OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION

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SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION 

January 30, 2007 

MEMORANDUM FOR UNDER SECRETARY OF DEFENSE (COMPTROLLER), 

 U.S. DEPARTMENT OF DEFENSE 

 DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET 

 U.S. AMBASSADOR TO IRAQ 

 COMMANDING GENERAL, MULTI-NATIONAL FORCE-IRAQ 

COMMANDING GENERAL, U.S. ARMY CORPS OF 

ENGINEERS 

DIRECTOR, IRAQ RECONSTRUCTION MANAGEMENT 

OFFICE 

 CHIEF FINANCIAL OFFICER, U.S. ARMY CORPS OF 

ENGINEERS 

 COMMANDING GENERAL, GULF REGION DIVISION, 

 U.S. ARMY CORPS OF ENGINEERS 

SUBJECT: Improper Obligations Using the Iraq Relief and Reconstruction Fund (IRRF 2) 

(SIGIR-06-040) 

We are providing this audit report for your information and use. We performed the audit in 

accordance with our statutory duties contained in Public Law 108-106, as amended, which 

requires that we provide for the independent and objective conduct of audits, as well as 

leadership and coordination of, and recommendations on, policies designed to promote 

economy, efficiency, and effectiveness in the administration of programs and operations and to 

prevent and detect waste, fraud, and abuse. This report discusses the circumstances related to 

questionable funds and subsequent actions taken or planned regarding the use of these funds. 

This report does not contain recommendations; therefore, no written response to this report is 

required. A draft of this report was provided to the Chief Financial Officer, U.S. Army Corps 

of Engineers, and the Iraq Reconstruction Management Office. We received informal 

comments from the Iraq Reconstruction Management Office, which were addressed in the final 

report, as appropriate. 

We appreciate the courtesies extended to the staff. For additional information on this report, 

please contact Mr. Joseph T. McDermott, Assistant Inspector General for Audit, (703-604-

0982 / joseph.mcdermott@sigir.mil), or Mr. Steven Sternlieb (steven.sternlieb@sigir.mil / 703-

428-0240). For the report distribution, see Appendix C. 

Stuart W. Bowen, Jr. 

Inspector General 

cc: See Distribution 

400 Army Navy Drive • Arlington, Virginia 22202
Table of Contents 

Executive Summary i

Introduction 

Background 1

Objectives 3

Contingency Advice Provided to GRD Changed Over Time 4

Status of GRD’s Expired IRRF 2 Funds 8

IRMO Has Developed Procedures for Use of IRRF 2 

Expired Funds 10

Conclusion and Recommendations 13

Appendices 

A. Scope and Methodology 14

B. Acronyms 16

C. Report Distribution 17

D. Audit Team Members 19
Improper Obligations Using the 

Iraq Relief and Reconstruction Fund (IRRF 2) 

SIGIR-06-040 January 30, 2007

Executive Summary

Introduction 

Congress appropriated $18.4 billion for the rebuilding of Iraq in Public Law 108-106, the 

Emergency Supplemental Appropriations Act for Defense and for the Reconstruction of Iraq 

and Afghanistan. This money is known as the Iraq Relief and Reconstruction Fund 2 (IRRF 

2).1

 On September 22, 2006, we issued an interim audit report on improper obligations 

using IRRF 2.2

 As a result of our interim findings, and as agreed to with senior U.S. Army 

Corps of Engineers officials, we further report on the circumstances related to these 

questionable funds and subsequent actions taken or planned by GRD regarding the use of 

these funds. This is our final report. 

In our September 2006 interim report, we concluded that $362 million in obligations did not 

constitute proper obligations. These funds were recorded as obligations by the U.S. Army 

Corps of Engineers (USACE) Gulf Region Division (GRD)3

 in USACE’s financial records 

under a general contingency account used to enter data into a data field for vendors when no 

specific vendor entity existed. Because we concluded that the obligation of funds from 

IRRF 2 must be made for bona fide purposes prior to their expiration on September 30, 

2006, we issued an interim audit report so timely action could be taken by USACE on the 

use of these funds. In providing official oral comments on our interim findings, the USACE 

Chief Financial Officer (CFO) agreed with our conclusion that the $362 million in IRRF 2 

funds that were obligated to non-existent vendors were not proper obligations. He advised 

us that USACE was seeking a solution to meet its needs to fund future contingency and 

close-out costs in a manner that constitutes proper obligations. In further discussions with 

USACE’s GRD staff in Iraq we were told that GRD had been previously advised that it 

could obligate IRRF 2 funds for contingencies to this general account. 

 

1

 P.L. 108-11 established the $2.48 billion Iraq Relief and Reconstruction Fund 1 (IRRF 1). The scope of this 

report does not include IRRF 1 funds. 

2 Interim Audit Report on Improper Obligations Using the Iraq Relief and Reconstruction Fund (IRRF 2), 

(SIGIR-06-037, September 22, 2006). 

3

 In December 2005, shortly before the events covered by this audit (January-November 2006), the Project and 

Contracting Office (PCO) and the USACE Gulf Region Division (GRD) merged into one organization to form 

GRD-PCO. On October 1, 2006, the financial management functions of PCO were absorbed into GRD. 

Because of this organizational change, we refer to GRD as the organization currently responsible for the 

financial management of IRRF. 

i
Objectives

The overall objective of this audit was to describe the events surrounding GRD’s decision to 

obligate the funds in question in Fiscal Year 2006 for future contingency requirements 

beyond Fiscal Year 2006, why GRD believed that it was proper to do so, and what has 

became of those funds. Specifically, the objectives of the audit were to determine: 

• What legal guidance was provided to GRD on whether it could obligate IRRF 2 

funds for contingencies? 

• What became of the funds associated with the obligations that we questioned as 

improper? 

• What procedures are in place regarding IRRF 2 expired funds? 

