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Testimony: 

Before the Subcommittee on Government Efficiency and Financial 
Management, Committee on Government Reform, House of Representatives:

For Release on Delivery Expected at 2:00 p.m. Wednesday, September 24, 
2003:

FINANCIAL MANAGEMENT:

Sustained Effort Needed to Resolve Long-Standing Problems at U.S. 
Agency for International Development:

Statement of Gregory D. Kutz, Director Financial Management and 
Assurance:

GAO-03-1170T:

GAO Highlights:

Highlights of GAO-03-1170T, a testimony before the Subcommittee on 
Government Efficiency and Financial Management, Committee on 
Government Reform, House of Representatives

Why GAO Did This Study:

GAO has long reported that the U.S. Agency for International 
Development (USAID) faces a number of performance and accountability 
challenges that affect its ability to implement its foreign economic 
and humanitarian assistance programs. These major challenges include 
human capital, performance measurement, information technology, and 
financial management. Effective financial management as envisioned by 
the Chief Financial Officers Act of 1990 (CFO Act) and other financial 
management reform laws is an important factor to the achievement of 
USAIDís mission.  USAID is one of the federal agencies subject to the 
CFO Act.

In light of these circumstances, the Subcommittee asked GAO to testify 
on the financial management challenges facing USAID, as well as the 
keys to reforming USAIDís financial management and business practices 
and the status of ongoing improvement efforts.

What GAO Found:

USAID has made some progress to improve financial management, 
primarily in achieving audit opinions on its financial statements. 
Through the rigors of the financial statement audit process and the 
requirements of the Federal Financial Management Improvement Act of 
1996 (FFMIA), USAID has gained a better understanding of its financial 
management weaknesses. However, pervasive internal control weaknesses 
continue to prevent USAID management from achieving the objective of 
the CFO Act, which is to have timely, accurate financial information 
for day-to-day decision making. 

USAIDís inadequate accounting systems make it difficult for the agency 
to accurately account for activity costs and measure its program 
results. Compounding USAIDís systems difficulties has been the lack of 
adequate financial management personnel. Since the early 1990s, we 
have reported that USAID has made limited progress in addressing its 
human capital management issues.

While some improvements have been made over the past several years, 
significant challenges remain. Transforming USAIDís financial and 
business environment into an efficient and effective operation that is 
capable of providing timely and accurate information will require a 
sustained effort. USAID has acknowledged the challenges it faces to 
reform its financial management problems and has initiatives underway 
to improve its systems, processes, and internal controls. USAID has 
also recognized the need for a specific human capital action plan that 
addresses financial management personnel shortfalls. 

www.gao.gov/cgi-bin/getrpt?GAO-03-1170T.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Gregory D. Kutz at 
(202) 512-9505 or kutzg@gao.gov.

[End of section]

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to appear before you today to testify on 
the U.S. Agency for International Development (USAID). USAID's 
financial management challenges have been the subject of prior 
oversight hearings by this Subcommittee's predecessor. GAO has long 
reported[Footnote 1] that USAID faces a number of performance and 
accountability challenges that affect its ability to implement its 
foreign economic and humanitarian assistance programs. These major 
challenges include human capital, performance measurement, information 
technology, and financial management. Today our testimony will focus on 
the financial management challenges at USAID.

USAID serves a critical role by providing nonmilitary international aid 
to further U.S. interests abroad. For fiscal year 2003, USAID received 
about $12 billion in total program funding that is spent in six 
principle areas: economic growth and development, population health and 
nutrition, environment, democracy and governance, education and 
training, and humanitarian assistance. USAID carries out its assistance 
role primarily through grants, contracts, and loan guarantees to 
foreign governments and to humanitarian organizations. With current 
rebuilding efforts in Iraq and Afghanistan and increased efforts 
towards HIV/AIDS relief, the amounts of funds flowing through USAID 
have increased significantly. USAID's role is critical to the success 
of these rebuilding efforts.

