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Accountability, but State Department Oversight Could Be Improved' which 
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Report to Congressional Requesters: 

United States Government Accountability Office: 

GAO: 

July 2004: 

Peacekeeping: 

Multinational Force and Observers Maintaining Accountability, but State 
Department Oversight Could Be Improved: 

GAO-04-883: 

GAO Highlights: 

Highlights of GAO-04-883, a report to congressional requesters

Why GAO Did This Study: 

Since 1982, the Multinational Force and Observers (MFO) has monitored 
compliance with the security provisions of the Egyptian-Israeli Treaty 
of Peace. The United States, while not a party to the treaty, 
contributes 40 percent of the troops and a third of MFO’s annual 
budget. All personnel in the MFO civilian observer unit (COU) are 
Americans. 

GAO (1) assessed State’s oversight of the MFO, (2) reviewed MFO’s 
personnel and financial management practices, and (3) reviewed MFO’s 
emerging budget challenges and U.S. MFO cost sharing arrangements.

What GAO Found: 

The State Department has fulfilled some but not all of its operational 
and financial oversight responsibilities for MFO, but lack of 
documentation prevented us from determining the quality and extent of 
its efforts. State has not consistently recruited candidates suited 
for the leadership position of the MFO’s civilian observer unit, which 
monitors and verifies the parties’ compliance with the treaty. State 
also has not evaluated MFO’s financial practices as required by State’s 
guidelines because they lacked staff with expertise in this area. 
However, State recently formed an MFO management advisory board to 
improve its oversight of MFO operations.

MFO has taken actions in recent years to improve its personnel system, 
financial accountability, and internal controls. For example, it has 
provided incentives to retain experienced staff and taken steps to 
standardize its performance appraisal system. It has received clean 
opinions on its annual financial statements and on special reviews of 
its internal controls. MFO has also controlled costs, reduced its 
military and civilian personnel levels, and kept its budget at $51 
million since 1995, while meeting mission objectives and Treaty party 
expectations.

U.S. Infantry Battalion Deployed as MFO Peacekeepers: 

[See PDF for image]

[End of figure] 

MFO faces a number of personnel, management, and budgetary challenges. 
For example, leading practices suggest its employees’ access to 
alternative dispute resolution mechanisms for discrimination 
complaints, and the gender imbalance in its workforce, could be issues 
of concern. Moreover, MFO lacks oversight from an audit committee or 
senior management review committee to ensure the independence of its 
external auditors. Finally, MFO’s budget is likely to increase because 
of costs associated with replacing its antiquated helicopter fleet. 
U.S. and MFO efforts to obtain support from other contributors 
generally have not succeeded. Army, State, and MFO officials have yet 
to agree who should pay the increased costs associated with changes in 
the composition and pay scales of U.S. troops deployed at MFO.

What GAO Recommends: 

GAO recommends that the Secretary of State (1) resolve the concern of 
recruiting for the chief COU post; (2) ensure that staff with 
accounting expertise carry out State’s MFO financial oversight 
responsibilities; (3) direct State’s MFO advisory board to monitor 
State’s compliance with its oversight guidelines; and (4) work to 
reconcile Army and State views on the MFO cost-sharing arrangement.

We received comments from DOD, State, and MFO. DOD and MFO generally 
agreed with our conclusions. State agreed with three of our 
recommendations and was nonresponsive to the recommendation that the 
oversight board monitor State’s compliance with MFO oversight 
guidelines. 

www.gao.gov/cgi-bin/getrpt?GAO-04-883.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Joseph Christoff at (202) 
512-8979 or christoffj@gao.gov.

Contents: 

Letter: 

Results in Brief: 

Background: 

State Has Met Some of Its Oversight Responsibilities but Has Limited 
Evidence Documenting These Efforts: 

MFO Has Taken Some Actions to Improve Personnel Management but has not 
Systematically Reformed Its Personnel System: 

MFO Has Improved Financial Accountability, but Additional Oversight May 
Be Needed: 

After 9 Years of Flat Budgets, MFO Faces Financial and Other 
Challenges: 

Conclusion: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: MFO's Small but Challenging Workforce: 

Appendix III: GAO's Model for Strategic Human Capital Management 
Planning: 

Appendix IV: Calculating MFO Budget in Terms of International Dollars: 

Appendix V: Cost of U.S. Participation in MFO: 

Appendix VI: Comments from the Department of State: 

Appendix VII: Comments from the Multinational Force and Observers: 

GAO Comments: 

Tables: 

Table 1: MFO Civilian Staff by Location and Type, 2003: 

Table 2: MFO Expenditures in Nominal and International Dollars: 

Table 3: Cost of U.S. Participation in MFO, Fiscal Years 1995 through 
2003: 

Table 4: U.S. Troop Contributions to the MFO as a Percentage of the 
Total, Fiscal Years 1995 through 2003: 

Figures: 

Figure 1: Sinai Peninsula and MFO Area of Operations: 

Figure 2: U.S. Soldiers on Duty at an MFO Outpost Near South Camp: 

Figure 3: MFO Organizational Chart (as of December 2003): 

Figure 4: MFO Budget in Nominal and Constant Purchasing Power Dollars: 

Figure 5: U.S. Army Helicopter Options for MFO Service: 

Figure 6: Total Number of MFO Troops (including U.S. troops) and Number 
of U.S. Troops for Fiscal Years 1995 through 2003: 

Figure 7: Cost of U.S. Participation in MFO: 

Figure 8: Excerpts from GAO's Strategic Human Capital Management Model: 

Figure 9: Percentage of MFO Dollar Budget Spent in Israel and Egypt: 

Figure 10: Percentage of MFO International Dollar Budget Spent in 
Israel and Egypt: 

Abbreviation: 

COU: Civilian Observer Unit:  
COSO: Committee of Sponsoring Organizations of the Treadway Commission:  
DOD: Department of Defense:  
HNSI: Holmes and Narver Services, Incorporated:  
MFO: Multinational Force and Observers:  
NEA: Bureau of Near Eastern Affairs, U.S. Department of State:  
NEA/EX: Office of the Executive Director, Bureau of Near Eastern 
Affairs:  
NEA/RA: Office of Regional Affairs, Bureau of Near Eastern Affairs:  
OIG: Office of Inspector General, U.S. Department of State:  
PPP: Purchasing Power Parity:  
U.N.: United Nations: 

United States Government Accountability Office: 

Washington, DC 20548: 

July 23, 2004: 

Congressional Requesters: 

Following years of violent confrontation, Egypt and Israel signed a 
treaty on March 26, 1979, that ended the existing state of war and 
agreed to the withdrawal of all Israeli forces from the Sinai. Although 
the treaty proposed that U.N. forces and observers supervise these 
security arrangements, the United States committed to providing a 
multinational force if the U.N. process failed. When the U.N. Security 
Council failed to reach an agreement, the governments of Egypt and 
Israel signed a protocol to the treaty in 1981 that established the 
Multinational Force and Observers (MFO). The treaty can be terminated 
by the consent of the parties; it does not contain a specific end date 
or establish specific conditions that, if met, would allow MFO to 
withdraw troops. MFO currently has 1,685 troops and a civilian 
workforce of about 108 international and local national staff who 
manage the organization and its annual budget of $51 million. To manage 
its operations, the MFO has developed personnel, financial management, 
budget, and internal control systems. This review examines these 
systems including MFO's personnel practices as they pertain primarily 
to its international civilian workforce.

The United States, although not a party to either the treaty or the 
protocol, agreed to provide military forces and a group of civilian 
observers to the MFO to monitor compliance with military limitations. 
The United States now contributes the largest share of military troops 
and about one third of the organization's financial resources. In 
addition, the Department of State conducts oversight of U.S. 
participation in the MFO. In 2001, the United States reviewed its 
commitments worldwide to security and peacekeeping operations, and in 
2003 reduced the number of troops serving in the MFO.

Given your interest in MFO's management practices and State's oversight 
responsibilities, we (1) assessed the Department of State's oversight 
of the MFO, (2) reviewed MFO's personnel policies and practices, (3) 
examined MFO's financial management practices, and (4) reviewed MFO's 
emerging budgetary challenges and cost-sharing arrangements.

To achieve our objectives, we interviewed officials at the Departments 
of State and Defense (DOD), and the MFO and collected key documents 
from those officials. We reviewed State's guidelines for overseeing 
MFO's activities and finances. We met with MFO officials in Rome, 
Cairo, and Tel Aviv; with Egyptian military and foreign affairs 
officials in Cairo; and with Israeli military and foreign affairs 
officials in Jerusalem. We also visited MFO force installations in the 
Sinai Peninsula. We reviewed MFO budget and related documents and the 
external audit reports of finances and internal controls. Finally, we 
met with MFO, State, and DOD officials to discuss the MFO budget and 
U.S. contribution to the MFO. We determined that the data they provided 
were sufficiently reliable for purposes of reviewing trends in the MFO 
budget and U.S. contributions between fiscal years 1995 and 2003. A 
detailed description of our scope and methodology is included in 
appendix 1. We conducted our review from September 2003 to May 2004 in 
accordance with generally accepted government auditing standards.

Results in Brief: 

State has fulfilled some but not all of its operational and financial 
oversight responsibilities described in its guidelines for overseeing 
the MFO. Overall, we could not determine the full extent of the 
department's efforts because it did not document the nature, quality, 
and range of its oversight activities. For example, a State official 
visited MFO locations twice a year to observe MFO operations and 
compare these observations to MFO regulations. However, because he did 
not document the results of his visits, we could not determine the 
range and quality of his oversight activities. In addition, the 
guidelines called for State officials within the Bureau of Near Eastern 
Affairs (NEA) to review the external auditors' reports and evaluate MFO 
financial practices. While staff reviewed the auditors' reports, they 
did not evaluate MFO financial practices because they lacked the 
accounting expertise to do so. State is exploring options for obtaining 
the necessary financial expertise; however, it has not yet determined 
how it will address this issue. The guidelines also direct State 
oversight through the transfer of U.S. government personnel to key MFO 
positions. While State has successfully recruited staff for the 
civilian observers unit, a number of chiefs of the unit exhibited poor 
leadership capabilities. Recruiting for the chief observer post remains 
a concern for State because many candidates at State seek higher 
priority posts, such as the U.S. Embassy in Cairo, to enhance their 
careers rather than seek an MFO position. In response to 
recommendations made by the State's Office of the Inspector General in 
February 2004, NEA agreed to form a board to improve its oversight of 
MFO operations and to address civilian observer unit personnel issues. 
In June 2004, the board held its initial meeting and discussed, among 
other topics, various approaches for recruiting for the chief observer 
post. However, the board has not yet developed the range of issues that 
it will address or established timelines for resolving these issues.

MFO has made changes to improve its personnel system and respond to 
some employee concerns. To improve its ability to retain experienced 
staff, MFO provided recontracting bonuses and incentive awards to 
staff. In addition, MFO standardized its employee performance reviews 
to improve the transparency of its appraisal system and upgraded the 
chief of personnel services position to a longer-term civilian position 
for greater expertise and continuity. MFO has also taken steps to 
improve workforce planning but has not undertaken a systematic review 
of its personnel system since 1985. Moreover, leading personnel 
practices suggest that other aspects of MFO's personnel system could be 
reviewed and subsequently modified. For example, MFO regulations and 
procedures do not clearly provide for outside mediation or external 
avenues of appeal for MFO employee complaints involving discrimination 
or sexual harassment. In addition, the MFO has neither addressed 
disparities in the representation of women in its workforce, especially 
in management positions, nor identified where barriers may operate to 
exclude certain groups and address these barriers.

The MFO has taken steps to improve its financial management and 
internal controls over the past 9 years. MFO installed a new financial 
management system and hired a management review officer to improve the 
efficiency and effectiveness of its operations. In addition, MFO 
changed its external auditor since the prior auditor had audited MFO's 
records for several years. Both auditors issued unqualified or "clean" 
opinions on MFO's annual financial statements. In addition, the current 
auditor audited the organization's internal controls and provided a 
clean opinion as well. Internal controls are audited every 3 years at 
MFO. However, unlike other international organizations, the MFO does 
not have an audit committee to independently oversee the external 
audits. According to leading internal control practices, an effective 
audit committee can provide an important oversight function. It can 
also play an important role in ensuring effective internal controls 
because of management's ability to override system controls. 
Establishing an additional oversight body or having the newly 
established State MFO management advisory board review and evaluate MFO 
financial practices could provide further assurance to MFO contributors 
on the state of MFO finances since the Director General has broad 
management authority not found in other international organizations.

For the past 9 years, MFO's budget has averaged about $51 million 
annually. However, the organization faces a number of challenges that 
will make it difficult to continue operating within its current budget. 
Most important, the MFO must address the cost of replacing its 
antiquated fleet of helicopters by fiscal year 2006, which preliminary 
estimates provided by DOD could total about $18 million. As a result of 
this and other pressures on the budget, the major contributors' cost of 
supporting the MFO are likely to increase if the MFO maintains its 
current level of operations. Israeli and Egyptian officials stated that 
their governments do not support increases in their contributions. U.S. 
and MFO efforts to obtain support from other contributors generally 
have not succeeded. In addition, U.S. officials have yet to make a 
decision about increasing U.S. support to the MFO or adjusting its 
current cost-sharing arrangements with the MFO. Army, State, and MFO 
officials have yet to agree who should pay the increased costs 
associated with changes in the composition and pay scales of U.S. 
troops under current cost-sharing arrangements.

In this report, we recommend that the Secretary of State take steps to 
resolve the recurring concern of finding qualified candidates for the 
chief of the civilian observer unit, ensure that staff with accounting 
expertise are available to carry out State's financial oversight 
responsibilities for MFO and review the terms of the external audits, 
direct the MFO management advisory board to monitor and document the 
bureau's compliance with its guidelines for overseeing MFO, and work 
with Army officials to reconcile differences between Army and State 
views about the current MFO cost-sharing arrangement.

We have received oral comments from DOD and written comments from the 
Department of State and MFO, which we have reprinted in appendixes VI 
and VII. DOD generally agreed with our findings and conclusions. The 
Army also provided technical comments. State agreed with three of our 
recommendations but was not responsive to our recommendation to direct 
the advisory board to monitor and document NEA's compliance with its 
guidelines for overseeing MFO. The MFO generally agreed with our 
comments.

Background: 

The mission of the MFO is to observe and report on Israeli and Egyptian 
compliance with the security aspects of the 1979 treaty of peace. The 
agreement established four security zones--three are in the Sinai in 
Egypt, and one is in Israel along the international border. The 
multinational force occupies checkpoints and conducts periodic patrols 
to observe adherence of the treaty parties to agreed force limitations 
and patrols the Strait of Tiran between the Gulf of Aqaba and the Red 
Sea to ensure the freedom of navigation. The agreed force limitations 
for the four zones (see fig. 1) are: 

* Zone A: One Egyptian mechanized division containing up to 22,000 
troops;

* Zone B: Four Egyptian border battalions manned by up to 4,000 
personnel;

* Zone C: MFO-patrolled areas within Egypt, although civil police units 
with light weapons are also allowed; and: 

* Zone D: Up to four Israeli infantry battalions totaling up to 4,000 
troops.