Results

On January 28, 2006, GRD developed an internal plan, including financial guidance. The 

purpose of the plan included ensuring that there were sufficient obligated funds in the 

expired IRRF 2 appropriation to close out design-build contracts during Fiscal Year 2007 

and beyond.4 The plan underwent legal review at multiple levels within the Department of 

Defense (DoD). Sometime in the February-March 2006 timeframe, the then senior official 

in the DoD Office of General Counsel (Fiscal) orally indicated to the Director, Management 

and Control, in the Army Budget Office,5 that the proposed plan to obligate IRRF 2 funds 

for contingencies was permissible, but a written opinion was not provided. In June 2006, 

after a change in personnel, the new senior official in the DoD Office of General Counsel 

(Fiscal) reached the opposite conclusion—that the proposed plan was not proper. As of 

October 2006, this remains the DoD legal position, albeit not written. 

A series of actions were taken between September 29, 2006, and October 4, 2006, to ensure 

that the funds in question remained available consistent with appropriations law. These 

funds were returned to the Department of the Army, moved to the custody of USACE, 

allowed to expire, and then returned to GRD for its use. On September 29 and 30, 2006, a 

total of $385.2 million in IRRF 2 funds were returned to the Department of the Army: 

o $378.8 million in deobligated funds that were returned by GRD on 

September 29-30, 2006, which included the $362 million questioned in our 

interim report 

o $6.4 million still held for the defunct Office of Reconstruction and 

Humanitarian Assistance, the original agency established for Iraq 

reconstruction 

On September 29 and 30, 2006, the Department of the Army reissued to USACE the $385.2 

million in returned IRRF 2 funds. These funds expired at midnight on September 30, 2006. 

 

4

 A design-build contract places the design and building phases of a project under the same contract. 

5

 This official is now the USACE CFO. 

ii
On October 3 and 4, 2006, USACE in turn issued $385.2 million in expired IRRF 2 funds to 

its subordinate command, GRD. 

IRMO has developed procedures for the use of expired funds, Updated Procedures for Iraq 

Relief and Reconstruction Fund (IRRF) Expired Funds, November 28, 2006. They require 

each IRRF-implementing organization to notify or receive approval from IRMO on the use 

of the expired funds, depending on the amount involved. However, we found that GRD has 

been directed by the USACE CFO, rather than IRMO, to use the $385.2 million of expired 

IRRF 2 funds to take actions to meet its contingency expectations. This amount represents 

almost all (99%) of the $389.2 million total expired funds that were deobligated and 

returned to the Department of the Army at the end of Fiscal Year 2006 for all agencies.6

 

The use of expired funds has been the subject of considerable discussion between IRMO 

and GRD and is but one aspect of a broader problem—how to manage future costs to 

complete work across the range of IRRF projects. USACE has conducted a detailed review 

of the cost to complete its pre-September 30, 2006 IRRF-funded contracts and has 

quantified its need for the expired funds. While GRD has quantified its requirements for the 

use of the expired funds, IRMO’s procedures call for its approval on a case-by-case basis to 

ensure the best use of limited funds. We believe that having IRMO’s approval is a good 

start, but it may be challenging from a strategic perspective. 

Recommendations 

As GRD has addressed our previous recommendation to safeguard the availability of the 

$362 million that had been improperly obligated, and because actions are underway to 

clarify the use of the expired IRRF 2 funds, we make no further recommendations. 

Management Comments and Audit Response 

This report contains no recommendations; therefore no written response was required. A 

draft of this report was provided to USACE and IRMO. USACE officials responded with 

no comments to add. IRMO officials provided technical comments, which were addressed 

in the final report. IRMO officials concurred and had no additional comments. 

 

6

 Of the $389.2 million in expired funds, GRD controlled $385.2 million, and other agencies controlled the 

balance of $4 million. 

iii
Introduction 

Background 

Congress appropriated $18.4 billion for the rebuilding of Iraq in Public Law 108-106, the 

Emergency Supplemental Appropriations Act for Defense and for the Reconstruction of 

Iraq and Afghanistan. This money is known as the Iraq Relief and Reconstruction Fund 2 

(IRRF 2).7

 These funds were to remain available until September 30, 2006, at which 

time the authority to initially obligate these funds expired. 

On September 22, 2006, we issued an interim audit report on improper obligations using 

IRRF 2.8 Our review determined that $362 million recorded in the U.S. Army Corps of 

Engineer’s (USACE’s) financial records did not constitute proper obligations. As a result 

of our interim findings, and as agreed to with senior U.S. Army Corps of Engineers 

officials, we further report on the circumstances related to these questionable funds and 

subsequent actions taken or planned by the USACE Gulf Region Division (GRD) 

regarding the use of these funds. This is our final report. 

Responsible Organizations 

The Coalition Provisional Authority was initially responsible for managing the 

construction and contracting efforts in the reconstruction of Iraq through its Program 

Management Office. In June 2004, the Program Management Office was redesignated the 

Project and Contracting Office (PCO). In December 2005, shortly before the events 

covered by this audit, the PCO and the USACE GRD merged into one organization to 

form GRD-PCO. On October 1, 2006, the financial management functions of PCO were 

absorbed into GRD. Because of this organizational change, we refer to GRD as the 

organization currently responsible for the financial management of IRRF for the 

Department of Defense (DoD). 

Project and Contracting Office (PCO) 

National Security Presidential Directive 36, United States Government Operations in 

Iraq, May 11, 2004, established the PCO and directed the PCO to provide acquisition and 

project management support for activities in Iraq. On June 22, 2004, the Deputy 

Secretary of Defense established the PCO within the Department of the Army and 

directed the PCO to provide support to the Chief of the U.S. Mission in Iraq for all 

activities associated with financial, program, and project management for both 

construction and non-construction IRRF activities. 

 

7

 P.L. 108-11 established the $2.48 billion Iraq Relief and Reconstruction Fund 1 (IRRF 1). The scope of 

this report does not include IRRF 1 funds. 

8 Interim Audit Report on Improper Obligations Using the Iraq Relief and reconstruction Fund (IRRF 2), 

(SIGIR-06-037, September 22, 2006). 

