Foreign Assistance: African Development Foundation's Overhead Costs Can
Be Reduced (Letter Report, 06/02/95, GAO/NSIAD-95-79).

Pursuant to a congressional request, GAO reviewed the African
Development Foundation's (ADF) administrative and financial management
practices, focusing on whether ADF: (1) used program funds for
administrative expenses; (2) presented reliable data in its budget
submissions to Congress; and (3) complied with financial reporting
requirements.

GAO found that in fiscal year 1994, ADF: (1) spent more of its budget
for administrative expenses than similar agencies, because of higher
salaries and its greater use of contractors to carry out ADF functions;
(2) exceeded the amounts included in its budget, partly because its
board of directors provided insufficient oversight of its activities;
(3) was not bound to the amount it spent for administrative overhead,
because its funds were appropriated as a lump sum and not earmarked for
program or administrative use; (4) budgetary and cost data for program
management and support was unreliable and based on unaudited financial
statements and an accounting system that was not viable for audit; (5)
and the Office of Management and Budget acknowledged the data problems
and took steps to improve the quality of budget reporting; and (6) did
not comply with financial reporting, internal controls assessment, and
budget report reconciliation requirements, but it took steps to do so.

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

 REPORTNUM:  NSIAD-95-79
     TITLE:  Foreign Assistance: African Development Foundation's 
             Overhead Costs Can Be Reduced
      DATE:  06/02/95
   SUBJECT:  Data integrity
             Administrative costs
             Internal controls
             Financial management
             Federal agency accounting systems
             Appropriated funds
             Financial statement audits
             Financial disclosure reporting
             Reporting requirements
             Accounting procedures

             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Subcommittee on Foreign
Operations, Committee on Appropriations,
U.S.  Senate

June 1995

FOREIGN ASSISTANCE - AFRICAN
DEVELOPMENT FOUNDATION'S OVERHEAD
COSTS CAN BE REDUCED

GAO/NSIAD-95-79

African Development Foundation


Abbreviations
=============================================================== ABBREV

  ADF - African Development Foundation
  IAF - Inter-American Foundation
  OMB - Office of Managementand Budget

Letter
=============================================================== LETTER


B-256714

June 2, 1995

The Honorable Patrick J.  Leahy
Ranking Minority Member
Subcommittee on Foreign Operations
Committee on Appropriations
United States Senate

Dear Senator Leahy: 

This report, prepared at your request, discusses the African
Development Foundation's (ADF) administrative and financial
management practices.  You were concerned about whether ADF used its
resources efficiently and asked that we assess the levels that ADF
budgeted and spent on administrative overhead, specifically whether
ADF (1) used program funds for administrative expenses, (2) presented
reliable data in its budget submissions to Congress, and (3) complied
with financial reporting requirements. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

During fiscal year 1994, as in prior years, ADF spent more of its
budget for headquarters administrative expenses (about 28 percent),
than the Inter-American Foundation (IAF), an organization that is
comparable to ADF, and other similar agencies spent for such costs. 
ADF's overhead rate was higher mainly because of higher salaries and
greater use of consultants and contractors than were budgeted to
carry out headquarters functions.  This may have occurred, in part,
because ADF's board of directors provided insufficient oversight of
ADF activities between 1991 and 1994. 

Because ADF's funds are appropriated as a lump sum and not earmarked
for program or administrative use, ADF is not bound by statute as to
the amount it can spend for administrative overhead.  During fiscal
years 1991-94, ADF generally spent more for administration and
in-country program support and less for development grants than it
proposed in its congressional budget submissions.  It also exceeded
amounts it included in its own budgets for administrative costs and
may have exceeded the amount that the Office of Management and Budget
(OMB) apportioned to ADF for administrative costs during 1 or more
years of this period. 

ADF budgetary and cost data presented to Congress and OMB for program
management and support (administrative overhead) was not reliable. 
The data was based on unaudited financial statements and an
accounting system that was not viable for audit.  Further, the data
did not always agree with the amounts shown in ADF records or reports
to ADF's board of directors, and explanations were not provided as to
why actual costs sometimes varied significantly from the budget
estimates.  Program categories used to present data to Congress and
OMB were not consistent in format from year to year, making
comparisons difficult; some costs were not properly coded; and
narrative justifications did not adequately describe what the costs
covered.  ADF and OMB have recently acknowledged the problem and
taken steps to improve the quality of budget reporting. 

ADF did not meet the financial reporting, internal controls
assessment, and budget report reconciliation requirements of the
Government Corporation Control Act; however, it began steps in 1994
to do so. 

In commenting on a draft of this report, ADF's new Chairman of the
Board indicated that ADF has already addressed or is in the process
of addressing most, if not all, of the problems noted in this report. 


   BACKGROUND
------------------------------------------------------------ Letter :2

ADF was created by Congress in 1980 as an independent public
corporation to support local self-help initiatives of the poor in
Africa.  It was patterned after IAF, which provides small social and
economic development grants to grassroots organizations in Latin
America and the Caribbean.  ADF is authorized to prescribe its own
rules and regulations for carrying out its functions.  It also has
authority to execute contracts and agreements, and to employ and fix
the compensation of staff.  ADF is subject to the Government
Corporation Control Act provisions applicable to wholly-owned
corporations and has stated that its programs and operations are
generally administered in accordance with existing federal
regulations. 

