Audit

 Report 

Oversight of Funds Provided to Iraqi Ministries 

through the National Budget Process 

Report No. 05-004 January 30, 2005 

Office of the Special Inspector General for Iraq Reconstruction
SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION 

400 Army Navy Drive • Arlington, Virginia 22202

January 30, 2005 

MEMORANDUM FOR U.S. AMBASSADOR TO IRAQ 

 DIRECTOR, DEFENSE SUPPORT OFFICE - IRAQ 

SUBJECT: Oversight of Funds Provided to Iraqi Ministries through the National Budget 

Process (Report No. 05-004) 

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

accordance with our statutory duties contained in Public Law 108-106, which mandated that we 

conduct audits relating to the treatment, handling, and expenditure of funds by the Coalition 

Provisional Authority (and its successor entities) on Iraq reconstruction, and of the programs, 

operations, and contracts carried out in utilizing such funds. 

We considered management comments provided in response to a draft of this report when 

preparing the final report. Additional comments to this report are not required. 

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

report, please contact Mr. Brian M. Flynn at (703) 343-9440 or Mr. Robert M. Murrell at 

(703) 428-0240. We will provide a formal briefing on the results of the audit, if desired. See 

Appendix H for the report distribution. 

Stuart W. Bowen, Jr. 

Inspector General 
Office of the Special Inspector General for Iraq Reconstruction 

Report Number 05-004 January 30, 2005 

 (Project No. D2004-DCPAAC-0007) 

Oversight of Funds Provided to Iraqi Ministries 

through the National Budget Process 

Executive Summary

Introduction. This audit report discusses the oversight of Development Fund for Iraq 

(DFI) funds provided to Interim Iraq Government (IIG) ministries through the national 

budget process. The Coalition Provisional Authority (CPA) was the authority responsible 

for the temporary governance of Iraq through June 28, 2004. Thereafter, the IIG was the 

authority responsible for the governance of Iraq. Therefore, this report does not address 

the CPA management or use of U.S. appropriated funds. 

Objective. The original objective of the audit was to determine whether the CPA had 

implemented adequate procedures for recording, reviewing, and reporting disbursements. 

During the audit, we limited the scope to review procedures and controls to only DFI 

funds provided to the interim Iraqi government through the national budget process. 

Specifically, we determined whether the CPA established and implemented adequate 

managerial, financial, and contractual controls over DFI disbursements provided to 

interim Iraqi ministries through the national budget process. 

Results. The CPA provided less than adequate controls for approximately $8.8 billion in 

DFI funds provided to Iraqi ministries through the national budget process. Specifically, 

the CPA did not establish or implement sufficient managerial, financial, and contractual 

controls to ensure DFI funds were used in a transparent manner. Consequently, there was 

no assurance the funds were used for the purposes mandated by Resolution 1483. 

• Managerial Controls. The CPA did not implement adequate managerial controls 

over DFI funds provided to Iraqi ministries through the national budget process. 

Specifically, authorities and responsibilities over DFI funds were not clearly 

assigned, and CPA regulations, orders, and memoranda did not contain clear 

guidance regarding the procedures and controls for disbursing funds for the 

national budget. 

• Financial Controls. The CPA did not implement adequate financial controls to 

ensure DFI funds were properly used. Specifically, the CPA did not exercise 

adequate responsibility over DFI funds provided to Iraqi ministries through the 

national budget process. Additionally, although the CPA published approved 

national budgets and total disbursements to Iraqi ministries on the Internet, it was 

not transparent what the funds were actually used for. Lastly, the CPA did not 

maintain adequate documentation to support budget spending plans, budget 

disbursements, or cash allocations made by coalition forces. 

• Contract Controls. The CPA did not adequately control DFI contracting actions. 

Specifically, the CPA contracting office did not review contracting procedures at 
the Iraqi ministries. In addition, CPA senior advisors and staffs did not provide 

oversight of Iraqi ministry procurements or contracting operations and executed 

contracts through the national budget process that were not in compliance with 

CPA Memorandum Number 4 guidance. 

Conclusion. While acknowledging the extraordinarily challenging threat environment 

that confronted the CPA throughout its existence and the number of actions taken by 

CPA to improve the IIG budgeting and financial management, we believe the CPA 

management of Iraq’s national budget process and oversight of Iraqi funds was burdened 

by severe inefficiencies and poor management. Although we did not include all aspects 

of the threat environment or all CPA actions to improve the IIG budgeting and financial 

management in our audit scope and, therefore, cannot verify the validity of statements 

made. The management comments to this report provide the detailed opinions of the 

CPA Administrator and the Defense Support Office – Iraq on those issues. 

Finally, although formal recommendations were not made in this report, we believe that 

the results of this audit dictate that lessons learned studies should be performed 

addressing not only the planning for specific managerial, financial, and contractual 

controls in future situations of this nature but also the national planning aspects necessary 

to overall management of these type of endeavors should they occur in the future. We 

are aware that other organizations have similar concerns. For example, the Office of the 

Secretary of Defense has initiated lessons learned studies concerning financial and 

logistics issues. However, we believe that those specific studies need to be brought 

together so that efforts can be better coordinated and be used to assist in formulating 

national planning initiatives. As such, rather than recommend others to perform this 

work, the SIGIR will take on the task of consolidating lessons learned studies that are 

specific in nature and also continue a broader scope lessons learned initiative previously 

started by this organization. 

Management Comments and Audit Response. The initial comments on a draft of this 

report were received on July 18, 2004, from the Director, Iraq Reconstruction 

Management Office. The Director and the Senior Advisor to the Ministry of 

Finance/Office of Management and Budget concurred with the report. Subsequently, the 

Defense Support Office - Iraq disagreed with the report by providing informal comments 

on July 20, 2004, and revised informal comments on August 12, 2004. The CPA 

Administrator provided comments on September 8, 2004, and the Director of the Defense 

Support Office – Iraq provided comments on October 7, 2004. Those comments are 

included in the Management Comments section of the report. 

The CPA Administrator and the Director, Defense Support Office – Iraq disagreed with 

the audit finding and stated the report did not acknowledge the difficult operational 

context in which the CPA was operating and did not recognize the actions taken to 

improve weaknesses in the Iraqi budgeting and financial management. We revised our 

report to address the comments from the CPA Administrator regarding the situation the 

CPA found in Iraq when it assumed control. However, their comments did not cause us 

to change our conclusion that the CPA did not establish or implement sufficient 

managerial, financial, and contractual controls to ensure DFI funds were used in a 

transparent manner or that there was no assurance the funds were used for the purposes 

mandated by Resolution 1483. See the Finding section of the report for a discussion of 

the management comments and the Management Comments section of the report for the 

complete text of the comments. 

ii 
Table of Contents 

Executive Summary i 

Introduction 

Background 1 

Objective 4 

Finding 

Oversight of Funds Provided to Iraqi Ministries 5 

Appendixes 

A. Scope and Methodology 20 

B. United Nations Security Council Resolution 1483 23 

C. United Nations Security Council International Advisory and 

Monitoring Board Terms of Reference 24 

D. Coalition Provisional Authority Regulation Number 2 25 

E. Development Fund for Iraq Disbursements by Agency 27 

F. Development Fund for Iraq Financial Reporting Matrix 28 

G. Acronyms 29 

H. Report Distribution 30 

I. Audit Team Members 32 

Management Comments 

Ambassador L. Paul Bremer III 

 Administrator, Coalition Provisional Authority 33 

Director, Defense Support Office – Iraq 41 
1

Background 

This audit report discusses the oversight of Development Fund for Iraq (DFI) funds provided to 

Interim Iraq Government (IIG) ministries through the national budget process. The Coalition 

Provisional Authority (CPA) was the authority responsible for the temporary governance of Iraq 

through June 28, 2004. Thereafter, the IIG was the authority responsible for the governance of 

Iraq. Therefore, this report does not address the CPA management or use of U.S. appropriated 

funds. 

Coalition Provisional Authority 

Appointment of the Presidential Envoy to Iraq. In a letter dated May 9, 2003, the President of 

the United States appointed Ambassador L. Paul Bremer III as the Presidential Envoy to Iraq to 

report through the Secretary of Defense. Ambassador Bremer was authorized to oversee, direct, 

and coordinate all United States Government (USG) programs and activities in Iraq (subject to 

the authority, direction, and control of the Secretary of Defense), except those under the 

command of the Commander, U.S. Central Command. Ambassador Bremer’s authority included 

the responsibility to oversee the use of USG appropriations in Iraq, as well as Iraqi state- or 

regime-owned property that was properly under U.S. possession, and made available for use in 

Iraq to assist the Iraqi people and support the recovery of Iraq. The appointment letter further 

provided that all USG elements in Iraq, other than those under the command of the Commander, 

U.S. Central Command, operated under Ambassador Bremer’s authority and were to keep him 

fully informed of their activities. 

Coalition Provisional Authority Regulation Number 1. CPA Regulation Number 1, 

May 16, 2003, was issued by Ambassador Bremer “Pursuant to my authority as Administrator of 

the Coalition Provisional Authority, relevant United Nations Security Council resolutions, 

including Resolution 1483 (2003), and the laws and usages of war. . . .” 

CPA Regulation Number 1 stated “The CPA shall exercise powers of government temporarily in 

order to provide for the effective administration of Iraq during the period of transitional 

administration. . . .” CPA Regulation Number 1 also stated: 

The CPA is vested with all executive, legislative and judicial authority 

necessary to achieve its objectives, to be exercised under relevant UN 

Security Council resolutions, including Resolution 1483 (2003), and the 

laws and usages of war. This authority shall be exercised by the CPA 

Administrator. 

The Development Fund for Iraq 

The Development Fund for Iraq. United Nations (UN) Security Council Resolution 1483 

(Resolution 1483), May 22, 2003, noted the establishment of the DFI and assigned responsibility 

for managing the fund to the CPA. Resolution 1483 noted that DFI funds should be disbursed at 

the direction of the CPA, in consultation with the Iraqi interim administration. It also required 

the DFI funds be used in a transparent manner to meet the humanitarian needs of the Iraqi 

people, for the economic reconstruction and repair of Iraq’s infrastructure, for the continued 

disarmament of Iraq, for the costs of Iraqi civilian administration, and for other purposes 

benefiting the people of Iraq. See Appendix B for excerpts from Resolution 1483 concerning the 

DFI. 
2

International Advisory and Monitoring Board. Resolution 1483 established the International 

Advisory and Monitoring Board (IAMB)1 of the DFI to perform functions similar to those of an 

outside audit committee. The letter from the Secretary-General to the President of the Security 

Council, dated October 22, 2003, established and approved the terms of reference for the IAMB. 

The terms of reference stated that the scope of the external audits shall encompass, among other 

things, 

(iv) disbursements of resources from the DFI, supporting the objective of 

ensuring that DFI funds are used for the purposes for which they were disbursed. 