1
U.S. Army Corps of Engineers Gulf Region Division (GRD) 

The GRD provides engineering services in the Iraq combat theater to Multi-National 

Force-Iraq, the Department of State, the U.S. Agency for International Development, and 

the Iraqi government with planning, design, and construction management support for 

military and civil infrastructure construction. 

Iraq Reconstruction Management Office (IRMO)

9 National Security Presidential Directive 36 also established IRMO, a temporary office 

within the Department of State and the U.S. Mission in Iraq, to facilitate the transition to 

a democratically elected, sovereign government of Iraq. IRMO executes its mission by 

assisting the U.S. Ambassador in setting reconstruction policy and provides expertise and 

operational assistance to Iraqi ministries in the reconstruction process. IRMO 

responsibilities relative to IRRF include strategic planning, prioritizing requirements, 

monitoring spending, and coordinating with the applicable military commander. 

Interim Audit Report Raised Concerns About Improper IRRF 2 

Obligations

In our September 2006 interim report we concluded that $362 million in IRRF 2 

obligations recorded by GRD in USACE’s financial records under a general contingency 

account used to allow entering data into a data field for vendors when no specific vendor 

entity existed did not constitute proper obligations. Because we concluded that the 

obligation of funds from IRRF 2 must be made for bona fide purposes prior to their 

expiration on September 30, 2006, we issued an interim audit report so timely action 

could be taken by USACE on the use of these funds. 

We reported that the establishment of these obligations was not consistent with a 1995 

decision by the Comptroller General of the United States on appropriations availability, 

the U.S. Government Accountability Office’s (GAO) Appropriations Law Manual, and 

the DoD Financial Management Regulation requirements for the recording and reviewing 

of commitments and obligations. Appropriated amounts are limited for obligation to a 

definite period and are available only for payment of expenses properly incurred during 

that period. Thus, unless obligated consistent with GAO and DoD guidance on what 

constitutes proper obligations during their period of availability, any amounts reserved as 

a contingency would not be available to support obligations arising after expiration of 

their period of availability. Consequently, we concluded that the $362 million recorded 

in USACE’s financial records as obligations for contingency requirements with no actual 

vendor entity were not proper obligations of IRRF 2 funds. Further, if these funds were 

not obligated against discrete contracts (or other recordable transactions) consistent with 

GAO and DoD guidance on what constitutes proper obligations, the authority to obligate 

them would expire on September 30, 2006. 

 

9

 National Security Presidential Directive/NSPD 36, United States Government Operations in Iraq, May 

11, 2004. 

2
As a result, in our September 22, 2006, report, we recommended that the Commanding 

General, USACE, direct GRD to immediately review the obligations established for the 

transactions without an actual vendor name and, to the extent practicable, take steps to 

obligate these funds consistent with GAO and DoD guidance on what constitutes proper 

obligations by September 30, 2006; or alternately take steps to assure that the funds 

remain legally available. In providing official oral comments on our interim findings, 

USACE’s Chief Financial Officer (CFO) agreed with our conclusion that the $362 

million in IRRF 2 funds obligated to non-existent vendors were not proper obligations. 

The CFO advised us that he was seeking a solution to meet USACE’s needs to fund 

future contingency and close-out costs in a manner that constitutes proper obligations. 

According to the CFO, he was recommending that GRD deobligate these funds 

immediately and return the funds to the Department of the Army. He also said that he 

planned to let these funds expire on September 30, 2006, and to maintain these expired 

funds for in-scope modifications in Fiscal Year 2007. In further discussions with senior 

GRD staff, we were told that GRD had been previously advised that it could obligate 

IRRF 2 funds for contingencies to a general account. 

Objectives

The overall objective of this audit was to describe the events surrounding GRD’s decision 

to obligate the funds in question in Fiscal Year 2006 for future contingency requirements 

beyond Fiscal Year 2006, why GRD believed that it was proper to do so, and what has 

became of those funds. Specifically, the objectives of the audit were to determine: 

• What legal guidance was provided to GRD on whether it could obligate IRRF 2 

funds for contingencies? 

• What became of the funds associated with the obligations that we questioned as 

improper? 

• What procedures are in place regarding IRRF 2 expired funds? 

For a discussion of the audit scope and methodology, and a summary of prior coverage, 

see Appendix A. For the acronyms, see Appendix B. For the report distribution, see 

Appendix C. For a list of the audit team members, see Appendix D. 

3
Contingency Advice Provided to GRD Changed 

Over Time

On January 28, 2006, GRD developed an internal plan, including financial guidance. The 

purpose of this plan included ensuring that there were sufficient obligated funds in the 

expired appropriation to close out its design-build contracts during Fiscal Year 2007 and 

beyond. The plan underwent legal review at multiple levels within DoD. Between 

February 2006 and September 2006, the legal advice provided to GRD changed from 

unacceptable—to acceptable—and finally unacceptable. As of November 2006, the DoD 

legal position is that it is not permissible to obligate IRRF 2 funds for contingencies. 

GRD’s Plan for Assuring Adequate Funding

On January 28, 2006, GRD developed an internal plan entitled IRRF II Contingency 

Management Plan and Financial Guidance for FY 06. The plan’s stated purpose was to: 

• Establish a common definition-set for successfully closing out the IRRF 2 

appropriation at the end of Fiscal Year 2006.

• Ensure that there were sufficient obligated funds in the expired appropriation to 

close out its design-build contracts during Fiscal Year 2007 and beyond.

The plan’s rationale stated that the Army Budget Office had informally agreed to obligate 

funds for project contingency based on reasonable estimates such as the cost-to-complete 

report.10 When actual obligation amounts became known, the estimated amount for 

obligation would be reversed and replaced with the actual amount. GRD personnel were 

to ensure that this reversal took place. Proposed legislative language to be submitted by 

the Department of the Army with the Fiscal Year 2006 request for supplemental 

appropriations was to further validate this process. 

The plan emphasized the importance of good financial management, stating the 

following: 

• While it was vital that sufficient funds be available to complete projects that are 

underway and planned, it is equally important not to hold excess funds. 