ADF's charter calls for a seven-member bipartisan board of directors,
comprised of five private sector and two public sector members,
appointed to 6-year staggered terms by the President with Senate
approval.  The board is responsible for the Foundation's overall
management.  This includes establishing policy and monitoring program
activities to ensure they are carried out within the framework of
legislative authority.  The board also appoints a president who
manages the day-to-day operations. 

ADF began operations in 1984, and as of September 30, 1994, had
funded 415 development grants and 123 research grants in 31 African
countries.  It had obligated about $45.4 million for development
projects and $3.7 million for research through fiscal year 1994.  Its
budgets for fiscal years 1993 through 1995 have remained constant at
$16.9 million.  During fiscal year 1994, ADF had a staff of 54 at its
Washington, D.C., headquarters and used the services of local country
liaison officers, resident evaluators, technical assistance
providers, and auditors under cooperative agreements and contract
arrangements in 22 African countries. 


   ADMINISTRATIVE OVERHEAD IS
   HIGHER THAN OTHER SIMILAR
   AGENCIES
------------------------------------------------------------ Letter :3

ADF's administrative overhead was significantly higher than other
grassroots development organizations.  The overhead rate, which
generally declined between fiscal years 1984-90 as the size of ADF's
budget increased, has remained fairly constant at about 28 percent
between fiscal years 1991-94 even though ADF's budget increased from
about $13 million to $17 million during this period.  In comparison,
IAF, which administered a budget that was more than twice as large as
ADF's ($38 million versus $17 million), spent 21 percent or less of
its budget for administrative overhead during the period.  ADF also
spent proportionately more of its budget for in-country support and
less for development grants.  (See fig.  1.)

   Figure 1:  Comparison of ADF
   and IAF Budget Expenditures,
   Fiscal Year 1994 (dollars in
   millions)

   (See figure in printed
   edition.)

We also found that two other regional development assistance
organizations with similar grant making activities but different
program delivery systems and accounting policies, the Asia and
Eurasia Foundations, which are privately operated under contract
funding arrangements with federal entities, had lower overhead rates
than ADF.  During fiscal year 1994, they reported combined program
services and administrative overhead of 17.9 percent and 18.3
percent, respectively. 

While ADF had less than one-half the overall funding level and spent
proportionately less of its budget for development grants than IAF
(as shown in fig.  1), it maintained program activity in as many
countries as IAF but at a much lower volume per country.  Both
organizations were active in 22 countries (though ADF had suspended
operations in several countries due to turmoil at the end of fiscal
year 1994).  Whereas the grants awarded by the organizations were of
comparable size, the number and total value of grants awarded by ADF
per country were less than one-half of those awarded by IAF.  During
fiscal years 1993-94, ADF averaged about three new development grants
and less than $400,000 per country whereas IAF averaged about seven
new grants and more than $1.1 million per country.  In addition, ADF
managed a much smaller portfolio of active grants than IAF, including
issuing far fewer grant amendments and supplements. 

Both ADF and IAF spent a comparatively modest share of their budgets
(5 percent versus 3 percent) for a congressionally mandated research
program of providing grants to local nationals and funding activities
that seek to disseminate "lessons learned" through them, as well as
for in-country technical assistance and evaluation.  We do not
believe that these research and support activities had a material
effect on either of their administrative overhead rates since they do
not appear to require as much staff supervision as development
grants, in part, because they are not audited and they require less
reporting and formal review. 

The difference between ADF's and IAF's administrative overhead costs
can be attributed mainly to higher ADF personnel compensation costs. 
Headquarters personnel compensation is ADF's fastest growing expense
and accounts for about two-thirds of the overhead cost.  ADF had
higher graded positions than IAF--more than half of its headquarters
staff was GS-12 or above--and a higher graded management structure. 
In their respective program offices, ADF had two regional directors
(GS-15) that each supervised three regional managers (GS-13/14) and
staff whereas IAF had one vice president (GS-15) that supervised four
regional directors (GS-14) and staff.  Also, IAF had no counterpart
to ADF's newly established Director of Central Operations (GS-15) and
Public Affairs Officer (GS-14). 

ADF's administrative support services costs were also higher than
planned or relative to IAF because ADF made significant and
frequently unbudgeted use of consultants and contract support staff
to supplement the work performed by its direct-hire employees.  ADF
spent over $400,000 annually for consulting and temporary services
during fiscal years 1991-94, or more than double the amount that was
budgeted for them.  The large majority of this cost was for long-term
personal services contractors providing support services ranging from
1 to 4 years.  In most cases, these contractors were retained by ADF
on a continuous basis through award of successive annual contracts,
including some for individuals who were later hired as regular
employees.  While ADF's legislation\1 authorizes it to make contracts
with individuals as necessary to carry out its functions, some
contractors were providing services more properly reserved to
employees.  Several of the contractors who were ultimately hired
continued to perform the same jobs they had done before.  In
addition, OMB confirmed an agreement with ADF in April 1992 that by
September 30, 1992, "no contractors will be permitted to perform
inherently governmental functions at ADF." While ADF phased down the
use of personal services contractors, it continued to use them to
perform governmental functions, such as reviewing project proposals
and monitoring grants and agreements during all of fiscal year 1993
and into 1994.  ADF had released all but two contractors by January
1994 and ADF officials told us in March 1995 that they planned to
release those two within several months. 