For purposes of (iv), the External Auditor(s) will make (a) a determination as to 

whether the disbursements from the DFI are duly authorized and received by the 

designated recipient; and (b) an assessment as to whether the controls (including 

the requirement to ensure proper records) of the designated recipient are 

adequate to ensure that disbursements from the DFI are utilized as intended. 

See Appendix C for excerpts from the IAMB terms of reference letter. 

Administration of the Development Fund of Iraq 

Coalition Provisional Authority Regulation Number 2. CPA Regulation Number 2, 

“Development Fund for Iraq,” June 10, 2003, was issued by Ambassador Bremer “Pursuant to 

my authority as Administrator of the Coalition Provisional Authority (CPA), relevant UN 

Security Council resolutions, including Resolution 1483 (2003), and the laws and usages of war. 

. . .” 

According to CPA Regulation Number 2, the guidance was issued for the following purpose. 

This Regulation applies to the administration, use, accounting and 

auditing of the Development Fund for Iraq (the “Fund”). The Regulation 

is intended and shall be applied to ensure that the Fund is managed in a 

transparent manner for and on behalf of the Iraqi people, consistent with 

Resolution 1483, and that all disbursements from the Fund are for 

purposes benefiting the people of Iraq. 

See Appendix D for excerpts from CPA Regulation Number 2 concerning the DFI. 

Development Fund for Iraq Internal Control Review. CPA Regulation Number 2 required 

the CPA to obtain the services of an independent certified public accounting firm to ensure the 

fund was administered and used in a transparent manner for the benefit of the people of Iraq. In 

October 2003, the CPA awarded a $1.4 million contract to NorthStar Consultants, Inc., to 

evaluate the design and effectiveness of the internal control system over the DFI. The contract 

required the contractor to issue a written report evaluating the CPA internal controls and 

providing the results of its reviews of the CPA administration, use, and operation of the DFI. 

Coalition Provisional Authority Regulation Number 3. CPA Regulation Number 3, “Program 

Review Board,” June 18, 2003, was issued by Ambassador Bremer “Pursuant to my authority as 

Administrator of the Coalition Provisional Authority (CPA), and consistent with relevant UN 

Security Council resolutions, including Resolution 1483 (2003), and the laws and usages of war. 

. . .” 

 

1

 According to Resolution 1483, the IAMB members include representatives lo the Secretary-General of the United 

Nations, the Managing Director of the IMF, the Director-General of the Arab Fund for Social and Economic 

Development, and the President of World Bank. 
3

CPA Regulation Number 3 addressed the establishment of the Program Review Board. 

There is hereby established as a part of the CPA an entity to be known as the 

Program Review Board (“Board”). The Board shall report directly to the 

Administrator of the CPA (“Administrator”). The Board shall carry out its 

responsibilities, as defined in this Regulation, in a manner consistent with the 

CPA’s obligation to ensure that funds available to the CPA for providing relief 

to, and the recovery of Iraq are managed in a transparent manner and consistent 

with applicable law, for and on behalf of the Iraqi people. In addition, the Board 

shall, when and to the extent appropriate, consult the Iraqi interim 

administration referred to in paragraph 9 of Resolution 1483 (2003) [See 

Appendix B for paragraph 9 from Resolution 1483 concerning the Iraqi interim 

administration], and shall seek every opportunity to further the CPA’s objective 

of gradually transferring to the Iraqi interim administration the responsibility of 

budgeting Iraq’s financial resources. This Regulation establishes the procedures 

applicable to the Board’s operations. 

CPA Regulation Number 3 also addressed the general duties of the Program Review Board. 

The Board shall be responsible for recommending expenditures of resources 

from the Development Fund for Iraq and other resources identified in subsection 

6 (3) of this Regulation, in a manner that meets the interests of the people of 

Iraq, furthers CPA’s policy objectives, and comports fully with the CPA’s 

stewardship and financial management duties under applicable laws and 

regulations, including United Nations Security Council Resolution 1483 (2003). 

The Board shall not be responsible for overseeing the manner in which approved 

spending requirements are executed. 

Iraqi National Budget 

In May 2003, a primary objective of the CPA was to establish a functioning government that 

would provide basic services to the Iraqi people, such as the payment of salaries and ministry 

operating expenses. The CPA, in coordination with the IIG ministries, formulated and approved 

the Iraqi national budgets. Rather than adopting a new national budget system, the CPA used the 

existing Iraqi national budget system. The Iraqi budget system required each ministry and 

government agency to submit monthly spending plans that identified the amounts required for 

salaries, operating expenses, and capital expenditures throughout the country. The budget 

system also required each ministry to submit a monthly trial balance that detailed how the 

previous month’s allocation was spent before the release of the current month’s funds. 

The 2003 Iraqi national budget, developed by CPA, provided the authority for the commitment 

and expenditure of approximately $6.1 billion2

. The 2004 Iraqi national budget, approved by 

CPA in October 2003, authorized expenditures of approximately $13.4 billion; and a revised 

budget, approved by CPA in March 2004, increased authorized expenditures to approximately 

$19.9 billion. From October 2003 through June 24, 2004, the CPA disbursed approximately 

$8.8 billion in DFI funds through the national budget process for salaries, operating and capital 

expenditures,3 and capital projects. See Appendixes E and F for the DFI disbursements and 

financial reports posted on the CPA website. 

 

2

 Dollar figures in this report have been rounded. 

3 Capital expenditures include purchases of capital items necessary for the operation of a ministry, such as vehicles. 

They do not include capital projects or investments. 
4

Contracting Procedures for the Development Fund for Iraq 

CPA Memorandum 4, “Contract and Grant Procedures Applicable to Vested and Seized Iraqi 

Property and the Development Fund for Iraq, Implementation of Regulation Number 3, Program 

Review Board,” August 19, 2003, established procedures for executing contracts with DFI funds. 

Objective 

The original objective of the audit was to determine whether the CPA had implemented adequate 

procedures for recording, reviewing, and reporting disbursements. During the audit, we limited 

the scope to review procedures and controls to only DFI funds provided to the interim Iraqi 

government through the national budget process. Specifically, we determined whether the CPA 

established and implemented adequate managerial, financial, and contractual controls over DFI 

disbursements provided to interim Iraqi ministries through the national budget process. The 

scope and methodology used to perform this audit and the prior coverage are discussed in 

Appendix A. The acronyms used in this report are shown in Appendix G and the audit team 

members are shown in Appendix I. 
5

Oversight of Funds Provided to Iraqi Ministries 

The CPA provided less than adequate controls for approximately $8.8 billion in DFI funds 

provided to Iraqi ministries through the national budget process. Specifically, the CPA did not 

establish or implement sufficient managerial, financial, and contractual controls to ensure DFI 

funds were used in a transparent manner. Consequently, there was no assurance the funds were 

used for the purposes mandated by Resolution 1483. 

Managerial Controls 

The CPA did not implement adequate managerial controls over DFI funds provided to Iraqi 

ministries through the national budget process. Specifically, authorities and responsibilities over 

DFI funds were not clearly assigned, and CPA regulations, orders, and memoranda did not 

contain clear guidance regarding the procedures and controls for disbursing funds for the 

national budget. Further, staffing shortages and personnel turnover resulted in inadequate 

oversight of budget execution by the Iraqi ministries. 

Authorities and Responsibilities. Authorities and responsibilities over the Iraq national budget 

funds were not clearly delineated. The CPA Administrator signed a memorandum on July 4, 

2003, delegating authority to the CPA Senior Advisor for the Iraqi Ministry of Finance to 

administer the affairs of the Ministry of Finance, including the management of the IIG finances 

and the preparation, execution, and financing of the Iraq national budget. The memorandum 

stated the delegation of authority may be revoked at any time by the CPA Administrator or upon 

appointment of an interim minister by the IIG. CPA officials stated the delegation of authority 

was revoked when the Interim Iraqi Minister to the Ministry of Finance was appointed. 

However, CPA personnel were unable to provide a memorandum delegating authority to the 

Interim Iraqi Minister to the Ministry of Finance. 

Additionally, CPA senior advisors' responsibilities for oversight of DFI financial and contracting 

actions in the Iraqi ministries were not clear. During discussions with nine senior advisors 

and/or senior consultants, CPA personnel stated that responsibilities over DFI funds were not 

clearly communicated to them. Consequently, 7 of 9 CPA senior advisors and staffs provided 

inadequate oversight of their respective Iraqi ministries’ financial operations. Further, senior 

advisors and staffs were not provided orientation or training on financial or contract duties and 

responsibilities. One senior advisor requested guidance from the CPA Office of General 

Counsel. In response, through an email dated February 21, 2004, the CPA Office of General 

Counsel stated the following: 

There are no written guidelines delineating the senior advisors’ role, 

responsibilities and authorities. The Administrator expects the interim Iraqi 

Ministers to assume responsibility for and exercise authority over all recurring, 

day-to-day functions of their Ministries. We’re increasingly empowering the 

interim Ministers, consistent with their capacities. The senior advisors serve as 

the primary liaison between the Administrator and the Ministers. They provide 

advice and assistance to the Ministers, but do not exercise decision making 

authority over routine ministry matters. The advisors are expected to keep the 

Administrator fully informed of activities within their Ministries, and ensure 

proper development, coordination, promulgation and implementation of any 

ministry policy initiatives that extend beyond routine ministry functions. 
6

Coalition Provisional Authority Guidance. CPA regulations, orders, and memoranda did not 

contain clear guidance regarding responsibilities, procedures, and controls for disbursing DFI 

funds for the national budget. CPA Regulation Number 2 stated that procedures for disbursing 

funds from the DFI would be prescribed in the CPA Order (subsequently established by CPA 

Regulation Number 3) establishing the Program Review Board (PRB). However, neither the 

CPA Regulation Number 3 that established the PRB nor the CPA Memorandum Number 4 that 

implemented CPA Regulation Number 3 included procedures regarding DFI disbursements to 

Iraqi ministries, except to state the CPA Office of Management and Budget (OMB) would 

allocate the funds. Additionally, CPA Regulation Number 3 assigned responsibility to the PRB 

Program Review Committee to distribute procedures for submitting funding requests. However, 

we were not able to locate any procedures regarding requests for funds to be disbursed to the 

Iraqi ministries. Lastly, CPA Regulation Number 3 stated the PRB would not be responsible for 

overseeing the manner in which approved spending requirements were executed, and we were 

unable to locate any other CPA guidance that assigned responsibility for providing oversight of 

DFI disbursements to IIG ministries. Consequently, documentation was not available to support 

disbursements to Iraqi ministries or explain significant differences between budget 

disbursements, ministry spending plans, and cash allocations. 

