International Boundary and Water Commission: U.S. Operations Need More
Financial Oversight (Letter Report, 09/28/1998, GAO/NSIAD-98-238).

The United States provides funding for several independent international
commissions, including the International Boundary and Water Commission,
which resolves water and boundary issues along the U.S.-Mexican border.
In response to congressional concerns about the lack of visibility and
openness of these commissions' programs and operations, this report
provides information on the U.S. Section of the International Boundary
and Water Commission. GAO examines (1) the sources and uses of the U.S.
Section's funds, (2) aspects of the U.S. Section's system of accounting
and internal controls, (3) the cost-sharing arrangements for joint
projects between the United States and Mexico, (4) the administration of
U.S. Section operations and maintenance contracts, and (5) the extent of
oversight over the U.S. Section's programs and operations.

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

 REPORTNUM:  NSIAD-98-238
     TITLE:  International Boundary and Water Commission: U.S.
	     Operations Need More Financial Oversight
      DATE:  09/28/1998
   SUBJECT:  International agreements
	     Financial statement audits
	     Territorial waters
	     International cooperation
	     Cost sharing (finance)
	     Financial management systems
	     Financial records
	     International organizations
	     Internal controls
IDENTIFIER:  Mexico

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GAO/NSIAD-98-238

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

Report to Congressional Requesters

September 1998

INTERNATIONAL BOUNDARY AND WATER
COMMISSION - U.S.  OPERATIONS NEED
MORE FINANCIAL OVERSIGHT

GAO/NSIAD-98-238

International Boundary and Water Commission

(711339)

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

  EPA - Environmental Protection Agency
  FY - fiscal year

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

B-280776

September 28, 1998

The Honorable Benjamin A.  Gilman
Chairman, Committee on International Relations
House of Representatives

The Honorable Harold Rogers
Chairman, Subcommittee on Commerce, Justice,
 State, the Judiciary, and Related Agencies
Committee on Appropriations
House of Representatives

The United States provides funds for a number of independent
international commissions, such as the International Boundary and
Water Commission.  You expressed concern about the lack of visibility
and transparency (openness) of these commissions' programs and
operations.  This report provides information on the U.S.  Section of
the International Boundary and Water Commission.  The Commission is
responsible for resolving water and boundary issues along the U.S.'
and Mexico's 1,952-mile common border.

As agreed with your staff, we examined (1) the sources and uses of
the U.S.  Section's funds, (2) certain aspects of the U.S.  Section's
system of accounting and internal controls, (3) the cost-sharing
arrangements for joint projects between the United States and Mexico,
(4) the administration of U.S.  Section operations and maintenance
contracts, and (5) the extent of oversight over the U.S.  Section's
programs and operations.

In completing this review, we examined the U.S.  Section's activities
for fiscal years 1994 through 1998, including project documents,
program and financial records, contracts, and internal and external
oversight mechanisms.  We interviewed officials of the Commission's
U.S.  Section, the Department of State, the U.S.  Environmental
Protection Agency (EPA), and selected state and local officials.  We
also visited selected Commission project sites along the U.S.-Mexico
border.  (See app.  I for a detailed description of our scope and
methodology.)

   BACKGROUND
------------------------------------------------------------ Letter :1

The International Boundary and Water Commission was established in
March 1889 by treaty between the governments of the United States and
Mexico.\1

Under the treaty and subsequent agreements, the Commission is
responsible for resolving boundary problems and maintaining the
boundary between the United States and Mexico and managing issues
involving the waters of the Rio Grande and Colorado Rivers.  The
focus of Commission responsibilities has evolved over time to include
resolving border water quality problems and, more recently, to
designing, constructing, and operating and maintaining wastewater
treatment facilities along the border (see fig.  1).  Much of this
change in responsibilities has occurred in response to the expansion
of economic activity and the growth of population along the border.
These developments have heightened the need for additional water
sources and an enhanced environmental infrastructure.

   Figure 1:  Evolution of
   Commission Responsibilities

   (See figure in printed
   edition.)