• It is imperative to identify available funds early and execute in a prudent and 

expeditious manner.

• A contingency management plan is pivotal in balancing risk and opportunity 

while continuing to execute the IRRF 2 program.

The plan contained definitions and “way-ahead” financial treatment. It defined available 

funds as those funds that are not committed or obligated and have not been identified for 

 

10 The cost-to-complete report contains estimates of the cost required to complete each project funded with 

IRRF 2. 

4
a specified purpose. These funds were deemed available for new projects, modifications 

of ongoing projects, increases for design-build close-out, and/or for design-build 

contingency as needed. The plan further stated that the use of these funds was at the 

discretion of the Chief of Mission who delegated responsibly to senior IRMO staff and 

the Director of IRMO, in consultation with the sectors. 

For design-build close-out, funds were defined as those set aside for closing out designbuild cost-reimbursement contracts plus any other validated close-out costs. The 

proposed approach was for design-build close-out funds identified on the cost-tocomplete report to be committed on a single purchase request and commitment (a funding 

document used for contracting) and then obligated on a miscellaneous obligation 

document per project code. These were the actions that resulted in the obligations 

recorded as transactions without an actual vendor that were the subject of our interim 

report. 

The Office of the Assistant Secretary of the Army for Financial Management and 

Comptroller developed proposed legislative language on January 5, 2006, or before the 

internal plan was completed, but it was subsequently decided to not send it forward. The 

language was as follows: 

“Notwithstanding any other provision of law, whereas some of the Iraq 

construction projects will be completed in fiscal year 2007 with no new 

appropriated funds anticipated for the Iraq Relief and Reconstruction Act, under 

PL 108-106, these funds may be obligated at the sector level in FY06 for project 

close-out costs based on reasonable estimates, such as cost at completion 

analyses. For the purpose of this section, project close-out costs are in-scope 

changes to existing construction projects, and any other costs associated with 

closing out existing contracts, including claims, for the projects and construction 

contracts that were in place prior to fund expiration.” 

11 According to USACE’s CFO , the legislative language was prepared and discussed 

within DoD in about the first week in January 2006. On November 18, 2006, the CFO 

told us that on January 6, 2006, the legislative proposal was discussed between himself, 

in his former capacity as the Director, Management and Control, in the Army Budget 

Office; senior Office of Management and Budget officials; and senior DoD financial 

management officials. According to the CFO, the Office of Management and Budget, on 

about January 7, 2006, recommended the contingency/close-out provision not be 

submitted as there was no precedence for such action and it was asking Congress to 

prescribe obligation rules in the supplemental. 

GRD’s plan was based on USACE’s long-standing practice of funding contingencies for 

projects involving military construction appropriations. This practice normally involves 

committing 5% of the estimated project’s construction cost for contingency requirements 

which are then obligated when actual in-scope contract changes are required. Military 

 

11 At the time of the January 6, 2006, discussion, the individual who is currently the USACE CFO was the 

Director, Management and Control, in the Army Budget Office. He became the USACE CFO on April 1, 

2006. 

5
construction projects are basically all fixed price contracts involving lower risk of 

contingency while the GRD contracts in Iraq were cost reimbursable contracts with 

higher risk for contingency costs. GRD’s legal counsel noted that the situation GRD 

faced in Iraq was similar to the situation USACE faces in the final year of projects funded 

with military construction appropriations.12 GRD’s legal counsel further noted that 

contingencies are not obligated in the last year the military construction appropriation is 

available; rather, USACE requests additional funds from Congress. However, in the case 

of IRRF 2 there were no successor appropriations and we found no evidence where there 

were any requests for additional funds to meet this purpose. 

Legal Guidance Changed Over Time

Between February 2006 and September 2006, legal counsel at multiple levels within DoD 

addressed GRD’s proposed plan for obligating funds for contingencies. Specifically, the 

following organizations within DoD were involved: 

• GRD Division Counsel 

• USACE Office of the Chief Counsel 

• Department of the Army, Office of General Counsel 

• DoD Office of General Counsel 

There were a series of discussions regarding GRD’s internal plan involving legal counsel 

in GRD, USACE headquarters, and the Department of the Army Office of General 

Counsel. In the course of those discussions the predominant view was that the proposed 

plan to obligate IRRF2 funds for contingencies was not permissible. Specifically: 

• On February 11, 2006, GRD Division Counsel raised concerns with USACE’s 

Office of the Chief Counsel about GRD’s proposed plan to obligate IRRF 2 funds 

for contingencies. The Division Counsel expressed the view that the proposal 

was GRD’s way to capture the contingencies of the cost reimbursable contracts 

today with expiring IRRF 2 Funds and expressed concern as funds are not 

supposed to be obligated for contingencies. These concerns were also 

communicated to both the PCO Comptroller and Finance and Accounting Officer 

as well as to the GRD Comptroller. 

• On February 13, 2006, in responding to GRD’s Division Counsel, USACE Office 

of the Chief Counsel advised that if GRD’s plan is an attempt to obligate money 

for future out-of-scope modifications then it lacks any basis of authority. USACE 

Office of the Chief Counsel further stated that an out-of-scope modification must 

be funded with current year funds and he realized that in the case of IRRF there 

will be no current year funds.13 However, he noted that the lack of future funds 

did not relieve the fiscal constraints on the use of expired funds. 

 

12 Funds appropriated for military construction are available for a 5-year period. 

13 The USACE Chief Counsel did not specify a date, but the implication is that he was referring to funds 

beyond Fiscal Year 2006. 

6
• On February 24, 2006, Department of the Army Office of General Counsel 

advised USACE’s Office of the Chief Counsel that it shared its concern and had 

brought the matter to the attention of DoD’s Office of General Counsel (Fiscal). 

14 Sometime in the February-March 2006 timeframe, the then senior official in the DoD 

Office of General Counsel (Fiscal) indicated to the then senior official in the Army 

Budget Office, that the proposed plan to obligate IRRF 2 funds for contingencies was 

permissible. This conclusion was provided orally, but no written opinion was provided. 

