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SIGIR 

Special Inspector General for IRAQ Reconstruction 

For more information, contact SIGIR Public Affairs at

(703) 428‐1100 or PublicAffairs@sigir.mil Special Inspector General for Iraq Reconstruction 

Summary of Report: SIGIR 10-006 

Why SIGIR Did this Audit 

The Development Fund for Iraq (DFI) was 

created by United Nations Security Council 

Resolution 1483 for: (1) economic 

reconstruction of Iraq, (2) continued 

disarmament of Iraq, (3) costs of Iraqi civilian 

administration, and (4) other purposes 

benefiting the Iraqi people. The funds were to 

be used in a transparent manner. During the 

Coalition Provisional Authority’s (CPA) 

administration of Iraq, the CPA Administrator 

managed DFI funds, and CPA Regulation 2, 

“Development Fund for Iraq” describes the 

responsibilities for the administration, use, 

accounting, and auditing of the DFI. When the 

CPA was disestablished in June 2004, 

responsibility for administering DFI funds 

eventually shifted to the Joint Contracting 

Command-Iraq/Afghanistan. The U.S. 

government’s stewardship of the DFI ended on 

December 31, 2007, and all remaining funds 

were to be returned to the Government of Iraq 

(GOI), per a GOI request.

Several Department of Defense (DoD) 

components received DFI funds, including the 

U.S. Army Corps of Engineers (USACE). The 

purpose of this audit is to determine whether 

USACE properly accounted for DFI funds it 

received.

Recommendations 

The Special Inspector General for Iraq 

Reconstruction (SIGIR) recommends the Under 

Secretary of Defense (Comptroller)/Chief 

Financial Officer provide guidance to USACE 

on the 1) use and ultimate disposition of DFI 

funds that it and one of its contractors are 

currently holding, 2) whether GOI funds should 

have been used to pay reimbursable work order 

expenses, and 3) how interest that might have 

been earned by several contractors on 

disallowed payments should be used. 

Management Comments 

We received comments from the Office of the 

Undersecretary of Defense (Comptroller) and 

USACE on a draft of this report. The 

comptroller concurred with the report 

recommendations. USACE provided detailed 

comments that we included as appropriate. 

October 29, 2009 

DEVELOPMENT FUND FOR IRAQ: POLICY GUIDANCE NEEDED TO 

ENHANCE ACCOUNTABILITY OF USACE-MANAGED FUNDS 

What SIGIR Found 

SIGIR has identified a number of policy issues related to the management of 

DFI funds that require DoD attention. To date, SIGIR has identified $27.5 

million in DFI funds for return or potential return to the GOI—$13.1 million 

was returned in March 2009 based on earlier SIGIR work; in this report, we 

identify $14.4 million that may potentially be available for return. 

After some delays, USACE provided a listing of DFI-funded contracts 

totaling $2.4 billion and is working on providing a listing of its expenditures. 

However, we did not confirm this data at the time our audit work was 

completed. USACE assumed responsibility for many DFI activities initiated 

by earlier reconstruction organizations, and a transaction-based accounting 

system was not used early in the U.S.-reconstruction program. Instead, data 

was recorded on spreadsheets, and cash was disbursed but not entered into 

USACE’s database. In addition, separate accounting codes were not 

established to segment DFI from other funding sources. 

Although the GOI requested that all DFI funds be returned to it by 

December 31, 2007, USACE is currently holding about $3.0 million of DFI 

funds pending final close-out of some DFI contracts. This situation occurred 

because USACE entered into contracts making the U.S. government 

responsible for all costs through the close-out of the contract. SIGIR 

understands that USACE may require funds associated with the DFI 

contracts. However, DoD policy guidance is lacking on whether it is 

appropriate to hold or use DFI funds to meet these obligations. 

SIGIR notes a USACE contractor is holding $2.2 million in DFI funds. 

Specifically, in November 2006, USACE issued contract modifications that 

led to three contractors—Perini Management Services, Washington Group 

International and Fluor Intercontinental—receiving about $11.2 million for 

costs that had not been incurred prior to the time they submitted vouchers. 

The Defense Contract Audit Agency (DCAA) subsequently disallowed the 

payments, and two of the contractors, Perini and Fluor, returned their funds. 