Source:  International Boundary and Water Commission.

The International Boundary and Water Commission is composed of a U.S.
Section and a Mexican Section, each headed by a Commissioner, who
must be an engineer.  The U.S.  Commissioner is appointed by the
President for an indefinite term.  The current Commissioner was
appointed on June 15, 1994.  The U.S.  Section is located in El Paso,
Texas; the Mexican Section is in the adjoining city of Ciudad Juarez,
(Chihuahua) Mexico.  As of July 1998, the U.S.  Section had 254 staff
at its headquarters and project offices located along the border.
(See fig.  2.)

   Figure 2:  Location of
   Commission Projects

   (See figure in printed
   edition.)

   Source:  International Boundary
   and Water Commission.

   (See figure in printed
   edition.)

The U.S.  Section must comply with applicable federal rules and
regulations regarding financial management and contracting, including
the Federal Acquisition Regulation.  When problems such as the need
for wastewater treatment plants on the border require joint actions
to resolve, the two Commissioners work together to define the
problem, plan the solution, and negotiate the level of participation
for each country.  The Commissioners jointly prepare draft agreements
(referred to as "Minutes") on all aspects of each country's
participation (including cost-sharing arrangements) to present to
both countries' governments for approval.  For joint projects
determined to require binding international obligations, the U.S.
Commissioner must obtain the approval of the Secretary of State.

--------------------
\1 The International Boundary and Water Commission was known as the
International Boundary Commission until it was reconstituted as the
International Boundary and Water Commission by the Water Treaty of
February 3, 1944.

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The U.S.  Section of the International Boundary and Water Commission
has received total funding of approximately $217.9 million over the
last
4 years.  The funds were from appropriations and grants or payments
from other federal agencies and state and local governments.  It also
received reimbursement from the Mexican government for costs incurred
on joint projects.  The U.S.  Section expended $46.7 million in
fiscal year 1997, including $21.9 million from its appropriations and
$24.8 million from grants and payments from others.  The funds were
used for salaries and benefits, administrative costs, operation and
maintenance of International Boundary and Water Commission projects,
and construction activities.

The cost-sharing agreements between the United States and Mexico for
two recently completed projects had payment terms that varied from
those used on other joint developments.  For these two projects, the
United States agreed to finance Mexico's share of costs due to
Mexico's economic difficulties and in order to cover the cost of
meeting environmental standards of the United States, which are
higher than those in Mexico.  This resulted in $8.6 million worth of
increased costs to the United States.  The total investment for those
two projects--Nogales, Arizona, and South Bay, California--is $321.9
million.

There are weaknesses in certain aspects of the U.S.  Section's
finance and accounting systems.  For example, funds owed by Mexico
were not reflected in year-end financial statements, accounting
duties were not properly segregated within the financial management
system, and previously identified financial management deficiencies
had not been corrected.

Regarding the administration of U.S.  Section operations and
maintenance contracts, required monthly reports on contractor
performance were not submitted.  As a result, the U.S.  Section made
payments of $1.2 million to the contractors without proper
documentation verifying that the required work was completed.

Oversight of the U.S.  Section is minimal.  Although the State
Department reviews the U.S.  Section's budget submission and provides
policy guidance to the U.S.  Commissioner, the Section is not a
constituent part of the State Department and, therefore, the
Department does not formally examine the Section's managerial
activities because it operates administratively as an independent
agency.  While the Environmental Protection Agency funds some
projects along the Southwest border, it only reviews U.S.  Section
contracts and monitors resulting construction projects where it is a
major contributor.  In addition, there have been no external
financial statement audits of U.S.  Section activities since the
year-end audit for fiscal
year 1995.  Further, there are no requirements for program management
audits, and none have been conducted since 1980.  Moreover, internal
audits were not being performed.

The U.S.  Commissioner informed us in a July 1998 letter that actions
have been taken or are in progress to correct the deficiencies
discussed in this report.  However, this report contains a matter
that Congress may wish to consider to require periodic external
financial statement audits of U.S.  Section operations.