On November 16, 2006, we discussed this oral opinion with the USACE CFO who 

agreed with our observation that, with the exception of the senior official in the DoD 

Office of General Counsel (Fiscal), the predominant legal counsel view at the time was 

that the proposed plan was not permissible. However, the CFO noted that because the 

opinion that the proposed plan was permissible was provided at the DoD senior official 

level, that became the guiding position for making obligations to the general contingency 

account. 

In June 2006, there was a change in personnel in the DoD Office of General Counsel 

(Fiscal) and the new senior official reached the opposite conclusion—that the proposed 

plan was not proper. This information was provided orally to the senior fiscal attorney in 

the Department of the Army Office of General Counsel. On September 6, 2006, 

USACE’s CFO requested a legal opinion from the Army Deputy General Counsel (Ethics 

and Fiscal) on USACE’s plan to reserve funds appropriated for IRRF for in-scope 

modifications and close-out costs by obligating contingency funds. During an October 

19, 2006, meeting we had with the Department of the Army Deputy General Counsel 

(Ethics and Fiscal), he told us that he did not support GRD’s proposed plan that was 

submitted for a legal opinion in September 2006. According to the Army Deputy General 

Counsel (Ethics and Fiscal), he had not provided an opinion to USACE, and he had 

advised the USACE CFO that the Department of the Army General Counsel would not 

issue a written opinion supporting using IRRF for future contingencies. 

 

14 The officials involved in these discussions, and with whom we spoke, could not recall specific dates. 

7
Status of GRD’s Expired IRRF 2 Funds

When appropriated funds expire they remain available for in-scope obligation 

adjustments (contract modifications within the scope of existing contracts) for a period of 

five years at which time they then become cancelled funds and are not available for any 

purpose relating to the original contract. It is common for contracts to be modified to 

reflect emerging needs within the original contract. Expired IRRF 2 funds are governed 

by the same appropriation law and regulations as other expired appropriated funds. 

GRD committed to deobligate the funds we questioned in response to our interim report. 

A tele-conference was held on September 29, 2006, between the Commanding General, 

GRD, the USACE CFO, and the Special Inspector General for Iraq Reconstruction. 

During this meeting, the Commanding General said that GRD would deobligate the $362 

million in questioned IRRF obligations. The USACE CFO added that the $362 million in 

IRRF 2 funds would be held at headquarters Department of the Army in an account for 

USACE and allowed to expire on September 30, 2006. The funds would then remain 

available for five years for in-scope adjustments to existing IRRF 2 obligations before 

cancelling. 

To put this in context, the USACE CFO told us that he believes that the IRRF 

appropriation was not compatible with the life cycle of major reconstruction projects 

because IRRF 2 was limited to a 3-year availability period, whereas appropriations 

normally used for major construction projects provide for a continuous funding stream 

that can be used to fund in-scope modifications. Since IRRF 2 was only available for 

obligation in Fiscal Years 2004 through 2006, and with many of the major construction 

projects starting in Fiscal Years 2005 and 2006, the IRRF 2 obligation period did not 

allow for normal in-scope modifications and close-out actions likely to occur in years 

beyond Fiscal Year 2006. However, as discussed earlier, GRD Division Counsel noted in 

February 2006 that the situation GRD faced in Iraq was similar to the situation USACE 

faces in the final year of projects funded with military construction appropriations. 

Rather than obligating funds for contingencies in the last year the military construction 

appropriation is available, USACE requests additional funds from Congress. 

Between September 29, 2006, and October 4, 2006, a series of actions were taken by 

USACE to ensure that the funds we questioned, as well as an additional $22 million in 

IRRF 2 funds that expired on September 30, 2006, remained available consistent with 

appropriations law. These actions resulted in having the funds returned to the Army, 

allowed to expire, and then reissued to GRD as shown in Figure 1. 

8
Figure 1: Timeline for Actions Involving GRD’s Expired IRRF 2 Funds 

Finish

6. GRD

Committed $337.7 million 

of the expired funds

as of Nov. 7, 2006

4. USACE

$385.2 million expired 

at midnight 

on Sept. 30, 2006

Start

1. GRD

De-obligated $378.8 million 

of IRRF 2 

on Sept. 29-30, 2006

2. GRD

Returned $378.8 million, 

and ORHA* returned $6.4 million, 

for a total of $385.2 million returned

to the Dept. of the Army 

on Sept. 29-30, 2006

5. USACE

Returned $385.2 million 

to GRD 

on Oct. 3-4, 2006

3. Dept. of the Army

Issued $385.2 million 

to USACE on

Sept. 29-30, 2006

 Source: SIGIR analysis of Army funding documents, as of October 4, 2006. 

*

Note: ORHA is the Office of Reconstruction and Humanitarian Assistance. 

9
IRMO Has Developed Procedures for Use of 

IRRF 2 Expired Funds 

IRMO has developed procedures for the use of expired funds, Updated Procedures for 

Iraq Relief and Reconstruction Fund (IRRF) Expired Funds, November 28, 2006. They 

require each IRRF-implementing organization to notify or receive approval from IRMO 

on the use of the expired funds, depending on the amount involved. However, we found 

that GRD has been directed by the USACE CFO, rather than IRMO, to use the $385.2 

million of expired IRRF 2 funds to take actions to meet its contingency expectations. 

This amount represents almost all (99%) of the $389.2 million total expired funds that 

were deobligated and returned to the Department of the Army at the end of Fiscal Year 

2006 for all agencies. 

IRMO Procedures for Expired Funds 

On May 11, 2004, National Security Presidential Directive 36 established IRMO with 

overall responsibility for the IRRF 2 program, although the Office of Management and 

Budget apportions funds directly to the agencies executing the IRRF 2 program. IRMO 

has developed procedures for the use of expired funds. 