My statement today will provide an overview of USAID's progress in 
addressing its financial management challenges. Effective financial 
management as envisioned by the Chief Financial Officers Act of 
1990[Footnote 2] (CFO Act) is an important factor to the achievement of 
USAID's mission. USAID has made some progress, primarily in achieving 
audit opinions on its financial statements. However, pervasive internal 
control weaknesses continue to prevent USAID management from achieving 
the primary objective of the CFO Act--which is to have relevant, 
timely, and accurate financial information for day-to-day decision 
making. As a result, much of the progress USAID achieved in getting 
improved opinions has been based on heroic efforts rather than systems 
that routinely generate timely and reliable financial information. 
USAID has a number of initiatives underway intended to improve its 
financial management, including the implementation of a new financial 
management system. Our analysis is based on USAID Inspector General 
(IG) reports and limited meetings with USAID management and the IG.

USAID is one of the federal agencies subject to the CFO Act as expanded 
by the Government Management Reform Act of 1994[Footnote 3] and the 
Federal Financial Management Improvement Act of 1996[Footnote 4] 
(FFMIA). The CFO Act envisions that agencies have financial management 
leadership, systems, and practices in place to provide complete, 
consistent, reliable, and timely information to agency management and 
other decision makers. Through the rigors of the financial statement 
audit process and the requirements of FFMIA, agencies such as USAID 
have gained a better understanding of their financial management 
weaknesses and the impetus to resolve problems caused by those 
weaknesses. At the same time, agencies are slowly making progress in 
addressing their problems. However, while most agencies are receiving 
"clean" audit opinions on their financial statements, remaining 
weaknesses in internal controls and the continued widespread 
noncompliance with FFMIA show that there is still a long way to go to 
reach the end game--that is, having systems, processes, and controls 
that routinely generate reliable, useful, and timely information for 
managers and other decision makers. In addition, reaching this "end 
game" should provide management, the Congress, and taxpayers with 
reasonable assurance that fraud, waste, and abuse are minimized.

In the federal government, many of the clean opinions in fiscal year 
2002 were achieved as a result of time-consuming, ad hoc programming 
and analysis of data produced by inadequate systems that are not 
integrated and often require significant audit adjustments. Such time-
consuming procedures, which often represent "heroic efforts," prevent 
financial management staff from doing other financial-related work such 
as financial analyses, which could directly support strategic decision 
making and ultimately improve overall business performance. In 
contrast, for most private sector corporations, the clean opinion 
confirms the fact that management has timely, reliable information to 
manage daily operations in:

a competitive environment. In our Executive Guide: Creating Value 
Through World-class Financial Management,[Footnote 5] we identified the 
success factors, practices, and outcomes associated with world-class 
financial management efforts. We found that many leading finance 
organizations have a goal to reduce the time spent on routine 
accounting activities, such as financial statement preparation, so that 
financial management staff can spend more time on activities such as 
business performance analysis or cost analysis. These organizations 
also had clear, strong executive leadership, that when combined with 
factors such as effective organizational alignment, strategic human 
capital management, and end-to-end business process improvement, were 
critical for ensuring their financial management staff delivered the 
kind of analysis and forward-looking information needed to effectively 
manage their programs. As discussed in the executive guide, to reap the 
full benefit of a modern, integrated financial management system, USAID 
must go beyond obtaining an unqualified audit opinion toward (1) 
routinely generating reliable cost and performance information and 
analysis, (2) undertaking other value-added activities that support 
strategic decision making and mission performance, and (3) building a 
finance team that supports the agency's mission and goals.

Progress Towards Financial Management Reform:

In May 2001, the Subcommittee's predecessor held a hearing[Footnote 6] 
on USAID financial management. Using that hearing as a baseline, we 
evaluated, using primarily USAID IG reports, the progress made to 
improve USAID's financial management systems, processes, and human 
capital (people) in the past 2 years. At the time of the May 2001 
hearing, USAID was one of three federal agencies subject to the CFO Act 
that had such significant problems that they were unable to produce 
financial statements that auditors could express an opinion on. The 
hearing focused on actions needed to resolve USAID's financial 
management issues. At that time, the Acting Assistant Administrator for 
the Bureau of Management told the Subcommittee that actions to correct 
reported material weaknesses in financial management were completed or 
in process and that all reported weaknesses would be resolved by 2002.