   U.S.  SECTION RECEIVES FUNDING
   FROM MANY SOURCES
------------------------------------------------------------ Letter :3

The U.S.  Section receives its direct appropriations through the
Department of State's budget.\2 The Section's appropriations for
salaries, expenses, and construction activities totaled $85.7 million
from fiscal years 1994 through 1997.  The Section also receives
contributions from federal, state, and local municipalities and the
government of Mexico to help construct new projects and operate and
maintain existing facilities, such as wastewater treatment plants.
Contributions for these purposes totaled approximately $132.2 million
from fiscal years 1994 through 1997.  Total funding for the 4-year
period, therefore, came to approximately $217.9 million, as shown in
table 1.

                                     Table 1

                      Sources of U.S. Section Funds, Fiscal
                                  Years 1994-97

Funding source            FY1994      FY1995      FY1996      FY1997       Total
--------------------  ----------  ----------  ----------  ----------  ==========
Appropriations        $25,600,00  $19,479,00  $18,669,00  $21,953,00  $85,701,00
                               0           0           0           0           0
Grants, payments,     22,831,000  50,106,000  34,446,000  24,780,000  132,163,00
 and                                                                           0
 reimbursements\a
================================================================================
Total funds           $48,431,00  $69,585,00  $53,115,00  $46,733,00  $217,864,0
                               0           0           0           0          00

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Note:  This table was developed from unaudited data provided by the
U.S.  Section.  We did not attempt to verify the data or determine
that it includes all grants, payments, or reimbursements from all
possible sources.

\a Includes funds from EPA; the General Services Administration; the
Western Area Power Administration; Mexico; and the cities of Nogales,
Arizona, and Hildalgo and El Paso, Texas.

Source:  GAO analysis based on Commission data.

EPA provided $123 million during this period.  Approximately $108
million was provided to construct wastewater treatment facilities
along the border; another $15 million was given for the
administration of an EPA-supported facilities planning program for
resolving border sanitation problems.  The remaining funds were
provided by Mexico ($1.6 million), the General Services
Administration and the Western Area Power Administration ($1.9
million), local municipalities ($4.4 million), and other ($1.3
million).

--------------------
\2 The U.S.  Section is funded through federal budget code
300--natural resources and environment, subcode 301--water resources.

      USES OF FUNDS IN FISCAL YEAR
      1997
---------------------------------------------------------- Letter :3.1

The U.S.  Section received funds totaling approximately $46.7 million
in fiscal year 1997.  These funds were used for U.S.  Section
operations, project engineering activities, operation and maintenance
of existing projects, and construction activities.  The expenditures
included payments for personnel and benefits, training, travel, and
supplies and materials; operating and maintaining field offices,
dams, and sanitation plants; monitoring river water quality; and
directing various construction projects.  (See table 2.)

                                Table 2

                U.S. Section's Use of Funds, Fiscal Year
                                  1997

Use of funds                                                    Amount
--------------------------------------------------------  ------------
Administration and engineering\a                            $5,415,000
Operations and maintenance\b                                10,070,000
Reimbursements used for operations and maintenance\c         2,132,000
Construction                                                 6,463,000
Reimbursements used for construction\d                      22,647,000
Unused funds                                                     6,000
======================================================================
Total                                                      $46,733,000
----------------------------------------------------------------------
Note:  This table was developed from unaudited data provided by the
U.S.  Section.  We did not attempt to verify the data or determine
that it includes all grants, payments, or reimbursements from all
possible sources nor did we attempt to verify actual expenditures by
program category.

\a Includes personnel compensation, benefits, travel, training,
supplies, materials, printing, and copying.

\b Includes field offices, dams, sanitation plants, and flood control
and water quality projects.

\c Work for which other entities provided a share of the cost in the
form of reimbursements.

\d Funds from other entities that are sponsoring the cost of
projects, such as EPA, or are sharing in the project cost, such as El
Paso.

Source:  GAO analysis based on U.S.  Section data.