We have reviewed IRMO’s procedures for expired IRRF 2 funds. These procedures 

require that the use of expired IRRF 2 funds be limited to in-scope changes, requests for 

equitable adjustment, claims, and any unrecorded obligations. Requests for equitable 

adjustment, claims, and any unrecorded obligations are an immediate liability to the U.S. 

government and require only notification to IRMO. For in-scope changes, IRMO’s 

procedures state that even if a contracting officer determines that the legal authority 

exists to use expired funds for an in-scope change, such modifications must have IRMO 

approval and that such coordination is to ensure that the proposed in-scope modification 

is a higher policy priority than other potential competing funding requirements. IRMO 

concurrence and approval is required for modifications or changes exceeding $500,000. 

Modifications or changes less than $500,000 shall require notification only. Required 

documentation to IRMO for the use of expired IRRF 2 funds includes the change and 

current percentage of activity completion, to justify how the change will enhance the 

achievement of the objectives; whether the increase exceeds the previous month’s costto-complete estimate; and budget to include all direct and contingency costs. 

In establishing IRRF 2 in Public Law 108-106 (117 STAT 1225), Congress allocated 

funds by sector, including for oil infrastructure, the electric sector, water, and sanitation. 

Congress also allowed the President to reallocate up to 10% of the original allocations. 

The appropriated funds were to be apportioned only to the Coalition Provisional 

Authority; the Departments of State, Defense, Health and Human Services, Treasury; and 

the U.S Agency for International Development. The Office of Management and Budget 

apportioned the IRRF 2 funds to specific implementing agencies, principally the 

Departments of Defense and State, and the U.S. Agency for International Development. 

IRMO does not have ownership of the funds. 

10
Interagency Discussions are Ongoing 

Within the Department of the Army, expired funds are normally retained at the 

headquarters level. The major Army commands request and are issued funds on a caseby-case basis for in-scope adjustments as funds are required. However, in the case of the 

expired IRRF 2 funds, GRD has been given custody of the $385.2 million under the 

Army’s control. While GRD cannot use these funds without notification to or prior 

approval from IRMO depending on the amount requested, IRMO’s procedures implicitly 

assign these funds to GRD and will address their need for funds on an obligation-byobligation basis. IRMO’s procedures seek to ensure that the proposed in-scope 

modification is a higher policy priority than other potential competing funding 

requirements. These procedures are designed to allow for a determination to be made on 

whether GRD’s financial needs reflect the best use of IRRF 2 funds in relation to 

requirements across all sectors and U.S. government agencies that are engaged in Iraq 

reconstruction. 

Normally, expired funds are not committed and are only obligated at the time that they 

are actually required for in-scope adjustments for contracts. The USACE CFO said that 

he has directed GRD to establish commitments using the IRRF 2 expired funds to cover 

the contingency requirements of all on-going IRRF construction contracts that had 

previously been obligated in Fiscal Year 2006 and that were then deobligated at the end 

of September 2006. This indicates that USACE plans to reserve and use all expired IRRF 

2 funds for GRD projects. 

In discussing our analysis with IRMO’s Chief Financial Officer on December 20, 2006, 

we were told that the use of expired funds has been the subject of considerable discussion 

between IRMO and GRD. The IRMO CFO also commented that the use of expired funds 

is but one aspect of a broader problem—how to manage future costs to complete work 

across the range of IRRF projects. When discussing our analysis with the USACE CFO 

on December 21, 2006, he told us that USACE has conducted a detailed review of the 

cost to complete its pre-September 30, 2006 IRRF-funded contracts and has quantified its 

need for the expired funds. He also said that he did not believe IRMO should be involved 

in reviewing individual actions, but rather its focus should be one of strategic direction as 

funds are not apportioned to USACE through IRMO. During an earlier discussion with 

the USACE CFO (on December 15, 2006), about our question on the status of actions 

that he previously told us he was taking15, he responded that he was continuing to vet the 

procedures on the expired IRRF appropriation with IRMO. The USACE CFO further 

observed that while he would agree that the Department of State is responsible for the 

management of the reconstruction effort, he believed that agencies receiving the IRRF 

funds are responsible for managing them. 

 

15 On September 7, 2006, the CFO told us that he had initiated discussions with the Office of Management 

and Budget to determine the validity of the method he was using for reserving and recording IRRF 2 funds 

and planned to initiate discussions with the Department of State, which is responsible for managing IRRF. 

11
While GRD has quantified its requirements for the use of the expired funds, IRMO’s 

procedures call for its approval on a case-by-case basis. We believe that having IRMO’s 

approval is a good start, but it may be challenging from a strategic perspective. In a 

January 16, 2007, discussion on how to ascertain if GRD’s proposed changes are the 

highest priority, IRMO officials told us that they cannot examine all requirements in 

advance as they are dependent on the contracting officers coming forward with proposed 

in-scope modifications. They also told us that the cost-to-complete reports provide a 

rough estimate on the need for expired funds, but not a hard figure. Further, the IRMO 

officials stated that GRD has most of the IRRF construction funds and other agencies 

such as the U.S. Agency for International Development and the Department of State—in 

their judgment—are likely to have limited need for expired funds. 

12
Conclusion and Recommendations 

Conclusion

At the time GRD took action to obligate funds for contingencies, it only had one of 

several legal opinions indicating that it was permissible. The legal advice provided to 

GRD and its parent command, USACE, changed from unacceptable—to acceptable—and 

finally unacceptable. The predominant legal counsel view at the time was that GRD’s 

proposed plan to obligate funds using unspecified vendors was not permissible. 

However, in February-March 2006, the period during which GRD implemented its plan 

to obligate IRRF 2 funds for contingencies, the then senior official in the DoD Office of 

General Counsel (Fiscal) orally indicated that this was permissible. Subsequently there 

was a change in personnel and the new senior official in the DoD Office of General 

Counsel (Fiscal) reached the opposite conclusion—that the proposed plan was not proper. 

This continued to be DoD’s position as of October 2006. Notwithstanding GRD and 

USACE requests for a formal opinion, none was ever issued. 