While USAID has made progress in its financial management since that 
hearing, it has not achieved the success that it had expected. Rather, 
its progress relates primarily to improved opinions on USAID's 
financial statements. Table 1 below shows that USAID has been able to 
achieve improved opinions on its financial statements over the past 3 
years.

Table 1: Audit Opinions on USAID's Financial Statements in Fiscal Years 
2000 Through 2002:

Financial statements: Balance sheet; Type of opinion: Fiscal year 2000: 
Disclaimer[A]; Type of opinion: Fiscal year 2001: Qualified[B]; Type of 
opinion: Fiscal year 2002: Unqualified[C].

Financial statements: Statement of net costs; Type of opinion: Fiscal 
year 2000: Disclaimer; Type of opinion: Fiscal year 2001: Disclaimer; 
Type of opinion: Fiscal year 2002: Qualified.

Financial statements: Statement of changes in net position; Type of 
opinion: Fiscal year 2000: Disclaimer; Type of opinion: Fiscal year 
2001: Qualified; Type of opinion: Fiscal year 2002: Unqualified.

Financial statements: Statement of budgetary resources; Type of 
opinion: Fiscal year 2000: Disclaimer; Type of opinion: Fiscal year 
2001: Qualified; Type of opinion: Fiscal year 2002: Unqualified.

Financial statements: Statement of financing; Type of opinion: Fiscal 
year 2000: Disclaimer; Type of opinion: Fiscal year 2001: Disclaimer; 
Type of opinion: Fiscal year 2002: Unqualified.

Source: USAID Inspector General reports.

[A] A disclaimer of opinion means that the auditor does not express an 
opinion on the financial statements. A disclaimer is appropriate when 
the audit scope is not sufficient enough to enable the auditor to 
express an opinion or when there are material uncertainties involving 
scope limitations.

[B] A qualified opinion means that, except for the effects of the 
matter to which the qualification relates, the auditor concludes that 
the financial statements are presented fairly, in all material 
respects, in accordance with generally accepted accounting principles.

[C] An unqualified, or clean, opinion means that the auditor concludes 
that the financial statements are presented fairly, in all material 
respects, in accordance with generally accepted accounting principles.

[End of table]

Fiscal year 2001 marked the first time that the USAID IG was able to 
express an opinion on three of USAID's financial statements--the 
Balance Sheet, Statement of Changes in Net Position, and Statement of 
Budgetary Resources. However, as noted above, the opinions were 
qualified and achieved through extensive efforts to overcome material 
internal control weaknesses. Further, the IG remained unable to express 
an opinion on USAID's Statement of Net Cost and Statement of Financing.

Fiscal year 2002 marked additional improvements in the opinions on 
USAID's financial statements. All but one of USAID's financial 
statements received unqualified opinions. The Statement of Net Cost 
received a qualified opinion. The IG reported that "Öon the Statement 
of Net Cost, the opinion was achieved only through extensive effort to 
overcome material weaknesses in internal control" and "[a]lthough these 
efforts resulted in auditable information, [they] did not provide 
timely information to USAID management to make cost and budgetary 
decisions throughout the year."[Footnote 7]

Compounding USAID's systems difficulties has been the lack of adequate 
financial management personnel. Since the early 1990s, we have reported 
that USAID has made limited progress in addressing its human capital 
management issues. A major concern is that USAID has not established a 
comprehensive workforce plan that is integrated with the agency's 
strategic objectives and ensures that the agency has skills and 
competencies necessary to meet its emerging foreign assistance 
challenges. While a viable financial management system is needed, and 
offers the capacity to achieve reliable data, it is not the entire 
answer for improving USAID's financial management information. 
Qualified personnel must be in place to implement and operate these 
systems.