Figure 1: Sinai Peninsula and MFO Area of Operations: 

[See PDF for image]

[End of figure]

The Department of State oversees U.S. participation in the MFO, 
nominates a U.S. citizen as the Director General, and helps recruit 
Americans to serve in the MFO civilian observer unit. MFO headquarters 
are located in Rome and the organization also maintains offices in 
Cairo and Tel Aviv to address policy and administration issues. The 
Force Commander--who is responsible for command and control of the 
force-and his multinational staff are located in the North Camp at El 
Gorah in the Sinai Peninsula. The U.S. infantry battalion and the 
coastal patrol unit are based in the South Camp near Sharm el Sheikh on 
the Red Sea (see fig. 2). The MFO's annual operating budget of about 
$51 million is funded in equal parts by Egypt, Israel, and the United 
States.[Footnote 2] All parties pay their contributions in U.S. 
dollars.

Figure 2: U.S. Soldiers on Duty at an MFO Outpost Near South Camp: 

[See PDF for image]

[End of figure]

Currently, 11 countries deploy troops to the MFO. As of December 2003, 
the MFO military force consisted of 1,685 multinational troops, of 
which 687 were from the United States (see fig. 3). Colombia and Fiji 
also provide infantry battalions and Italy provides the coastal patrol 
unit. In addition, there is a civilian observer unit of 15 U.S. 
citizens that performs reconnaissance and verification missions. The 
chief observer and about half of the other observers temporarily resign 
from the State Department to fulfill 1-or 2-year MFO contract 
commitments; the other civilian observers are usually retired U.S. 
military personnel with renewable 2-year MFO contracts. (See app. II 
for details on the MFO work force.) Retired military personnel are 
often hired for their familiarity with military weapons and 
organizations, while State personnel are often hired for their 
diplomatic skills and experience in the region. All members need to 
become proficient in navigation, map reading, and driving in the Sinai, 
according to an MFO official.

Figure 3: MFO Organizational Chart (as of December 2003): 

[See PDF for image]

Note: The Operations function is currently headed by a Norwegian 
officer.

[End of figure]

The MFO Director General must be a U.S. citizen that is nominated by 
the State Department and appointed by the parties for a 4-year 
renewable term. The Director General appoints the Force Commander for a 
3-year term that can also be renewed. The Force Commander cannot be of 
the same nationality as the Director General. MFO's other civilian 
employees are generally hired on 2-year contracts that can be renewed 
at the Director General's discretion.

In a 1995 report, we reported that the parties to the treaty and the 
U.S. government viewed the MFO as effective in helping maintain peace 
and in reducing certain costs. However, we found that State needed to 
provide greater oversight due to a lack of assurance regarding the 
adequacy of internal controls.[Footnote 3] The report noted that, 
unlike other international organizations, the MFO does not have a 
formal board of directors or independent audit committee to oversee 
audits. Our recommendations in 1995 included that State take steps to 
improve its oversight by examining MFO annual financial statements for 
discrepancies and having MFO's external auditor periodically perform a 
separate audit of MFO internal controls that State was to review. State 
has implemented our recommendations except for examining MFO's 
financial statements for discrepancies.[Footnote 4]

State Has Met Some of Its Oversight Responsibilities but Has Limited 
Evidence Documenting These Efforts: 

State has developed but not completely fulfilled its operational and 
financial oversight responsibilities described in its guidelines for 
overseeing the MFO. These oversight responsibilities included 
evaluating MFO financial practices, conducting oversight visits of MFO 
operations, and recruiting staff for the civilian observers' unit. We 
could not determine the full extent of the department's compliance with 
its guidelines because it does not have sufficient documentation to 
describe the quality and range of its efforts. The Office of Regional 
Affairs within State's Bureau of Near Eastern Affairs (NEA) is the 
single U.S. focal point for all MFO-United States government 
interaction and oversight. NEA's guidelines called for State officials 
to review the external auditors' reports and evaluate MFO financial 
practices. While reviews of the auditors' reports were performed, the 
staff did not possess the accounting expertise to evaluate MFO 
financial practices and did not do so. NEA is exploring options for 
obtaining the necessary expertise; however, it has not finalized its 
approach for redressing this issue. According to the guidelines, 
oversight is also informally conducted through the transfer of U.S. 
government personnel to key MFO positions, including a U.S. civilian 
observer unit. While State has successfully recruited many civilian 
observers, it has had difficulty in consistently recruiting candidates 
with strong leadership capabilities for the chief position. Recruiting 
for the chief observer post remains a concern because many candidates 
at State seek higher priority posts, such as the U.S. Embassy in Cairo, 
to enhance their careers rather than seek an MFO position. In response 
to a February 2004 recommendation made by the State Office of the 
Inspector General (OIG), NEA agreed to form an advisory board to 
oversee MFO operations. In June 2004, the advisory board had its 
initial meeting and discussed options for making the chief observer 
position more attractive. The board has not fully developed the range 
of issues that it will address or established timelines for resolving 
these issues.

Guidelines Did Not Require Documentation of Oversight Efforts: 

NEA developed guidelines for conducting MFO oversight in 1995 and 
updated the guidelines in 2002; however, the guidelines did not require 
that NEA document its oversight efforts. The guidelines sought to 
ensure that (1) U.S. government agreements and foreign policy 
objectives were being met; (2) MFO personnel practices were appropriate 
and in accordance with MFO regulations; (3) MFO operations were in 
compliance with its regulations; and (4) MFO resources were spent 
appropriately, financial transactions were recorded accurately, and 
internal controls were adequate. We could not determine whether State 
fully complied with its oversight responsibilities because it did not 
have sufficient documentation to support the extent and quality of its 
oversight efforts.

We reviewed documentation to support State's efforts to provide 
oversight of MFO from 1996 to 2004. These documents recorded 
communication between MFO and State officials about daily activities 
and operations of the MFO. However, we found that this documentation 
did not fully describe State's oversight efforts, the condition of MFO 
operations, State's views on MFO policies/practices, or recommendations 
for improving MFO operations. As a result, we could not determine the 
extent and quality of NEA oversight activities. The maintenance of 
accurate and timely records document efforts undertaken, and reviews by 
management help ensure that management directives are carried out. 
Records are an integral part of an entity's stewardship of government 
resources. In addition, documentation provides information so that 
oversight activities can be assessed over time.

State Has Fulfilled Some but Not All of Its Oversight Responsibilities: 

While State has met some aspects of the guidelines for overseeing MFO, 
it has not fully complied with its guidelines in other areas such as 
evaluating MFO's financial practices. As discussed below, we reviewed 
the operational and financial oversight guidelines and State's efforts 
for complying with them.

State Officials Regularly Communicated with MFO Officials and 
Participated in Annual Trilateral Meeting: 

NEA guidelines called for its officials to maintain regular 
communications with key MFO officials, discuss U.S. foreign policy 
issues with MFO, and participate in the annual MFO Trilateral Meeting 
between Egyptian, Israeli, and U.S. officials. We reviewed letters of 
correspondence, reports, cables, and e-mails documenting regular 
communications with MFO officials and State's participation in the MFO 
Annual Trilateral Conferences of Major Fund Contributors. At the 
Trilateral, senior MFO officials discussed with delegates from Egypt 
and Israel information of interest to the United States. The U.S. 
delegate conveyed the U.S. position to the treaty parties and the MFO 
and discussed issues that ranged from routine matters relating to 
management and other administrative issues to major issues concerning 
MFO finances.

Recruiting Candidates Suited for Chief Observer Position Remains a 
Concern: 

NEA guidelines note that the transfer of U.S government personnel to 
key MFO positions--including the U.S. civilian observer unit (COU)--is 
an informal mechanism of U.S. oversight. While NEA has successfully 
recruited many candidates for the civilian observer positions, it has 
not consistently recruited candidates with the qualities that senior 
State officials regard as important for the chief civilian observer 
post. These qualities include having the capacity to exercise strong 
leadership and management skills in a predominantly male military 
culture in an isolated environment. Annually, NEA recruits U.S. 
government employees for about six 1-year observer positions and a 
chief observer who serves 2 years in the MFO. State reviews the 
applications for these posts, develops a "short list" from which the 
MFO Director General selects a candidate, provides input into the final 
selection, and recommends the candidate for the chief observer 
position. In recent years, according to the MFO and State officials, 
ineffective leadership in the chief observer position contributed to 
considerable turnover in the unit. A number of chiefs or interim chiefs 
were dismissed or transferred due to poor leadership capabilities. 
These problems resulted in low morale in the unit and to the early 
resignation of several observers.

Recruiting for the leadership post remains a concern because many 
qualified candidates at State desire and accept higher priority posts 
to enhance their careers rather than seek MFO positions. According to a 
senior State official, the qualities that make a good chief observer--
regional experience, including Arabic language skills, and managerial 
experience--are in demand at regional posts with higher priority 
staffing demands. The MFO Director General stated that he would like to 
broaden the pool of candidates and recruit from other sources for the 
leadership position if State could not provide a candidate with 
appropriate credentials. State officials oppose this approach, stating 
that the position was an important symbol of U.S. commitment and 
required an experienced Foreign Service Officer. According to senior 
State officials, the department is reviewing options, such as elevating 
the position to a more senior Foreign Service level, to make the 
position more attractive to Foreign Service Officers. However, a 
timeline for addressing this issue has not yet been established.

Some Financial Oversight Responsibilities Were Met, but Staff Lacked 
Financial Expertise to Meet All Responsibilities: 

NEA has fulfilled some of its financial oversight responsibilities; 
however, its staff lacked the expertise to perform many required tasks. 
The guidelines called for NEA to review MFO budgets and financial 
plans; analyze income, expenditures, and inflation rates; review and 
analyze annual audit and internal controls reports issued by the 
external auditor; and evaluate MFO financial and auditing regulations. 
NEA guidelines stated that the OIG would provide assistance in 
evaluating MFO financial and auditing regulations. While NEA officials 
reviewed budgets and financial plans, audits, and internal control 
reports, they did not evaluate the financial and auditing regulations 
of the MFO, review its accounting notes, or assess the potential 
financial impact that inflation rates had on the MFO budget request. 
NEA officials stated that its staff did not possess the needed 
accounting and auditing expertise to fulfill all of the financial 
oversight responsibilities and that the OIG has not provided accounting 
and auditing assistance to NEA since 1998. In June 2004, NEA officials 
stated that they were exploring options for obtaining the necessary 
accounting expertise to review MFO financial practices; however, they 
have not yet determined how they will redress this issue or a establish 
a timeframe for doing so. Leading practices indicate that personnel 
need to possess and maintain the skills to accomplish their assigned 
duties.[Footnote 5] Staff with the required skill could provide 
reasonable assurance that U.S. contributions are being used as intended 
and that financial reporting is reliable--including reports on budget 
execution, and financial statements.

State Annually Reported to Congress and Inspected MFO Locations: 

Public Law 97-132 authorized U.S. participation in the MFO and 
established a requirement that the President submit annual reports to 
Congress every January 15. The report is to describe, among other 
things, the activities performed by MFO during the preceding year, the 
composition of observers, the costs incurred by the U.S. government 
associated with U.S. troops participating in the MFO, and the results 
of discussions with Egypt and Israel regarding the future of MFO and 
its possible reduction or elimination. State has met the annual 
reporting requirement.

NEA officials conducted biannual oversight visits to MFO headquarters 
and field locations as called for in the guidelines but did not 
document the results of those visits. In addition, the OIG reported 
that it found no trip reports that were prepared by NEA during that 
office's 20 years of MFO oversight. The guidelines stated that the 
purpose of the visits is to observe MFO operations and conditions in 
the field and compare observed practices with published MFO 
regulations. Among other things, oversight visits were to include tours 
of MFO facilities, including offices, warehouses, check points, and 
facilities for U.S. soldiers; meetings with all key MFO and U.S. 
military officials; and meetings with members of the U.S. civilian 
observer unit. According to State officials, briefings were held 
afterwards to describe the visits but written reports of these visits 
were not completed. However, without the maintenance of accurate and 
timely records, it is difficult to determine whether management 
directives were appropriately carried out.

NEA Is Considering Improvements for Conducting MFO Oversight: 

In November 2003, State's Inspector General conducted an internal 
review of NEA and made recommendations in February 2004 to improve NEA 
oversight. The OIG recommended that NEA transfer some of its oversight 
responsibilities from its Office of Regional Affairs to the Office of 
the Executive Director of NEA (NEA/EX). The OIG also recommended that 
NEA establish an advisory board to review MFO management practices and 
internal controls, including internal audits, and ensure the 
independence of these audits. NEA plans to give responsibility for the 
oversight of management/personnel issues to NEA/EX while the Office of 
Regional Affairs retains responsibility for the oversight of policy 
issues. NEA also agreed to form an oversight board to oversee MFO 
operations that is to be chaired by NEA/EX and include representatives 
from the OIG and the bureaus of Human Resources, International 
Operations, and Political-Military Affairs. The board, which met for 
the first time in mid-June 2004, discussed approaches to attracting 
candidates for the position of chief observer and other COU recruiting 
issues. The board has yet to determine its full range of 
responsibilities or scope of work. In addition, it has not yet 
established timelines for addressing these areas.

MFO Has Taken Some Actions to Improve Personnel Management but has not 
Systematically Reformed Its Personnel System: 

MFO managers have made improvements to MFO's personnel system but have 
not systematically updated the personnel system since 1985. For 
example, the Director General recently appointed a longer-serving 
civilian with personnel management expertise to replace the short-term 
military personnel officers serving short rotations on the MFO command 
staff. Moreover, leading personnel practices suggest that other aspects 
of the MFO personnel system could be reviewed and subsequently 
modified. For example, MFO regulations and procedures do not clearly 
provide for outside mediation or external avenues of appeal for MFO 
employee complaints involving discrimination or sexual harassment. In 
addition, the MFO has not addressed disparities in the representation 
of women in its workforce, especially in management positions, nor 
identified where barriers may operate to exclude certain groups and 
address these barriers.

MFO Has Made Some Improvements to Its Personnel System: 

MFO's current Director General has taken steps to update personnel 
policies to retain staff. In 2003, the Director General appointed a 
longer-serving civilian with personnel management expertise to replace 
the short-term military personnel officers serving short rotations on 
the MFO command staff. According to MFO documents and officials, this 
new manager for personnel in the Sinai provides continuity over 
personnel issues, takes a more active role in recruitment, has surveyed 
employees and acted on their concerns about safety and other quality of 
life issues, and is responsible for the equitable allocation of 
housing. Moreover, he has sought additional training to improve his 
effectiveness in this new role. Finally, MFO leadership has updated 
grievance procedures pertaining to sexual harassment complaints to 
boost employee confidence in the system and reemphasized to employees 
that they have zero tolerance for infractions of this policy. As the 
current Director General left in June 2004, his successor will have to 
demonstrate a similar commitment to these changes in personnel policy 
to ensure that they succeed.