The funds we identified in our interim report as improper obligations, along with other 

available IRRF 2 funds, were deobligated and then allowed to expire on September 30, 

2006. As expired funds, they remain available for 5 years for in-scope contract 

modifications. After allowing these funds to expire, the Department of the Army and 

USACE returned them to GRD for its use. Reconstruction funds are made available at 

the discretion of senior IRMO staff and Chief of Mission. IRMO has procedures 

regarding the use of available IRRF 2 expired funds that require IRMO approval or 

notification depending on the amount. 

The use of expired funds has been the subject of considerable discussion between IRMO 

and GRD, and is but one aspect of a broader problem—how to manage future costs to 

complete work across the range of IRRF projects. USACE has conducted a detailed 

review of the cost to complete its pre-September 30, 2006, IRRF-funded contracts and 

has quantified its need for the expired funds. While GRD has quantified its requirements 

for the use of the expired funds, IRMO’s procedures call for its approval on a case-bycase basis to ensure the best use of limited funds. We believe that having IRMO’s 

approval is a good start, but it may be challenging from a strategic perspective. 

Recommendations 

As GRD has addressed our previous recommendation to safeguard the availability of the 

$362 million that had been improperly obligated, and because actions are underway to 

clarify the use of the expired IRRF 2 funds, we make no further recommendations. 

Management Comments and Audit Response 

This report contains no recommendations; therefore no written response was required. A 

draft of this report was provided to USACE and IRMO. USACE officials responded with 

no comments to add. IRMO officials provided technical comments, which were 

addressed in the final report. IRMO officials concurred and had no additional comments. 

13
Appendix A – Scope and Methodology 

On September 22, 2006, we issued an interim audit report on what we detected to be 

$362 million in improper Iraq Relief and Reconstruction Fund (IRRF) obligations 

recorded by the U.S. Army Corp of Engineers (USACE) Gulf Region Division (GRD) 

during our ongoing audit of unmatched disbursements.16 As a result of our interim 

findings, we further reviewed the circumstances related to these questionable funds and 

subsequent actions taken or planned by GRD regarding the use of these funds (Project 

6036). 

The overall objective of this audit was to describe the events surrounding GRD’s decision 

to obligate the funds in question in Fiscal Year 2006 for future contingency requirements 

beyond Fiscal Year 2006, why GRD believed that it was proper to do so, and what has 

became of those funds. Specifically, the objectives of the audit were to determine: 

• What legal guidance was provided to GRD on whether it could obligate IRRF 2 

funds for contingencies? 

• What became of the funds associated with the obligations that we questioned as 

improper? 

• What procedures are in place regarding IRRF 2 expired funds? 

To determine what legal guidance was provided GRD on whether it could obligate IRRF 

2 funds for contingencies, we held discussions with officials from each of the following 

General Counsel offices within the Department of Defense: 

• GRD Division Counsel 

• USACE Office of the Chief Counsel 

• Department of the Army, Office of General Counsel 

• DoD Office of General Counsel (Fiscal) 

We reviewed relevant documents, including GRD’s January 28, 2006, plan entitled IRRF 

II Contingency Management Plan and Financial Guidance for FY 06 and correspondence 

discussing the plan. We also held a conference call with USACE’s Chief Financial 

Officer (CFO) and GRD’s Commanding General to discuss the basis for their actions. 

In order to determine what became of the funds associated with the obligations we 

questioned as improper, we obtained the IRRF 2 Funding Authorization Documents from 

the Office of the Assistant Secretary of the Army (Financial Management and 

Comptroller) and from USACE that were issued at the end of Fiscal Year 2006 and at the 

beginning of Fiscal Year 2007. We reviewed those documents and developed 

spreadsheets to chronicle the actions taken in the Funding Authorization Documents. We 

 

16 Interim Audit Report on Improper Obligations Using the Iraq Relief and Reconstruction Fund (IRRF 2), 

(SIGIR-06-037, September 22, 2006). 

14
also held discussions with the USACE CFO and other USACE financial management 

officials. 

To determine the procedures that were in place for expired IRRF 2 funds, we contacted 

USACE and Iraq Reconstruction Management Office (IRMO) officials. We reviewed 

GRD documents describing IRMO’s procedures and IRMO’s November 28, 2006, 

memorandum prescribing procedures for expired IRRF funds. We also reviewed Public 

Law 108-106, the Emergency Supplemental Appropriations Act for Defense and for the 

Reconstruction of Iraq and Afghanistan, to identify how Congress intended funds be 

allocated. 

 

We performed this review from July 21, 2006, through December 21, 2006, in 

accordance with generally accepted government auditing standards. 

Use of Computer-Processed Data 

To perform this audit we used data that originated in the U.S. Army Corps of Engineers 

financial management system. We did not test the general or application controls of this 

system. However, to determine data validity, we compared the system data to source 

documents (contract delivery orders, shipment receiving documents, and contractor 

invoices). This assessment indicated the data was sufficiently reliable to fairly portray the 

obligations recorded without vendor names. 

Prior Coverage 

We reviewed applicable reports issued by SIGIR. 

• Interim Audit Report on Improper Obligations Using the Iraq Relief and 

Reconstruction Fund (IRRF 2) (SIGIR-06-037, September 22, 2006) 

• Iraq Reconstruction: Lessons in Contracting and Procurement (SIGIR Report 

Number 2, July 2006) 

• Review of the U.S. Agency for International Development’s Management of the 

Basrah Children’s Hospital Project (SIGIR-06-026, July 31, 2006) 

• Review of the Use of Definitization Requirements for Contracts Supporting 

Reconstruction in Iraq (SIGIR-06-019, July 28, 2006)

• Management of the Primary Healthcare Centers Construction Projects (SIGIR06-011, April 29, 2006) 

• Iraq Reconstruction: Lessons in Human Capital Management (SIGIR Report 

Number 1, January 2006)