Staffing and Personnel Turnover. According to CPA officials, the CPA Ministry of 

Finance/OMB experienced critical personnel shortfalls throughout 2003 and 2004. For example, 

during Fall 2003, when new salary policies were being implemented and the 2004 Iraq national 

budget was being revised, there were only six staff members assigned to the OMB budget team 

and all were inexperienced in government budget procedures. In addition, key financial 

management positions (Chief Financial Officer, Comptroller, and Senior Advisor to Ministry of 

Finance/Director of OMB) turned over on an average of three times since June 2003, and the 

Chief Financial Officer position was vacant for over three months. Finally, 3 of 9 IIG ministries 

we visited did not have personnel assigned to financial and/or budget positions. 

Financial Controls 

The CPA did not implement adequate financial controls to ensure DFI funds were properly used. 

Specifically, the CPA did not exercise adequate responsibility over DFI funds provided to Iraqi 

ministries through the national budget process. Additionally, although the CPA published 

approved national budgets and total disbursements to Iraqi ministries on the Internet, it was not 

transparent what the funds were actually used for. Lastly, the CPA did not maintain adequate 

documentation to support budget spending plans, budget disbursements, or cash allocations made 

by coalition forces. External assessments and allegations of corruption in Iraq’s ministries under 

the Oil-for-Food program should have raised concerns about the Iraqi government's ability to 

manage DFI Funds. 

Responsibilities Over Funds Provided to Iraq Ministries Through the Development Funds 

for Iraq. The CPA did not exercise adequate responsibility over DFI funds provided to Iraqi 

Ministries through the national budget process. Specifically, the CPA disbursed over $8.8 billion 

in DFI funds to the Iraqi ministries without assurance the monies were properly used or 

accounted for. Neither CPA Ministry of Finance/OMB nor CPA senior advisors reviewed the 

internal controls in the Iraqi ministries. Further, CPA personnel did not review and compare 

financial, budgetary, and operational performance to planned or expected results. According to 

CPA Ministry of Finance/OMB officials, reviewing budget execution was not their 

responsibility. Rather, CPA personnel stated they relied on the Iraqi Board of Supreme Audit 

and had taken steps, such as appointing the inspectors general (which was not completed until 

May 2004) and establishing the Commission on Public Integrity, to build internal control and 

accountability measures at IIG ministries. However, these institutions were not yet functioning 
7

and should not have been relied upon to monitor the Iraqi ministries use of DFI funds in 2003 

and 2004. Resolution 1483 required the CPA to disburse funds from the DFI in a transparent 

manner to meet the needs of the Iraqi people. By not adequately reviewing the use of and 

accounting for the DFI funds provided to the Iraqi ministries, the CPA did not meet the mandate 

of Resolution 1483 with respect to this issue. 

 Controls at Iraqi Ministries. CPA officials did not review budget execution at Iraqi 

ministries even though external assessments indicated budget and financial control systems 

required strengthening. In June 2003, the International Monetary Fund (IMF) provided 

preliminary observations to CPA officials that noted the most urgent issue in the financial area 

was not budget planning but budget execution. Further, an October 2003 IMF assessment 

indicated the Iraqi ministries implementation of the budget would require a strengthening of 

payment and accounting functions, procurement procedures, and internal and external audit 

functions. The assessment also noted the difficulties that the Iraqi ministries were facing due to 

lack of staff, the security environment, disruptions in communications, damage and looting of 

government buildings, and lack of infrastructure and fiscal policies from before the occupation. 

In addition, a management consultant for the United States Agency for International 

Development reviewed internal controls at one Iraqi ministry in April 2004 and concluded 

financial management and internal controls over the ministry’s approximate $435 million budget 

were either weak or non-existent and the financial process was open to fraud, kickbacks, and 

misappropriation of funds. In light of the problems noted in the Iraqi ministries, combined with 

the lack of the financial reports4

 for DFI spending, CPA officials should have reviewed internal 

controls and assisted the Iraqi ministries in preparing financial, budgetary, and operational 

performance reports. 

In response to our draft audit, the CPA Administrator stated that, given the hostile situation the 

CPA found in Iraq, it was unrealistic for the coalition to achieve a standard of budgetary 

transparency and execution in the midst of a war. He stated there was no functioning Iraqi 

government, essential services were primitive or nonexistent, there was no national telephone 

system, and most Iraqi ministries had no computers. He further stated that Iraqi government 

budget and personnel records were destroyed by looting and sabotage and during Saddam’s era, 

less than 8 percent of annual state expenditures were run through the Ministry of Finance. He 

further stated that the CPA could find no reliable records of these “off budget” expenditures. He 

also stated the CPA discovered that the Iraqi ministries had no unified civil service pay system or 

regular payroll systems, and these systems had been corrupted beyond repair by decades of 

cronyism and ad hoc measures. Lastly, the CPA Administrator stated the Iraqi economy was 

"dead in the water;" so the CPA's top priority was to get the economy going. 

 Salary Payments. CPA did not implement adequate controls to ensure DFI funds were 

properly used for salaries of Iraqi employees.5 Consequently, there was no assurance funds were 

not provided for ghost employees. For example, CPA officials authorized payments of DFI 

funds for approximately 74,000 Facilities Protective Services (FPS) guards’ salaries even though 

the FPS sites and number of guards were not validated. CPA staff identified at one ministry that, 

although 8,206 guards were on the payroll, only 602 guards could be validated. CPA staff at 

another ministry validated the payroll at one FPS site and found that although 1,471 guards were 

on the payroll, only 642 guards could be validated. However, when the CPA staff recommended 

 

4

 As of June 15, 2004, the Iraqi Ministry of Finance had not developed financial reports for DFI funds spent in 2003, 

and told CPA officials that financial data for November and December was lost. 

5 Funds for salary payments were provided through the national budget process to the responsible Iraqi Treasury 

offices or the Iraqi Ministry of Finance. Coalition forces that hired the security forces (Iraqi Border Police, Iraqi 

Civil Defense Corps, Iraqi Armed Forces, and Facilities Protective Services) were responsible for salary payments 

until responsibilities were transferred to the Iraqi ministries. 
8

the Iraqi Ministry of Finance require certified payrolls prior to salary payments, CPA Ministry of 

Finance personnel stated the CPA would rather overpay salaries than risk not paying employees 

and inciting violence. Furthermore, CPA payroll guidance to Iraqi ministries and coalition 

forces responsible for salary payments required only spreadsheets with summary totals6 be 

provided to the Iraqi Treasury offices responsible for disbursing the funds. Additionally, the 

CPA Ministry of Finance did not require coalition forces to provide supporting documentation 

for salary payments made before transferring responsibilities for payroll management to the Iraqi 

ministries. For example, the CPA Ministry of Finance/OMB could not provide documentation to 

support approximately $17 million provided to coalition forces for FPS and Iraqi Civil Defense 

Corps salaries in February 2004. 

Transparency. The CPA sought to comply with the Resolution 1483 mandate for transparency 

by publishing the Iraqi national budgets and the total amounts of disbursements made to the Iraqi 

ministries on the Internet. For example, as of June 28, 2004, when the DFI was turned over to 

the IIG, the only budget information reported on the Internet was the approximately $8.8 billion 

in disbursements for ministry budgets and the total amounts provided to each ministry (see 

Appendixes E and F). However, transparency requires more than just posting budgets and total 

disbursements on the Internet. The CPA should have provided detailed budgetary, financial, and 

operational results of the DFI disbursements. Furthermore, although the UN provided 

approximately $2.5 billion dollars to the DFI in Oil-for-Food funds in March and April 2004, the 

CPA did not update the Iraqi national budget for the monies. 

Budget Documentation. Adequate documentation was not maintained to support budget 

disbursements. CPA Memorandum Number 4 stated that funds allocated through the national 

budget process would be made available to the IIG ministries in accordance with the national 

budget, and the CPA OMB would allocate the funds to the Iraqi Ministry of Finance for further 

distribution to the Iraqi ministries in a manner that would ensure transparency. A review of 

10 disbursements made by the CPA Comptroller’s office between October 2003 and June 2004 

disclosed: 

• None of the 10 disbursements - ranging between approximately $120 and $900 million - 

included documentation such as budget spending plans to support the amounts provided 

to the Iraqi ministries. 

• Six disbursements were made without CPA/OMB allocation memoranda. 

• Two disbursements totaling approximately $616 million were not supported by 

disbursement vouchers. 

• An improper approximately $120 million disbursement was made in May 2004 because 

of miscommunication between the CPA/OMB and CPA Comptroller’s office. 

Between January and April 2004, CPA OMB personnel developed the spending plans for the 

Iraqi ministries along with the cash allocations to be made to the banks to meet the monthly 

budget requirements. However, CPA OMB personnel were unable to provide supporting 

documentation or explain significant differences between the spending plans, budget 

disbursements, and cash allocations. For example, approximately $1.5 billion in cash allocations 

were made to Iraqi banks between January and April 2004 for operating expenses, yet spending 

plans supported only approximately $498 million in operating expenses. 

Financial Contractor Performance. In October 2003, the CPA awarded a $1.4 million contract 

to NorthStar Consultants, Inc. to evaluate the design and effectiveness of the internal control 

system over the DFI. The NorthStar Consultants, Inc., were not certified public accountants and 

 

6

 The CPA Ministry of Finance guidance required only summary totals of funds received, funds paid, number of 

employees by pay grade, and the remaining balance of funds. 
9

did not perform a review of internal controls as required by the contract. Consequently, internal 

controls over DFI disbursements to and from Iraqi ministries were not evaluated. This occurred 

because a Contracting Officers Representative was not assigned7 to monitor contractor 

performance. Further, the Comptroller verbally modified the contract and employed the 

contractor personnel to primarily perform accounting duties in the Comptroller’s office. 

Contract Controls 

The CPA did not adequately control DFI contracting actions. Specifically, the CPA contracting 

office reviewed contracting procedures at 2 of the 26 Iraqi ministries. In addition, CPA senior 

advisors and staffs did not provide oversight of Iraqi ministry procurements or contracting 

operations and executed contracts through the national budget process that were not in 

compliance with CPA Memorandum Number 4 guidance. This occurred because the CPA issued 

procurement and contracting policy but did not implement procedures to determine compliance 

with the policy or monitor contracting actions in the Iraqi ministries. Consequently, contracts 

were entered into without the benefit of adequate contract controls. 

Contracting Procedures. CPA Memorandum Number 4 established procedures for executing 

contracts with DFI funds. CPA Memorandum Number 4 required contracting officers to 

compete contracts and determine whether the contract price was fair and reasonable. Iraqi 

ministries and governmental agencies were also required to comply with the guidance in CPA 

Memorandum Number 4. An Iraqi ministry could execute contracts in accordance with Iraqi 

laws and ministry contracting procedures, but only if the CPA had determined and certified that 

the contracting procedures of the ministry were adequate to ensure the transparent use and 

management of DFI funds. If the contracting procedures of a particular Iraqi ministry were not 

determined to be adequate, the ministry was required to execute contracts through the CPA 

contracting office. However, the CPA contracting office reviewed and approved the contracting 

procedures of only two Iraqi ministries, the Ministry of Finance and the Ministry of Electricity, 

and those approvals did not occur until April 11, 2004, and June 26, 2004, respectively. 