These funds were later returned to the GOI. However, Washington Group 

returned only about $3.0 million of the $5.2 million it received and continues 

to hold about $2.2 million for work it said was completed but not yet 

approved for payment. DCAA is currently auditing the data supporting the 

$2.2 million. DoD may also have an opportunity to collect interest earned 

on funds provided by USACE to several contractors but disallowed by 

DCAA. 

USACE stated it has used $9.2 million of GOI funds to cover unpaid 

expenses from earlier reimbursable work orders that it believes were the 

responsibility of the GOI; $8.9 million for actual contract costs, and $0.3 

million for labor and overhead. This payment may be inconsistent with 

guidance from the Under Secretary of Defense (Comptroller)/Chief 

Financial Officer stating that residual advanced seized funds should not be 

used for this purpose. During our review we have been unable to separately 

account for DFI funds and seized asset funds because the funds have been 

commingled. We also have not been able to verify whether GOI funds 

should have been used to pay these expenses. 
SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION 

Draft Report 

For Official Use Only

October 29, 2009 

MEMORANDUM FOR U.S. UNDER SECRETARY OF DEFENSE 

(COMPTROLLER)/CHIEF FINANCIAL OFFICER 

COMMANDING GENERAL, U.S. ARMY CORPS OF ENGINEERS 

SUBJECT: Development Fund for Iraq: Policy Guidance Needed To Enhance Accountability 

of USACE-managed Funds (SIGIR 10-006) 

This report is provided for your review and use. It focuses on the U.S. Army Corps of 

Engineers’ accountability for funds received from the Development Fund for Iraq. We 

performed this audit in accordance with our statutory responsibilities contained in Public Law 

108-106, as amended, which also incorporates the duties and responsibilities of inspectors 

general under the Inspector General Act of 1978. This law provides for independent and 

objective audits of programs and operations funded with amounts appropriated or otherwise 

made available for the reconstruction of Iraq, and for recommendations on related policies 

designed to promote economy, efficiency and effectiveness and to prevent and detect waste, 

fraud, and abuse. This audit was conducted as Project 9011. We plan to conduct a series of 

audits to determine whether the Department of Defense and its components, as well as other U.S. 

agencies, have properly accounted for DFI funds they have received. 

We considered comments from the Office of the Under Secretary of Defense (Comptroller) and 

USACE when preparing this report. The comments are addressed in the report where applicable, 

and the letter is included in Appendix D of this report. 

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

please contact David Warren, Assistant Inspector General for Audits, (703) 604-0982/ 

david.warren@sigir.mil, or Glenn Furbish, Principal Deputy Assistant Inspector General for 

Audits, (703) 604-1388/ glenn.furbish@sigir.mil. 

Stuart W. Bowen, Jr. 

Special Inspector General for Iraq Reconstruction 

cc: U.S. Secretary of State 

U.S. Ambassador to Iraq 

U.S. Secretary of Defense 

Assistant Secretary of the Army (Financial Management and Comptroller) 

Commander, U.S. Central Command 

Commanding General, Multi-National Force-Iraq 

Commanding General, Joint Contracting Command-Iraq/Afghanistan 
Table of Contents 

Introduction 1

Background 1

Objective 3

Policy Guidance Is Needed To Enhance Accountability of USACE-managed 

Funds 4

USACE’s DFI Funding Remains Under Review 4

One USACE Contractor Is Still in Possession of DFI Funds 5

The Majority of DFI Funds Returned but Some Remain In a Suspense Account 6

Use of GOI Funds May Be Inconsistent With DoD Guidance 7

Other DoD Components May Have Retained DFI Funds 8

Conclusions, Recommendations and Lessons Learned 9

Conclusions 9

Recommendations 9

Lessons Learned 9

Management Comments and Audit Response 10

Appendix A—Scope and Methodology 11

Appendix B—Acronyms 15

Appendix C—Audit Team Members 16

Appendix D—Management Comments 17

Appendix E—SIGIR Mission and Contact Information 20
1 

Development Fund for Iraq: Policy Guidance Needed To 

Enhance Accountability of USACE-managed Funds 

SIGIR 10-006 October 29, 2009

Introduction 

U.S. government agencies received more than $2.4 billion from the Development Fund for Iraq 