MFO management is taking steps to improve workforce planning. MFO 
managers stated that the personnel system was originally modeled in 
1982 on State Department and U.N. systems. In addition, the MFO 
personnel manager stated that MFO managers have not undertaken a review 
of the personnel management rules since an outside consultant examined 
MFO personnel policies in 1985. However, MFO reviewed and updated some 
sections of its personnel manual in January 2004. MFO has also begun to 
make increased use of information technology to compare its future work 
requirements with its current human resources, and is using existing 
U.S. Army efficiency reviews of the U.S. contingent's operations to 
suggest ways to restructure its own military staff (see app. III for 
excerpts from our model for strategic human capital management 
planning).

To acquire, develop, and retain talent, MFO management has updated its 
recruitment practices to ensure that its new hires are both qualified 
and a good "fit" for the demanding work conditions in the Sinai. MFO 
uses professional recruiters to obtain civilians better suited to the 
MFO environment. MFO management has also updated its introductory 
materials, handbooks, and Web site to give prospective recruits a more 
comprehensive view of work requirements, benefits, and living 
conditions. MFO managers stated, however, that the "temporary" nature 
of the MFO mission precluded it from developing a career track for 
international staff. It does not, for example, provide the benefits 
that a career service track would offer, such as routine opportunities 
for promotion and pensions for long-serving employees.[Footnote 6] 
Nevertheless, the MFO has introduced incentives to retain long-serving 
staff, including pay increases normally worth 2 percent of salary for 
every employee who signs a contract extension and special nonmonetary 
service awards for 10-year and 20-year employees.

The MFO has also introduced improved performance appraisals for new 
staff on their probationary period and at the end of their contract 
period. These appraisals include basic assessments of job skills, 
performance, leadership, communications, cost management, initiative, 
and adjustment to the work environment and document performance 
feedback sessions. Staff are allowed to read and comment on their 
appraisals. MFO, however, does not require its managers or staff to use 
a detailed formal appraisal to document annual performance reviews and 
feedback sessions. Instead, managers have the option of declaring that 
a staff member has performed satisfactorily. The new chief of personnel 
services stated that it was his intention to systematically collect 
employee feedback to help adjust MFO's human capital approaches and 
workforce planning, but he had not yet developed any data collection 
instruments as of December 2003.

MFO Has Not Addressed Other Important Personnel Management Practices: 

Despite its efforts to improve its personnel management practices, the 
MFO has not addressed two challenges that leading practices indicate 
could adversely affect its ability to strategically manage its human 
capital resources more effectively. These challenges are (1) the degree 
to which its grievance procedures are subject to outside and neutral 
arbitration or other alternative dispute resolution mechanisms and (2) 
the gender imbalance in the international civilian workforce.

Although the MFO employee grievance policy encourages early reporting 
and resolution at the lowest level practicable, it does not clearly 
provide for an independent avenue of appeal in cases of discrimination 
or sexual harassment. MFO's policies against discrimination and 
harassment allow for the possibility of employees using outside 
mediators to resolve complaints when an internal inquiry or 
investigation determines that sexual harassment or discrimination has 
occurred. However, the decision to use mediation rests with the Force 
Commander or Contingent Commander, not the complainant.[Footnote 7] 
Furthermore, MFO procedures do not allow complainants to seek mediation 
or pursue appeal outside the MFO when an investigation results in a 
finding that harassment or discrimination has not occurred.[Footnote 8] 
In contrast, the Equal Employment Opportunity Commission calls for U.S. 
agencies to make alternative dispute mechanisms, such as mediators, 
available to complainants and U.S. antidiscrimination laws allow 
complainants to appeal their cases in court if necessary.[Footnote 9]

We noted in past work that a one single model for international 
organizations' grievance procedures does not exist because criteria 
such as the degree of independence of a grievance board or committee 
depend on the legal environments in which these organizations 
operate.[Footnote 10] Nevertheless, our analysis of leading practices 
in the World Bank and other organizations indicates that a lack of 
clear means for resolving such grievances could be a concern for an 
organization's management because it could undermine employee 
confidence in the fairness of the personnel management system. For 
example, the U.S. government and the private sector employ alternative 
dispute resolution mechanisms such as arbitration, mediation, or 
management review boards to resolve discrimination complaints and other 
grievances in a cost-effective manner.[Footnote 11] Moreover, we noted 
that U.S. government agencies and international organizations have 
determined that access to alternative dispute mechanisms and providing 
an avenue for an independent appeal can enhance employee confidence in 
the entire human capital system.[Footnote 12]

MFO's current gender imbalance in management may also merit attention. 
The imbalance may indicate that there are obstacles to women attaining 
management positions that may need to be addressed. The United Nations, 
for example, determined that the gender balance of its professional 
workforce was problematic, particularly in the management of peace 
operations. To address this imbalance, the United Nations is trying to 
achieve a professional work force with a 50 percent gender balance. We 
examined MFO prepared documents that showed that women represented 29 
percent of the workforce (31 out of 108 international and national 
civilian positions)[Footnote 13] and women filled only 8 percent of 
management positions (1 of 13 as of June 2004).[Footnote 14] In the 
United States, the Equal Employment Opportunity Commission would 
consider that such a gender disparity could be evidence of a 
differential rate for selection for women that warrants management 
attention.

State and MFO managers have noted that there are mitigating 
circumstances that may explain the lower representation of women in 
MFO's workforce. They stated a number of factors that might make the 
MFO posts in the Sinai an unattractive workplace for women: It is a 
predominantly male and military culture, there are few posts that allow 
for accompaniment by spouses, and it has no facilities for children. 
Nevertheless, these gender differences also exist at MFO locations in 
Rome, Tel Aviv, and Cairo, where these factors are not necessarily a 
concern. Leading practices among public organizations include 
evaluating the composition of their workforce, identifying differences 
in representation among groups, identifying where barriers may operate 
to exclude certain groups, and addressing these barriers.

MFO Has Improved Financial Accountability, but Additional Oversight May 
Be Needed: 

The MFO has taken steps to improve its financial accountability and its 
related financial internal controls over the past 9 years. It has also 
taken additional steps to improve its financial reporting to the State 
Department and to strengthen internal controls in response to 
recommendations we made to the MFO through the Department of State in 
1995. Since then, the external auditors of its financial statements 
found no material weaknesses. The external auditors who reviewed MFO 
internal controls determined that the internal controls they tested 
were effective. However, internal control standards adopted by the MFO 
suggest that the MFO could do more to enhance the external audit 
function, particularly through the use of an independent audit 
committee to review the scope of activities of the internal and 
external auditors annually.[Footnote 15] MFO and some State officials 
stated that this concern has been addressed by the new audit and review 
mechanisms adopted by the MFO since our last report. Israeli and 
Egyptian officials stated that their governments are satisfied with the 
degree of financial oversight and control they exercise over the MFO. 
Nevertheless, officials from State's OIG and senior managers within 
State's NEA Bureau acknowledged that the bureau's new MFO management 
advisory board needs to examine the issue of creating an external 
oversight board.

MFO Strengthened Financial Accountability and Internal Controls in 
Recent Years: 

The MFO has taken steps to improve financial accountability and 
strengthen internal controls. To keep the budget under $51 million and 
improve the efficiency of the organization by emulating leading 
commercial management practices, MFO has (1) adopted a business 
activity tracking software program to improve management visibility 
over financial activities and logistics management, and (2) hired a 
management review officer to identify cost savings through the reviews 
of management procedures and contracts.[Footnote 16] Although we have 
not performed any direct testing of the software, or assessed the role 
or performance of the management review officer, both initiatives 
appear to be positive steps for MFO.

According to MFO staff, its adoption of a commercial business activity 
tracking software package in 2001 led to greater management oversight 
over all stages of procurement and other transactions and has 
strengthened internal controls. MFO officials state that this new 
system has built-in requirements for managerial approval at each step 
of the procurement process. Under this system, MFO procurement officers 
are assigned preset spending authority. Further, all procurement over 
$50,000 and any sole source contract over $30,000 requires the approval 
of the Director General. According to MFO officials, the visibility and 
control provided by this system have also simplified the external 
auditor's task in conducting its latest review of internal controls. 
MFO officials and documents did not attribute any budget savings 
directly to the implementation of this new system. However, they stated 
that they were able to reduce the number of staff and centralize four 
procurement operations. MFO officials did not make available the 
results of any recent implementation testing, however, and noted that 
many of the key performance indicators the system will track are under 
development.

In 2001, MFO hired a management review officer to identify cost savings 
through the reviews of management procedures, logistics contracts, and 
compliance with MFO requirements and controls. At the request of the 
Director General, this official performs some inspector general 
functions by conducting investigations on specific operations and 
accountability controls, and makes recommendations to improve 
procedures.[Footnote 17] According to MFO records and estimates, the 
MFO has conducted 19 "most efficient organization (i.e., leading 
practice) reviews" through January 2004. The management review 
officer's recommendations contributed to more than $1.6 million in 
budgetary savings.

MFO Has Received "Clean" Opinions on Annual Financial Statements and 
Reports on Internal Controls since 1995: 

All MFO special reviews and annual financial audits since 1995 have 
demonstrated to the satisfaction of the external auditor that MFO 
maintained sufficient financial accountability. First, in late 1995, 
its external auditor, Price Waterhouse, reviewed MFO's internal control 
structure and made recommendations to strengthen them, which MFO agreed 
to adopt.[Footnote 18] Second, in 1996, MFO switched to a new external 
auditor, Reconta Ernst & Young, to conduct its annual financial audits. 
It issued unqualified or clean opinions on MFO's financial statements 
between 1996 and 2004.[Footnote 19] Third, MFO commissioned the auditor 
to perform management compensation and benefits reviews in 1996, 1997, 
and 1999, which concluded that management received compensation and 
benefits substantially in compliance with MFO regulations.[Footnote 20] 
In 2000, however, the Director General terminated further compensation 
audits on the external auditor's recommendation that concluded that 
these reviews duplicated the annual audit and other reviews. Fourth, 
MFO commissioned Reconta Ernst & Young to perform separate internal 
control reviews every 3 years beginning in 1998. Reports issued in 1998 
and 2001 stated that its auditors assessed the MFO's use of internal 
controls in relation to the criteria established in "Internal Control-
Integrated Framework" issued by the Committee of Sponsoring 
Organizations (COSO) and found that the internal controls it tested 
were effective.[Footnote 21]

MFO Could Strengthen the Independence of the External Auditor: 

The Treaty Protocol and MFO administrative and financial regulations 
provide the Director General responsibility for political, operational, 
and financial control issues pertaining to the organization. However, 
leading practices suggest that the MFO could better use independent 
input and oversight over external audits. The Director General selects 
and receives the reports of the external auditor. In addition, he can 
change MFO operations, policies, and procedures without review, 
consent, or approval from an oversight or senior management board. We 
previously reported that this level of authority is unique among 
international organizations, noting that other international 
organizations have an independent governing body above the chief 
executive to oversee and approve operations and finances. COSO internal 
control standards note that an effective internal control environment 
could depend in part on the attention and direction provided by 
oversight groups. These groups, such as an active and effective board 
of directors or audit committee, could enhance the audit function 
through their various review duties.[Footnote 22] Our standards for 
internal controls in the federal government similarly note the 
importance of independent audit committees or senior management 
councils as part of effective monitoring and audit quality 
assurance.[Footnote 23]

MFO and some State officials stated that there is no need for an 
oversight board to provide this extra degree of assurance. They note 
that our concern about the Director General's autonomy--and the 
potential for abuse of authority raised in our 1995 report--has been 
mitigated by the external auditor's reviews of management compensation 
and internal controls, as well as steps the MFO has taken to improve 
financial accountability and strengthen internal controls. Moreover, 
these officials stated that the organization is too small to employ a 
full-time independent inspector general. Finally, Israeli and Egyptian 
officials said that their respective governments are satisfied with the 
degree of oversight that they exercise through formal annual meetings, 
informal daily contacts, and review of MFO financial reports. However, 
officials from State's OIG and NEA acknowledge that a State oversight 
board could help ensure that the scope of work for audits are set 
independently from MFO management direction. Neither State nor its OIG 
has reviewed the scope of these external audits. The Inspector General 
concluded that, while State can only advise the MFO on these matters, 
the board is important because U.S. confidence in the integrity of the 
MFO is crucial to its continued support for the force.

After 9 Years of Flat Budgets, MFO Faces Financial and Other 
Challenges: 

The MFO has maintained a flat budget of about $51 million for the past 
9 years, but it faces a number of challenges that will make it 
difficult to continue operating within its current budget. In 
particular, the MFO must address the issue of replacing its antiquated 
fleet of helicopters by fiscal year 2006. DOD projects that replacing 
the fleet could cost about $18 million. As a result of this and other 
pressures on the budget, the costs of supporting the MFO are likely to 
increase if the MFO maintains its current level of operations. However, 
Israeli and Egyptian officials stated that their governments do not 
support increases in their contributions, and U.S. and MFO efforts to 
obtain support from other contributors have not succeeded. U.S. 
officials have yet to make a decision about increasing U.S. support to 
the MFO or adjusting its current cost-sharing arrangements with the 
MFO. In addition, the U.S. Army, State, and MFO officials have yet to 
agree on who should pay the increased costs associated with changes in 
the composition and pay scales of U.S. troops under current 
arrangements.

MFO Has Maintained a Level Budget of $51 Million since 1995: 

MFO financial reports show that the organization has kept its budget at 
about $51 million between fiscal years 1995 and 2003. Contributions to 
MFO's annual budget are paid by all parties in U.S. dollars. We 
reviewed MFO's budget from fiscal years 1995 through 2002. We found 
that when adjusted using a U.S. dollar inflation rate, MFO's budget has 
declined 12 percent between fiscal years 1995 and 2002 (see fig. 4). We 
also estimated the MFO's budget in constant international dollars 
because MFO purchases goods and services in countries such as Egypt, 
Israel, and the United States, where the U.S. dollar has different 
purchasing power.[Footnote 24] Because similar goods are inexpensive in 
dollar terms when purchased in Israel and Egypt as compared to the 
United States, the purchasing power of MFO's budget was significantly 
greater when measured in constant 1995 international dollars. This 
figure was $72 million in fiscal year 1995 and $69 million in fiscal 
year 2002. However, the MFO budget was $51 million in fiscal year 1995 
and $45 million in fiscal year 2002 when measured in fiscal year 1995 
dollars. Moreover, we found that, between fiscal years 1995 and 2002, 
the MFO budget declined only about 5 percent using constant 1995 
international dollars as compared with the 12 percent decline in fiscal 
year 1995 U.S. dollars. This decline was partially offset because MFO 
was able to reduce the economic impact of U.S. dollar inflation by 
shifting more of its purchases to Egypt and Israel during this period. 
MFO increased its purchases in Egypt and Israel from 43 percent of its 
budget in 1995 to 54 percent in 2002 as measured in nominal U.S. 
dollars. When measured in international dollars, however, goods and 
services purchased from those two countries increased from an estimated 
60 percent of the MFO budget in 1995 to almost 70 percent in 2002 (see 
app. IV for details on calculating MFO budget in international 
dollars).