Oversight. CPA senior advisors and staffs did not provide oversight of Iraqi ministry 

procurements or contracting operations. Specifically, 5 of 7 CPA senior advisors and staffs did 

not provide adequate oversight of Iraqi ministry contracting operations. Further, we requested 

that CPA ministry senior advisors obtain data for contracts awarded with DFI funds, and, as of 

June 30, 2004, only 3 of 26 CPA ministry senior advisors (Communications, Housing and 

Construction, and Interior) were able to provide contracting actions taken by the IIG ministries. 

One of the Iraqi ministries that provided data indicated over 250 contracts valued at 

approximately $430 million were executed without CPA ministry advisors visibility over the 

contracts. 

Unauthorized Contracting Actions. CPA senior advisors and staffs executed contracts through 

the national budget process without warrants or authority, and the contracts were not in 

compliance with CPA Memorandum Number 4 guidance. For example, a CPA senior advisor 

signed four Iraqi ministry contracts without competition, adequate contract specifications, or 

beneficial delivery terms and conditions. One of these contracts required full payment for three 

armored cars prior to shipment from Europe. Another CPA ministry advisor executed over 

 

7

 The contract assigned responsibility to monitor contractor performance to the CPA Chief Financial Officer. 

However, the Chief Financial Officer assigned as the Contracting Officers Representative left Iraq on November 15, 

2003, and when the Chief Financial Officer position was filled in March 2004 the newly assigned Chief Financial 

Officer was not assigned any duties over DFI funds or made aware of the NorthStar Consultants, Inc., contract. 
10

20 contracts without contract authority; and a review of 10 contract files disclosed that 

7 contracts were not competed and all 10 had missing or incomplete contract documentation. 

National Assembly Building. The Governance Directorate, working with the Al 

Rasheed Company through the Ministry of Housing and Construction, began renovation of the 

National Assembly building without complying with CPA Memorandum Number 4 guidance. 

Before hostilities began in March 2003, the Al Rasheed Company, an Iraqi state–ownedenterprise, began remodeling the National Assembly building. During the rioting and looting at 

the conclusion of the war, the building and nine others in the compound were severely damaged 

and looted. In October 2003, the Al Rasheed Company and the Iraq State Commission of 

Buildings drafted an agreement to refurbish the compound buildings for $1,019,676. 

Subsequently, the CPA Governance Directorate established a requirement to renovate the 

National Assembly Building and the other buildings in the surrounding compound, and the CPA 

Administrator approved a budget of $5 million for the renovation in February 2004 and an 

additional $8.2 million to complete the project in March 2004. During the course of the project, 

the CPA Governance Directorate project manager issued verbal direction to the contractor that 

incorrectly conveyed to Iraqi officials that he had authority to enter into sole source contracts, 

and he advised Iraqi officials that rules requiring public bidding of subcontracts did not apply to 

the National Assembly project. These conditions occurred because the CPA did not implement 

procedures to ensure compliance with CPA Memorandum Number 4. 

Conclusion 

While acknowledging the extraordinarily challenging threat environment that confronted the 

CPA throughout its existence and the number of actions taken by CPA to improve the IIG 

budgeting and financial management, we believe the CPA management of Iraq’s national budget 

process and oversight of Iraqi funds was burdened by severe inefficiencies and poor 

management. Although we did not include all aspects of the threat environment or all CPA 

actions to improve the IIG budgeting and financial management in our audit scope and, 

therefore, can not verify the validity of statements made. The management comments to this 

report provide the detailed opinions of the CPA Administrator and the Defense Support Office – 

Iraq on those issues. 

Formal recommendations were not made in this report because responsibility for the DFI 

transferred from the CPA to the IIG on June 28, 2004. However, the actions listed below that 

were taken by the IAMB and the CPA may mitigate the internal control weaknesses noted in the 

report. 

Assessment of Internal Controls. On April 5, 2004, the IAMB selected KPMG Audit 

and Risk Advisory Services, Bahrain to perform an audit of the DFI financial statements and 

disbursements from the DFI, and to provide an assessment of internal controls of the recipients 

of DFI funds to determine whether the funds were used in a transparent manner and for the 

purposes for which they were disbursed. On July 14 and October 12, 2004, KPMG provided 

reports to the IAMB covering audits of DFI operations through December 31, 2003, and June 28, 

2004, respectively. 

Coalition Provisional Authority Order Number 87. On May 16, 2004, the CPA 

Administrator approved CPA Order Number 87, “Public Contracts.” CPA Order Number 87 

applies to all procurements of goods, services, and construction services by Iraqi ministries, 

federal agencies, and governmental units that can commit public funds. CPA Order Number 87 

requires full, fair, and open competitive public bidding procedures, international standards of 

transparency, procurement process integrity and minimum ethical standards, rights to file 

protests and related appeals, and dispute resolution mechanisms. In addition, CPA Order 
11

Number 87 establishes an Office of Government Public Contract Policy that is responsible for 

coordination of government public contract policy for all ministries and public entities. 

Coalition Provisional Authority Order Number 95. On June 4, 2004, the CPA 

Administrator approved CPA Order Number 95, “Financial Management Law and Public Debt 

Law.” CPA Order Number 95 provides detailed guidance for the conduct of fiscal and budgetary 

policy in Iraq and includes reporting requirements aimed at increasing the accountability and 

transparency of the budgeting process. CPA Order Number 95 addresses the preparation, 

adoption, recording, management, execution, and reporting of the federal budget of Iraq and 

related issues including internal controls, accounting, and auditing. 

Finally, although formal recommendations were not made in this report, we believe that the 

results of this audit dictate that lessons learned studies should be performed addressing not only 

the planning for specific managerial, financial, and contractual controls in future situations of 

this nature but also the national planning aspects necessary to overall management of these type 

of endeavors should they occur in the future. We are aware that other organizations have similar 

concerns. For example, the Office of the Secretary of Defense has initiated lessons learned 

studies concerning financial and logistics issues. However, we believe that those specific studies 

need to be brought together so that efforts can be better coordinated and be used to assist in 

formulating national planning initiatives. As such, rather than recommend others to perform this 

work, the SIGIR will take on the task of consolidating lessons learned studies that are specific in 

nature and also continue a broader scope lessons learned initiative previously started by this 

organization. 

Management Comments and Audit Response

Coalition Provisional Authority Administrator. The management comments provided by the 

CPA Administrator and the audit response to those comments are discussed below. The 

complete text of the comments is in the Management Comments section of the report. 

Management Comments. The CPA Administrator disagreed with our report and stated that it 

did not acknowledge the context in which the CPA was operating or recognize the actions taken 

to improve weaknesses in the Iraqi budgeting system. He further stated that the report contained 

misconceptions, inaccuracies, and numerous factual errors that were brought to our attention by 

the Defense Support Office - Iraq and did not meet Inspector General standards. 

Audit Response. We disagree. One issue was brought to our attention by the Defense Support 

Office – Iraq concerning contracting procedures that were approved for the Ministry of 

Electricity on June 26, 2004. However, the CPA Head of Contracting Activity approved these 

procedures on June 26, 2004, after our fieldwork in contracting was complete and validated with 

contracting officials. We revised the final report to include that information. Otherwise, the 

CPA Administrator did not provide any documentation or evidence to substantiate any other 

misconceptions, inaccuracies, or factual errors. Further, as stated in the report, the audit was 

conducted in accordance with generally accepted government audit standards. 

Management Comments. The CPA Administrator stated that our report ignored the security 

context of the CPA role in Iraq and suggested the CPA should have delayed paying Iraqi public 

servants until fully modern pay records were implemented. He further stated more than a million 

Iraqi families depended on the government for their salaries and not paying the civil servants 

would have been destabilizing, would have increased the security threat to Iraqis and Americans, 

and would have cost lives. 
12

The CPA Administrator also stated military commanders were instructed to build up the FPS 

force quickly to relieve the military of tasks such as providing static security to government 

buildings. The CPA decided in November to give Iraqis responsibility for the FPS forces by 

shifting the forces' payroll from the military commanders to the Iraqi ministries. Many IIG 

ministries, already struggling to cope with the new budgetary demands, had difficulties making 

the transfer. The CPA was aware of the problem and accepted that the payroll system was still 

imperfect, as there was a war going on and it would have been dangerous for security to stop 

paying armed young men. 

Audit Response. The CPA Administrator’s criticisms are inappropriate. The report does not 

suggest the CPA should have delayed paying Iraqi public servants; instead, it addresses the lack 

of controls and supporting documentation for salary payments made by coalition forces to Iraqi 

security forces personnel. Specifically, the report addresses the CPA policy for coalition forces 

to support monthly salary payments with only summary information of total funds received and 

paid, and total number of employees by pay grade rather than certified payroll listings. The 

report also addresses the lack of supporting documentation maintained by the CPA. 

Furthermore, the six months that passed between the date the CPA decided to transfer payroll 

responsibilities and actually transferred those responsibilities to the Iraqi ministries was 

sufficient time to validate the payroll listings. 

Management Comments. The CPA Administrator stated that our report ignored the political 

context of the CPA role in Iraq. The USG policy, mandated by UN Security Council resolutions, 

was to transfer as much responsibility as possible as quickly as possible to the Iraqis, including 

responsibility for the Iraqi budget. Clear guidance was provided to CPA Senior Advisors that 

Iraqi ministers, not the Senior Advisors, would run the ministries, and that the Senior Advisors 

were to leave the operations of the ministries, including the budgets, to the Iraqis. He further 

stated the report suggested that instead of giving the Iraqi ministers responsibility for their 

budgets, the CPA should have placed hundreds of auditors into the IIG ministries and that would 

have been directly contrary to USG policy and to the mandate of the UN. 

Audit Response. The report does not suggest that CPA should have placed hundreds of auditors 

into the ministries or that CPA Senior Advisors should have run the ministries. Further, the 

report does not ignore the political context of the CPA role in Iraq but rather discusses the 

actions the CPA did not take to fulfill the responsibilities mandated by Resolution 1483 and the 

causes of those inactions. 

The CPA had a responsibility to determine whether the Iraqi ministries had basic financial 

controls in place prior to transferring full authority over to the ministries. This responsibility was 

mandated by the UN, acknowledged by USG officials, was documented in the CPA Strategic 

Plan and was documented in CPA guidance. 