ADF also spent a higher proportion of its administrative budget on
travel and transportation than IAF (about 12 versus 8 percent).  Much
of the difference can be accounted for by the longer distances ADF
personnel have to travel and the difficulties in getting to and
around African countries.  However, ADF travel policies and practices
contributed to higher operating costs.  For example, ADF records
showed that the board of directors, president, and vice president
traveled business class by virtue of their position and that staff
members who accompanied them also did so without having to make any
further justification.  Moreover, adequate efforts were not made to
defray travel costs by combining tasks to eliminate short trips.  ADF
has since tightened its travel policies, including improving trip
planning and eliminating all business class travel except in cases of
medical emergency. 


--------------------
\1 Public Law 96-533, Sec.  506 (a)(5). 


   INADEQUATE BOARD OVERSIGHT AND
   COST CONTROLS CONTRIBUTED TO
   HIGHER OVERHEAD
------------------------------------------------------------ Letter :4

Between 1991 and 1994, ADF's board of directors, due to extended
vacancies in its membership, did not provide the oversight necessary
to control overhead costs.  As shown in table 1, even though four
board members agreed to extend their service terms, there were still
long periods of vacancy in board membership.  Four of the seven board
member positions were vacant for periods ranging from 14 months to 3
years and only one position did not experience a vacancy or need to
extend a member's term of service. 



                           Table 1
           
             Service Extensions and Vacancies on
            ADF's Board of Directors Between 1991-
                              94

                 Extended
                 service        Vacancy        Length of
Position         period         period         vacancy
---------------  -------------  -------------  -------------
Chairman         10/89 to 3/    8/92 to 7/94   23 months
                 91

Vice chairman    None           6/92 to 5/94   23 months

Public member    None           None           None

Public member    None           1/93 to 3/94   14 months

Private member   10/93 to 5/    5/94 to        Since 5/94
                 94             present

Private member   10/93 to 5/    None           None
                 94

Private member   11/89 to 12/   12/91 to 10/   34 months
                 91             94
------------------------------------------------------------
Until a new board was formed in July 1994, the board had not met at
least quarterly, as stipulated in the ADF's board manual.  Three out
of four previously scheduled meetings (in June 1993 and in February
and June 1994) were canceled or delayed because the board could not
establish a quorum or lacked a chairman.  Also, the last meeting held
(in October 1993) before the new board was established was attended
by the board's only three members, two of whom were serving on
extended appointments.  Vacancies in the board's vice chairman and
chairman positions had existed since June and August 1992, although
one board member was chosen in October 1992 to be acting chairman. 

Although we were told that the ADF president did have frequent
contact with the existing board members during the period (which
appeared to be the case), our review indicated that ADF management
did not receive the appropriate attention necessary to ensure that
administrative and program support costs were in line with budget
estimates and were spent efficiently and effectively. 

In addition, while ADF has asserted that it had generally adhered to
government travel and procurement regulations, we found that ADF's
president had engaged in some practices that appeared to be
questionable.  For example, he: 

  Established a travel pattern that appeared to combine personal and
     business activity through indirect routing that included
     frequent stops at a New York residence on official trips between
     March 1991 and January 1994 without using constructive travel
     cost (required by travel regulations) as the basis for claiming
     reimbursement of travel expenses. 

  Employed a policy, inconsistent with federal travel regulations,
     that permitted himself and certain ADF staff to routinely use
     business-class accommodations without appropriate justification. 

  Acquired a portable cellular telephone that was used primarily for
     personal business and obtained discounted rates from contract
     providers of cellular communications and express mail services
     that created an additional administrative burden on staff to
     identify and seek reimbursement for personal charges. 

  Retained a consultant on a continuous but largely unbudgeted basis,
     using six successive personal service contracts and amendments
     commencing June 1991 and ending January 1994, totaling about
     $189,000, for the purpose of developing a new grant audit manual
     and bookkeeping system for field operations and training for
     regional managers, country liaison officers, and grantees.  ADF
     officials familiar with implementation procedures for the new
     manual and bookkeeping system told us they considered the
     consultant's work to be of marginal value. 

Weak budgetary and cost controls also contributed to ADF's high
overhead costs.  It used an accounting system designed and operated
by the National Transportation Safety Board that was not well suited
for grant making.  Written operating procedures were not current or
complete, and certain organizational functions were inappropriate for
effective internal control or not clearly defined.  For example,
ADF's operating manual did not reflect important changes in staff
organization, and the delegation of authority to officers of ADF had
not been updated since 1985.  Also, manual procedures had not been
drafted for office director responsibilities, budget preparation,
procurement and contracting, property management, and most aspects of
ADF personnel and grant program administration.  The risk of
impropriety was increased by a concentration of certain key functions
(including personnel hiring and compensation, travel authorization,
and the cash imprest fund) in the Office of the President and
management's failure to assess agency internal accounting controls. 