(DFI) to administer and oversee reconstruction contracts for the betterment of the Iraqi people, 

according to independent audit reports of the Fund prepared for the Government of Iraq (GOI) 

and the International Advisory and Monitoring Board.1

 The DFI was established by the 

Administrator of the Coalition Provisional Authority (CPA), and recognized by a resolution of 

the United Nations Security Council,2

 to be used in a transparent manner to provide for: (1) 

humanitarian needs of the Iraqi people, (2) economic reconstruction and repair of Iraq’s 

infrastructure, (3) continued disarmament of Iraq, (4) cost of Iraqi civilian administration, and (5) 

other purposes benefiting the people of Iraq. The Department of Defense (DoD) was one of 

several U.S. agencies to participate in the DFI program, and the U.S. Army Corps of Engineers 

(USACE) was one of several DoD components to receive DFI funds. The total amount of DFI 

funds that USACE received is unclear as referenced in the body of the report. 

GOI authorization for U.S. administration of DFI funds ended on December 31, 2007. The 

Special Inspector General for Iraq Reconstruction (SIGIR) initiated an audit (Project 9011) of 

USACE’s use of DFI funds in response to a hotline tip regarding possible irregularities with 

USACE’s contracting activities. SIGIR is providing this report on DFI funds held by USACE 

and plans to issue a series of reports to determine whether other U.S. government agencies are 

holding DFI funds. 

Background 

The DFI was established in May 2003 pursuant to the power vested in the Administrator of the 

CPA.3

 During the CPA’s administration of Iraq, the CPA Administrator managed DFI funds, 

and CPA Regulation 2, “Development Fund for Iraq” described the responsibilities for the 

administration, use, accounting, and auditing of the DFI. The DFI was funded from export sales 

of petroleum, petroleum products, and natural gas from Iraq. In addition, surplus funds from the 

United Nations Oil-for-Food Program as well as frozen assets were transferred to the fund. The 

Federal Reserve Bank of New York holds DFI funds in two accounts: the Central Bank of Iraq 

account—known as the main account—and an account available to U.S. government agencies 

for use in administering DFI contracts—known as the secondary or sub-account. On June 28, 

2004, the beginning balance in the DFI sub-account was $800 million. The United Nations also 

set up the International Advisory and Monitoring Board to monitor and audit the use of the DFI. 

 

1

 See Appendix A for a list of these reports. 

2

 United Nations Security Council Resolution 1483, dated May 22, 2003. 

3

 The CPA was established in April 2003 for the temporary governance of Iraq following the invasion of Iraq. 
2 

Upon dissolution of the CPA in June 2004 and the transfer of sovereignty to the Interim GOI, 

DFI’s administrative responsibilities were transferred to the Iraq Ministry of Finance. From June 

through December 2004, the Iraq Minister of Finance assigned responsibility to the U.S. 

government Program Management Office4

 in Iraq to monitor and confirm performance, certify 

and/or make payments, and otherwise administer certain DFI funded contracts and grants. 

The Minister of Finance extended this authority on several occasions and to different U.S. 

organizations—the Joint Contracting Command-Iraq/Afghanistan (JCC-I/A) is the last 

organization to have such authority. The Minister of Finance, in a letter to the Commander, 

JCC-I/A, agreed to extend JCC-I/A’s authority to administer and complete payment of remaining 

money due on DFI-funded contracts until December 31, 2007. The Minister of Finance specified 

that JCC-I/A should not award any new contracts after December 31, 2007, nor renew or extend 

any previously awarded contracts. The Minister also noted that all contracts were to be 

completed by December 31, 2007 and remaining funds were to be transferred from the secondary 

account to the main account within the Federal Reserve Bank of New York. 

Upon notification of program termination, JCC-I/A took immediate steps to close out its DFI 

activities. For example, in November 2007, JCC-I/A began sending letters notifying contractors 

that the contract administration authority granted to it by the GOI would cease on December 31, 

2007. JCC-I/A also directed that all remaining cash being held for DFI activities be returned to 

the GOI.5

 In contrast, as of September 2009, U.S. Army Corps of Engineers (USACE) continued 

to hold contracts open and retain DFI funds. USACE officials stated that DFI funds might be 

needed to pay cost reimbursable expenses on contracts it entered into, on behalf of the U.S. 

government, for DFI activities. 