UN Security Council Resolution 1511 required the return of responsibilities and authorities to 

the Iraqis as soon as practicable, but also reaffirmed Resolution 1483. The UN Security Council 

Secretary-General noted in an October 2003 letter8

 discussing IAMB responsibilities that the 

CPA was responsible for establishing financial reporting and internal control systems to ensure 

DFI funds were used for the purposes for which they were disbursed. 

 

8

 The letter from the UN Secretary-General to the President of the Security Council, October 22, 2003, stated one of 

the responsibilities of the IAMB was to monitor the financial reporting and internal control systems established by 

the CPA over disbursements from the DFI, supporting the objective of ensuring that DFI funds were used for the 

purposes for which they were disbursed. 
13

USG officials acknowledged these responsibilities. Specifically, 

• Secretary of State Colin Powell stated during a September 2003 press conference9 that 

one can’t just say, “You’re a government, fine, go. You have full authority.” He stated 

there needed to be a deliberate process that builds the institutions of government and 

capacity to govern prior to the handover of sovereignty. 

• The CPA Senior Advisor to the Ministry of Finance/Director of OMB notified all senior 

advisors in February 2004 that the CPA needed to determine whether there were adequate 

controls in the Iraqi ministries to ensure DFI disbursements were received by the 

designated recipient and used as intended. The Senior Advisor also requested the senior 

advisors provide the results of any internal reviews performed by their offices to ensure 

that proper controls were in place at the Iraqi ministries. 

• The CPA Administrator acknowledged the CPA fiduciary responsibilities in March 2004. 

Specifically, the CPA Administrator stated during the transfer of sovereignty10 to the 

Ministry of Health, which was the first Iraqi ministry to attain sovereignty, that the CPA 

gave full authority to the Iraqi ministries only after fundamental financial and budgetary 

controls were in place. However, the CPA did not review internal controls or the 

accounting and use of funds in the Ministry of Health prior to the transfer, and CPA 

officials stated they were unaware of the basis for the CPA Administrator's statement that 

controls were in place. 

• The CPA Press Secretary noted during the June 21, 2004, press briefing11 that coalition 

officials still had operational authority in the 11 Iraqi ministries that had not yet attained 

sovereignty. Since the Ministry of Finance was one of those 11 ministries, CPA officials 

still had operational authority and responsibility to ensure DFI funds were accounted for 

and properly used. 

The CPA Strategic Plan documented the CPA responsibilities. For example, two key objectives 

in the economy section of the Strategic Plan were to develop transparent budgeting and 

accounting arrangements and to increase the capacity of the Ministries of Finance and Planning 

to manage public resources. A key task under these objectives was to conduct reviews of Iraqi 

budget expenditure and control systems. However, this task was not accomplished by CPA. 

CPA Regulation Number 2 also documented the CPA responsibilities and required the CPA to 

obtain the services of an independent certified public accountant firm to ensure the fund was 

administered and used in a transparent manner. The CPA contract award required the contractor 

ensure disbursements were used for the purposes intended. Although the contractor submitted 

milestone reports stating they would review internal processes for controlling and documenting 

disbursements in the Iraqi ministries, the contractor did not perform these reviews. CPA 

Memorandum Number 4 further stated, as part of the CPA responsibility to ensure that funds 

were used for their intended purpose, the CPA Comptroller and Head of Contracting Activity 

could review contracting actions of interim Iraqi ministries. 

Management Comments. The CPA Administrator stated that our report ignored the 

administrative context of the CPA role in Iraq and presumed the coalition could achieve a 

standard of budgetary transparency and execution which even peaceful Western nations would 

 

9

 Transcript of press conference with Secretary of State Colin Powell and CPA Administrator L. Paul Bremer, 

Baghdad, Iraq, September 14, 2003. 

10 Transcript of CPA Administrator L. Paul Bremer, Transfer of Sovereignty to the Ministry of Health, March 27, 

2004. 

11 Transcript of press briefing with Dan Senor and Brigadier General Mark Kimmitt, Baghdad, Iraq, June 21, 2004. 
14

have trouble meeting within a year, especially in the midst of a war. When the CPA was 

established, there was no functioning Iraqi government and essential services were primitive or 

nonexistent. The Iraqi government budget and personnel records, inadequate before the war, had 

been destroyed and CPA determined that less than 8 percent of the annual state expenditures 

were run through the Ministry of Finance. The vast majority of government expenditures were 

directly controlled “off budget,” and the CPA could find no reliable records of these 

expenditures. The CPA discovered that the Iraqi ministries had no unified civil service pay 

system or regular payroll system and the systems had been corrupted beyond repair by decades 

of cronyism and ad hoc fixes. The CPA's top priority was to get the economy going, and the 

quickest way was to pay the country's 1.2 million civil servants who had not been paid for two 

months. CPA established a four-grade pay scale, started paying civil servants, and established a 

professional civil-service pay system that was put in place in August 2003. 

Audit Response. We disagree. Instead, the report discusses the actions the CPA did not take to 

fulfill it's responsibilities in light of this context. The audit's presumption that the USG should 

have practiced sound financial management and internal control over Iraqi monies is both 

realistic and supported by extensive legislation, policies, and procedures. 

We fully recognize that the CPA operated in a dangerous working environment under difficult 

conditions. However, the existing administrative conditions should have underscored the need 

for controls over the disbursements to the Iraqi ministries. The CPA should have established 

controls and provided oversight over the financial management of the DFI funds precisely 

because there was no functioning Iraqi government, no experience within the Ministry of 

Finance in managing the national budget, no budget or personnel records, and the payroll 

systems were corrupted by cronyism and ad hoc fixes. On an individual basis, any of these 

conditions should have sent strong signals to financial managers that weaknesses were 

widespread, posed unacceptable risks, and called for forceful action. Those weaknesses should 

have represented goals for corrective actions, not reasons for inaction. 

Management Comments. The CPA Administrator stated that our report did not adequately 

credit the major reforms the CPA instituted to deal with the deficiencies found in the Iraqi 

budgeting system. The CPA established the PRB to provide an open transparent mechanism for 

determining how to spend DFI funds; ensured there was Iraqi representation on the PRB; and 

posted the minutes, budget, and DFI funds balances on the Internet. The CPA established an 

independent judiciary, an Office of Inspector General in each Iraqi Ministry, an Iraqi 

Commission on Public Integrity, and revitalized and strengthened the Iraqi Board of Supreme 

Audit to fight corruption. The CPA introduced a Financial Management Information System to 

begin modernizing the Iraqi government's procedures and encouraged the World Bank and IMF 

to set up training programs and establish a program to restructure the chart of accounts to 

improve Iraqi capabilities. 

Audit Response. We did not evaluate or address CPA actions related to formulating the budget 

because the audit’s focus was to review controls over disbursements. Similarly, we did not 

address the Financial Management Information System because it was not intended to account 

for DFI expenditures during the time the CPA was the governing body in Iraq. The report did 

address the adequacy of the information posted on the Internet and CPA reliance on the AntiCorruption institutions even though these institutions were not yet functioning. 

Moreover, the CPA Administrator is silent the fact that the budget process includes more than 

decision-making on public finance matters and projecting revenues and expenses. The budget 

process also includes the management of the revenues and expenditures. The scope of the audit 

focused on this phase of the budget process. 
15

Director, Defense Support Office – Iraq. The management comments provided by the 

Director, Defense Support Office – Iraq and the audit response to those comments are discussed 

below. The complete text of the comments is in the Management Comments section of the 

report. 

Management Comments. The Director strongly disagreed with the report and stated the 

findings were not a basis for concluding that the CPA did not provide adequate stewardship of 

$8.8 billion in DFI funds. He stated that the conclusions were sweeping and unqualified, did not 

accurately represent the CPA management of the DFI, and were not substantiated by the findings 

that related only to the CPA oversight of the execution of funds. He further stated the CPA 

disbursed DFI funds to the Iraqi ministries consistent with the published national budget, and the 

funds were allocated, disbursed, and used in a transparent manner for the benefit of the Iraqi 

people. 

Audit Response. We disagree. The objective of this audit was to review controls and 

procedures over disbursements provided to Iraqi ministries through the national budget process, 

not to evaluate the CPA overall management of the DFI. We concluded that the CPA did not 

provide adequate control of the funds because CPA officials: 

• Were unable to provide any documentation to support that disbursements were managed 

against budgeted amounts. • Were unable to support that funds were used for the purposes mandated by Resolution 

1483. • Had no assurance that funds were accounted for properly. • Did not review financial reporting and internal control systems over disbursements. • Did not publish a budget for $2.5 billion in Oil-for-Food funds received in March and 

April 2004 even though the funds were allocated and disbursed. 

The Director acknowledged that there was no USG involvement in the Iraqi ministries’ 

accounting and use of the funds. The preceding facts call into question the Director's assertion 

that funds were allocated, disbursed, and used in a transparent manner for the benefit of the Iraqi 

people. 

Management Comments. The Director stated our report failed to account for the objectives of 

USG policy to transfer responsibilities to Iraqis as soon as possible, which was consistent with 

international law and UN Security Council Resolutions. The CPA took the position that 

expenditures by Iraqi ministries were to be managed by the Iraqis and overseen by Iraqi auditors, 

and the CPA realized that the only practicable approach was to assume a supervisory role. 

Additionally, the Director commented that the security situation in Iraq made recruiting efforts 

extremely difficult and limited the assistance the CPA was able to provide to the Iraqi ministries 

in their budget execution. 

Audit Response. We disagree. The report discusses areas where the CPA did not take actions 

to fulfill its responsibilities in determining whether the Iraqi ministries had established basic 

financial controls prior to transferring full authority to the Iraqi ministries. As previously stated 

in our audit response, the responsibilities were mandated by the UN and acknowledged by USG 

officials and were documented in the CPA Strategic Plan and in CPA guidance. 

The CPA had a responsibility to determine whether the Iraqi ministries had basic financial 

controls in place prior to transferring full authority over to the Iraqi ministries. This 

responsibility was acknowledged by the CPA Administrator during the March 2004 transfer of 

sovereignty to the Ministry of Health, when the CPA Administrator stated that the coalition gave 

full authority to the Iraqi ministries only after fundamental financial and budgetary controls were 

in place. The CPA Press Secretary reiterated this responsibility when he noted that Iraqi 
16

government workers still reported to coalition officials, who had operational authority, in the 

Ministry of Finance, as of June 21, 2004. Additionally, the CPA Strategic Plan and other official 

CPA guidance also documented these responsibilities. 

Management Comments. The Director stated our report does not recognize the context in 

which the CPA was operating, to include the difficult circumstances under which the CPA 

operated and managed the DFI, the wartime security conditions, the CPA critical need to 

reestablish Iraqi ministries that had never functioned and/or had ceased to function, the 

ministries’ lack of basic tools such as computers and telephones, and the constraints of a largely 

cash economy. 