An almost complete board has been in place since July 1994 when a new
chairman was appointed.  In December 1994, the new Chairman told us
that the board intended to be more vigorous in its oversight of ADF
program and administrative support activities, including cost
controls.  As of the end of March 1995, it had held five meetings and
was actively engaged in selecting a new president and formulating
policies and strategies designed to improve ADF's operations. 


   ADF HAS BEGUN TAKING STEPS TO
   REDUCE ADMINISTRATIVE COSTS
------------------------------------------------------------ Letter :5

To reduce its administrative costs, ADF terminated several of its
long-term personal services contractors in 1994 and plans to
terminate the remainder during 1995.  ADF officials identified other
steps designed to reduce these costs and promote efficiency,
including improving and simplifying financial management systems and
controls, promoting better communication and working relations
between headquarters staff, and providing better training to field
staff and grantees. 

In response to the executive branch's National Performance Review
initiative and OMB guidance, ADF's president appointed a committee in
February 1994 to review ADF's operations and structure to find ways
to reduce workload and streamline procedures.  The review identified
opportunities for improving staff efficiency and controlling overhead
costs.  The ADF president endorsed a number of the committee's
recommendations and submitted them in November 1994 to the board of
directors for approval.  They provided for

  increased delegation of approval authority to lower management
     levels to permit decisions to be made at the operating level,

  transfer of certain functions to increase operational efficiency
     and reduce overlap or duplication,

  flexible policies and procedures for grant audits and closeouts,

  improved planning and use of travel and communications services,

  staggered or reduced frequency of reporting by grantees, and

  establishment of criteria for selecting countries for program
     participation and minimum funding level for efficient operation. 

The president did not endorse some of the committee's proposals and
did not immediately forward other recommendations for the board's
consideration, stating that he intended to further review or seek
additional assistance before submitting them.  The proposals that
were not initially forwarded included realigning, eliminating, or
downgrading existing staff positions; making more effective use of
existing personnel resources, including less dependence on outside
contractors and consultants; reducing priority for representational
travel; and improving administration of incentive awards programs. 

In December 1994, ADF hired a private consultant (The Mitchell Group)
to analyze ADF's organizational structure and staffing patterns.  The
Group's March 1995 report to ADF focuses mainly on ADF's organization
and operating procedures.  The report highlights an inefficient
management structure with poor communications and confused lines of
authority, and confirmed the existence of weak budgetary discipline
and cost controls.  ADF's board chairman told us that the board had
accepted the Group's recommendations to restructure and downsize ADF
and referred them to the staff for implementation. 


   ADMINISTRATIVE OVERHEAD
   EXCLUDES IN-COUNTRY SUPPORT
   COSTS
------------------------------------------------------------ Letter :6

In-country support costs that include liaison and administrative
activities, technical assistance, and project evaluation, make up
about 18 percent of ADF's budget (compared to 11 percent for IAF),
but ADF does not consider any of these costs to be administrative
overhead.  ADF officials believe the costs for in-country support are
an integral part of ADF's unique program concept of capacity-building
and fully consistent with its legislative mandate that projects are
for grassroots development and that they be designed, managed, and
implemented for and by Africans.  ADF officials argue that other
development organizations are able to achieve lower program overhead
ratios by channeling their project funds through various
intermediaries or requiring they be spent on foreign consultants and
equipment.  ADF in-country support costs are principally made up of
the following: 

  A country liaison officer network of local national development
     specialists who (1) carry out the day-to-day monitoring of
     ADF-funded projects in each country in which ADF operates, (2)
     disseminate information about ADF funding procedures, (3) help
     screen applicants and evaluate project proposals, and (4)
     provide technical assistance to applicants and grantees. 

  A resident evaluator network through which ADF maintains a cadre of
     African development professionals who, on a consultant basis,
     facilitate implementation of ongoing, self-evaluations of
     ADF-funded projects. 

  Recruitment and training of local technical assistance providers
     who train grantees and field support staff in basic bookkeeping
     and financial management. 

ADF and OMB have debated for years whether the cost of country
liaison officers should be accounted for as ADF administrative or
program overhead.  ADF regards country liaison officer costs, which
include ADF-provided office space and equipment and have ranged from
11 to 14 percent of its budget in recent years, to be program-related
support and has included them along with research grants and other
cooperative agreements as a single cost category in prior budget
presentations under "Development studies and technical assistance."
OMB clarified the matter by revising the budget format in 1994 so
that country liaison officer and other program support costs covered
by cooperative agreements would be shown as separate line items under
an "In-country support" category. 

ADF's in-country support costs nearly doubled from $1.8 million in
1992 to about $3 million during fiscal years 1993 and 1994 at a time
when ADF's overall budget increased by 32 percent.  The cost
increases were primarily for (1) country liaison officers, which ADF
officials attributed mainly to expanded country liaison officer
staffing and installation of computer and communications equipment in
their offices and (2) expanded emphasis on technical training
programs for grantees and field support staff, including
standardizing the method of providing this assistance so that the
cost was accounted for as in-country support rather than charging it
to individual projects, for example, "Direct development assistance"
(grants), as it was presented in congressional budget presentations. 
According to ADF officials, grantees needed more training and
technical support to ensure maximum project impact.  During fiscal
year 1994, such technical assistance amounted to $604,000. 