In addition to the improved opinions for fiscal year 2002, the IG 
reported that while USAID had made improvements in its processes and 
procedures, a substantial number of material weaknesses,[Footnote 8] 
reportable conditions,[Footnote 9] and noncompliance with laws and 
regulations[Footnote 10] remain. The report also noted that USAID's 
financial management systems do not meet federal financial system 
requirements. Table 2 shows that while USAID's opinions on its 
financial statements improved, reported material weaknesses, 
reportable conditions, and noncompliance increased.

Table 2: Weaknesses Reported by the USAID Inspector General in Fiscal 
Years 2000 Through 2002:

Reported material weaknesses: 

Reconciling fund balance with Treasury; Fiscal year: 2000: No; 
Fiscal year: 2001: No; Fiscal year: 2002: Yes.

Recognizing, recording, and reporting accounts receivable; Fiscal year: 
2000: Yes; Fiscal year: 2001: No; Fiscal year: 2002: Yes.

Calculating and reporting accounts payable; Fiscal year: 2000: Yes; 
Fiscal year: 2001: No; Fiscal year: 2002: Yes.

Recording and classifying advances to grantees and related expenses; 
Fiscal year: 2000: Yes; Fiscal year: 2001: Yes; Fiscal year: 2002: Yes.

Computer security deficiencies; Fiscal year: 2000: Yes; Fiscal year: 
2001: Yes; Fiscal year: 2002: Reported as a Compliance with Laws and 
Regulations Condition.

Process for preparing the Management's Discussion and Analysis needs 
improvement; Fiscal year: 2000: Yes; Fiscal year: 2001: No; Fiscal 
year: 2002: Now a Reportable Condition.

Allocating program expenses on its Statement of Net Costs; Fiscal year: 
2000: No; Fiscal year: 2001: No; Fiscal year: 2002: Yes.

Reviewing, analyzing, and deobligating unliquidated obligations; 
Fiscal year: 2000: No; Fiscal year: 2001: Yes; Fiscal year: 2002: Yes.

Calculating credit program allowances; Fiscal year: 2000: No; Fiscal 
year: 2001: No; Fiscal year: 2002: Yes.

Reportable conditions: 

Reconciling fund balance with Treasury; Fiscal year: 2000: Yes; Fiscal 
year: 2001: No; Fiscal year: 2002: No.

Calculating and reporting accounts payable; Fiscal year: 2000: No; 
Fiscal year: 2001: Yes; Fiscal year: 2002: No.

Recognizing, recording, and reporting accounts receivable; Fiscal year: 
2000: No; Fiscal year: 2001: Yes; Fiscal year: 2002: No.

Establish monthly closing procedures; Fiscal year: 2000: No; Fiscal 
year: 2001: No; Fiscal year: 2002: Yes.

Improve controls and management of property at overseas missions; 
Fiscal year: 2000: No; Fiscal year: 2001: No; Fiscal year: 2002: Yes.

Process for preparing the Management's Discussion and Analysis needs 
improvement; Fiscal year: 2000: No; Fiscal year: 2001: Yes; Fiscal year: 
2002: Yes.

Compliance with laws and regulations: 

Chief Financial Officers Act of 1990; Fiscal year: 2000: Yes; Fiscal 
year: 2001: No; Fiscal year: 2002: .

Federal Financial Management Improvement Act of 1996; Fiscal year: 
2000: Yes; Fiscal year: 2001: Yes; Fiscal year: 2002: Yes.

Computer Security Act of 1987; Fiscal year: 2000: Yes; Fiscal year: 
2001: Yes; Fiscal year: 2002: Yes.

Debt Collection and Improvement Act of 1996; Fiscal year: 2000: No; 
Fiscal year: 2001: No; Fiscal year: 2002: Yes.

Source: USAID Inspector General reports.

[End of table]

The increase in reported material weaknesses, reportable conditions, 
and noncompliance is, in part, due to the full scope audits that were 
not possible in prior years. As financial information improved over the 
years, it has assisted the USAID IG in identifying additional internal 
control and system weaknesses. Identifying these additional weaknesses 
is constructive in that they highlight areas that management needs to 
address in order to improve the overall operations of the agency and 
provide accurate, timely, and reliable information to management and 
the Congress.