Audit Response. We disagree. The report discusses the difficulties the Iraqi ministries and the 

CPA were facing, as noted by the IMF. It was precisely those conditions which underscored the 

need for controls over the disbursements provided to the Iraqi ministries. The fact that the Iraqi 

ministries ceased to or had never functioned, lacked basic tools, and operated in a cash economy 

was precisely why the CPA should have provided oversight of the financial management of the 

funds. However, we have revised our report to better reflect the difficult situation within which 

CPA operated. 

Management Comments. The Director commented the report did not recognize a number of 

actions CPA took to improve budgeting and financial management and promote transparency 

and good governance. 

Audit Response. We evaluated the actions that were relevant to the audit objectives. 

Specifically, we evaluated the adequacy of, and compliance with, CPA Regulation Numbers 2 

and 3, CPA Memorandum Number 4, and acknowledged the new procurement and financial 

management laws that were issued in May and June 2004, respectively. We also addressed the 

CPA reliance on Iraq's Board of Supreme Audit and Inspectors General and the adequacy of the 

DFI financial information published on the CPA web page. 

We did not address the economic reforms that had no impact on the accounting for and use of 

DFI funds during the time the CPA was the governing body in Iraq. Similarly, we did not 

address the Financial Management Information System because it was not intended to manage 

DFI expenditures during the period 2003 to 2004. 

Management Comments. The Director stated that our audit disregarded the fact that the CPA 

took a number of actions to ensure transparency (i.e., publishing PRB meeting minutes and the 

Iraqi national budget and including Iraqis in the PRB) and focused only on the unavailability of 

near real-time budget execution data. He further stated the audit failed to present an international 

standard for transparency against which the CPA was being evaluated and presumed the CPA 

could achieve a standard of budgetary transparency and execution that even Western nations 

would have trouble meeting within one year, especially in a combat environment. 

Audit Response. We recognize that the CPA took such actions to improve transparency but we 

did not address these actions in the report because they were not relevant to the audit objective. 

The Director disregarded the fact that the government budget process includes more than 

decision-making on public finance matters and projecting revenues and expenditures. The 

budget is a fundamental management tool for monitoring performance and the budget process 

also includes the actual management of revenues and expenditures. 
17

We evaluated the CPA performance based on the standards included in the IMF Manual on 

Fiscal Transparency and Revised Code of Good Practices on Fiscal Transparency.12 That 

document includes principles and practices that emphasize the importance of publishing 

comprehensive fiscal information and identifies the information that should be provided during 

the budget preparation, execution, and reporting processes. Since the CPA goals were to 

restructure the Iraqi budget and accounting systems to conform to IMF standards, and the CPA 

arranged IMF training and workshops for Iraqi Ministry employees, the IMF standards were 

appropriate. The IMF standards represent internationally accepted criteria upon which audit 

verification can be tested and evaluated. 

Finally, we disagree with management’s contention that the CPA could not provide detailed 

budgetary, financial, and operational results of the DFI disbursements during the time it was the 

governing body in Iraq. DoD policy requires that, even in contingency operations, the 

government establish controls, procedures, and accounting systems to properly account for 

funds. As stewards of the Iraqis' money, the CPA should have provided oversight of the 

financial management and internal controls in the Iraqi ministries to ensure the DFI funds were 

properly managed. 

Management Comments. The Director stated that our report makes broad, un-validated 

statements based upon limited reviews and unclear standards of performance, since only 9 of the 

26 senior advisors’ offices were reviewed and the audit was conducted over a span of several 

weeks near the end of the CPA tenure, yet formed conclusions on the performance of CPA as a 

whole over the CPA entire tenure. Further, during the time the audit was conducted, all CPA 

senior advisors were focused on the critical requirement of transitioning governance 

responsibilities to the Iraqi ministries. 

Audit Response. We disagree. As stated in the report, the audit was conducted in accordance 

with generally accepted government audit standards, which include the use of sampling 

techniques to gather evidence needed to provide a reasonable basis for audit conclusions. We 

evaluated evidence gathered in the Iraqi Ministry of Finance/OMB, the Comptroller’s office, and 

9 of 26 (35 percent) Iraqi ministries to provide a reasonable basis for the conclusions provided in 

the report. Additionally, fieldwork was conducted over a span of four months, not several 

weeks, and included a review of procedures and controls in addition to interviews with CPA 

officials who were in Iraq during the complete span of the CPA tenure. Furthermore, as 

previously stated, although one of the CPA Administrator’s criterion for transitioning 

governance was reviewing financial and budgetary controls, discussions with CPA officials in 

the Ministry of Finance/OMB and seven ministries during this period disclosed personnel did not 

review financial and budgetary controls in the Iraqi ministries prior to the transfer of governance. 

If the financial and budgetary controls in the Iraqi ministries were not reviewed prior to the 

transfer of governance, then it was not done, and a more lengthy audit would not have reached a 

different conclusion. 

Management Comments. The Director stated that our report cited a single instance of poor 

management of the FPS and generalized that all salary payments were flawed when the FPS 

represented 74,000 employees, approximately six-tenths of 1 percent of the approximately 

1.2 million Iraqis on the national payroll. The overriding priority was for the FPS to be 

established as soon as possible to relieve the pressure on coalition forces for providing fixed-site 

security. The CPA and DoD recognized that although it was necessary to entrust Iraqi ministry 

officials with the responsibility for expending Iraqi funds for salary purposes, such actions could 

 

12 The IMF Manual on Fiscal Transparency and Revised Code of Good Practices on Fiscal Transparency, March 23, 

2001, are available at website: www.imf.org/external/np/fad/trans/manual/index.htm. 
18

result in potential duplicate or otherwise improper payments. Prompt payment was considered to 

be absolutely vital to the safety and well being of the FPS guards and the Iraqi people in general. 

Audit Response. We disagree. In this instance, the Director’s interpretation of the disclosure of 

limited support for salary payment issues in our report is erroneous. The issues addressed in the 

report are the lack of internal controls and supporting documentation for salary payments made 

by coalition forces to Iraqi security forces personnel. We reviewed controls over salary 

payments not only for FPS, but also for Iraqi Police Service, Border Police, National Guard, and 

Armed Forces. Further, the FPS payroll comprised over 6 percent (approximately 74,000 FPS 

employees divided by approximately 1.2 million national payroll employees) of the Iraqis on the 

national payroll, not six-tenths of 1 percent as stated by the Director. 

The report addresses the CPA policy for coalition forces to accept as support monthly salary 

payments of DFI funds with only summary information of total funds received, paid out, and the 

total number of employees by pay grade rather than using certified payroll listings. The report 

also addressed the lack of supporting documentation maintained by the CPA for the DFI salary 

payments made by coalition forces. Furthermore, we reviewed controls over FPS salary 

payments made by coalition forces prior to the responsibilities being transferred to the Iraqi 

ministries in March and April 2004. Since coalition forces hired and paid these forces, we 

believe the CPA should have, at a minimum, provided validated site and payroll listings to the 

Iraqi ministries prior to the transfer of responsibilities. 

Management Comments. The Director commented that although additional staff might have 

been helpful, the report did not provide any indication of how many personnel would have been 

sufficient to provide the level of oversight called for in the report. Further, there was no 

evidence that any Ministry of Finance/OMB staffing request was denied by the CPA. 

Audit Response. Our report attributes the issue of staffing shortages to CPA officials. Three 

Senior Advisors to the Ministry of Finance/Directors of OMB stated they elevated requests for 

additional staff not only to the CPA Administrator but also to very senior levels of USG officials 

at the Departments of Defense, State, and Treasury, as well as OMB and other USG officials. 

The numbers of requested staff varied among the CPA officials. For example, in September 

2003, a Senior Advisor requested a total of 12 personnel with 4 projected to perform budget 

execution duties at the Iraqi Ministry of Finance. In December 2003, the Senior Advisor 

requested a minimum of 7 personnel, to include a Chief of Budget Execution with experience in 

international budget execution, to conduct a 2004 mid-year review. The December 2003 request 

stated OMB in Iraq had only 12 of 55 positions filled and the bulk of the personnel assigned 

were inexperienced recent college graduates. 

Management Comments. The Director stated that at least one other ministry, the Ministry of 

Electricity, besides the Ministry of Finance had been approved for contracting. 

Audit Response. The Director is correct. We agree that the Ministry of Electricity was 

authorized to perform contracting. However, the CPA Head of Contracting Activity approved 

these procedures on June 26, 2004, after our fieldwork in contracting was complete and validated 

with contracting officials. Nevertheless, we have revised our report to note the CPA approved 

contracting procedures for the Ministry of Electricity. 

Management Comments. The Director commented that the statement in the report that the 

CPA did not update the Iraqi national budget to reflect budget plans for the approximately 

$2.5 billion dollars provided by the UN was not correct. He stated the CPA produced an updated 

working copy of the budget that was shared with the Iraqi Ministry of Finance. When asked, IIG 

officials indicated a preference that the CPA not officially publish the amended budget that had 
19

been prepared. Rather, they preferred to leave final decisions regarding an amended budget to 

the new sovereign government. Their wishes were honored. 

Audit Response. We disagree. We believe the CPA’s decision not to officially publish the 

revised budget, regardless of the IIG officials’ preferences, violated the Resolution 1483 

requirement to use DFI funds in a transparent manner. An “updated working copy” fails to meet 

the requirements for a published annual budget. 
20

Appendix A. Scope and Methodology 

We performed this audit from May through October 2004 in accordance with generally accepted 

Government auditing standards. We interviewed key personnel responsible for the management 

of the Coalition Provisional Authority (CPA). We interviewed the CPA Administrator, General 

Counsel, Chief Financial Officer, Comptroller, Head of Contracting Activity, CPA Ministry of 

Finance/Office of Management and Budget Director, and staffs. We also interviewed Senior 

Advisors and/or Senior Consultants and staffs assigned to nine Interim Iraqi Government 

Ministries (Communications, Defense, Education, Health, Housing and Construction, Interior, 

Labor and Social Affairs, Oil, and Transportation). We reviewed the following documents. 