USACE is headquartered in Washington, D.C. and within its headquarters, the Directorate of 

Military Programs is responsible for coordinating efforts in Iraq and Afghanistan. USACE’s 

Transatlantic Programs Center (TAC) in Winchester, Virginia, is a subordinate element of 

USACE that reports to USACE-Headquarters, and provides administrative support on behalf of 

contracting officials working within the theater of operations. The USACE Gulf Region 

Division was established as a provisional Major Subordinate Command after operations in Iraq 

exceeded TAC’s capabilities.6

 The USACE Finance Center in Millington, Tennessee is 

responsible for posting disbursements and maintaining supporting documentation through an 

automated information system known as the Corps of Engineers Financial Management System 

(CEFMS). 

SIGIR’s Investigations Directorate, based on a hotline tip, conducted a preliminary investigation 

that centered on a contractor that had submitted a voucher for a large dollar amount for costs that 

had not been incurred. The Investigations Directorate determined the voucher was submitted at 

the direction of USACE but it concluded there was no criminal wrongdoing involved. In 

response to SIGIR’s investigation, in March 2009, USACE returned to the GOI about $13.1 

million in DFI funds it was holding. 

 

4

 The Program Management Office was originally established to direct, coordinate and oversee the contracting 

organizations for the Iraq Relief and Reconstruction Fund. 

5 Attestation to Development Fund for Iraq Cash in the Possession of the Joint Area Support Group-Central, SIGIR 

08-012, 3/13/2008. 

6

 USACE has announced the inactivation of the Gulf Region Division effective October 23, 2009. 
3 

Objective 

SIGIR plans to conduct a series of audits to determine whether DoD and its components, as well 

as other U.S. agencies, have properly accounted for DFI funds they received. This report on 

USACE represents the first in this series of reports. Our reporting objective is to determine 

USACE’s accountability for funds it received from the DFI. For a discussion of the audit scope 

and methodology, see Appendix A. For a list of the acronyms used in this report, see Appendix 

B. For a list of the audit team members, see Appendix C. For management comments, see 

Appendix D. For the SIGIR mission and contact information, see Appendix E. 

 
4 

Policy Guidance Is Needed To Enhance Accountability 

of USACE-managed Funds 

SIGIR’s review of USACE’s DFI fund management identified a number of issues that raise 

questions about how DFI funds can and should be managed and used. For example: 

• To date, USACE has not provided us with a complete listing of its DFI fund activities. 

Numerous organizational changes in the management and accounting of DFI funds prior 

to USACE assuming responsibility contributes to this problem. At the conclusion of our 

audit, USACE officials provided a list of funds it received but information on fund use is 

still being gathered. 

• Although the GOI apparently directed that payment of remaining money due on DFIfunded contracts was to be completed by December 31, 2007, USACE currently has 

about $3.0 million in DFI funds for potential liabilities associated with open 

reconstruction contracts, and one USACE contractor has about $2.2 million it said was 

for work that had been completed but not yet approved for payment. The Defense 

Contract Audit Agency (DCAA) is currently auditing the data supporting the $2.2 

million. 

• USACE used $9.2 million of GOI funds to pay for reimbursable work order expenses, 

which may be inconsistent with guidance provided by the Office of the Secretary of 

Defense. 

SIGIR also notes that DoD lacks clear policy guidance on the handling and continued use of DFI 

funds, such as those held by USACE. 

USACE’s DFI Funding Remains Under Review 

After some delays, USACE provided a listing of DFI-funding it received totaling $2.4 billion. 

Initially, SIGIR asked USACE to identify all of its DFI-funded activities from the start of the 

DFI in the spring of 2003 until the end of the U.S. government’s control of DFI in December of 

2007. SIGIR was initially provided reports that did not include all USACE DFI activities. For 

example, SIGIR was provided two different accounts: the first list identified 24 projects with a 

combined value of about $127.8 million; and the second list identified 41 projects with a 

combined value of about $143.4 million. We discussed these concerns with USACE officials 

who provided a more comprehensive list showing the amount of DFI funds USACE received 

was about $2.4 billion. However, we did not confirm this data nor did we receive information on 

fund use by the time our field work was completed. USACE officials said that a contributing 

factor for the delayed response was the lack of a single DFI accounting code in the Defense 

Finance and Accounting Service regulations. 