Several of the weaknesses reported by the USAID IG are chronic in 
nature and resolution has been a challenge. For example, similar to the 
USAID fiscal year 2002 material weakness, in 1993 we reported[Footnote 
11] that USAID did not promptly and accurately report disbursements. At 
that time, USAID could not ensure that disbursements were made only 
against valid, preestablished obligations and that its recorded 
unliquidated obligations balances were valid. Additionally, we reported 
USAID did not have effective control and accountability over its 
property.

The chronic nature of the reported weaknesses at USAID reflect 
challenges with people (human capital), processes, and financial 
management systems. USAID management represented to us that, over time, 
they have lost a significant number of staff in this area and face 
challenges recruiting and retaining financial management staff. 
Further, according to IG representatives, many of the individuals that 
financial managers must depend on to provide the data that are used for 
financial reports are not answerable to the financial managers and 
often do not have the background or training necessary to report the 
data accurately. Also contributing to the challenge are USAID's 
nonintegrated systems that require data reentry, supplementary 
accounting records, and lengthy and burdensome reconciliation 
processes.

Financial Management Reform Will Require a Long-term Commitment:

Transforming USAID's financial and business management environment into 
an efficient and effective operation that is capable of providing 
management and the Congress with relevant, timely, and accurate 
information on the results of operation will require a sustained 
effort. Improved financial systems and properly trained financial 
management personnel are key elements of this transformation. While 
these challenges are difficult, they are not insurmountable. Without 
sustained leadership and oversight by senior management, the likelihood 
of success is diminished.

In its fiscal year 2002 Performance and Accountability Report, USAID 
noted that it was in the process of implementing an agencywide 
financial management system. USAID reported that the system has been 
successfully implemented in Washington. In June 2003, USAID awarded a 
contract for the implementation of the system overseas. According to 
USAID officials, they anticipate this effort to be completed by fiscal 
year 2006. While we are encouraged by USAID's progress toward 
implementing an integrated system, it should be noted that this is the 
second attempt in the past 10 years to implement an agencywide 
integrated financial management system. To provide reasonable assurance 
that the current effort is successful, top management must be actively 
involved in the oversight of the current project. Management must have 
performance metrics in place to ensure the modernization effort is 
accomplished on time, within budget, and provides the planned and 
needed capabilities.

In this regard, in fiscal year 2002, USAID redesigned its overall 
governance structure for the acquisition and management of information 
technology. Specifically, USAID created the Business Transformation 
Executive Committee, chaired by the Deputy Administrator and with 
membership including key senior management. The committee's purpose is 
to provide USAID-wide leadership for initiatives and investments to 
transform USAID business systems and organizational performance. The 
committee's roles and responsibilities include:

* Guiding business transformation efforts and ensuring broad-based 
cooperation, ownership, and accountability for results.

* Initiating, reviewing, approving, monitoring, coordinating, and 
evaluating projects and investments.

* Ensuring that investments are focused on highest pay-off performance 
improvement opportunities aligned with USAID's programmatic and budget 
priorities.

Active, substantive oversight by this committee over USAID's 
information technology investments, including its agencywide 
integrated financial management system initiative, will be needed for 
business reform efforts to succeed.

In addition to improved business systems, it is critical that USAID 
have sustained financial management leadership and the requisite 
personnel and skill set to operate the system in an efficient and 
effective manner once it is in place. We have reported for years and 
USAID acknowledges that human capital is one of the management 
challenges that must be overcome. As previously noted, since the early 
1990s we have reported that USAID has made limited progress in 
addressing its human capital management issues. Within the area of 
financial management, progress in this area has also been slow, with no 
specific plan of action on how to address shortages of trained 
financial managers. USAID represented to us that as part of its 
agencywide human capital strategy, it plans to specifically address its 
financial management personnel challenges.