   FINANCIAL AND ACCOUNTING
   SYSTEMS CONTAIN WEAKNESSES
------------------------------------------------------------ Letter :4

Our examination of certain aspects of the U.S.  Section's financial
and accounting system found several weaknesses.  These weaknesses
included problems in recording reimbursements and accounting for
funds owed by Mexico.  We also observed that the U.S.  Section did
not follow applicable internal control standards\3 regarding
separation of duties and had not yet corrected previously identified
financial management deficiencies.  In addition, we noted that the
U.S.  Section has had no external financial statement audits
conducted since 1995.

--------------------
\3 GAO Policy and Procedures Manual for Guidance of Federal Agencies,
"Standards for Internal Controls in the Federal Government"
(Washington, D.C.:  U.S.  General Accounting Office, 1983), title 2,
appendix II.

      FUNDS OWED BY MEXICO NOT
      REFLECTED IN FINANCIAL
      STATEMENTS
---------------------------------------------------------- Letter :4.1

In light of prior audit findings and the size of reimbursements to
the U.S.  Section by Mexico, we examined the U.S.  Section's
accounting procedures for billings to Mexico.  We found that the U.S.
Section had not corrected deficiencies identified in prior external
audit reports.  In fact, we observed that approximately $16 million
owed by Mexico for construction and operations and maintenance costs,
including $400,000 that had been billed between July 23, 1997, and
March 6, 1998, was not properly recorded as required by generally
accepted accounting principles for federal financial reporting
purposes.  These billings were for the South Bay, California, and
Nogales, Arizona, Wastewater Treatment facilities.  Since these
receivables were not included in the accounting records, the U.S.
Section's financial statements and reports did not reflect the
Section's true financial position.  This discrepancy occurred because
the U.S.  Section lacks an integrated accounting system.  For
example, record-keeping for funds owed by Mexico was maintained
independently from the accounting and finance system.  However, the
U.S.  Section subsequently provided documentation to adequately
support payments made.

      STANDARDS FOR SEPARATION OF
      DUTIES ARE NOT MET
---------------------------------------------------------- Letter :4.2

To reduce the risk of error, waste, or wrongful acts and ensure that
effective checks and balances exist, "Standards for Internal Controls
in the Federal Government"\4 require a separation of duties and
responsibilities.  Our review of selected U.S.  Section disbursements
in fiscal years 1997-98 identified that the individual who created an
obligation for an expenditure also had the authority to approve a
bill for payment without any requirement for approval from
contracting or procurement officials that goods or services were
received.  This scenario is inconsistent with the guidance contained
in the "Standards for Internal Controls in the Federal Government,"
which call for the separation of duties.

--------------------
\4 GAO Policy and Procedures Manual for Guidance of Federal Agencies.

      PREVIOUSLY IDENTIFIED
      DEFICIENCIES REMAIN
---------------------------------------------------------- Letter :4.3

To ensure that resources are not put at risk and that financial
reports are based on accurate data, federal internal control
standards require prompt resolution of audit findings.  We found that
the U.S.  Section had not corrected 11 of 26 deficiencies, or about
42 percent, identified in annual financial statement audits conducted
from fiscal years 1992 through 1995.  As these deficiencies remained,
the U.S.  Section was vulnerable to unreliable financial reporting,
noncompliance with laws and regulations, and inadequate safeguarding
of assets.

The 11 deficiencies that the U.S.  Section had not corrected include

  -- no procedures for tracking and recording costs to prepare annual
     financial statements;

  -- no monitoring of receivable accounts and failure to assess
     interest on late payments;

  -- insufficient procedures to record amounts due from state and
     local governments and the government of Mexico to ensure that
     all amounts due were properly recorded;

  -- outdated and/or incomplete written accounting policies and
     procedures;

  -- no performance of periodic vulnerability assessments and tests
     of internal controls;

  -- no system directive providing policy guidance to establish a
     single, integrated financial management system;

  -- no submission of payment performance data to the Office of
     Management and Budget as required by the Prompt Payment Act of
     1983;\5

  -- no audit follow-up system or procedures to evaluate the system;

  -- no system to identify and monitor compliance with applicable
     laws and regulations;

  -- no performance of periodic, independent reviews of electronic
     data processing controls; and

  -- no performance of periodic, physical counts of inventory on
     hand.