   ADMINISTRATIVE AND PROGRAM
   SUPPORT COSTS EXCEEDED BUDGET
   ESTIMATES
------------------------------------------------------------ Letter :7

ADF is funded by annual lump-sum appropriations, which do not specify
how funds must be spent among cost categories.  Although ADF's
appropriations are based on an annual budget estimate and priority
agenda that ADF submits through OMB to Congress, the appropriation
acts do not earmark funds for specific purposes such as for program
or administrative support activities.  Each year, the acts state that
ADF may use the funds as necessary to carry out its responsibilities. 
As a result, ADF is not bound by statute as to the amount it can
spend for administrative overhead or other support and program
purposes.  However, while ADF budget and cost controls have been weak
and financial reporting generally could not be relied on, we found
that actual operating and support costs were higher and development
grants were lower than the budget estimates approved by OMB and
submitted to Congress for fiscal years 1991-94.  (See fig.  2.)

   Figure 2:  Budget Shortfalls
   and Overruns by Major Category,
   Fiscal Years 1991-94

   (See figure in printed
   edition.)

Furthermore, we found that ADF does not provide Congress with advance
notification for anticipated or actual changes that it makes in
allocating the resources it uses for operating expenses and program
support costs.  However, it does provide Congress with prior
notification for proposed individual development grants that exceed
$50,000 and for cooperative agreements and research grants, including
major amendments or funding supplements. 

OMB apportions appropriated ADF funds quarterly for administrative
expenses and annually for all other expenses.  This procedure made
about 80 percent of ADF's appropriation available to be spent from
the start of fiscal year 1994.  The apportionment process is expected
to reduce the risk that the funds will be overobligated but does not
give OMB control over whether ADF funds are used for program or
overhead purposes.  ADF budget and accounting reports showed that
actual administrative expenses were higher than the amount that was
originally apportioned by OMB or that was given final budget approval
by ADF's president, with overruns that ranged from $220,000 in fiscal
year 1991 to $138,000 in fiscal year 1994.  Federal entities are
supposed to seek advance approval from OMB before exceeding their
spending authority in any apportionment category.  While ADF
requested and received higher spending authority for administrative
expenses for fiscal years 1993 and 1994, we found no evidence it
sought such approval in fiscal year 1991 or for exceeding the higher
amount that OMB authorized for this category in fiscal year 1993.\2
In addition, program support costs were significantly higher than the
budget estimates during these years, reflecting increased in-country
staffing and equipment as well as increased emphasis on research and
technical assistance.  However, development grant funding was below
the targeted levels during each of these years. 


--------------------
\2 No apportionment was made during fiscal year 1992 because of a
continuing resolution. 


   BUDGET REPORTING WAS UNRELIABLE
------------------------------------------------------------ Letter :8

ADF budget and cost data reported to OMB and Congress in recent years
for program management and support were unreliable or not useful for
several reasons.  First, the cost categories used in the budget
presentations were not consistent in format from year to year.  ADF's
congressional budget presentations summarized program and financing
activity by major cost category and object class, but the categories
and descriptions used and data supplied did not provide enough
detailed information to make year-to-year comparisons of headquarters
program management and overseas support costs.  For example, the
costs were combined in fiscal year 1991, separated into three parts
(with a portion of headquarters cost shown separately) during fiscal
years 1992-94, divided into two parts in fiscal year 1995, and
changed again in the executive branch's proposed budget for fiscal
year 1996.  Also, research grants and cooperative agreements for
in-country support, evaluation, and education and dissemination were
merged into a single budget category in prior years and all of the
related costs continue to be reported as grants in the breakdown by
object classification. 

Second, the narrative explanations did not accurately describe what
ADF costs were covered in the major program categories.  Program
narratives did not agree with the funding categories and tended to be
misleading.  For example, the narrative justification in ADF's recent
congressional presentations (1) described in-country support costs
under separate programs, (2) discussed the costs of doing business in
Africa as administrative overhead, and (3) understated the proportion
of ADF's budget spent on administrative overhead--25 percent versus
the actual rate of 28 percent--and did not make it clear that this
level of program support excluded in-country costs. 

Third, actual costs presented in the budgets did not always agree
with amounts shown in ADF's records or reported to ADF's board of
directors.  For example, the fiscal year 1995 budget presentation
showed that actual fiscal year 1993 operating expenses totaled
$4,529,000, whereas ADF's records and its report to the board of
directors showed that these expenses totaled $4,665,000.  Budget
presentations also understated ADF's use of consulting and other
services because personal services contractor costs were improperly
shown as "Other personnel compensation" and because ADF records
showed that more was spent on consulting services than was shown in
the budget presentations.  In addition, explanations were not given
in the budget presentations as to why actual fund allocation varied
significantly from earlier estimates.  ADF budget documents did not
explain the reasons for the $673,000 shortfall in development grant
funding in fiscal year 1993 and the generally higher than estimated
levels of spending for headquarters and in-country program support;
nor did they disclose the use of personal services contractors to
supplement a direct-hire workforce that resulted in costs that far
exceeded the budget estimates between fiscal years 1991 and 1994. 
Finally, historical funding data presented to ADF's new board of
directors in June 1994 for briefing purposes was not consistent; we
found that it intermingled budget and actual results data for fiscal
years 1991-93. 