15
Appendix B – Acronyms 

ACRONYM DESCRIPTION 

CFO Chief Financial Officer

DoD Department of Defense 

GAO Government Accountability Office 

GRD Gulf Region Division, U.S. Army Corps of Engineers 

IRRF 2 Iraq Relief and Reconstruction Fund 2 

IRMO Iraq Reconstruction Management Office 

PCO Project and Contracting Office 

SIGIR Special Inspector General for Iraq Reconstruction 

USACE U.S. Army Corps of Engineers 

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Appendix C – Report Distribution 

Department of State 

Secretary of State 

Senior Advisor to the Secretary and Coordinator for Iraq 

Director of U.S. Foreign Assistance/Administrator, U.S. Agency for 

International Development 

 Director, Office of Iraq Reconstruction 

 Assistant Secretary for Resource Management/Chief Financial Officer, 

 Bureau of Resource Management 

U.S. Ambassador to Iraq 

Director, Iraq Reconstruction Management Office* 

Mission Director-Iraq, U.S. Agency for International Development 

Inspector General, Department of State 

Department of Defense 

Secretary of Defense 

Deputy Secretary of Defense 

Under Secretary of Defense (Comptroller)/Chief Financial Officer 

 Deputy Chief Financial Officer 

 Deputy Comptroller (Program/Budget) 

Deputy Assistant Secretary of Defense-Middle East, Office of Policy/International 

Security Affairs 

Inspector General, Department of Defense 

Director, Defense Contract Audit Agency 

Director, Defense Finance and Accounting Service 

Director, Defense Contract Management Agency 

Department of the Army 

Assistant Secretary of the Army for Acquisition, Logistics, and Technology 

Principal Deputy to the Assistant Secretary of the Army for Acquisition, 

Logistics, and Technology 

Deputy Assistant Secretary of the Army (Policy and Procurement) 

Director, Project and Contracting Office 

Commanding General, Joint Contracting Command-Iraq/Afghanistan 

Assistant Secretary of the Army for Financial Management and Comptroller 

Chief of Engineers and Commander, U.S. Army Corps of Engineers 

 Commanding General, Gulf Region Division 

Chief Financial Officer, U.S. Army Corps of Engineers* 

Auditor General of the Army 

U.S. Central Command

Commanding General, Multi-National Force-Iraq 

Commanding General, Multi-National Corps-Iraq 

Commanding General, Multi-National Security Transition Command-Iraq 

Commander, Joint Area Support Group-Central 

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Other Federal Government Organizations 

Director, Office of Management and Budget 

Comptroller General of the United States 

Inspector General, Department of the Treasury 

Inspector General, Department of Commerce 

Inspector General, Department of Health and Human Services 

Inspector General, U.S. Agency for International Development 

President, Overseas Private Investment Corporation 

President, U.S. Institute for Peace 

Congressional Committees and Subcommittees, Chairman and 

Ranking Minority Member 

U.S. Senate 

Senate Committee on Appropriations 

Subcommittee on Defense 

Subcommittee on State, Foreign Operations and Related Programs 

Senate Committee on Armed Services 

Senate Committee on Foreign Relations 

Subcommittee on International Operations and Terrorism 

Subcommittee on Near Eastern and South Asian Affairs 

Senate Committee on Homeland Security and Governmental Affairs 

Subcommittee on Federal Financial Management, Government Information and 

International Security 

Subcommittee on Oversight of Government Management, the Federal 

Workforce, and the District of Columbia 

U.S. House of Representatives 

House Committee on Appropriations 

Subcommittee on Defense 

Subcommittee on Foreign Operations, Export Financing and Related Programs 

Subcommittee on Science, State, Justice and Commerce and Related Agencies 

House Committee on Armed Services 

House Committee on Government Reform 

Subcommittee on Management, Finance and Accountability 

Subcommittee on National Security, Emerging Threats and International 

Relations 

House Committee on International Relations 

Subcommittee on Middle East and Central Asia 

*Recipient of the draft audit report. 

18
Appendix D – Audit Team Members 

This report was prepared and the review was conducted under the direction of Joseph T. 

McDermott, Assistant Inspector General for Audit, Office of the Special Inspector 

General for Iraq Reconstruction. The staff members who contributed to the report 

include: 

Karen Bell 

Shawn Kline 

Kenneth Littlefield 

Richard McVay 

Steven Sternlieb 

Jason Venner 

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SIGIR’s Mission Regarding the U.S. reconstruction plans, programs, 

and operations in Iraq, the Special Inspector General 

for Iraq Reconstruction provides independent and 

objective: 

• oversight and review through comprehensive 

audits, inspections, and investigations 

• advice and recommendations on policies to 

promote economy, efficiency, and effectiveness 

• deterrence of malfeasance through the prevention 

and detection of fraud, waste, and abuse 

• information and analysis to the Secretary of 

State, the Secretary of Defense, the Congress, 

and the American people through Quarterly 

Reports 

Obtaining Copies of SIGIR 

Reports and Testimonies 

To obtain copies of SIGIR documents at no cost, go 

to SIGIR’s Web site (www.sigir.mil). 

To Report Fraud, Waste, 

and Abuse in Iraq Relief 

and Reconstruction 

Programs 

Help prevent fraud, waste, and abuse by reporting 

suspicious or illegal activities to the SIGIR Hotline: 

• Web: www.sigir.mil/submit_fraud.html 

• Phone: 703-602-4063 

• Toll Free: 866-301-2003 

Congressional Affairs Marthena Cowart 

Assistant Inspector General for Congressional 

 Affairs 

Mail: Office of the Special Inspector General 

 for Iraq Reconstruction 

 400 Army Navy Drive 

 Arlington, VA 22202-4704 

Phone: 703-604-0368 

Email: marthena.cowart@sigir.mil 

Public Affairs Denise Burgess 

Assistant Inspector General for Public Affairs 

Mail: Office of the Special Inspector General 

 for Iraq Reconstruction 

 400 Army Navy Drive 

 Arlington, VA 22202-4704 

Phone: 703-428-1217 

Fax: 703-428-0818 

Email: PublicAffairs@sigir.mil 

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