--------------------
\5 31 U.S.C.  3901-07.

   COST-SHARING ARRANGEMENTS ON
   RECENT JOINT PROJECTS
------------------------------------------------------------ Letter :5

We examined the negotiated cost-sharing arrangements for the five
most recent Commission projects undertaken jointly by the United
States and Mexico.  These projects had terms that varied from those
for the other three.  For three projects--two wastewater treatment
plants and a cross-border bridge--each country assumed full
responsibility for their respective project costs.  However, for the
other two projects--the Nogales Wastewater Treatment Plant, completed
in 1992, and the South Bay Wastewater Treatment Plant, completed in
1998--the United States financed Mexico's share of the construction
costs with a no-interest loan.  Mexico will repay the loaned funds in
10 annual installments and was given a grace period until the plants
were fully operational to initiate repayment.

Mexico's agreed-upon shares of the construction costs for the Nogales
and South Bay projects were $1 million and $16.8 million,
respectively.  In present value terms, the net cost to the United
States to finance Mexico's share for the two projects is
approximately $8.6 million, as shown in
table 3.  U.S.  Section and Department of State officials informed us
that this type of arrangement was made by the United States,
following negotiation with Mexico, in response to the state of the
Mexican economy and the dire need to build these joint projects in
the United States, which is the preferred location from technical
points of view, but where costs and standards are higher than in
Mexico.  This arrangement was made due to the strong desire on the
part of the U.S.  communities, with the support of their
congressional delegations, that these two projects go forward
expeditiously.

                                     Table 3

                      Difference Between Mexico's Actual and
                      Discounted Cost-Share Payments for the
                          Nogales and South Bay Projects

                                                           Discounted
                                                              present
                                    Mexico's        Total    value of
                                      annual      Mexican     Mexican  Differenc
Project                             payments     payments    payments          e
--------------------------------  ----------  -----------  ----------  ---------
Nogales Wastewater Treatment        $100,000   $1,000,000    $603,000   $397,000
 Facility
South Bay Wastewater Treatment     1,680,000   16,800,000   8,606,000  8,194,000
 Plant
================================================================================
Total                                      $            $           $  $8,591,00
                                   1,780,000   17,800,000   9,209,000          0
--------------------------------------------------------------------------------
Source:  Our analysis based on International Boundary and Water
Commission Minutes.

   WEAKNESSES IN CONTRACT
   ADMINISTRATION BY THE U.S.
   SECTION
------------------------------------------------------------ Letter :6

The primary tool used to validate payment claims by contractors is
monthly reports prepared by the on-site contract operations
representative.  We found that the contract operations representative
did not submit these required monthly reports on the performance of
the contractors at the international wastewater treatment facilities
at South Bay, California, and Nogales, Arizona, to the contract
administrator.  The reports were not submitted because the reporting
requirement was not enforced by the contract administrator.  As a
result, payments of $1.2 million were made without proper
documentation demonstrating that the required work had been
completed.

U.S.  Section officials agreed with our findings.  They issued
directives to the U.S.  Section's on-site representatives at both
facilities stating that the representatives should immediately begin
submitting written reports evaluating the contractor's overall
performance and documenting specific performance for each month's
work.

   MINIMAL OVERSIGHT OF U.S.
   SECTION PROGRAMS AND ACTIVITIES
------------------------------------------------------------ Letter :7

Oversight of the U.S.  Section of the Commission is minimal.  While
the Department of State reviews the U.S.  Section's budget requests
and provides foreign policy guidance to the section, the Department
told us that it does not have the authority to routinely monitor or
oversee the management of the U.S.  Section because the Section is
not a constituent part of the Department of State.  And, EPA's
oversight authority over the Commission's operations is limited to
construction projects for which it provides funding.  In addition,
there is no requirement that financial or program audits of the U.S.
Section be conducted.  In fact, the U.S.  Section has not undergone
an external program review since 1980, and, as pointed out earlier,
no financial statement audit has taken place since 1995.  Moreover,
internal audits were not being conducted.