Figure 4: MFO Budget in Nominal and Constant Purchasing Power Dollars: 

[See PDF for image]

[End of figure]

MFO has attained cost savings in recent years through better management 
oversight and reduction of inventory costs. As mentioned previously, 
the adoption of a commercial business activity tracking software 
package and the hiring of a management review officer in 2001 led to 
greater efficiencies in logistics and facilities management, vehicle 
maintenance, personnel, finance, and contracting. As a result, 
according to a senior MFO official, recommendations of the management 
review officer contributed to almost $1.7 million in savings. Moreover, 
according to a senior MFO official, more effective management of 
tracking of freight costs and services has contributed to a 46 percent 
reduction in total storage and freight costs between fiscal years 2002 
and 2003, or a savings of $265,000. Furthermore, its projects to 
connect its two camps in the Sinai to the commercial Egyptian power 
grid is projected by MFO to save about $825,000 a year on electricity 
costs, once the North Camp project is completed in 2004.

New Challenges Complicate Future Budget Outlook: 

One of the key cost issues for the immediate future is the replacement 
of aging UH-1H Huey helicopters. The U.S. Army provides an aviation 
company with 10 UH-1H helicopters to the MFO to perform various 
mission-related tasks for the MFO. As of December 2003, the unit had 
about 97 associated Army personnel. According to DOD officials, U.S. 
Army plans call for the retirement of its entire UH-1H helicopter fleet 
by fiscal year 2006. Furthermore, Army officials stated that DOD has 
considered various options as replacements for the MFO helicopter fleet 
and is waiting for the Secretary of Defense's decision on this matter. 
First, the Army is considering outsourcing its MFO aviation unit to a 
private contractor.[Footnote 25] This option would reduce U.S. military 
personnel participation in the MFO, but preliminary DOD estimates 
indicate that it would cost about $18 million in the first year and $13 
million annually thereafter.[Footnote 26] Second, according to U.S. 
Army officials, Army is considering replacing the MFO Hueys with eight 
UH-60 Black Hawk helicopters (see fig. 5). These officials stated that 
MFO prefers the outsourcing option because there would be no need to 
upgrade hangar facilities and other infrastructure to support the Black 
Hawks, thereby limiting their financial obligation. Officials from 
Israel and Egypt stated that they would leave the decision to the 
United States. They do not, however, want to incur additional financial 
obligations.

Figure 5: U.S. Army Helicopter Options for MFO Service: 

[See PDF for image]

[End of figure]

The need to replace aging infrastructure and fund new capital 
improvement projects will also require additional funding. According to 
U.S. military officers in the Sinai, the North Camp accommodations for 
the soldiers will need to be replaced over the next 2 to 5 years. A 
senior MFO official stated that the MFO has begun to consider replacing 
some of these accommodations and will be exploring several options in 
the near term. However, no plan has been finalized, and the official 
did not have cost estimates to provide as of March 2004.

Efforts to Increase Other Sources of Support Have Not Generally 
Succeeded: 

As part of U.S. efforts to reduce troop deployments throughout the 
world to better meet the demands of the war on terror--and the cost of 
these deployments--the United States has tried to obtain troop and 
financial contributions from other nations to reduce its MFO 
obligation, according to U.S. officials.[Footnote 27] To date, these 
efforts have not been successful. In 2003, the Department of State 
requested military contributions from more than 20 countries that would 
then enable the United States to draw down its forces. Five countries 
responded favorably, but only an offer by Uruguay to send additional 
transportation personnel to replace a U.S. Army transport company was 
considered feasible by the MFO. The increased Uruguayan deployment in 
July 2003 allowed the Army to draw down its MFO contingent by 74 
troops.[Footnote 28] U.S. officials also requested financial 
contributions as part of this query, but other countries declined to 
provide this support. U.S. attempts to obtain increased financial 
contributions from Israel and Egypt have also not been successful.

Army, State, and MFO Have Yet to Agree as to Who Should Pay the 
Increased Expense for Providing U.S. Troops to the MFO: 

In addition to the annual U.S. financial contribution to the MFO of 
about $16 million, the United States incurs an annual expense for 
deploying several hundred troops to the MFO that averaged about $45 
million annually from fiscal years 1995 through 2003. The cost of 
supplying U.S. troops to MFO has risen since fiscal year 1999, even 
though the number of U.S. troops has declined (see figs. 6 and 7). The 
increase is due to rises in salaries and in the amount of special pay 
provided to U.S. troops. The MFO agreed to compensate the U.S. Army for 
special pay categories and other allowances incurred when U.S. troops 
are deployed to the Sinai. However, in recent years, the U.S. Army has 
raised the rates for some cost categories and has created additional 
costs categories that did not exist at the time of the initial or 
revised cost-sharing arrangement. Currently, Army disagrees with State 
and MFO over who should pay these additional costs.

Figure 6: Total Number of MFO Troops (including U.S. troops) and Number 
of U.S. Troops for Fiscal Years 1995 through 2003: 

[See PDF for image]

[End of figure]

Figure 7: Cost of U.S. Participation in MFO: 

[See PDF for image]

[End of figure]

The increased expense for supplying the MFO with U.S. troops is due 
primarily to a rise in troop salaries, which are paid by the Army, and 
changes in special pay categories such as foreign duty pay and family 
separation pay, which are partly paid for by the MFO. For example, 
salaries have increased because beginning in 2002, National Guard 
troops have been deployed instead of active duty soldiers. National 
Guard troops tend to have been in grade longer than active duty 
soldiers and are consequently paid more. The U.S. Army pays for the 
increases in troop salaries. (See app. V for details on the cost of 
U.S. participation in MFO between fiscal years 1995 and 2003.)

The MFO and the United States agreed to share the costs of providing 
U.S. troops to the MFO in 1982 and revised these arrangements in 1994 
and 1998. Under these agreements, the Army agreed to credit the MFO for 
the costs these troops would have normally incurred had they remained 
in the United States, including food and lodging, base support, and 
operations and maintenance costs. The MFO agreed to pay some of the 
additional costs incurred by the deployment of U.S. troops to the 
Sinai, including special pay categories and other allowances.

In the revised 1998 arrangement, the U.S. Army and the MFO did not 
reach specific agreement on how Imminent Danger Pay would be shared. 
While the agreement increased rates for other special pay categories, 
these rates were less than those established in U.S. law. Army 
officials believe that MFO should pay these increased costs for 
supplying U.S. troops; however, MFO and State officials disagree with 
this position.[Footnote 29] According to an Army official, the Army 
will seek MFO reimbursements for special pay categories totaling $3.3 
million for fiscal year 2004; an MFO official stated in June 2004 that 
the MFO protested this action to the Army and Department of State. In 
addition, Army officials stated that MFO should pay a greater share of 
the costs for sustaining National Guard troops while they are on duty 
at the MFO. Army officials reduced by $1 million the credit it will 
provide to the MFO for sustaining the U.S. infantry battalion in fiscal 
year 2004 because the formula it used to calculate the credit was out-
of-date since National Guard battalions have been sent to the MFO in 
place of active duty units in recent years.[Footnote 30] In May 2004, 
U.S. Army and State officials met with MFO officials to discuss 
differences but did not present a unified U.S. government position on 
how the cost-sharing arrangement should be modified.

Conclusion: 

The two parties to the treaty and the United States are satisfied that 
the MFO is effectively fulfilling its mission of helping to maintain 
peace between Egypt and Israel. MFO has maintained its peacekeeping 
operation with a multinational force in the Middle East, a troubled and 
unstable part of the world. The organization has modified several of 
its policies and practices to make them consistent with leading 
practices in financial management and personnel. There are, however, 
opportunities for the organization to further improve in these areas. 
MFO has made several changes to its operations even though its budget 
has been flat for the past 9 years. The organization has benefited 
greatly because it has increased the amount of goods and services 
purchased in Israel and Egypt where the purchasing power of the U.S. 
dollar had increased during that period. Despite these changes, MFO 
contributors may face increased budgetary challenges due to the 
possible replacement of MFO's helicopter fleet. State is the 
organization charged with overseeing U.S. participation in the MFO and 
recruits State employees to fill key MFO positions. Nevertheless, State 
has not provided employees who possess the expertise to carry out many 
of its financial oversight responsibilities. In addition, MFO raised 
concerns about the leadership capabilities of some of the staff whom 
State recruited for the chief civilian observer post. Finally, since 
the MFO does not have an external oversight board, as do many 
international organizations, effective State oversight of MFO and 
agreement between the United States and the MFO on cost-sharing 
arrangements is essential to ensure that the cost of U.S. troop 
participation is equitably shared.

Recommendations for Executive Action: 

While NEA has begun to address some of the issues that are stated 
below, it has not established timelines for their resolution. To 
promote improved oversight of the MFO and ensure that NEA redresses 
these issues, we recommend that the Secretary of State take the 
following four actions: 

* resolve the recurring concern of finding qualified candidates for the 
chief of the civilian observer unit;

* ensure that staff with accounting expertise are available to carry 
out NEA's financial oversight responsibilities for MFO and, if 
necessary, review the terms of MFO's external audits to ensure that 
they are appropriate;

* direct the MFO management advisory board to monitor and document 
NEA's compliance with its guidelines for overseeing the MFO; and: 

* work with Army officials to reconcile differences between Army and 
State views about the current MFO cost-sharing arrangements.

Agency Comments and Our Evaluation: 

The Department of State and MFO provided technical and written comments 
on a draft of this report (see apps. VI and VII). The Department of 
Defense provided oral comments and generally agreed with our findings. 
It also provided technical comments that we incorporated where 
appropriate. The Department of State agreed with three of the four 
recommendations and did not respond to one of the recommendations. 
State agreed with our conclusion that it had experienced problems in 
consistently recruiting chief observers with the necessary leadership 
skills and stated that the new State MFO Management Advisory Board is 
considering measures to encourage highly qualified State employees to 
fill the chief observer position. State agreed with our recommendation 
that staff with accounting expertise carry out NEA's financial 
oversight responsibilities for MFO. However, State believes that the 
current NEA oversight regime provides the assurances necessary and its 
limited resources do not allow hiring additional accounting personnel 
to evaluate MFO's financial practices. As a result, State plans to ask 
the OIG to periodically evaluate MFO's accounting and financial 
practices. We do not agree that the current oversight regime provides 
the assurances necessary regarding MFO's finances. We found that NEA 
did not perform several aspects of MFO financial management oversight-
-such as evaluating MFO financial practices--because of a lack of 
expertise among NEA staff. We agree, however, that having the OIG 
periodically review MFO accounting and financial practices is 
sufficient. Finally, State also agreed with our recommendation to work 
with Army to reconcile differences about current MFO cost sharing 
arrangements.

State was not responsive to our recommendation to direct the MFO 
Management Advisory Board to monitor and document NEA's compliance with 
its guidelines for overseeing MFO. State responded that it plans to 
supplement the annual report to Congress that describes its MFO 
oversight activities with quarterly reports to the newly formed 
advisory board. The OIG recommended that NEA establish an advisory 
board because it found that while NEA policy oversight was strong, its 
management and personnel oversight were not as satisfactory. While the 
board works to define its authority and responsibilities, it should 
ensure that NEA exercise more concerted oversight of MFO activities by 
complying with NEA guidelines and documenting its efforts for 
overseeing MFO.

The MFO generally agreed with the report's findings. The MFO welcomed 
the report's recommendations for State to improve the recruiting 
process for the chief observer and for the U.S. government to develop a 
unified position regarding the Army's claims for increased payments by 
the MFO. MFO also stated that it would consider our report's findings 
regarding additional outside mediation or review mechanisms for 
complaints involving discrimination and sexual harassment. It also 
noted that it will also consider our findings of a perceived gender 
imbalance in the MFO workforce.

The MFO took exception to our finding that, with few exceptions, MFO 
employees tend to stay in the same positions for which they were 
contracted. They stated that six headquarters' employees had been 
promoted or transferred from other positions. However, the MFO 
personnel manual states that there is not a career path for employees 
due to the temporary nature of the organization. Moreover, MFO does not 
have systems in place that establish standard employment grades for its 
positions, requirements for competitive promotion opportunities, or 
advertise opportunities for promotion. We interviewed several long-
serving staff in the field who stated that opportunities for 
advancement were not available and that they have remained in the 
position for which they were hired. Finally, MFO accepts that there are 
opportunities to improve its human resource management but noted that 
the adoption of U.S. government or U.N. human resource practices may 
entail significant costs and overhead for a small organization. We 
agree that organizations must be careful to consider their unique 
characteristics and circumstances when considering the applicability of 
human resources practices that we have identified in appendix III. MFO 
also disagreed with the factual accuracy of one of the numbers in 
appendix II. We made changes to reflect MFO corrections.

We are sending copies of this report to other interested Members of 
Congress. We are also providing copies of this report to the Secretary 
of State, the Secretary of Defense, and the Director General of the 
Multinational Force and Observers. We will also make copies available 
to others upon request. In addition, this report will be available at 
no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please 
contact me at (202) 512-8979 or christoffj@gao.gov, or Phyllis Anderson 
at (202) 512-7364 or andersonp@gao.gov. In addition to the persons 
named above, B. Patrick Hickey, Lynn Cothern, Elizabeth Guran, and 
Bruce Kutnick made key contributions to this report.

Sincerely,

Signed by: 

Joseph A. Christoff 
Director, International Affairs and Trade: 

List of Requesters: 

The Honorable Joseph I. Lieberman: 
Ranking Minority Member: 
Committee on Governmental Affairs: 
United States Senate: 

The Honorable Daniel K. Akaka: 
Ranking Minority Member: 
Subcommittee on Financial Management, the Budget, and International 
Security: 
Committee on Governmental Affairs: 
United States Senate: 

The Honorable Richard J. Durbin: 
Ranking Minority Member: 
Subcommittee on Oversight of Government Management, the Federal 
Workforce, and the District of Columbia: 
Committee on Governmental Affairs: 
United States Senate: 

The Honorable Mark Pryor: 
United States Senate:

[End of section]

Appendix I: Scope and Methodology: 

We (1) assessed the Department of State's oversight responsibilities 
for U.S. participation in the MFO, (2) reviewed MFO's personnel 
policies and practices, (3) examined MFO's financial management and 
accountability, and (4) reviewed emerging budgetary challenges.

We focused our audit work at MFO and State on activities and 
transactions starting in 1996 through 2004, the period subsequent to 
the prior GAO report. We visited MFO offices in Rome, Cairo, and Tel 
Aviv and force installations in the Sinai Peninsula. We also met with 
the Israeli and Egyptian Ministries of Foreign Affairs and Defense in 
Jerusalem and Cairo.