United Nations and International Monetary Fund documents: 

• United Nations Security Council Resolution 1483 (2003), adopted by the Security 

Council on May 22, 2003 

• United Nations Security Council Resolution 1500 (2003), adopted by the Security 

Council on August 14, 2003 

• United Nations Security Council Resolution 1511 (2003), adopted by the Security 

Council on October 16, 2003 

• United Nations Security Council Resolution 1546 (2004), adopted by the Security 

Council on June 8, 2004 

• Letter from the UN Secretary-General to the President of the Security Council, 

establishing the IAMB and approving the IAMB terms of reference, October 22, 2003 

• The IMF Manual on Fiscal Transparency and Revised Code of Good Practices on Fiscal 

Transparency, March 23, 2001 

CPA Regulations, Orders, Memoranda, and Public Notices: 

• CPA Regulation Number 1, May 16, 2003 

• CPA Regulation Number 2, “Development Fund for Iraq,” June 10, 2003 

• CPA Regulation Number 3, “Program Review Board,” June 18, 2003 

• CPA Regulation Number 11, “Amendments to Coalition Provisional Authority 

Regulations No. 2 (CPA/REG/10 June 2003/02) and No. 3 (CPA/REG/18 June 

2003/03),” June 15, 2004 

• CPA Order Number 87, “Public Contracts,” May 14, 2004 

• CPA Order Number 95, “Financial Management Law and Public Debt Law,” June 2, 

2004 

• CPA Memorandum Number 4, “Contract and Grant Procedures Applicable to Vested and 

Seized Iraqi Property and the Development Fund For Iraq, Implementation of Regulation 

Number 3, Program Review Board,” August 19, 2003 

• CPA Public Notice, “Managing Financial Resources for Iraq,” June 18, 2003 

CPA budget, financial, and contracting guidance documents: 

• Budget Execution – Financing the Iraqi Budget 

• Budget Execution Instruction 

• Budget Execution Procedures for July 2003 

• Instructions for Preparing the Budget for Year 2004 

• Iraq’s Budget Execution Process 

• Release of Operating and Capital Funds for July-August 2003, August 1, 2003 

• Distributions by Department, and Distribution by Chapter, September 2, 2003 

• Ministry Allocations by Governorate 

• Contracting Responsibilities for the Iraqi Budget 
21

We reviewed all available electronic and hard copy documents for the period May 2003 through 

July 2004 that were maintained by the CPA Ministry of Finance/OMB to include: the results of 

all internal control reviews and IMF assessments; Program Review Board budget approvals, 

allocations and minutes; and, budget spending plan, cash allocations, and salary documents. We 

reviewed all Program Review Board minutes to determine the turnover of key financial 

management personnel. We compared spending plans, cash allocations, and budget 

disbursements for January through April 2004. We verified vouchers and authorization 

memoranda for 10 high-dollar budget disbursements to Iraqi Ministries from November 2003 

through June 2004. 

We examined KPMG, Bahrain audit reports related to the Development Fund for Iraq. We also 

obtained and examined all available results of work performed by the Iraqi Inspector Generals 

and the Board of Supreme Audit. 

We interviewed NorthStar Consultants, Inc. personnel and reviewed all contract file 

documentation maintained by the CPA Comptroller and Contracting Activity for work under 

Contract FY5866-04-C-001, “The Development Fund of Iraq Accountant Consultant,” October 

25, 2003, to determine whether contractor personnel performed in accordance with contract 

requirements. 

We examined all CPA Strategic Plan objectives and tasks related to the audit objectives. We 

interviewed contractor personnel and reviewed Financial Management Information System 

implementation updates. We also requested all CPA senior advisors obtain contract data from 

the Iraqi Ministries, determined the oversight of contracting actions by 7 ministry advisors, and 

judgmentally selected 15 contracts for detailed review. 

Use of Computer-Processed Data. We did not rely on computer-processed data to perform this 

audit. 

Prior Coverage. The Government Accountability Office (GAO) and the Special Inspector 

General for Iraq Reconstruction (formerly the Office of the Inspector General, Coalition 

Provisional Authority (IG CPA)) collectively issued six reports related to the Development Fund 

for Iraq. However, the objectives and scopes of those audits were not the same as discussed in 

this report. Reports issued by the Special Inspector General for Iraq Reconstruction can be 

accessed over the Internet at http://www.cpa-ig.org. Also, the International Advisory and 

Monitoring Board contracted with KPMG in Bahrain for audits concerning Development Funds 

for Iraq Export sales, Oil Proceeds, and Disbursements. The reports are listed below. 

GAO Report No. 04-651T, “United Nations: Observations on the Oil for Food Program,” 

April 7, 2004 

IG CPA Report No. 04-001, “Coalition Provisional Authority Coordination of Donated Funds,” 

June 25, 2004 

IG CPA Report No. 04-007, “Oil for Food Cash Controls for the Office of Project Coordination 

in Erbil, Iraq,” July 26, 2004 

IG CPA Report No. 04-008, “Coalition Provisional Authority Control Over Seized and Vested 

Assets,” July 30, 2004 

IG CPA Report No. 04-009, “Coalition Provisional Authority Comptroller Cash Management 

Controls Over the Development Fund for Iraq,” July 28, 2004 
22

IG CPA Report No. 04-013, “Coalition Provisional Authority’s Contracting Processes Leading 

Up To and Including Contract Award,” July 27, 2004 

KPMG Report, “Development Funds for Iraq - Statement of Cash Receipts and Payments for the 

Period 22 May 2003 to 31 December 2003,” June 29, 2004 

KPMG Report, “Development Funds for Iraq - Matters Noted Involving Internal Controls and 

Other Operations during the Audit of the Fund for the Period to 31 December 2003,” June 29, 

2004 

 

KPMG Report, “Development Funds for Iraq – Agreed-Upon Procedures Report for the Period 

22 May 2003 to 31 December 2003 (Disbursements),” June 2004 

 

KPMG Report, “Development Funds for Iraq - Statement of Cash Receipts and Payments for the 

Period 1 January 2004 to 28 June 2004,” September 30, 2004 

KPMG Report, “Development Funds for Iraq – Management Letter on Internal Controls for the 

Period 1 January 2004 to 28 June 2004,” September 30, 2004 

KPMG Report, “Development Funds for Iraq - Report of Factual Findings for the Period 1 

January 2004 to 28 June 2004 (Disbursements),” September 30, 2004 
23

Appendix B. United Nations Security Council 

Resolution 1483 

United Nations Security Council Resolution 1483, May 22, 2003, established the Development 

Fund for Iraq and assigned responsibility for managing the fund to the Coalition Provisional 

Authority. United Nations Security Council Resolution 1483 provisions were organized under 

specific statements and paragraphs within the resolution and provided guidance for the 

management of the Development Fund for Iraq. Key statements include: 

Noting the letter of 8 May 2003 from the Permanent 

Representatives of the United States of America and the United Kingdom of 

Great Britain and Northern Ireland to the President of the Security Council 

(S/2003/538) and recognizing the specific authorities, responsibilities, and 

obligations under applicable international law of these states as occupying 

powers under unified command (the “Authority) [the Coalition Provisional 

Authority], 

4. Calls upon the Authority, consistent with the Charter of the 

United Nations and other relevant international law, to promote the welfare 

of the Iraqi people through the effective administration of the territory, 

including in particular working towards the restoration of conditions of 

security and stability and the creation of conditions in which the Iraqi people 

can freely determine their own political future; 

9. Supports the formation, by the people of Iraq with the help of the 

Authority and working with the Special Representative, of an Iraqi interim 

administration as a transitional administration run by Iraqis, until an 

internationally recognized, representative government is established by the 

people of Iraq and assumes the responsibilities if the Authority; 

12. Notes the establishment of a Development Fund for Iraq to be 

held by the Central Bank of Iraq and to be audited by independent public 

accountants approved by the International Advisory and Monitoring Board 

of the Development Fund for Iraq and looks forward to the early meeting of 

that International Advisory and Monitoring Board, whose members shall 

include duly qualified representatives of the Secretary-General, of the 

Managing Director of the International Monetary Fund, of the DirectorGeneral of the Arab Fund for Social and Economic Development, and of the 

President of the World Bank; 

13. Notes further that the funds in the Development Fund for Iraq 

shall be disbursed at the direction of the Authority, in consultation with the 

Iraqi interim administration, for the purposes set out in paragraph 14 below; 

14. Underlines that the Development Fund for Iraq shall be used in 

a transparent manner to meet the humanitarian needs of the Iraqi people, for 

the economic reconstruction and repair of Iraq’s infrastructure, for the 

continued disarmament of Iraq, and for the costs of Iraqi civilian 

administration, and for other purposes benefiting the people of Iraq; 
24

Appendix C. United Nations Security Council 

International Advisory and Monitoring Board 

Terms of Reference 

The letter from the Secretary-General to the President of the Security Council, dated 

October 22, 2003, established and approved the terms of reference for the International Advisory 

and Monitoring Board (IAMB). Key statements include: 

1. Purpose: 

The purpose of the International Advisory and Monitoring Board shall be 

to promote the objectives set forth in the United Nations Security 

Council Resolution 1483 (2003) of ensuring that Development Fund for 

Iraq is used in a transparent manner for the purposes set out in operative 

paragraph 14 of that Resolution ... 

3. Powers and Responsibilities: 

B. Scope of external audits. The scope of the external audits 

shall be as to enable the IAMB to achieve its purpose as set out in 1 

above. The scope of the external audits shall encompass: ...(iii) the DFI 

(including, but not limited to, all inflows, investments and other assets, 

disbursements, liabilities and contingencies of the DFI), supporting the 

objective of ensuring that the DFI is used in a transparent manner in 

accordance with applicable control procedures; and (iv) disbursements of 

resources from the DFI, supporting the objective of ensuring that DFI 

funds are used for the purposes for which they were disbursed. For 

purposes of (iv), the External Auditor(s) will make (a) a determination as 

to whether the disbursements from the DFI are duly authorized and 

received by the designated recipient; and (b) an assessment as to whether 

the controls (including the requirement to ensure proper records) of the 

designated recipient are adequate to ensure that disbursements from the 

DFI are utilized as intended. This assessment shall be carried out as 

specified in the contract with the external auditor(s). 

D. Internal Controls/Financial Reporting. The IAMB shall 

monitor the financial reporting and internal control systems established 

by the CPA for the areas subject to external audit in 3.B above and 

advise, as appropriate, the CPA on the adequacy of such systems. 
25

Appendix D. Coalition Provisional Authority 

Regulation Number 2 

On June 15, 2003, Ambassador Bremer issued Coalition Provisional Authority (CPA) Regulation 

Number 2, entitled the “Development Fund for Iraq,” which provided that: 

This Regulation applies to the administration, use, accounting and 

auditing of the Development Fund for Iraq (the “Fund”). The Regulation 

is intended and shall be applied to ensure that the Fund is managed in a 

transparent manner for and on behalf of the Iraqi people, consistent with 

Resolution 1483, and that all disbursements from the Fund are for 

purposes benefiting the people of Iraq. 

Key provisions of Section 2, “Responsibilities,” included: 

1) Administrator of the CPA (Administrator). Oversees and controls the 

establishment, administration and use of the Fund for and on behalf of 

the Iraqi people, and directs disbursements from the Fund for those 

purposes he determines to be for the benefit of the people of Iraq. 

3) CPA Program Review Board (PRB). Reviews all competing 

requirements for the relief and recovery of Iraq, assesses all available 

resources, and, in consultation with the Iraq interim administration, when 

established, develops for the approval of the Administrator spending 

plans, consistent with a comprehensive budgetary framework, that 

identify prioritized requirements for proposed disbursements from the 

Fund; considers in this process information provided by the CPA 

International Coordination Council, the International Advisory and 

Monitoring Board, and other entities, as appropriate. 