Good management practices call for periodic program audits to
determine the extent to which the organization is achieving the
desired results or benefits established by its charter, the
effectiveness of its programs and activities, and the compliance with
the laws and regulations applicable to its programs.  The U.S.
Section has received no external program audits of its activities
since 1980.

The Commission acts as the project manager for selected EPA-funded
projects along the southwest border.  EPA officials informed us that
they (1) review U.S.  Section construction contracts, (2) monitor
disbursement of project funds, (3) participate in periodic sessions
to review the progress of projects with the U.S.  Section and other
involved agencies, and (4) conduct periodic site visits.  They also
said that, when appropriate, they contract with other entities to
inspect actual construction activities.  With respect to contracting,
EPA provides advice to the Commission on both technical and business
issues.  However, EPA's review focuses only on contracts for which it
provides funding.

While the head of the Department of State's Office of Mexican Affairs
told us that the Department does not routinely exercise management
oversight, the Department's Inspector General said that it has
authority\6 to conduct audits and contracted for financial statement
audits from 1992 to 1995.  However, in a July 1998 letter, State's
Inspector General informed us that the Inspector General has not
conducted audits since 1995 due to resource constraints.

--------------------
\6 Inspector General Act of 1978 (5 U.S.C.  app.  3).

      LACK OF INTERNAL AUDITS
---------------------------------------------------------- Letter :7.1

Our review also found that the U.S.  Section did not have a
well-functioning internal audit capability.  The U.S.  Section
recognizes that internal audit is to be used to determine, through
unbiased examinations, that operations are efficient and economical
and that other internal controls are sufficient, adequate, and
consistently applied.  Although the U.S.  Section had a compliance
office with internal audit responsibilities, the head of the office
stated that he was working on other critical personnel issues.  He
told us that 10 audits had been scheduled for 1998, but no audits had
been completed to date.

In a July 29, 1998, letter to us, the U.S.  Commissioner agreed with
our observations regarding the Section's financial and accounting
systems' weaknesses.  The Commissioner told us that actions had been
taken or were in process to (1) correct general ledger accounts to
assure that the accounting reports reflect correct accounts
receivable amounts, (2) establish proper segregation of duties and
assure that all payments are approved by contracting officers, (3)
correct previously identified weaknesses, and (4) provide the
internal auditor more time to conduct audits.  In light of the
Commissioner's actions, this report contains no recommendations for
corrective actions regarding the Section's financial and accounting
systems.

   CONCLUSIONS
------------------------------------------------------------ Letter :8

Border issues between the United States and Mexico form an
increasingly critical part of the bilateral relationship.  The
Commission is involved in a growing number of issues along the
U.S.-Mexico border.  The expected increase in commerce between the
two countries and the resulting impact on the environmental
infrastructure are likely to expand the importance of the
Commission's operations.  Moreover, in addition to its own annual
appropriations, the Commission directs funding from other federal,
state, and local sources.  In light of our findings regarding the
finance and accounting systems, including the failure to correct
previously identified weaknesses, weaknesses in contract
administration, and minimal oversight of programs and activities and
the significance of the U.S.  Section's activities, we believe
greater oversight of the U.S.  Section's financial and program
operations is needed.

   MATTER FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :9

In order to provide greater oversight over International Boundary and
Water Commission operations, Congress may wish to consider requiring
the U.S.  Commissioner to obtain annual financial statement audits of
the U.S.  Section's activities by an independent accounting firm in
accordance with generally accepted government auditing standards.

AGENCY COMMENTS

In written comments on a draft of this report, the State Department
agreed with our matter for congressional consideration.  The
Department also provided technical comments, which we have
incoporated in the report where appropriate.  The Department of
State's comments are reprinted in appendix II.