To assess the Department of State's oversight responsibilities, we 
reviewed the oversight guidelines developed by the Office of Regional 
Affairs of State's Bureau of Near Eastern Affairs (NEA/RA) and 
supporting documentation including State's Annual Reports to Congress, 
cables, MFO Director General Annual Reports for the Trilateral 
Conferences of Major Fund Contributors, MFO external auditors' 
financial statement audit and internal control reports and turnover 
statistics of staff working in the civilian observer unit. We could not 
determine the full extent of State's efforts because it did not 
document the nature, quality, and range of its oversight activities. We 
also met with State/NEA officials responsible for overseeing U.S. 
participation in the MFO to discuss the frequency, nature, and extent 
of State contact with MFO. We discussed the views of the Egyptian and 
Israeli governments on the MFO's performance with military and foreign 
affairs officials from both countries. We interviewed NEA and MFO 
officials and current and former members of the Civilian Observer Unit 
to obtain an understanding of State's recruiting efforts and 
interaction with the COU. We met with officials from State's Office of 
Inspector General (OIG) to discuss their inspection of NEA, and we also 
reviewed relevant OIG reports. In addition, we assessed the status of 
State's compliance with prior GAO recommendations.

To review MFO's personnel management system, we examined MFO personnel 
regulations, internal reports and briefings that described personnel 
policy changes, personnel statistics, performance appraisal forms, and 
other documentation on the organization's personnel practices. We also 
examined leading human capital management policies and practices of 
public organizations to determine if MFO personnel regulations and 
policies relating to employee expectation setting, performance 
appraisals, employee grievance processes, alternative dispute 
resolution mechanisms, and sexual harassment policies followed the 
spirit of leading practices. We interviewed MFO officials, members of 
the civilian observer unit, MFO staff, and NEA officials to obtain 
their views on the organization's personnel system.

To examine MFO's financial management and accountability, we reviewed 
the external auditors' financial statement audits and internal control 
reports, other special reviews performed by the external auditor, and 
reports completed by State's OIG. We also reviewed MFO management 
review officer's reports, MFO financial regulations, and documentation 
on MFO's recently installed financial management system. We discussed 
the scope and nature of the management review officer's position and 
recent work with MFO officials. We interviewed NEA, DOD, MFO, Israeli, 
and Egyptian officials to determine their views on MFO's financial 
management and the degree of accountability of the Director General.

To report on some of the potential budgetary challenges MFO may face, 
we examined budget data and supporting documentation for fiscal years 
1995 through 2003 provided by MFO, NEA, and the U.S. Army's Office of 
Assistant Secretary of the Army for Financial Management and 
Comptroller. We discussed with DOD, State, and MFO officials trend data 
on costs and estimates for substituting U.S. Army UH-60 Black Hawk 
helicopters or a private contractor's helicopter unit for the current 
MFO force of UH-1H Huey helicopters. We did not verify the accuracy or 
completeness of the estimates or verify the accuracy of the budgetary 
savings MFO officials associated with particular cost saving 
initiatives.

To assess the reliability of the data on the costs associated with U.S. 
participation in the MFO, we (1) interviewed State, Army, and MFO 
officials about the sources of their data and the means used to 
calculate costs, (2) reviewed MFO's annual financial reports and 
State's annual report to Congress on the MFO, (3) traced U.S. Army's 
reported costs for its contributions to the MFO back to the source 
documents, (4) traced the Army's calculation of the costs associated 
with providing salaries to the soldiers stationed with the MFO--these 
salary costs constitute over 80 percent of the total costs of the U.S. 
Army contribution to the MFO-back to the DOD personnel composite 
standard pay and reimbursement rates for fiscal years 1999 through 
2003, (5) performed tests on the data provided by the U.S. Army 
regarding the cost of U.S. participation in the MFO between 1999 and 
2003 to check for obvious errors or miscalculations, and (6) reviewed 
the report of the MFO's independent external auditor on State's 
contributions. However, we did not audit the data and are not 
expressing an opinion on them. We determined that the data were 
sufficiently reliable for the purpose of reporting the total costs of 
U.S. participation in the MFO.

We conducted our review from September 2003 to May 2004 in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: MFO's Small but Challenging Workforce: 

MFO has a small and varied professional civilian workforce of 108 
international and local national staff located in Rome, Cairo, and Tel 
Aviv.[Footnote 31] Contractors provide an additional 59 expatriate 
support staff and 454 local workers. Eight of the 13 management-level 
employees are U.S. citizens. The international staff, including 14 U.S. 
citizens, support and direct the operations of 1,685 peacekeeping 
troops from 11 countries with unit or individual tours of duty varying 
between about 2 months and 1 year.[Footnote 32] A further 15 U.S. 
citizens serve in the civilian observer unit (COU): about half the 
observers, including the chief observer, temporarily resign from the 
State Department to fulfill 1-to 2-year contract commitments; the other 
half are civilian contractors, usually recruited from retired U.S. 
military personnel serving under renewable 2-year contracts. Table 1 
provides details on MFO personnel locations, types, and numbers.

Table 1: MFO Civilian Staff by Location and Type, 2003: 

Location: Rome; 
International-managerial and other direct hire civilians: 12; 
COU staff (U.S.) Location: N/A; 
National - Administration & Support (Italian and Israeli): 11; 
Total MFO employees: 23; 
Local-Professional Contract Hire Civilians (Egyptian): N/A; 
Contracted Technical and Support Staff[A] (expatriates): N/A; 
Sub-Contracted Local Technical and Support Personnel (Egyptian)[B]: 
N/A; 
Total staff at MFO sites: 23.

Location: Tel Aviv; 
International-managerial and other direct hire civilians: 1; 
COU staff (U.S.) Location: N/A; 
National - Administration & Support (Italian and Israeli): 18; 
Total MFO employees: 19; 
Local-Professional Contract Hire Civilians (Egyptian): N/A; 
Contracted Technical and Support Staff[A] (expatriates): N/A; 
Sub-Contracted Local Technical and Support Personnel (Egyptian)[B]: 
N/A; 
Total staff at MFO sites: 19.

Location: Cairo; 
International-managerial and other direct hire civilians: 2; 
COU staff (U.S.) Location: N/A; 
National - Administration & Support (Italian and Israeli): 0; 
Total MFO employees: 2; 
Local-Professional Contract Hire Civilians (Egyptian): 14; 
Contracted Technical and Support Staff[A] (expatriates): N/A; 
Sub-Contracted Local Technical and Support Personnel (Egyptian)[B]: 
N/A; 
Total staff at MFO sites: 16.

Location: Sinai; 
International-managerial and other direct hire civilians: 49; 
COU staff (U.S.) Location: 15; 
National - Administration & Support (Italian and Israeli): N/A; 
Total MFO employees: 64; 
Local-Professional Contract Hire Civilians (Egyptian): 15; 
Contracted Technical and Support Staff[A] (expatriates): 59; 
Sub-Contracted Local Technical and Support Personnel (Egyptian)[B]: 
454; 
Total staff at MFO sites: 592.

Total; 
International-managerial and other direct hire civilians: 64; 
COU staff (U.S.): 15; 
National - Administration & Support (Italian and Israeli): 29; 
Total MFO employees: 108; 
Local- Professional Contract Hire Civilians (Egyptian): 29; 
Contracted Technical and Support Staff[A] (expatriates): 59; 
Sub-Contracted Local Technical and Support Personnel (Egyptian)[B]: 
454; 
Total staff at MFO sites: 650. 

[A] U.S.-based firm Holmes and Narver Services Incorporated (HNSI) 
employs the expatriate technical and support staff.

[B] An HNSI subcontractor, Care Services, Incorporated, provides these 
employees.

[End of table]

MFO working conditions present challenges for management and staff. MFO 
workers have limited prospects for advancement or job mobility because 
the organization views itself as having a temporary mission. The 
international workforce has decreased by about 62 percent since 1982. 
With few exceptions, MFO employees tend to stay in the same positions 
for which they were contracted and its many long-serving workers in 
administrative positions lack opportunities to progress to higher 
positions.

MFO managers stated that while MFO's pay scales and other benefits help 
it successfully compete for staff with oil companies and other 
commercial international organizations in the region, it is challenging 
to find civilian employees with the ability to work successfully in the 
austere military atmosphere and isolated living environment in the 
Sinai. The main camp at El Gorah in the northern part of the Sinai is 
in a sparsely populated area with few amenities outside the camp. Only 
17 military and civilian positions in the Sinai allow for accompaniment 
by a spouse, and facilities for children are lacking. Visits by family 
members are also very limited. The force's personnel system reflects 
the "temporary" nature of the MFO's mission; most international 
contractors serve under initial 2-year contracts that can be renewed at 
the discretion of the Director General. According to MFO documents, 
employment with the MFO is not a career service and initial employment 
with the MFO does not carry any expectation of contract renewal or 
extension. Several long-term employees stated that there are limited 
job progression opportunities with the MFO. Heightened concerns about 
terrorism since September 11, 2001, and ongoing violence in areas under 
Israeli control has led to significantly restricted opportunities for 
travel off the bases.

[End of section]

Appendix III: GAO's Model for Strategic Human Capital Management 
Planning: 

U.S. and international public organizations have found that strategic 
workforce planning is essential to (1) aligning an organization's human 
capital program with its current and emerging mission and programmatic 
goals and (2) developing long-term strategies for acquiring, 
developing, and retaining staff to achieve programmatic goals.[Footnote 
33] We have developed a strategic human capital management model based 
on leading practices to help U.S. and international public 
organizations assess their efforts to address the key challenges to 
developing a consistent and strategic approach to human capital 
management. We caution that agencies applying this model must be 
careful to recognize the unique characteristics and circumstances that 
make organizations different from one another and to consider the 
applicability of practices that have worked elsewhere to their own 
management practices.[Footnote 34]

Our work has shown that the public organizations face four key human 
capital challenges that undermine agency efficiency. The model consists 
of four cornerstones designed to help public organizations address the 
challenges in the four areas--leadership; strategic human capital 
planning; acquiring, developing, and retaining talent; and results-
oriented organizational culture. Each cornerstone is associated with 
two critical factors that an agency's approach to strategic human 
capital planning must address. Moreover, for each of the eight critical 
success factors, the model describes three levels of progress in an 
agency's approach to strategic human capital planning: 

* Level 1: The approach to human capital is largely compliance-based; 
the agency has yet to realize the value of managing human capital 
strategically to achieve results; existing human capital approaches 
have yet to be assessed in light of current and emerging agency needs.

* Level 2: The agency recognizes that people are a critical asset that 
must be managed strategically; new human capital policies, programs, 
and practices are being designed and implemented to support mission 
accomplishment.

* Level 3: The agency's human capital approaches contribute to improved 
agency performance; human capital considerations are fully integrated 
into strategic planning and day-to-day operations; the agency is 
continuously seeking ways to further improve its "people management" to 
achieve results.

Figure 8 illustrates the critical success factors an organization in 
the second level of progress must address as it develops a strategic 
approach to managing its human capital.

Figure 8: Excerpts from GAO's Strategic Human Capital Management Model: 

[See PDF for image]

[End of figure]

[End of section]

Appendix IV: Calculating MFO Budget in Terms of International Dollars: 

The MFO receives dollar contributions from Egypt, Israel, and the 
United States and purchases goods and services from Egypt, Israel, the 
United States, and other countries. The MFO's budget has remained flat 
at 51 million in nominal dollars between fiscal years 1995 and 2002, 
although it has declined about 12 percent over the same period when 
adjusted for U.S. inflation. However, MFO officials stated that they 
increased the purchasing power of its budget by shifting its purchases 
of goods and services away from the United States and other countries 
to relatively lower cost Egyptian and Israeli markets. As figure 9 
demonstrates, MFO spending in Egypt and Israel rose from 43 to 54 
percent of the budget between fiscal years 1995 and 2002. On average, 
the MFO spent 26 percent of its budget in Egypt and 23 percent in 
Israel in this period. By converting the MFO's budget into 
international dollars, we are able to better assess the impact of these 
shifts to the lower cost Egyptian and Israeli markets on the overall 
purchasing power of the MFO budget.

Figure 9: Percentage of MFO Dollar Budget Spent in Israel and Egypt: 

[See PDF for image]

[End of figure]

As table 2 demonstrates, expressing the MFO budget in international 
dollars reveals that: (1) the purchasing power of the budget--ranging 
between $72.3 million in fiscal year 1995 and $69 million in fiscal 
year 2002-was significantly higher than its nominal level of $51 
million suggests; and (2) the real decline in the budget between fiscal 
years 1995 and 2002 was about 5 percent rather than 12 percent.

Table 2: MFO Expenditures in Nominal and International Dollars: 

In 1995 international dollars, millions: 

Egypt; 
Fiscal years: 1995: $32.1; 
Fiscal years: 1996: $31.0; 
Fiscal years: 1997: $29.6; 
Fiscal years: 1998: $32.6; 
Fiscal years: 1999: $31.8; 
Fiscal years: 2000: $30.6; 
Fiscal years: 2001: $29.4; 
Fiscal years: 2002: $34.0.

Israel; 
Fiscal years: 1995: $10.9; 
Fiscal years: 1996: $10.4; 
Fiscal years: 1997: $10.5; 
Fiscal years: 1998: $12.5; 
Fiscal years: 1999: $12.4; 
Fiscal years: 2000: $12.5; 
Fiscal years: 2001: $12.9; 
Fiscal years: 2002: $14.3.

US and other countries[A]; 
Fiscal years: 1995: $29.4; 
Fiscal years: 1996: $28.1; 
Fiscal years: 1997: $27.1; 
Fiscal years: 1998: $23.3; 
Fiscal years: 1999: $23.2; 
Fiscal years: 2000: $22.3; 
Fiscal years: 2001: $22.2; 
Fiscal years: 2002: $20.8.

Total; 
Fiscal years: 1995: $72.3; 
Fiscal years: 1996: $69.5; 
Fiscal years: 1997: $67.2; 
Fiscal years: 1998: $68.3; 
Fiscal years: 1999: $67.4; 
Fiscal years: 2000: $65.4; 
Fiscal years: 2001: $64.5; 
Fiscal years: 2002: $69.0.

In nominal dollars, millions: 

Egypt; 
Fiscal years: 1995: $11.7; 
Fiscal years: 1996: $12.2; 
Fiscal years: 1997: $12.4; 
Fiscal years: 1998: $14.2; 
Fiscal years: 1999: $14.2; 
Fiscal years: 2000: $14.4; 
Fiscal years: 2001: $13.6; 
Fiscal years: 2002: $14.2.

Israel; 
Fiscal years: 1995: $10.1; 
Fiscal years: 1996: $10.3; 
Fiscal years: 1997: $10.6; 
Fiscal years: 1998: $12.4; 
Fiscal years: 1999: $12.1; 
Fiscal years: 2000: $12.5; 
Fiscal years: 2001: $12.9; 
Fiscal years: 2002: $13.5.