In addition to addressing systems and human capital challenges, USAID 
is working to improve its processes and internal controls. Effective 
processes and internal controls are necessary to ensure that whatever 
systems are in place are fully utilized and that its operations are as 
efficient and effective as possible. USAID is working to eliminate the 
material weaknesses, reportable conditions, and noncompliance reported 
by the USAID IG in fiscal year 2002. For fiscal year 2003, the 
Administrator of USAID and the IG agreed to work together to provide 
for the issuance of audited financial statements by November 15, 2003, 
in line with the Office of Management and Budget's accelerated 
timetable for reporting. To meet this tight timeframe, the CFO must 
provide timely and reliable information that can withstand the test of 
audit with little to no needed adjustment. However, given the continued 
financial management system, process, and human capital challenges, 
meeting this goal will be difficult.

Conclusion:

USAID appears to be making a serious attempt to reform its financial 
management, as evidenced by initiatives to improve its human capital, 
internal controls, and business systems. However, progress to date is 
most evident in the improvement in the opinions on its financial 
statements, which reflect USAID's ability to generate reliable 
information one time a year, rather than routinely for purposes of 
management decision making. Through fiscal year 2002 these improved 
opinions reflect a significant "heroic" effort to overcome human 
capital, internal control, and systems problems. Although these 
improved opinions represent progress, the measures of fundamental 
reform will be the ability of USAID to provide relevant, timely, 
reliable financial information and sound internal controls to enable it 
to operate in an efficient and effective manner.

:

Mr. Chairman, this concludes my statement. I would be pleased to answer 
any questions you or other members of the Subcommittee may have at this 
time.

Contacts and Acknowledgments:

For further information about this testimony, please contact Gregory D. 
Kutz at (202) 512-9095 or [Hyperlink, kutzg@gao.gov] kutzg@gao.gov or 
John Kelly at (202) 512-6926 or [Hyperlink, kellyj@gao.gov] 
kellyj@gao.gov. Other key contributors to this testimony include 
Stephen Donahue, Dianne Guensberg, and Darby Smith.

(192107):

FOOTNOTES

[1] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: U.S. Agency for International Development, GAO-03-111 
(Washington, D.C.: January 2003).

[2] Pub. L. No. 101-576, 104 Stat. 2838 (1990).

[3] Pub. L. No. 103-356, title IV, 108 Stat. 3412 (1994).

[4] Pub. L. No. 104-208, div. A, sec. 101(f), title VIII, 110 Stat. 
3009-389 (1996).

[5] U.S. General Accounting Office, Executive Guide: Creating Value 
Through World-class Financial Management, GAO/AIMD-00-134 (Washington, 
D.C.: April 2000).

[6] House Committee on Government Reform, Subcommittee on Government 
Efficiency, Financial Management and Intergovernmental Relations, The 
U.S. Agency for International Development: What Must Be Done to Resolve 
USAID's Longstanding Financial Management Problems? 107TH Cong., 1ST 
Sess., May 8, 2001.

[7] USAID Office of Inspector General, Report on USAID's Consolidated 
Financial Statements, Internal Controls, and Compliance for the Fiscal 
Year 2002, Audit Report No. 0-000-03-001-C (Washington, D.C.: Jan. 24, 
2003).

[8] A material weakness is a condition that precludes the entity's 
internal control from providing reasonable assurance that 
misstatements, losses, or noncompliance material in relation to the 
financial statements or to stewardship information would be prevented 
or detected on a timely basis.

[9] Reportable conditions are matters coming to the auditor's attention 
that, in the auditor's judgment, should be communicated because they 
could adversely affect the entity's ability to record, process, 
summarize, and report financial data consistent with the assertions by 
management in the financial statements.

[10] The auditor determined that the agency was not in compliance with 
selected provisions of applicable laws and regulations that could have 
a direct and material effect on amounts reported in the financial 
statements.

[11] U.S. General Accounting Office, Financial Management: Inadequate 
Accounting and System Project Controls at AID, GAO/AFMD-93-19 
(Washington D.C.: May 24, 1993).