The EPA reviewed a draft of this report and had no comments.

---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the Secretary of State; the
Administrator, EPA; and the U.S.  Commissioner of the International
Boundary and Water Commission.  Copies will also be made available to
other interested parties on request.

If you or your staff have any questions concerning this report,
please call me at (202) 512-4128.  Major contributors to this report
are listed in appendix III.

Benjamin F.  Nelson, Director
International Relations and Trade Issues

OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

Our objectives were to examine (1) the sources and uses of the funds
for the U.S.  Section of the International Boundary and Water
Commission, (2) certain aspects of the U.S.  Section's system of
accounting and internal controls, (3) the cost-sharing arrangements
for joint projects between the United States and Mexico, (4) the
administration of U.S.  Section construction and operations and
maintenance contracts, and (5) the extent of oversight over the U.S.
Section's programs and operations.

We conducted our review at the Department of State and the
Environmental Protection Agency (EPA) in Washington, D.C.; the
International Boundary and Water Commission's U.S.  Section in El
Paso, Texas; the International Wastewater Treatment plants in
Nogales, Arizona, and South Bay, California; and at EPA Region 9 in
San Francisco, California.  At all these locations, we examined
available program records and files and interviewed knowledgeable
officials involved with the Commission's activities.

We did not conduct a full internal control review nor a financial
audit of the U.S.  Section.  Instead, we focused on key aspects of
U.S.  Section activities that were related to our audit objectives.
Further, we did not evaluate the effectiveness of the U.S.  Section's
activities.

   SOURCES AND USES OF FUNDS
--------------------------------------------------------- Appendix I:1

To identify the amount of the U.S.  Section's direct appropriation,
we reviewed the U.S.  Department of State's appropriation data for
fiscal
years 1994 to 1998 and its budget request for fiscal year 1999.
Specifically, we analyzed the U.S.  Section's funding development
schedules, Department of State apportionment schedules, and reports
on budget execution.

To identify those funding sources in addition to the direct
appropriation, we analyzed records supporting the U.S.  Section's
financial statement.  We reviewed the funds reimbursed to the U.S.
Section for construction, as well as for operations and maintenance
expenses from Mexico, other federal agencies (such as EPA), and state
and local municipalities.  We examined interagency agreements between
the Commission and EPA for the administration of EPA's Facility
Planning Fund.  We reviewed the history and status of construction
project funding, schedules of anticipated and earned reimbursements,
and various congressional hearing records and correspondence.

To obtain an understanding of various budget and execution records,
we interviewed the U.S.  Section's key financial management officers,
including the Chief Administrative Officer, the Chief of the Finance
and Accounting Division, and the Budget Office Analyst.  We inspected
the records of all funds provided to the U.S.  Section for fiscal
years 1994-98, identifying direct appropriations from the Department
of State and all other funding sources.  We also analyzed the uses of
those funds and reviewed fiscal year 1997 expenditures.

   ACCOUNTING AND INTERNAL
   CONTROLS
--------------------------------------------------------- Appendix I:2

To determine that funds owed to the U.S.  Section from Mexico and
other entities for construction and operations and maintenance costs
were properly included and classified in the accounts and financial
reports, we reviewed appropriation and funding data documents and
project Minutes to identify arrangements for and amounts of payments
the accounting system should reflect.  We examined accounting system
reports maintained by the U.S.  Section's Finance and Accounting
Division that included monthly trial balances, accounts receivable
aging, and general ledger unbilled receivables.  We also reviewed the
Mexico receivables records maintained by the Foreign Affairs Office.
We analyzed and scheduled construction and operations and maintenance
receivable receipts for fiscal year 1994 through April 1998.  To
assess whether any corrective measures have been instituted, we
reviewed earlier financial statement audits to identify and follow up
on any condition of improper accountability of funds due to the U.S.
Section.  In cases of identified deficiencies in the accounting
system processes, we discussed the results with the U.S.  Section's
Chief Administrative Officer and the Chief of the Financial Services
Division to consider what needed to be done to correct the process.