US and other countries[A]; 
Fiscal years: 1995: $29.2; 
Fiscal years: 1996: $28.5; 
Fiscal years: 1997: $28.0; 
Fiscal years: 1998: $24.4; 
Fiscal years: 1999: $24.7; 
Fiscal years: 2000: $24.1; 
Fiscal years: 2001: $24.5; 
Fiscal years: 2002: $23.3.

Total; 
Fiscal years: 1995: $51.0; 
Fiscal years: 1996: $51.0; 
Fiscal years: 1997: $51.0; 
Fiscal years: 1998: $51.0; 
Fiscal years: 1999: $51.0; 
Fiscal years: 2000: $51.0; 
Fiscal years: 2001: $51.0; 
Fiscal years: 2002: $51.0.

Budget in real fiscal year 1995 dollars, millions; 
Fiscal years: 1995: $51.0; 
Fiscal years: 1996: $50.0; 
Fiscal years: 1997: $49.2; 
Fiscal years: 1998: $48.6; 
Fiscal years: 1999: $48.0; 
Fiscal years: 2000: $47.0; 
Fiscal years: 2001: $45.9; 
Fiscal years: 2002: $45.1.

Nominal dollars (percentage): 

Egypt; 
Fiscal years: 1995: 23%; 
Fiscal years: 1996: 24%; 
Fiscal years: 1997: 24%; 
Fiscal years: 1998: 28%; 
Fiscal years: 1999: 28%; 
Fiscal years: 2000: 28%; 
Fiscal years: 2001: 27%; 
Fiscal years: 2002: 28%.

Israel; 
Fiscal years: 1995: 20%; 
Fiscal years: 1996: 20%; 
Fiscal years: 1997: 21%; 
Fiscal years: 1998: 24%; 
Fiscal years: 1999: 24%; 
Fiscal years: 2000: 25%; 
Fiscal years: 2001: 25%; 
Fiscal years: 2002: 26%.

US and other countries[A]; 
Fiscal years: 1995: 57%; 
Fiscal years: 1996: 56%; 
Fiscal years: 1997: 55%; 
Fiscal years: 1998: 48%; 
Fiscal years: 1999: 48%; 
Fiscal years: 2000: 47%; 
Fiscal years: 2001: 48%; 
Fiscal years: 2002: 46%.

1995 international dollars (percentage): 

Egypt; 
Fiscal years: 1995: 44%; 
Fiscal years: 1996: 45%; 
Fiscal years: 1997: 44%; 
Fiscal years: 1998: 48%; 
Fiscal years: 1999: 47%; 
Fiscal years: 2000: 47%; 
Fiscal years: 2001: 46%; 
Fiscal years: 2002: 49%.

Israel; 
Fiscal years: 1995: 15%; 
Fiscal years: 1996: 15%; 
Fiscal years: 1997: 16%; 
Fiscal years: 1998: 18%; 
Fiscal years: 1999: 18%; 
Fiscal years: 2000: 19%; 
Fiscal years: 2001: 20%; 
Fiscal years: 2002: 21%.

US and other countries[A]; 
Fiscal years: 1995: 41%; 
Fiscal years: 1996: 40%; 
Fiscal years: 1997: 40%; 
Fiscal years: 1998: 34%; 
Fiscal years: 1999: 34%; 
Fiscal years: 2000: 34%; 
Fiscal years: 2001: 34%; 
Fiscal years: 2002: 30%. 

Source: GAO calculations using World Bank and MFO data.

[A] The MFO reported its total expenditures in Egypt, Israel, and the 
United States between 1995 and 2002, but breakdowns are not available 
for the other countries. For computational purposes, we assumed that 
purchases made in the other countries are made in the United States.

[End of table]

Moreover, figure 10 demonstrates that MFO purchased a larger proportion 
of its goods and services in Egypt and Israel when calculated in 
international dollars than the nominal-dollar budget expenditures 
suggest--70 percent versus 54 percent for fiscal year 2002, for 
example. Also, it purchased a significantly greater percentage of its 
budget in Egypt than in Israel on average when calculated in 
international dollars during this period--46 percent versus 18 percent 
on average.[Footnote 35]

Figure 10: Percentage of MFO International Dollar Budget Spent in 
Israel and Egypt: 

[See PDF for image]

[End of figure]

An international dollar is equivalent to the amount of goods and 
services that 1 U.S. dollar can purchase in the United States. Two 
steps are required to convert an amount valued in local currency into 
international dollars: 

* First, convert the local currency figure into U.S. dollars using the 
official exchange rate; and: 

* Second, divide this dollar amount by the country-specific purchasing 
power parity (PPP) conversion factor to official exchange rate ratio.

The PPP conversion factor converts into international dollars the cost 
of a basket of tradable and nontradable goods and services valued in 
local currency units (pounds in the case of Egypt and shekels in the 
case of Israel). The PPP conversion factor is the number of local 
currency units required to buy the same amount of goods and services in 
the domestic market that a U.S. dollar would buy in the United States. 
For example, a basket of goods that could be purchased in the United 
States for $1, equal by definition to 1 international dollar, could be 
bought in Egypt for 1.259 Egyptian pounds in 1995. Therefore, the PPP 
conversion factor is 1.259 Egyptian pounds per international dollar. In 
calendar year 1995, the official annual average exchange rate (based on 
monthly averages) was 3.392 Egyptian pounds per U.S. dollar. The ratio 
of the PPP conversion factor to the official exchange rate is 
0.371.[Footnote 36] The nominal dollar amount the MFO spent in Egypt in 
fiscal year 1995 ($11.7 million as shown in table 2) is divided by the 
fiscal year ratio, to compute the international dollar amount of 32.2 
million.[Footnote 37]

[End of section]

Appendix V: Cost of U.S. Participation in MFO: 

The United States agreed in 1981 to provide one third of the annual MFO 
budget and provide a military contingent in support of the force. Annex 
II of the 1982 Exchange of Letters between the MFO Director General and 
the U.S. Secretary of State set the financial arrangements for the U.S. 
military contribution. The Memoranda of Understandings between the MFO 
and the Department of the Army established in 1994 and 1998 confirm 
additional understandings and procedures to supplement Annex II of the 
1982 Exchange of Letters.

Under the terms of these cost-sharing arrangements, U.S. costs to 
support the MFO has increased from a low of $55.8 million in fiscal 
year 1996 to $70.8 million in fiscal year 2003 as depicted in table 3-
-a 20 percent increase overall. While State Department's contribution 
to the annual MFO budget has averaged about $16 million since fiscal 
year 1995, the number of U.S. military personnel participating in the 
MFO has declined 11 percent since then, as depicted in table 4 below. 
However the cost of U.S. military participation has risen approximately 
25 percent between fiscal year 1996 and 2003.

Table 3: Cost of U.S. Participation in MFO, Fiscal Years 1995 through 
2003: 

Millions of dollars.

1. Total Net Cost Of DOD Contributions (A-B); 
Fiscal years: 1995: $45.37; 
Fiscal years: 1996: $40.34; 
Fiscal years: 1997: $41.04; 
Fiscal years: 1998: $42.95; 
Fiscal years: 1999: $42.55; 
Fiscal years: 2000: $44.64; 
Fiscal years: 2001: $45.20; 
Fiscal years: 2002: $50.82; 
Fiscal years: 2003: $54.58.

A. Total Non-Reimbursable Costs for DOD Contributions; 
Fiscal years: 1995: $47.27; 
Fiscal years: 1996: $42.58; 
Fiscal years: 1997: $43.51; 
Fiscal years: 1998: $44.29; 
Fiscal years: 1999: $42.78; 
Fiscal years: 2000: $45.12; 
Fiscal years: 2001: $46.43; 
Fiscal years: 2002: $49.94; 
Fiscal years: 2003: $55.62.

Salary Cost of Troops; 
Fiscal years: 1995: $40.68; 
Fiscal years: 1996: $35.72; 
Fiscal years: 1997: $36.03; 
Fiscal years: 1998: $35.75; 
Fiscal years: 1999: $34.46; 
Fiscal years: 2000: $36.61; 
Fiscal years: 2001: $37.80; 
Fiscal years: 2002: $39.92; 
Fiscal years: 2003: $45.50.

Predeployment Training; 
Fiscal years: 1995: $1.13; 
Fiscal years: 1996: $1.07; 
Fiscal years: 1997: $0.99; 
Fiscal years: 1998: $1.06; 
Fiscal years: 1999: $0.94; 
Fiscal years: 2000: $1.09; 
Fiscal years: 2001: $1.32; 
Fiscal years: 2002: $2.15; 
Fiscal years: 2003: $1.20.

Special Pays and Allowances: Family Separation / Imminent Danger/ Hardship/ Foreign Duty/ Per Diem; 
Fiscal years: 1995: $0.31; 
Fiscal years: 1996: $0.30; 
Fiscal years: 1997: $1.39; 
Fiscal years: 1998: $2.12; 
Fiscal years: 1999: $2.05; 
Fiscal years: 2000: $1.89; 
Fiscal years: 2001: $1.88; 
Fiscal years: 2002: $2.19; 
Fiscal years: 2003: $3.01.

MFO-Related Travel; 
Fiscal years: 1995: $0.07; 
Fiscal years: 1996: $0.12; 
Fiscal years: 1997: $0.08; 
Fiscal years: 1998: $0.04; 
Fiscal years: 1999: $0.11; 
Fiscal years: 2000: $0.14; 
Fiscal years: 2001: $0.13; 
Fiscal years: 2002: $0.18; 
Fiscal years: 2003: $0.05.

Training, Base Operations and Subsistence Costs[A]; 
Fiscal years: 1995: $4.47; 
Fiscal years: 1996: $4.81; 
Fiscal years: 1997: $4.57; 
Fiscal years: 1998: $4.82; 
Fiscal years: 1999: $4.74; 
Fiscal years: 2000: $4.75; 
Fiscal years: 2001: $4.63; 
Fiscal years: 2002: $4.60; 
Fiscal years: 2003: $3.51.

Helicopter Operations & Maintenance[A]; 
Fiscal years: 1995: $0.61; 
Fiscal years: 1996: $0.57; 
Fiscal years: 1997: $0.45; 
Fiscal years: 1998: $0.51; 
Fiscal years: 1999: $0.49; 
Fiscal years: 2000: $0.63; 
Fiscal years: 2001: $0.67; 
Fiscal years: 2002: $0.91; 
Fiscal years: 2003: $1.08.

B: Total Net DOD Costs Reimbursed by MFO (B1-B2); 
Fiscal years: 1995: $1.90; 
Fiscal years: 1996: $2.24; 
Fiscal years: 1997: $2.47; 
Fiscal years: 1998: $1.34; 
Fiscal years: 1999: $0.24; 
Fiscal years: 2000: $0.48; 
Fiscal years: 2001: $1.23; 
Fiscal years: 2002: $-0.88; 
Fiscal years: 2003: $1.03.

B1. Total Reimbursed Costs; 
Fiscal years: 1995: $6.98; 
Fiscal years: 1996: $7.62; 
Fiscal years: 1997: $7.49; 
Fiscal years: 1998: $6.66; 
Fiscal years: 1999: $5.47; 
Fiscal years: 2000: $5.86; 
Fiscal years: 2001: $6.53; 
Fiscal years: 2002: $4.63; 
Fiscal years: 2003: $6.90.

* Special Allowances/ Foreign Duty Pay; 
Fiscal years: 1995: $1.68; 
Fiscal years: 1996: $1.74; 
Fiscal years: 1997: $1.88; 
Fiscal years: 1998: $1.92; 
Fiscal years: 1999: $2.09; 
Fiscal years: 2000: $2.09; 
Fiscal years: 2001: $2.14; 
Fiscal years: 2002: $2.18; 
Fiscal years: 2003: $2.24.

* Transportation, Per Diem, etc; 
Fiscal years: 1995: $1.04; 
Fiscal years: 1996: $1.55; 
Fiscal years: 1997: $1.30; 
Fiscal years: 1998: $1.61; 
Fiscal years: 1999: $2.40; 
Fiscal years: 2000: $2.01; 
Fiscal years: 2001: $2.24; 
Fiscal years: 2002: $1.04; 
Fiscal years: 2003: $2.80.

* Sale of DOD Supplies and Equipment to MFO; 
Fiscal years: 1995: $4.27; 
Fiscal years: 1996: $4.33; 
Fiscal years: 1997: $4.32; 
Fiscal years: 1998: $3.14; 
Fiscal years: 1999: $0.98; 
Fiscal years: 2000: $1.77; 
Fiscal years: 2001: $2.15; 
Fiscal years: 2002: $1.37; 
Fiscal years: 2003: $1.79.

B2. Less Offset Credit Provided by DOD[B]; 
Fiscal years: 1995: $5.08; 
Fiscal years: 1996: $5.38; 
Fiscal years: 1997: $5.02; 
Fiscal years: 1998: $5.32; 
Fiscal years: 1999: $5.23; 
Fiscal years: 2000: $5.39; 
Fiscal years: 2001: $5.30; 
Fiscal years: 2002: $5.51; 
Fiscal years: 2003: $5.87.

2. Net State Contribution; 
Fiscal years: 1995: $16.09; 
Fiscal years: 1996: $15.41; 
Fiscal years: 1997: $15.43; 
Fiscal years: 1998: $15.41; 
Fiscal years: 1999: $15.60; 
Fiscal years: 2000: $15.90; 
Fiscal years: 2001: $15.95; 
Fiscal years: 2002: $16.02; 
Fiscal years: 2003: $16.21.

Assessed Share of MFO Cost Paid by State; 
Fiscal years: 1995: $16.35; 
Fiscal years: 1996: $16.03; 
Fiscal years: 1997: $16.09; 
Fiscal years: 1998: $16.06; 
Fiscal years: 1999: $16.112; 
Fiscal years: 2000: $16.37; 
Fiscal years: 2001: $16.35; 
Fiscal years: 2002: $16.25; 
Fiscal years: 2003: $16.35.

Less U.S. Share of MFO Budget Surplus[C]; 
Fiscal years: 1995: $0.26; 
Fiscal years: 1996: $0.62; 
Fiscal years: 1997: $0.66; 
Fiscal years: 1998: $0.65; 
Fiscal years: 1999: $0.52; 
Fiscal years: 2000: $0.47; 
Fiscal years: 2001: $0.40; 
Fiscal years: 2002: $0.23; 
Fiscal years: 2003: $0.14.

Total U.S. Net Contribution (1+2); 
Fiscal years: 1995: $61.46; 
Fiscal years: 1996: $55.75; 
Fiscal years: 1997: $56.48; 
Fiscal years: 1998: $58.36; 
Fiscal years: 1999: $58.14; 
Fiscal years: 2000: $60.54; 
Fiscal years: 2001: $61.15; 
Fiscal years: 2002: $66.87; 
Fiscal years: 2003: $70.86.