OMB, in cooperation with ADF and IAF and with our assistance, has
partially addressed these problems by developing a standard budget
format for ADF and IAF in 1994 that makes it easier to distinguish
between program and support elements and make year-to-year cost
comparisons between estimates and expenditures.  However, ADF and IAF
continue to use different object classification codes to account for
essentially the same in-country support costs, apparently because of
the means used and purposes served in acquiring the assistance
services.  IAF classifies contracting costs with local organizations
for grantee technical assistance and training as "advisory and
assistance services" because it considers the services accruing to
IAF's benefit; ADF uses cooperative agreements with individuals and
classifies them as grants because even though the recipients perform
required services, it considers them beneficiaries of ADF program
assistance the same as grantees. 


   FINANCIAL REPORTING
   REQUIREMENTS WERE NOT MET
------------------------------------------------------------ Letter :9

Under a 1990 amendment to the Government Corporation Control Act (the
Chief Financial Officers Act), ADF and other government corporations
are required to prepare an annual report to Congress that includes
financial statements and an auditor's report on the statements, an
assessment of internal controls, and a budget report reconciliation
that links the actual amounts that are submitted in the President's
budget with program and operating expenses in agency accounting
records and financial reports.  We recently reported that ADF was the
only 1 of 34 government corporations that did not meet the act's
financial statement reporting and audit requirements.\3

ADF officials told us that they had been unaware that ADF was subject
to the act's reporting requirements but since learning of it they had
hired an audit firm (Coopers & Lybrand) to assist them in complying
with the act's financial statement and audit requirements.  Coopers &
Lybrand commenced audit work in April 1994 but suspended it in August
1994 when it concluded after performing intermittent work that the
existing ADF accounting system was not viable or cost-effective for
audit.  The firm agreed to delay the audit and preparation of
financial statements until a new system was completed.  ADF had
sought approval to install a new budget and accounting system since
1992.  The revised audit, expected to include an examination of ADF's
financial management reporting system and controls, was scheduled to
resume in May 1995. 


--------------------
\3 Government Corporations:  CFO Act Management Reporting Could Be
Enhanced (GAO/AIMD-94-73, Sept.  19, 1994). 


   RECOMMENDATIONS
----------------------------------------------------------- Letter :10

We recommend that the president of ADF, with the board of directors'
approval, (1) obtain an independent review of ADF's position
classifications and grade structure;(2) provide improved disclosure
in budget and expenditure reporting, including explaining the
reason(s) for any significant differences in actual results; and (3)
annually conduct the management assessment of internal controls and
reconciliation of budget reporting required by the Government
Corporation Control Act. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
----------------------------------------------------------- Letter :11

If Congress wishes to ensure that ADF funds intended for program
purposes are not used for administrative overhead or program support
costs, it may wish to impose a limitation on the amount that ADF
spends for these costs through the annual appropriation process. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :12

In commenting on a draft of this report in March 1995, ADF's Chairman
of the Board said that our report focused too heavily on issues that
he says have been resolved and did not give sufficient attention to
corrective actions that ADF has initiated to reduce its
administrative costs and improve its financial accountability.  He
indicated that efforts to address most, if not all, of the concerns
in this report were in various stages of implementation.  He pointed
out that (1) an entirely new board of directors had been appointed;
(2) a new president was being sought; (3) pursuant to a National
Performance Review initiative, the ADF's administrative operations
were being reappraised; (4) long-term personal services contracting
had virtually been eliminated; (5) efforts to update ADF's written
policies and procedures were on-going; and (6) a new accounting
system was expected to be completed in April 1995. 

ADF said that comparisons with IAF and other foundations are
inappropriate.  While the comparisons may be imperfect, we believe
there are sufficient similarities among the foundations to make such
comparisons worthwhile and instructive.  We also noted that OMB
routinely compares ADF with IAF in terms of their program performance
and administrative cost. 

ADF was also concerned that this report creates the impression that
ADF had concealed or misrepresented fiscal data concerning ADF
operations.  Our analysis shows that between fiscal years 1991 and
1994, ADF's actual administrative support costs were appreciably
higher than what ADF had previously budgeted, but we cannot comment
on whether ADF's inaccurate reporting was intentional.  ADF's
comments are presented in their entirety in appendix I. 


   SCOPE AND METHODOLOGY
----------------------------------------------------------- Letter :13

Our review focused on ADF financial administration.  To accomplish
our objectives, we interviewed ADF officials and examined relevant
program, administrative, financial, and legislative documents at ADF
headquarters in Washington, D.C.  We also interviewed officials of
the Asia, Eurasia, and Inter-American Foundations and other
knowledgeable development specialists in the Washington, D.C., area
and obtained comparative program and administrative information from
them.  We reviewed budget reporting requirements and financial
reporting and internal control requirements.  We also discussed these
requirements with OMB officials and a private contractor hired by ADF
in 1994 to assess its accounting system and assist in the preparation
of its financial statements.  We did not assess project funding and
implementation because, at the time of our review, ADF was conducting
an assessment to find out what aspects of its program worked well,
what did not, and why; however, this assessment had not been released
as of March 1995. 