To determine that disbursements were exercised by personnel who had
delegated authority and were separate from the obligation function,
we selected 11 payments made in fiscal years 1997-98 to review for
compliance with requirements.  These payments were chosen because
they were of an international nature requiring more sensitive
scrutiny and were processed outside the unit that initiates
contractor payments.  We reviewed the transactions' documentation and
steps followed to determine who initiated, who reviewed, and who
approved the execution of these disbursements.  We also documented
and reviewed the certifications of delegated monetary authority and
obligation authority for personnel associated with these payments.
In cases of deficiencies in the process and to understand the
consequences of not meeting the "Standards for Internal Controls in
the Federal Government," we discussed the results with cognizant
officials to consider what needed to be done to correct the process.

To determine the extent to which previously identified oversight
weaknesses have been addressed, we obtained and reviewed all
available U.S.  Section reports and management letters related to
external audits conducted from 1992-95 and compiled a list of all
deficiencies identified.  For each deficiency, we interviewed
cognizant U.S.  Section officials and their staff members and
reviewed U.S.  Section policies and procedures to determine if
corrective actions had been taken.  To the extent that previously
identified deficiencies had not been corrected, we obtained the
rationale for not doing so and documented whether a plan for
corrective action had been determined.

To assess the adequacy of internal oversight, we interviewed the
Compliance Officer and obtained and reviewed pertinent U.S.  Section
requirements for compliance reviews.  We reviewed the U.S.  Section's
Internal Audit Directive, the current Compliance Officer's activities
since joining the U.S.  Section, reports and working papers related
to completed audits, and the Compliance Officer's future audit plans.

   COST-SHARING ARRANGEMENTS
--------------------------------------------------------- Appendix I:3

To evaluate the cost-sharing arrangements for joint projects with
Mexico, we reviewed the Minutes associated with the five most recent
negotiations and compared the agreed-upon terms with both Commission
and Department of State documentation that demonstrated the level of
involvement and when that involvement occurred.  To determine how the
terms provided to Mexico on two recent joint projects would affect
costs, we performed a present value analysis of the repayment
schedule.  We also reviewed the appropriate Minutes to determine if
there were other agreements reached that were not beneficial to the
United States.

   CONTRACT ADMINISTRATION
--------------------------------------------------------- Appendix I:4

To determine the adequacy of the U.S.  Section's oversight of
contract administration, we reviewed the contract administrator's
performance on five recent contracts awarded by the U.S.  Section.
We identified the applicable regulations, policies, and procedures
that govern U.S.  Section contracting processes.  We selected the
five contracts based on their having been awarded in the 1990s,
having exceeded $1 million in value, and having files and key
personnel located at the U.S.  Section in El Paso, Texas.  We
assessed the performance of the contract administrator on two
operations and maintenance contracts to ensure that certified
payments were supported by proper documentation.  We also reviewed
the contractor's performance by evaluating the extent to which the
contractor corrected known deficiencies.

   PROGRAM AND OPERATIONS
   OVERSIGHT
--------------------------------------------------------- Appendix I:5

To assess the adequacy of management oversight over U.S.  Section
activities, we obtained and reviewed policies and procedures
associated with oversight of the U.S.  Section.  We interviewed
cognizant officials of the Department of State, EPA, and state and
local entities to identify requirements for oversight of the U.S.
Section.  We analyzed regulations, policies, and procedures provided
by these organizations and compared the requirements to the level of
oversight achieved.

We performed our work between April and July 1998 in accordance with
generally accepted government auditing standards.

(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
STATE
=========================================================== Appendix I

(See figure in printed edition.)

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

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

David R.  Martin
Rona Mendelsohn

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C.

Mark Speight

DALLAS FIELD OFFICE

Elliott C.  Smith
Jeffrey A.  Kans
John E.  Clary
James B.  Smoak
Linda Kay Willard
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