Key provisions of Section 4, “Control of the Fund” included: 

The Fund shall be controlled by the Administrator of the CPA, for and on 

behalf of the Iraqi people. The Central Bank of Iraq and the Federal 

Reserve Bank (and/or other financial institutions(s), if the Administrator 

so directs), shall accept instructions, as agreed, concerning the Fund, 

including instructions to pay sums out of the Fund, only from the 

Administrator or his authorized delegee(s). 

Key provisions of Section 5, “Administration of the Fund” included: 

4) Internal Accounting. The CPA shall obtain the services of an 

independent, certified public accounting firm to support the objective of 

ensuring that the Fund is administered and used in a transparent manner 

for the benefit of the people of Iraq, and is operated consistent with 

Resolution 1483. The accountants performing this function shall be 

separate from those public accountants (auditors) approved by the 

International Advisory and Monitoring Board. 
26

Key provisions of Section 6, “Disbursements from the Fund” included: 

1) Authority to Approve. Only the Administrator or his delegee may 

approve disbursements from the Fund. 

2) Directions to Disburse. Sums shall be disbursed from the Fund, in 

accordance with this Regulation, only upon the express direction of the 

Administrator, or upon the express direction of individual(s) to whom the 

Administrator has delegated that authority. 

3) Purposes. Sums may be disbursed from the Fund to meet the 

humanitarian needs of the Iraqi people and for the economic 

reconstruction and repair of Iraq’s infrastructure; for the continued 

disarmament of Iraq; for the costs of Iraq’s civilian administration; and 

for other purposes the Administrator determines to be for the benefit of 

the people of Iraq. 

4) Proposals for Disbursements. Disbursements from the Fund 

generally shall be proposed through procedures prescribed in, or 

promulgated in implementation of the CPA Order establishing the PRB. 

These procedures shall ensure that proposed disbursements are set forth 

in a spending plan reflecting the cost, purpose and priority of the 

requirement, and that, prior to approval by the Administrator, all 

spending plans are developed in consultation with the Iraqi interim 

administration, once established. 

Key provisions of Section 7, “Auditing” included: 

The Fund and the export sales of petroleum, petroleum products, and 

natural gas from Iraq, shall be audited by independent public accountants 

nominated by the Administrator and approved by the IAMB. The 

expenses incurred in obtaining the services of the approved independent 

public accountants shall be charged against the Fund. The CPA shall 

cooperate fully with the IAMB and the approved independent public 

accountants in carrying out each party’s respective responsibilities. In 

particular, the CPA shall provide the IAMB and such accountants with 

access to the Fund’s financial records, with confidential materials 

protected in a manner agreed between the parties. 
27

Appendix E. Development Fund for Iraq 

Disbursements by Agency 

 Disbursements by Agency since Inception: Date: 26 June 2004 

Baghdad Central $3,294,750.00

Central Bank of Iraq $19,674,105.44

CJTF 7 $9,606,184.18

Coalition Military Assistance Training Team $16,248,317.94

Commanders Emergency Response Program $360,554,507.03

Communication Support Office $1,659,897.06

Comptrollers Office $3,565,200.00

CPA Front Office $2,774,978.44

Governance $10,000.00

Ministry of Agriculture $31,250,385.80

Ministry of Communications $2,080,000.00

Ministry of Culture $20,000.00

Ministry of Defense $562,711.50

Ministry of Education $1,100,000.00

Ministry of Electricity $639,205,316.51

Ministry of Finance $7,711,940,159.57

Ministry of Health $55,033,103.15

Ministry of Housing and Construction $405,031.66

Ministry of Industry and Minerals $18,950.00

Ministry of Interior $47,852,851.64

Ministry of Justice $1,000,219.50

Ministry of National Security & Defense $3,130,506.39

Ministry of Oil $2,012,397,915.48

Ministry of Planning $5,558,698.00

Ministry of Public Works $26,116.00

Ministry of Trade $444,076,620.36

Ministry of Transportation $1,706,687.00

Office of Security Cooperation $40,419,321.46

Private Sector Development $13,665.00

Program Management Office $76,720,000.00

Rapid Regional Response Program $244,216,497.75

Regional Projects - CPA South $46,783,087.16

State Oil Marketing Organization $76,620,172.65

Strategic Communications $361,000.00

World Food Programme $143,376,100.00

Grand Total $11,893,196,850.37

The DFI Disbursements by Agency and Financial Reporting Matrix (at Appendix F) are 

available at the following website: http://www.cpa-iraq.org/budget/DFI_26jun2004.xls
28

Appendix F. Development Fund for Iraq 

Financial Reporting Matrix 

Development Fund for Iraq (DFI) - Financial Reporting Matrix 

 Reporting Date: June 26, 2004 

 As of Date: June 24, 2004 

 Inception Date: May 28, 2003 

Bank Accounts and Investments US Dollars 

 Central Bank of Iraq - Oil Proceeds Receipt Account, FRB, NY 616,499.19 

 DFI Account - Federal Reserve Bank, New York 151,544.75 

 DFI Account - Central Bank of Iraq, Baghdad 1,050,527,283.09 

 DFI Account - Treasury Bills at Purchase Price 4,768,665,359.51 

 DFI Account - Overnight Deposits, FRB, New York 1,673,300,000.00 

 DFI Account - Vested Assets, Federal Reserve Bank, New York 21,716.63 

 DFI Account - Temporary Cash Holdings 70,971,490.00 

 Total - DFI Assets 7,564,253,893.17 

Cash Inflow (Since Inception) 

 Oil For Food 8,100,000,000.00 

 Proceeds from Oil Exports 11,111,692,362.73 

 UNSCR 1483 - Repatriated Funds 1,014,805,645.22 

 Interest Income - Treasury Bills 33,874,372.53 

 Interest Income - Overnight Deposits, Repurchase Agreements 7,636,464.80 

 Returned Letter of Credit Funding 3,686,295.39 

 Other Deposits 542,455.97 

 Donations 20,000.00 

 United Nations World Food Program 145,878,779.00 

 Vested Assets (Including Interest) 16,291,014.19 

 Transactional Deposits from Public Sector Entities 162,954,456.80 

 Total Cash Inflow 20,597,381,846.63 

Cash Outflow (Since Inception) 

 Ministry Budgets (8,825,926,528.27) 

 Payments for Projects. (3,348,865,439.20) 

 Transactional Withdrawals - Public Sector Entities (886,846,675.18) 

 Miscellaneous Transactions (32,105,810.00) 

 Total Cash Outflow (13,093,744,452.65) 

 

Net Cash Position 7,503,637,393.98 

 

Outstanding Contractual Commitments 

Total PRB Approved Commitments (Since inception) 19,697,863,666.63 

Commitments Returned / Cancelled (3,185,642,810.08) 

Commitments Paid (11,892,642,550.37) 

Outstanding Commitments 4,619,578,306.18 

DFI Assets On Hand Committed to Remaining 2004 Budget 2,884,059,087.80 
29

Appendix G. Acronyms 

CPA Coalition Provisional Authority 

DFI Development Fund for Iraq 

FPS Facilities Protective Services 

IAMB International Advisory and Monitoring Board 

IMF International Monetary Fund 

MoF Ministry of Finance 

OMB Office of Management and Budget 

PRB Program Review Board 

UN United Nations 

USG United States Government 
30

Appendix H. Report Distribution 

Office of the Secretary of Defense 

Secretary of Defense 

Deputy Secretary of Defense 

Under Secretary of Defense (Comptroller)/Chief Financial Officer 

 Director, Program Analysis and Evaluation 

 Deputy Chief Financial Officer 

 Deputy Comptroller (Program/Budget) 

Inspector General, Department of Defense 

Director, Defense Procurement and Acquisition 

Director, Defense Support Office - Iraq 

Office of the Secretary of State 

Secretary of State 

Deputy Secretary of State 

U.S. Ambassador to Iraq 

Inspector General, Department of State 

Director, Iraq Reconstruction Management Office 

Department of the Army 

Assistant Secretary of the Army, Acquisition, Logistics & Technology 

 Assistant Secretary of the Army for Policy and Procurement 

Auditor General, Department of the Army 

Other Defense Organizations

Director, Defense Contract Audit Agency 

Director, Iraq Project and Contracting Office 

Other Federal Government Organizations 

Office of Management and Budget 

Government Accountability Office 

Inspector General, Department of Commerce 

Inspector General, Health and Human Services 

Inspector General, U.S. Agency for International Development 
31

Congressional Committees and Subcommittees, Chairman and Ranking 

Minority Member 

Senate Committee on Appropriations 

Senate Subcommittee on Defense, Committee on Appropriations 

Senate Committee on Armed Services 

Senate Committee on Governmental Affairs 

Senate Committee on Foreign Relations 

House Committee on Appropriations 

House Subcommittee on Defense, Committee on Appropriations 

House Committee on Armed Services 

House Committee on Government Reform 

House Subcommittee on Government Efficiency and Financial Management, Committee on 

Government Reform 

House Subcommittee on National Security, Emerging Threats, and International Relations, 

Committee on Government Reform 

House Subcommittee on Technology, Information Policy, Intergovernmental Relations, and the 

Census, Committee on Government Reform 
32

Appendix I. Audit Team Members 

The Financial Management Division, Office of the Assistant Inspector General for Auditing, 

Special Inspector General for Iraq Reconstruction, prepared this report. Personnel who 

contributed to the report are listed below. 

John Betar 

Brian Flynn 

Robert Murrell 

Kevin Ellenberger 

William Whitehead 

Leona Brent 

Ramon Miller 
33

Management Comments, Coalition Provisional 

Authority Administrator 
34
35
36
37
38
39
40
41

Management Comments, Defense Support Office – Iraq 
42
42a 
43
44
45
46
47
48

 
SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION 

400 Army Navy Drive • Arlington, Virginia 22202

March 3, 2005 

MEMORANDUM FOR DISTRUBTION 

SUBJECT: Errata Page Insert, Special Inspector General for Iraq Reconstruction 

Report No. 05-004, “Oversight of Funds Provided to Iraqi Ministries through the 

National Budget Process,” January 30, 2005 

We are adding page 3 of the Management Comments from the Director, Defense Support 

Office – Iraq to the report as an errata page insert. Page 3 was inadvertently omitted from the 

report and should be added to fully reflect the Director’s entire management comments to the 

report. The Director’s comments on the errata pages were addressed in our representation of 

management comments in the report. Please insert the attached errata page as page 42a of the 

report. 

If you have any questions on the change, please contact Mr. James P. Mitchell at 

(703) 428-1217 or jpmitchell@cpaig.mil. 

Robert M. Murrell 

Deputy Inspector General 

Attachment(s): 

As stated