during the period that the grants were in effect.
We disagree with this comment. The Foundation's scope of work

for its contractors in El Salvador states that they were required to submit
monitoring reports twice a year beginning in December 1996 through June
2000. Our analysis showed that 6 of the 14 grants in our sample from El
Salvador met the requirement for submitting monitoring reports twice a year.
We revised our report to describe in detail the criteria we used to assess
compliance with this requirement.

For one grant in our sample, IAF stated that we applied the policy requiring
monitoring reports to a grant that had expired a year before the policy was
issued. We had, in fact, concluded that the contractor

met the reporting requirement for this grant. 4. The Foundation took
exception to the fact that we did not give it credit for having a 98-
percent compliance rate for completing the audits and

that the amount of uncollected funds we reported was not material. However,
despite our requests, the Foundation did not provide us documentation of the
total number of grants requiring audits for the period covered by our
review. Therefore, we could not verify the

Foundation's compliance rate. The Foundation also stated that we applied
inappropriate criteria in determining whether audits performed by
independent contractors of grantee activity were late. The Foundation
requires an audit after the first disbursement of funds to cover 6 months of
grant activity, but it does not have an explicit policy stating when audit
reports should be submitted. However, the Foundation's internal auditor
stated that 9 months after the first disbursement was a reasonable time to
receive the report. We counted reports as being late only if they were
received at least 10 months from the date of the first disbursement. We
added a chart to our report that provides the details of our analysis.

As to the materiality of the $130, 000 of uncollected, unused funds
identified by grant audits, the Foundation did not provide documentation, so
that we could confirm whether $62,004,160 was the total amount of grants
outstanding. 5. The Foundation stated that our analysis of its requirement
for staff to

visit embassies during each country visit did not take into consideration
the various Foundation policies in effect at different times. We disagree
with the Foundation's view that we did not use the appropriate policy. Our
assessment was based on the Foundation's policy that took effect in 1997
requiring that staff visit embassies as part of every country visit.
However, trip reports to document the visits

were not required until 1998. Our analysis of the trip reports for visits
that took place in 1998 and 1999 showed that for 56 country visits, IAF
staff visited the embassy in the respective countries 35 times. 6. The
Foundation questioned our statement that the amount of grants not

audited totaled $3.7 million rather than the $3. 2 million the Foundation
reported. As we explained to Foundation staff and officials, our analysis of
the sample of 50 grants revealed two additional grants that had not been
audited. We added the unaudited amount of the grants we identified to the
amount IAF reported to arrive at the $3.7 million.

7. We revised the report to show the number of grants IAF reported. 8. We
revised the report to remove the reference to the requirement that
Foundation staff visit the U. S. embassy before the grant is awarded.

9. We revised the report to reflect the information provided by the
Foundation that one grantee, not two, made statements threatening an
American citizen. However, the Foundation's statements concerning the status
of the grantee involved in the threat and the involvement of grantees in a
kidnapping are not supported by the documentation in the Foundation's files.
The Acting President stated that the organization that made the threat was a
former grantee and that the organization later considerably “toned
down” this statement in a letter to the Foundation. Our audit work,
however, indicates that the grantee

organization was receiving funds from the Inter- American Foundation at the
time that it issued threats against the American citizen. Moreover,
documentation provided by IAF does not show that the organization later
toned down its statements. IAF also stated that one of the organizations
that supported the kidnapping was a former grantee and

that neither organization was involved in the demand for ransom. However,
Foundation documents we reviewed stated that both organizations were
receiving funds at the time of the kidnapping. Moreover, according to an
internal Foundation memorandum, the

grantees not only supported the kidnapping, but also signed, along with
other indigenous groups, a document that raised the ransom demand to $2
million. We also provided additional details in the background to reflect
these corrections.

Appendi x II Comments From the Department of State

Appendi x II I GAO Contacts and Staff Acknowledgments GAO Contacts Jess Ford
(202) 512- 4128 Phyllis Anderson (202) 512- 7364 Acknowledgments In addition
to those named above, La Verne Tharpes, Norm Thorpe, and

Mary Moutsos made key contributions to this report. Other contributors
include Jack Edwards, Rona Mendelsohn, Jeanette Espinola, and Jody Woods.

(711553) Lett er

GAO United States General Accounting Office

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Contents

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Appendix I

Appendix I Comments From the Inter- American Foundation

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Appendix I Comments From the Inter- American Foundation

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Appendix I Comments From the Inter- American Foundation

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Appendix I Comments From the Inter- American Foundation

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Appendix I Comments From the Inter- American Foundation

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Appendix I Comments From the Inter- American Foundation

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Appendix II

Appendix II Comments From the Department of State

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Appendix III

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