Fiscal Year 2003 Deflator; 
Fiscal years: 1995: $1.15; 
Fiscal years: 1996: $1.13; 
Fiscal years: 1997: $1.11; 
Fiscal years: 1998: $1.09; 
Fiscal years: 1999: $1.08; 
Fiscal years: 2000: $1.06; 
Fiscal years: 2001: $1.03; 
Fiscal years: 2002: $1.02; 
Fiscal years: 2003: $1.00.

Total U.S. Net Contribution In Constant Fiscal Year 2003 Dollars; 
Fiscal years: 1995: $70.55; 
Fiscal years: 1996: $62.83; 
Fiscal years: 1997: $62.52; 
Fiscal years: 1998: $63.85; 
Fiscal years: 1999: $62.80; 
Fiscal years: 2000: $64.12; 
Fiscal years: 2001: $63.22; 
Fiscal years: 2002: $67.90; 
Fiscal years: 2003: $70.80. 

Source: GAO analysis of U.S. Army data.

[A] Estimates are based on the expense (offset cost) that the United 
States would have incurred for training, food and lodging, base 
support, and operations and maintenance for such units when stationed 
in the United States .

[B] Credit to the account of the MFO by the U.S. Army for the amount of 
the offset costs.

[C] MFO returns budget surplus in the form of a reduced assessment for 
the following fiscal year.

[End of table]

Table 4: U.S. Troop Contributions to the MFO as a Percentage of the 
Total, Fiscal Years 1995 through 2003: 

U.S. Troops; 
Fiscal years: 1995: 970; 
Fiscal years: 1996: 917; 
Fiscal years: 1997: 917; 
Fiscal years: 1998: 917; 
Fiscal years: 1999: 871; 

Fiscal years: 2000: 865; 
Fiscal years: 2001: 865; 
Fiscal years: 2002: 865; 
Fiscal years: 2003: 687.

Total MFO Force; 
Fiscal years: 1995: 1,954; 
Fiscal years: 1996: 1,896; 
Fiscal years: 1997: 1,896; 
Fiscal years: 1998: 1,896; 
Fiscal years: 1999: 1,844; 
Fiscal years: 2000: 1,838; 
Fiscal years: 2001: 1,835; 
Fiscal years: 2002: 1,835; 
Fiscal years: 2003: 1,685.

U.S. Troops as a Percentage of all MFO Troops; 
Fiscal years: 1995: 50%; 
Fiscal years: 1996: 48%; 
Fiscal years: 1997: 48%; 
Fiscal years: 1998: 48%; 
Fiscal years: 1999: 47%; 
Fiscal years: 2000: 47%; 
Fiscal years: 2001: 47%; 
Fiscal years: 2002: 47%; 
Fiscal years: 2003: 41%.

[End of table]

As depicted in table 3, a number of factors account for this increase 
in the total cost of U.S. commitments to the MFO over this period: 

* Total troop salaries increased 27 percent, despite a decrease in the 
U.S. troop contingent between fiscal years 1995 and 2002.[Footnote 38] 
These salaries constitute over 80 percent of the cost of the total Army 
contribution. In FY 2002, the Army substituted Army National Guard 
forces for the regular Army personnel, contributing to a salary cost 
increase of 12 percent between fiscal years 2002 and 2003. National 
Guard troops tend to be older and have been in grade longer than 
regular Army forces and are consequently paid more. Across-the-board 
salary increases for all military forces is another factor contributing 
to rising military costs, according to Army officials.

* Special pay and allowances paid to U.S. soldiers participating in the 
MFO mission have increased nearly ten-fold since fiscal year 1995, 
going from about $300,000 to $3 million in fiscal year 2003. Under the 
March 1982 Exchange of Letters between the MFO Director General and the 
Secretary of State, the MFO agreed to pay for certain special 
allowances to U.S. military personnel participating in the MFO mission, 
including a Family Separation Allowance for married personnel and 
Foreign Duty Pay for enlisted personnel. The coverage and rates of 
these existing allowances has been expanded since then to include both 
enlisted men and officers and costs about $250 per soldier per month. 
Moreover, in fiscal year 1997, DOD began providing imminent danger pay 
to military personnel serving in Israel and Egypt. The current rate 
amounts to $225 per soldier per month. In fiscal year 2003, the 
imminent danger pay allowance constituted 78 percent of total DOD 
special pays provided to military personnel participating in the MFO.

* Reimbursement payments from DOD to the MFO increased 13 percent. 
Currently, the U.S. Army provides the MFO a credit or "offset" for 
certain costs associated with the support of U.S. forces. These costs 
are those which would normally have been incurred by the U.S. 
government for food and lodging, base support, and operations and 
maintenance for such units when stationed in the United States.

* MFO purchases of supplies from DOD decreased by about 60 percent. In 
fiscal year 1995, the MFO reimbursed DOD for the purchase of supplies, 
equipment, and rations totaling $4.3 million dollars. MFO has sought to 
replace DOD as a source of supply with lower cost local commercial 
vendors in recent years, limiting its purchases from DOD to medical 
supplies and certain helicopter parts. In fiscal year 2003, these 
purchases totaled about $1.8 million.

[End of section]

Appendix VI: Comments from the Department of State: 

United States Department of State:
Assistant Secretary and Chief Financial Officer:
Washington, D.C. 20520:

JUL 13 2004:

Ms. Jacqueline Williams-Bridgers: 
Managing Director:
International Affairs and Trade: 
General Accounting Office: 
441 G Street, N.W.: 
Washington, D.C. 20548-0001:

Dear Ms. Williams-Bridgers:

We appreciate the opportunity to review your draft report, 
"PEACEKEEPING: Multinational Force And Observers Maintaining 
Accountability But State Department Oversight Could Be Improved," GAO 
Job Code 320220.

The enclosed Department of State comments are provided for 
incorporation with this letter as an appendix to the final report.

If you have any questions concerning this response, please contact 
Robert Krantz, Officer in Charge, Bureau of Near Eastern Affairs, at 
(202) 647-1766.

Sincerely,

Signed by:

Christopher B. Burnham

cc: GAO - Phyllis Anderson 
NEA - Paul Sutphin 
State/OIG - Mark Duda:

Department of State Comments on GAO Draft Report 
PEACEKEEPING: Multinational Force And Observers Maintaining 
Accountability But State Department Oversight Could Be Improved, 
(GAO-04-883, GAO Code 320220):

The GAO notes that while NEA has begun to address some of the issues 
that cited in the report, it has not established a timeline for their 
resolution. To ensure that NEA redresses these issues, the GAO listed 
four specific recommendations that the Secretary of State should 
address to promote improved oversight of the MFO. We address the four 
GAO recommendations below.

We thank GAO for providing us with this opportunity to comment on their 
report. The Egyptian-Israeli Peace Treaty and the security arrangements 
monitored by the MFO are a cornerstone of our efforts to achieve peace 
in the region. Although both treaty parties are strongly committed to 
the Peace Treaty, they continue to believe that a credible 
Multinational Force and Observers (MFO) is essential; particularly as 
tensions along the northern border in the Sinai have ratcheted up.

The GAO report concludes that the treaty parties "are satisfied that 
the MFO is effectively fulfilling its mission of helping to maintain 
peace between Egypt and Israel." We share that satisfaction; however, 
we look forward to working with GAO to strengthen the MFO further, to 
build on its past successes and to ensure that it remains a robust 
peacekeeping force able to respond to current needs and new 
developments in the region.

GAO Recommendation: Resolve the recurring concern of finding qualified 
candidates for the chief of the civilian observer unit.

State Response: Although many strong officers have served as Chiefs of 
the Civilian Observer Unit, we recognize that there have been a few 
lapses in leadership in this position. Many highly qualified Chief 
Observers have gone on to positions of great responsibility in the 
Department. The incumbent Chief Observer has done a superb job over the 
past two years and we are confident that the individual selected as his 
replacement will be an equally strong performer.

As noted during the organizational meeting of the MFO Management 
Advisory Review Board on June 18, 2004, there are many competing 
demands for the pool of potential candidates. For this position to be 
competitive with other Department assignments, the Advisory Board 
agreed new incentives might be necessary to encourage highly qualified 
persons to fill this critical position. To that end, we are exploring 
the possibility filling the position with personnel from the Senior 
Foreign Service on detail rather than on transfer thereby allowing 
greater flexibility in compensation. In addition, although Civil 
Service personnel always have been eligible to apply for this position, 
we will take steps to advertise that fact. These steps should provide a 
larger pool of highly qualified individuals from which to select.

GAO Recommendation: Ensure that staff with accounting experience are 
available to carry out NEA's financial oversight responsibilities for 
MFO which include evaluating MFO accounting and financial practices and 
the reports of external auditors.

State Response: We note that, as the GAO report states, the MFO has had 
"clean" audits since 1995. In fact, since its inception, all special 
reviews and annual audits, using "U.S. Generally Accepted Accounting 
Standards," have demonstrated to the satisfaction of the MFO's external 
auditors that the MFO has maintained sufficient financial 
accountability and internal controls. Israeli and Egyptian officials 
report that they are satisfied with the degree of oversight that they 
exercise through formal annual meetings, informal daily contacts and 
review of MFO financial reports.

We do not believe the MFO Director General's authorities to effect 
management changes to audit and other functions are as autonomous as 
the GAO report describes. The MFO currently provides the Department 
with information on compensation of senior MFO staff. The MFO also 
calls to the Department's attention and provides copies of changes to 
MFO regulations, including those relating to authorized expenditures, 
to ensure that we are aware of, and have the opportunity to object to, 
changes we might consider inappropriate. The MFO provides NEA with 
copies of all external financial and management audit reports, as well 
as the MFO's internal budget projections.

The Department believes the current oversight regime provides the 
necessary assurances and circumstances and limited resources do not 
allow hiring additional accounting personnel to evaluate the MFO's 
accounting and financial practices and the reports of the external 
auditors. These documents have been, and will continue to be, reviewed 
by NEA personnel who have substantial experience with budgets and 
internal controls. These reviews, while not performed by trained 
auditors or accountants provide a good cost effective picture of the 
MFO's management practices and financial operations. However, to 
further improve on our ability to carry out our financial management 
oversight responsibilities we will supplement the routine NEA reviews. 
In the past, State OIG auditors periodically evaluated the MFO's 
accounting and financial practices and reviewed the scope of MFO 
external audits with to ensure that they provide sufficient clarity, 
transparency and accuracy. We will ask that State OIG resume this 
practice.

GAO Recommendation: Direct the NEA advisory board to monitor and 
document NEA's compliance with its guidelines for overseeing the MFO.

State Response: NEA consistently has documented its oversight of the 
MFO in its Annual Report to Congress on the Activities of the MFO, 
submitted pursuant to Public Law 97-132. The most recent 21 page report 
provided an overview of MFO activities during the period January 16 
2003 to January 15 2004; including: significant visitors, the Treaty 
environment, financial developments, information systems, personnel, 
morale support activities, logistics, helicopters, facilities 
maintenance and rehabilitation, external audits, force protection, 
participation and implementation of force reduction proposals. This 
information was obtained by NEA representatives during field visits to 
Egypt, Israel and Italy; in telephone conversations with MFO officials 
in Rome and the Sinai; and from documents obtained from the MFO. NEA 
will supplement this report with quarterly reports to the advisory 
board.

GAO Recommendation: Work with Army officials to reconcile differences 
between Army and State views about current MFO cost sharing 
arrangements.

State Response: There are differences of opinion between the Army and 
the MFO relating to cost sharing arrangements that we are trying to 
reconcile. Following a May 19-20 Army-MFO meeting, which also was 
attended by an NEA representative, the Army undertook to develop a revised and more 
transparent cost allocation model and provide it to the MFO for review 
and comment in preparation for another meeting. Since legal arguments 
can be made in support of both parties, this issue likely will have to 
be resolved at a policy level between State and DOD. NEA has 
recommended to DOD that the Army not send any further bills to the MFO 
that are inconsistent with the existing Army-MFO memorandum of 
understanding until it has developed the new model and meets with the 
MFO as discussed in the May meeting. If there is no agreement following 
the second Army-MFO meeting, then the underlying issue may require 
policy level review within the Administration.

[End of section]

Appendix VII: Comments from the Multinational Force and Observers: 

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

Multinational Force and Observers 
Rome, Italy:
July 9, 2004:

Mr. Joseph A. Christoff:
Director, International Affairs and Trade 
United States General Accounting Office 
Washington, D.C. 20548:

Dear Mr. Christoff:

Thank you for the opportunity to comment formally on the GAO's proposed 
report entitled "Peacekeeping: Multinaticnal Force and Observers 
Maintaining Accountability, but State Department Oversight Could be 
Improved" (GAO-04-883).

We greatly appreciate the Report's conclusion that "[t]he twc parties 
to the treaty and the United States are satisfied that the MFO is 
effectively fulfilling its mission of helping to maintain peace between 
Egypt and Israel." The men and women of the MFO work hard to carry out 
this mission, often in harsh and difficult conditions, and it is good 
to know that the significance of their work is recognized and 
appreciated.

We also welcome the fact that the Report draws attention to two pending 
U.S. Government decisions that have potentially very important 
financial implications for the MFO 
Helicopter Support. The MFO greatly depends upon and appreciates the 
outstanding helicopter support provided by the U.S. Army. We have 
maintained close contact with the Army regarding possible transitions 
to Blackhawk helicopters, to a private contractor, or to a new Army 
light utility helicopter. We will cooperate to carry out whatever the 
United States decides. However, changes, particularly to Blackhawks or 
to a private contractor, may have profound implications for our 
finances. The MFO simply does not have the resources in its current $51 
million budget to address the large additional helicopter costs cited 
in GAO's report. Accordingly, it is essential that future U.S. 
Government decision-making concerning helicopters also address how to 
meet the additional costs.

Army Claims for Hazardous Duty Pay and other Increased Allowances. We 
also welcome the Report's encouragement to relevant U.S. Government 
agencies to arrive at a unified Government position regarding the 
Army's claims for greatly increased MFO payments to cover hazardous 
duty pay and other increased allowances of U.S. soldiers.	(As the Report 
notes, the Army also apparently.intends to substantially cut the offset 
credit provided to the MFO pursuant to the U.S.-MFO Participation 
Agreement.) The Army is already billing the MFO for over $3.0 million a 
year for hazardous duty pay and other allowances that MFO does not 
believe are legally due and that it does not have means to pay.

As we've noted in recent correspondence with the Army and the 
Department of State, it is in no one's interest to have large, disputed 
and un-funded charges accruing on the MFO's accounts. We hope that this 
matter can be resolved soon. If it is the collective judgment of the 
U.S. Government that the MFO should bear substantially increased costs 
for U.S. troops, the United States will need to work with Egypt and 
Israel or other donors to obtain the necessary additional funding or 
alternatively to discuss with Israel, Egypt and the MFO compensating 
cuts in the MFO mission and budget.