We conducted our review between February 1994 and March 1995 in
accordance with generally accepted government auditing standards. 


--------------------------------------------------------- Letter :13.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members, House and Senate Committees on Appropriations, and
other appropriate congressional committees; the president of ADF and
its board of directors; the Director, Office of Management and
Budget; and other interested parties. 

Please call me on (202) 512-4128 if you or your staff have any
questions concerning this report.  Major contributors to the report
are listed in appendix II. 

Sincerely yours,

Harold J.  Johnson, Director
International Affairs Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE AFRICAN
DEVELOPMENT FOUNDATION
============================================================== Letter 

See comment 1. 



(See figure in printed edition.)

See comment 2. 

See comment 3. 

See comment 4. 



(See figure in printed edition.)

See comment 1. 

See comment 5. 

See comment 6. 



(See figure in printed edition.)

See comment 7. 

See comment 8. 



(See figure in printed edition.)

See comment 4. 

See comment 3. 



(See figure in printed edition.)

See comment 9. 

See comment 10. 



(See figure in printed edition.)

See comment 11. 

See comment 12. 

See comment 13. 

See comment 14. 

See pp.  10-11. 



(See figure in printed edition.)

See comment 15. 



(See figure in printed edition.)

See comment 16. 

See comment 17. 



(See figure in printed edition.)


The following are GAO's comments on the African Development
Foundation's (ADF) letter dated March 30, 1995. 

GAO COMMENTS

1. We have included information on actions taken by ADF's new board
of directors throughout the report.  The board had not specifically
addressed matters such as the ADF president's combining of personal
and business travel activity and use of cellular telephone and
express mail services that contributed to increased administrative
overhead, but it was moving quickly to select a new president and
review ADF's operating policies. 

2. We had previously discussed the preliminary results of our work
during the course of our review.  Because many of the actions cited
by ADF are in various stages of implementation and it is too early to
tell how they will be carried out, we have retained three of the four
recommendations contained in our draft report. 

3. We do not agree with ADF's contention that the draft report
contained a number of factual inaccuracies.  In some instances, we
were able to resolve differences involving presentation and
interpretation of ADF budgetary and cost data through discussions
with ADF staff and we have modified the report as appropriate to
improve clarity.  However, in other instances, ADF's claims of
inaccuracy did not withstand careful tracing back to source
documentation and we stand by our analysis as described below in our
detailed annotation of ADF's comments. 

4. Our report makes the point that the lack of consistent budget
presentations from year to year has been a source of confusion as
Congress and the Office of Management and Budget (OMB) have sought to
reduce ADF's administrative costs.  We also point out discrepancies
in the reporting, but we cannot comment on whether ADF's inaccurate
and inconsistent reporting was intentional. 

5. While the Office of Personnel Management and OMB may have
concurred in ADF's use of such contractors starting in 1985, OMB
officials subsequently instructed ADF to reduce its use of long-term
personal services contractors during the period covered by the
report. 

6. We have reflected ADF's recent change in policy regarding use of
business class for travel in the report.  We also modified the report
to clarify our point that prior to the policy change, ADF board
members, the president, vice president, and travelers accompanying
the above were authorized business class travel by virtue of their
position or accompanying status without any further justification. 

7. We have modified the report to note that ADF has attempted since
1992 to acquire a new computerized accounting system to replace its
existing system, which it found to be unsuitable.  We also modified
our report to clarify our main point that it was management
ineffectiveness, not just the accounting system, that caused weak
budgetary and cost controls. 

8. We have added information on The Mitchell Group's March 1995
report. 

9. In making this comparison, ADF understates the cost of its
contracting and consulting services.  The amount that ADF said it
spent for contracting and consulting services in fiscal year 1994
($185,780) and the basis for its average cost during fiscal years
1991-94 ($318,500) were solely attributable to its use of personal
services contractors.  ADF did not include the additional cost of
services of temporary contract support staff.  Our average annual
figure of $400,000 for fiscal years 1991-94 includes both personal
service contractors and the cost of services of temporary contract
support staff, but does not include the cost of other professional
and technical contractual services (such as carpet cleaning and
computer repair and maintenance) that ADF reported as "consulting and
other services."

10. The report notes that the shortfall in development grant funding
for fiscal year 1994 was caused primarily by a change in the method
by which ADF accounted for technical training and support that it
provided to grantees.  The effect of this accounting change was to
reduce development grant funding and to increase in-country support
cost by the amount that ADF spent for such technical assistance.  In
fiscal year 1994, this assistance ($604,000) accounted for nearly all
of the shortfall ($742,000) reported in development grant funding. 
We have modified the report to clarify this point. 