USACE’s difficulty in identifying the universe of DFI-funded activities stems from long 

standing weaknesses in DFI accounting processes, some occurring before USACE assumed 

responsibility for DFI projects initiated by other organizations. For example, independent audit 

reports completed for the GOI and the International Advisory and Monitoring Board in 2005 
5 

indicated that U.S. government agencies did not maintain a complete and accurate database of 

contractual commitments signed by the former CPA. In addition, independent auditors reported 

that USACE did not routinely monitor the amount of cash received from the DFI against project 

disbursements and remaining obligations on DFI-funded contracts and task orders. As of the 

most recent audit report,7

 dated December 31, 2008, the auditors had no indication that the 

deficiencies had been corrected. 

USACE officials stated that they assumed responsibility for many DFI activities initiated by 

earlier reconstruction organizations, and a transaction-based accounting system was not used 

early in the U.S.-reconstruction program. Instead, data was recorded on spreadsheets, and cash 

was disbursed but not entered into USACE’s database. In addition, separate codes were not 

established to segment DFI from other funding sources. 

One USACE Contractor Is Still in Possession of DFI Funds 

One USACE contractor is still in possession of $2.2 million in DFI funds. In November 2006, 

USACE-TAC issued modifications to DFI contracts involving Perini Management Services, 

Incorporated; Washington Group International, Incorporated; and Fluor Intercontinental, 

Incorporated, which required the three contractors to bill the U.S. government a total of about 

$11.2 million for costs they did not incur prior to the time they submitted vouchers. In 

submitting their vouchers, the contractors were instructed to send them directly to USACE-TAC. 

USACE officials told us that they ordered the modifications because they understood that unused 

DFI funds were going to be turned back to the GOI on December 31, 2006.8

 The officials stated 

that if they did not retain the funds, they may not have the money to pay outstanding vouchers on 

DFI contracts. Several USACE officials were aware of the contract modifications and assisted in 

developing the language for them, including that for submitting the invoices directly to TAC 

rather than through DCAA, which is the normal process. However, the modifications specified 

that the payments would be subject to future DCAA audits. In 2008, DCAA issued audit reports 

on all three contractors and disallowed the payments made by USACE. 

Washington Group’s contract modification totaled approximately $1.5 million, and Washington 

Group was instructed to submit a final invoice directly to the contracting officer at TAC in the 

amount of all remaining funding under the contract. Washington Group’s invoice totaled about 

$5.2 million. DCAA issued an audit report9

 on Washington Group, dated September 5, 2008, 

which stated, “Although we reconciled the voucher amounts to its books of record, we 

determined that $5,203,045 of the billed costs were not actually incurred.” When USACE sent a 

letter requesting the funds be returned, Washington Group requested an extension in order to 

provide documentation for costs it incurred and for which it believes it should be compensated. 

As a result, Washington Group did not return about $2.2 million of the approximately $5.2 

million that it had received from USACE. DCAA is currently auditing Washington Group’s 

vouchers to determine what portion of the costs can be validated and retained. 

 

7 Development Fund for Iraq Management Letter Arising from Audit, Independent Auditors Report, KPMG, 

12/31/2008. 

8

 The GOI extended U.S. administration of the DFI through December 31, 2007. 9 Report on Voucher No. 1409-27, November 9, 2006 Under Prime Contract No. DACA 78-03-D-0004, Task Order 

0002, DCAA Audit Report No. 4261-2008W17900004, 9/5/2008. 
6 

Perini and Fluor also received contract modifications for costs that had not been incurred prior to 

the time they submitted vouchers. The modifications for Perini and Fluor totaled approximately 

$1.7 million and $3.5 million, respectively. Perini billed USACE, as directed, for all funds 

remaining on the contract, which totaled $2.5 million. DCAA issued audit reports10 for both 

Perini, dated January 31, 2008, and Fluor, dated August 20, 2008, disallowing the payments 

made by USACE. Both Perini and Fluor returned the full amount of the disallowed payments 

when USACE sent letters requesting the funds be returned. 