Financial Oversight. As the Report notes, the MFO's finances are subject 
to the discipline of recurring audits by an independent outside 
auditing firm applying U.S. generally accepted auditing standards 
(GRAS). This is, as it should be, a rigorous process. We are committed 
to full cooperation with the auditors and consistently receive 
unqualified opinions. We believe that the clarity, transparency and 
accuracy of our financial statements compare favorably with those of 
other international and governmental organizations.

We are also fully committed to working with the new State Department 
Advisory Board to address any and all issues arising in the MFO-U.S. 
Government relationship. We believe the new Advisory Board offers a 
useful mechanism to address any U.S. Government information 
requirements regarding MFO financial statements or the external audits 
of the MFC. As the Report notes, Israel and Egypt have advised us that 
they are satisfied with the oversight and information they have from 
working alongside us in the field and in their own channels to the MFO. 
As to the Board's potential role in relation to the terms of the audit, 
we note that the scope and conduct of the annual audit is not set by 
the MFO, but by the external auditor according to GARS standards. 
Similarly, the auditors determine the scope and conduct of the internal 
control-review according to American Institute of Certified Public 
Accountants (AICPA) standards, independent of the MFO.

COU Personnel. The Report also notes the recurring past difficulties in 
recruiting (and retaining) suitable State Department officers to lead 
the Civilian Observer Unit. While the current Chief has done an 
outstanding job, the past zecord has been mixed. Accordingly, the MFO 
welcomes the measures being taken by;the State Department to improve 
the recruiting process.	

Personnel Matters. The GAO Report detailed a number of steps taken by 
the MFO as a part of. what we view as an ongoing process to update and 
improve the MFO personnel system. However, it also encouraged MFO to 
consider possible additional changes in two specific areas, taking 
account of "leading personnel practices," including GAO's "Model for 
Strategic Human Capital Management Planning." The Report. encouraged 
MFO management to consider:

* Adding additional outside mediation or review mechanisms for any 
complaints involving discrimination and Sexual harassment. (This would 
be in addition to the internal mediation and outside third-party arbitration mechanisms 
already provided for in the MFO's regulations.):

* Assessing a perceived gender imbalance in the MFO workforce, 
particularly in MFO management, and in particular whether there may be 
barriers to women attaining management positions. (The Report does not 
mention the Tel Aviv Office, where female employees, including the 
deputy head of the office, occupy senior positions, or the senior 
female members of the Rome staff.) In this connection, earlier this 
year, Director General Hughes (whose term of office just ended) asked 
our principal executive recruiter to help us.broaden the pool of women 
applicants. She undertook to do so.

We respect these suggestions, and the spirit in which they were 
offered by GAO. MFO management will consider both matters carefully, in 
light of the comments and analysis in the GAO report and the context in 
which we operate.

There is one other personnel issue we want to note. The Report suggests 
a lack of career mobility inside of the MFO, going so far as to say 
that "'[w]ith few exceptions, MFO employees tend to stay in the same 
positions for which they were contracted." This is not entirely 
correct. The nine people who attended the former Director General's 
aily staff meeting at Headquarters illustrate a different pattern. Six 
of the nine were originally hired for other positions, some quite 
junior, and were promoted; two were promoted to their present positions 
from jobs in the Sinai. (The three others were hired from outside the 
MFO to provide specialized military, information systems and legal 
skills.)

It is true that many MFO employees are hired to provide specialized 
skills, often in areas where the MFO may only he one or two deep. 
However, as the above shows, even for persons in this situation, there 
have been and will remain opportunities for bright and able employees 
to advance tc other fields and locations in the MFO.

We accept that there are opportunities to improve our human rescurces 
management; we have and will continue to pursue them_ We believe that 
caution is necessary, however, to avoid uncritical adoption of human resource management 
concepts drawn from the U.S. Government or United Nations that may be 
out of scale for a small organization with 108 direct-hire employees, 
and that may entail significant costs and overhead.

Factual Issues. Last week, we had the opportunity to review an earlier 
draft solely to check factual accuracy, which we appreciated.	GAO 
accepted many of the changes we suggested, for which we thank you. 
However, some suggested corrections to the text of Annex 11 were not 
incorporated, so that scme of the numbers given there for certain types 
of employees are not accurate. The correct figures are as shown in the 
MFO Annual Report. Further, as we noted earlier, it is not appropriate 
to refer to the 464 Egyptian Care Services personnel in the Sinai as 
"day laborers." This group includes many highly skilled craftsmen and 
other experienced and specialized personnel.

Thank you for your consideration of these comments. The MFO has sought 
through out to cooperate with the GAO in all respects, and I hope that 
our assistance has been of value in preparing your Report. 
Consideration of the Report will be a matter of priority for the MFO 
senior staff and the new Director General, James A. Larocco, as he 
assumes charge of the MFO.

Our continued best wishes to your colleagues on the GAO team that 
prepared the Report.

Sincerely, 

Signed by: 

K. Scott Gudgeon 
Deputy Director General:

GAO Comments: 

The following are additional GAO comments on the Multinational Force 
and Observers letter dated July 9, 2004.

1. In its comments, MFO stated that the report does not mention a 
number of female employees occupying senior positions. Our analysis is 
based upon information obtained from an early 2004 report that lists 
all international and national staff by gender in management positions. 
There may have been some changes made to the data since that time.

2. In its comments, MFO stated that there were factual inaccuracies 
regarding the number and classification of civilians employees. GAO 
made changes based upon MFO technical comments and noted that these 
changes disagreed with data in the MFO 2004 Annual Report. MFO's annual 
report notes that there are 636 civilians, while the information 
provided to us from MFO totaled 650.

[End of section]

FOOTNOTES

[1] The governments of Germany, Japan, and Switzerland provided a 
combined financial contribution that averaged about $1.4 million 
annually between fiscal years 1995 and 2003.

[2] U.S. General Accounting Office Peacekeeping: Assessment of U.S. 
Participation in the Multinational Force and Observers. GAO/
NSIAD-95-113 (Washington, D.C.: Aug. 15, 1995).

[3] In our 1995 review, State officials said that management of the U.S 
contribution was based on a relationship of mutual trust with MFO 
management coupled with the reports of MFO's external auditor. We 
noted, however, that the generally accepted auditing standards for 
financial statement audits do not require an opinion on MFO internal 
controls and that MFO's external auditor reports had not included one.

[4] See U.S. General Accounting Office: Standards for Internal Control 
in the Federal Government, GAO/AIMD-00-21.3.1 (Washington D.C.: Nov. 
1999).

[5] MFO employees are eligible to receive a monthly premium worth 7 
percent of employees' base salaries for use in retirement plan 
investments.

[6] Multinational Force Standing Orders, Policy Against Discrimination 
and Harassment, Ch. 38, § 38.14 (a-b) and 38.15(j) (Vol. 2). These 
procedures pertain to civilian employees of the MFO or to MFO soldiers 
when the complainant and the accused are soldiers from different 
national contingents. MFO's policy notes that when the complainant and 
accused are soldiers from the same national contingent, the contingent 
commander will handle the complaint. 

[7] Broader MFO regulations allow for international arbitration of 
disputes or controversies involving employment contracts or the 
regulations, which, the MFO General Counsel states, could be invoked by 
employees who allege harassment or discrimination. Nevertheless, these 
regulations do not specifically cover sexual harassment or 
discrimination, and, according to the General Counsel, in the 22-year 
history of the MFO have never been used by MFO employees to take the 
organization to outside arbitration.

[8] State Department and MFO officials stated that members of the COU 
from the State Department can informally appeal to State in such cases, 
but State's OIG has concluded that the department has no jurisdiction 
because COU members are not State employees.

[9] The World Bank, for example, found that no one single model could 
be easily adapted to restructure its grievance procedures to meet its 
needs, because of the diverse approaches to workplace dispute 
resolution and differing legal structures found among Bank members. We 
noted that the World Bank did not follow through on our recommendation 
to collect meaningful data on employees' perspective on the fairness 
and credibility of its proposed reforms. See U.S. General Accounting 
Office, World Bank: Status of Grievance Procedure Reforms, GAO/
NSIAD-99-96 (Washington, D.C.: May 13, 1999).

[10] See Alternative Dispute Resolution: Employers' Experiences with 
ADR in the Workplace, GAO/GGD-97-157 (Washington, D.C.: Aug. 12, 1997); 
and Human Capital: The Role of the Ombudsmen in Dispute Resolution, 
GAO-01-466 (Washington, D.C.: Apr. 13, 2001).

[11] See U.S. General Accounting Office, Human Capital: Preliminary 
Observations on Proposed DHS Human Capital Regulations. GAO-04-479T 
(Washington, D.C.: Feb. 25, 2004), and GAO/NSIAD-99-96. 

[12] The total includes four vacancies as of early 2004.

[13] MFO officials stated that they have selected a female manager as 
the next chief observer of the COU. In addition, MFO officials 
commented that local support staff hired by its labor contractor in 
Egypt employee some women in professional positions. 

[14] In line with the best practices of major financial institutions in 
the United States, the World Bank, and other international 
organizations, the MFO assessed its financial controls using the 
criteria for effective internal control established by the Committee of 
Sponsoring Organizations of the Treadway Commission (COSO), according 
to internal control evaluations conducted in 1998 and 2001. This 
control framework, known as the "Internal Control-Integrated 
Framework," establishes a common definition of management controls and 
provides a standard by which to assess improvements in these controls.

[15] Since 1995, MFO's leadership has committed itself to keeping the 
budget under $51 million.

[16] According to leading public sector internal control practices 
described in GAO's Standards for Internal Control in the Federal 
Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999), public 
agencies should have mechanisms in place to monitor and review 
operations and programs. The mechanisms could include an Inspector 
General independent of management to audit and review agency 
activities. The MFO management review officer consults with the 
Director General on the logic and scope of each review in advance, 
however.

[17] Price Waterhouse is now part of PricewaterhouseCoopers.

[18] In the external auditor's opinion, each of the MFO's financial 
statements between fiscal years 1995 and 2003 was prepared in 
conformity with modified generally accepted accounting principles 
(GAAP).

[19] The external auditor reached this conclusion in each compensation 
and benefit report using generally accepted auditing standards set 
forth in Statements of Auditing Standards number 35 (SAS 35) "Special 
Reports - Applying Agreed Upon Procedures to Specified Elements, 
Accounts or Items of a Financial Statement" as stipulated by 
Professional Standards of The American Institute of Certified Public 
Accountants.

[20] The results of the 2004 internal controls review will not be 
available until autumn 2004, according to State Department officials.

[21] COSO standards caution that not all such mechanisms must be 
present to conclude that an internal control system is effective. They 
also note that there are no preferred methods to conduct and document 
internal control evaluations because the circumstances that different 
entities and industries are under dictate their choice of evaluation 
methodologies and documentation techniques. Small entities, for 
example, tend to be less formal and less structured than large 
organizations, and rely more on direct and continuous communication 
between management and lower-level personnel. COSO standards note, 
however, that the evaluation tools described in its framework can be 
used by entities of any size.

[22] See U.S. General Accounting Office: Standards for Internal Control 
in the Federal Government, GAO/AIMD-00-21.3.1 (Washington D.C.: Nov. 
1999).

[23] Purchasing power refers to the amount of goods that one 
international dollar can purchase in different countries. An 
international dollar is equivalent to the amount of goods and services 
that 1 U.S. dollar can purchase in the United States. For example, in 
1995, 1 U.S. dollar could purchase goods in Egypt worth $2.69 in the 
United States. In 2002, 1 U.S. dollar could purchase goods in Egypt 
worth $2.93 in the United States. For purposes of this analysis, we 
assumed all MFO purchases not made in Egypt or Israel were made in the 
United States because MFO could not provide data regarding purchases 
made in other countries.

[24] According to Army officials, the helicopter equipment and support 
would be provided through the Logistics Civil Augmentation Program, a 
single, centrally managed worldwide planning and services contract used 
by the Army to (1) preplan for the use of contractor support in 
contingencies or crises and (2) take advantage of civilian resources in 
the United States and overseas to augment active and reserve forces. 
Halliburton's subsidiary, Kellogg Brown & Root, currently holds this 
contract.

[25] According to an Army official, this figure is based on a rough 
order of magnitude cost estimate prepared by Kellogg, Brown & Root in 
2002. The final cost is likely to be significantly higher when adjusted 
for inflation and a revised statement of work is prepared. 

[26] In addition to the income that the MFO receives from the United 
States, Egypt, and Israel, it also receives some additional financial 
contributions from Japan, Germany, and Switzerland. In fiscal year 
1995, these countries together provided an additional $1.7 million to 
the MFO. However, these annual contributions have steadily declined and 
totaled less than $1 million in fiscal year 2003.

[27] The United States also reduced its infantry battalion by 104 
soldiers in 2003, for a total reduction of 178 U.S. troops.

[28] According to State and MFO officials, the MFO is only required to 
reimburse the Army for certain special pay categories at the lower 
levels set in the March 1982 letter and annexes exchanged between the 
Secretary of State and the MFO Director General, and as increased in 
cost-sharing memorandums of understanding signed in 1994 and 1998. 
These agreed upon rates are lower than those currently provided under 
U.S. law.

[29] These reimbursement costs originally were calculated based on the 
cost to the U.S. Army of sustaining an active duty infantry battalion 
in the United States. According to an Army document, the cost-sharing 
formula is out-of-date because the Army does not generally pay costs 
for National Guard troops that are deployed in the United States.

[30] The total includes four vacant international positions in the 
Sinai.

[31] Other international civilian staff come from Great Britain (35), 
Australia (2), Canada (2), France (1), New Zealand (2), Italy (1), and 
Mexico (1). A staff member of unidentified nationality fills one 
position.

[32] See U.S. General Accounting Office, Human Capital: Key Principles 
for Effective Strategic Workforce Planning, GAO-04-39 (Washington, 
D.C.: Dec. 11, 2003).

[33] See U.S. General Accounting Office, Human Capital: A Self-
Assessment Checklist for Agency Leaders, GAO/OCG-00-14G (Washington, 
D.C.: Sep. 1, 2000).

[34] Data for fiscal year 2003 purchasing power parity in Egypt and 
Israel are not available as of June 2004.

[35] A ratio of less than 1 implies that a basket of goods in the 
foreign country costs less in U.S. dollars than in the United States. 
For example, in 2002, a basket of goods that would cost $1 in the 
United States would cost $0.34 in Egypt, $0.81 in Israel, $0.78 in 
Italy, and $1.22 in Switzerland.

[36] The fiscal year conversion factor ratio is calculated as a 
weighted average of calendar year ratios. The calendar year ratio in 
constant 1995 dollars is computed as the ratio of nominal gross 
domestic product expressed in U.S. dollars to the gross domestic 
product expressed in constant 1995 international dollars.

[37] The budgetary impact of the further reduction of U.S. troops from 
865 to 687 soldiers did no effect DOD's cost calculations for fiscal 
year 2003. The impact will be measurable beginning in fiscal year 2004.

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