11. We agree in principle that the difference in ADF and the
Inter-American Foundation (IAF) administrative overhead rates can
partly be explained by economy of scale that is often achievable
through larger budgets.  As we point out in the report, ADF's
overhead rate generally declined as the size of its budget increased
between 1984-90; however, we also note that the rate has not declined
in the past 4 years even though ADF funding is up by 30 percent since
1991.  Further, the report compares not only the total size but the
composition of ADF's and IAF's fiscal year 1994 budget expenditures. 

12. Although it is true that IAF is not required to operate within
the funding limit of $250,000 per project that applies to ADF, both
its grant awards and the life-of-project costs have been smaller in
size than ADF's.  During fiscal year 1994, IAF awarded 168 new
grants, of which 138 were less than $100,000 and 7 were $200,000 or
more, with the average value of its active grants being $131,000; ADF
awarded 64 new development grants, of which 29 were under $100,000
and 13 were $200,000 or more, with an average active grant value of
$137,000. 

13. Our report notes that travel costs are a significant component of
ADF's administrative budget and that geographical factors contribute
to making ADF's costs higher as a share of its budget than IAF's. 
Nonetheless, ADF travel policies and practices, which were changed
during the course of our review, also contributed to its higher
operating costs. 

14. Our report points out that the Eurasia Foundation's program
delivery systems and accounting policies, as well as those of the
Asia Foundation, differ from those of ADF.  However, although they
are privately run and operate somewhat differently than ADF and IAF,
we believe that a cost comparison of their administrative and program
services overhead rates merits attention and is instructive because,
as U.S.-based regional development assistance organizations, both
maintain overseas field offices and their program servicing costs
include personnel salaries and benefits, travel, rent, utilities, and
communications in their overhead rates. 

15. We reported that ADF budget reporting was unreliable.  We do not
know or imply whether ADF was intentionally misleading in its
reporting in order to conceal true program costs.  Our comparisons of
what ADF budgeted and actually spent on administrative support costs
are based on funds that it received, not on what it requested.  While
events between the time that funds are budgeted and spent can alter
any proposed spending pattern, we believe that ADF did not adequately
explain why actual costs in some instances varied significantly from
its budget estimates. 

16.  ADF's fiscal year 1994 administrative support costs were not
lower than the amount it had previously budgeted.  Based on the
fiscal year 1994 approved funding level of $16.9 million, ADF
initially estimated that administrative support costs would be $4.265
million in its fiscal year 1994 congressional presentation submitted
in April 1993.  ADF revised its administrative support cost estimate
for fiscal year 1994 to $4.6 million in its fiscal year 1995 budget
presentation that was submitted to OMB in October 1993 and to
Congress in March 1994.  ADF estimated that the 10-year assessment
would cost $130,000 in the October 1993 presentation but did not make
clear whether it included this amount in its revised fiscal year 1994
estimate for administrative support.  In any case, ADF established a
fiscal 1994 operating budget of $4.6 million that did not include any
amount for the 10-year assessment.  Ultimately, however, ADF actually
spent $4,738,000, including the cost of the assessment, on
administrative support costs in fiscal year 1994, an increase that is
more than 10 percent higher than what ADF had budgeted 2 years
earlier. 

17.  ADF accounting records show that operating expenses were higher
than the amounts that OMB originally apportioned to ADF in fiscal
year 1994 and OMB provided through an increased apportionment in
fiscal year 1993.  We could not verify whether there had been an
understanding between ADF and OMB from the beginning of fiscal year
1994 that OMB would reapportion funds to cover the 10-year assessment
costs once they became known, but OMB did subsequently (in September
1994) permit ADF to transfer $150,000 from its program funds to
administrative support to cover the cost of increased actual
operating expenses, including the 10-year assessment. 

As for fiscal year 1993, OMB originally apportioned $4,505,000 for
ADF operating expenses and raised the amount by $50,000 to $4,555,000
at the end of the fiscal year.  ADF's final obligation report for
fiscal 1993, submitted to ADF's board of directors in June 1994,
shows that it spent $4,665,000 on administrative support costs.  A
February 6, 1994, budget and accounting report shows administrative
support expenditures of $4,679,000 for fiscal year 1993.  The actual
reported operating expense figure of $4,529,000 that was used in the
executive branch's budget for fiscal year 1995 (published in January
1994) and ADF's March 1994 congressional presentation appears to be
have been based on an interoffice memo submitted to ADF's president
on January 5, 1994.  However, we found no evidence that any
reconciliation or adjustment was made that supports ADF's contention
that the costs reflected in the cited reports overstated salary costs
by more than $150,000. 

ADF's conflicting records and reports and the lack of back-up data to
document its financial performance, as described above, considerably
complicated our review.  ADF acknowledges that numerous problems
exist in its accounting system and, as we noted in our report,
Coopers and Lybrand suspended its financial statement preparation
work in August 1994 because it found that the system was not viable
or cost effective for audit.  Until these matters are corrected,
neither Congress nor OMB will be able to rely on the information in
ADF's budget presentations. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Lawrence L.  Suda
Rolf A.  Nilsson
James M.  Strus

OFFICE OF SPECIAL INVESTIGATIONS,
WASHINGTON, D.C. 

Barbara J.  Cart
Harvey D.  Gold