Perini returned two checks to USACE—one for the principal amount of approximately $2.5 

million and one for $300,290 in interest earned on the funds sent by USACE and disallowed by 

DCAA. USACE was not aware that interest had been earned on the funds that it provided under 

the contract modifications until Perini brought it to their attention. USACE responded to Perini 

with a letter stating, “...because funds obligated to contracts are for specific authorized amounts, 

the United States Government is not able to process the interest amount generated by GOI funds 

belonging to the GOI that were obligated to this contract...” Accordingly, USACE directed 

Perini to transfer the interest earned to the GOI and provided procedures on how to do it. While 

evidence shows that Perini returned the $300,290 to the GOI, USACE did not contact 

Washington Group or Fluor to determine whether they also had earned interest on the USACEprovided funds. According to USACE officials, under the Federal Acquisition Regulation, the 

government does not charge a contractor interest until it identifies a debt and issues a demand 

letter for that debt. Moreover, contract debts do not begin to accrue interest until they remain 

unpaid for 30 days after the date of the demand payment. While this is true, SIGIR questions 

why contractors are permitted to retain interest earned on money that was subsequently returned 

to the GOI. 

In an email a USACE Headquarters official stated that it would direct the Middle East District to 

contact Washington Group and Fluor to seek recovery of any interest earned on DFI funds held 

by those contractors that were subsequently disallowed. 

The Majority of DFI Funds Returned but Some Remain In a 

Suspense Account 

USACE officials returned the majority of USACE’s DFI funds to the GOI in early 2009 but 

continue to hold additional funds that may also need to be returned. USACE officials provided 

documentation showing that on March 3, 2009, it transferred approximately $13.1 million to the 

GOI. Our analysis of this transfer shows that about $5.9 million originated from DFI funds 

returned by Perini and Fluor when DCAA disallowed payment of those funds and $7.2 million 

came from suspense accounts maintained by USACE. USACE officials stated that, in response 

to SIGIR’s investigation, they returned these funds to the GOI. 

According to USACE officials, as of September 2009, its Finance Center still held 

approximately $3.0 million of DFI funds in a suspense account. The majority of these funds, or 

 

10 Report on Voucher No. 151-FM-061, November 9, 2006 Under Prime Contract No. DACA 78-03-D-006 

D.O.0002, DCAA Audit Report Mo. 02161-2008V17900002, 1/31/2008. Report on Voucher No. 58, November 9, 

2006 Contract No. DACA 78-03-D-0005, Task Order 0006, DACA Audit Report No. 4411-2008N17900005, 

8/20/2008. 
7 

about $2.9 million, represent funds returned to USACE by Washington Group. USACE officials 

stated they were holding approximately $3.0 million to pay possible claims against the U.S. 

government for cost-reimbursable expenses on DFI-funded contracts that have not been 

financially closed. USACE officials stated they used DFI funds to award cost-reimbursable 

contracts between themselves and a variety of U.S. and Iraq-based providers. The officials noted 

that under cost-reimbursable contracts, the U.S. government remains liable until expenditures, 

including applicable overhead rates, are finalized. In contrast, USACE officials told us that JCCI/A awarded contracts under the DFI program on behalf of the GOI; therefore, the U.S. 

government was not liable. However, USACE-TAC officials stated that if this was the preferred 

method of contracting, no one ever communicated it to them. 

Use of GOI Funds May Be Inconsistent With DoD Guidance 

USACE stated that it used about $9.2 million in GOI funds to reimburse itself for expenses 

incurred on earlier reimbursable work orders. However, this action may be inconsistent with 

DoD guidance on the use of DFI. USACE had requested guidance from the Under Secretary of 

Defense (Comptroller)/Chief Financial Officer concerning the propriety of using DFI funds to 

cover unpaid expenses that they believed were the GOI’s responsibility. USACE’s request for 

guidance notes that it had accumulated an estimated $32.5 million in expenses to support 

contracts awarded with DFI funds. The memorandum states that, of this amount, USACE had 

previously received about $23.3 million from the GOI, leaving an unpaid balance of 

approximately $9.2 million. The memorandum also indicates that USACE had exhausted all 

available means in-country to obtain reimbursement for the unpaid balance. 

On February 25, 2008, a USACE official sent a message to the Under Secretary of Defense 

(Comptroller) Accounting and Finance Policy officer asking if DoD legal counsel had consulted 

with international lawyers concerning the possible use of “war funds that are involved with 

seized assets” to reimburse USACE for its work in support of DFI-funded contracts. On 

February 26, 2008, DoD legal and Comptroller staff sent an email to USACE indicating the 

Department had no legal objection to using seized and vested funds to pay outstanding balances 

attributable to actual contracts awarded for the benefit of the Iraqi people, but that these funds 

should not to be used to reimburse USACE for any overhead expenses. 

On March 5, 2008, USACE processed payment vouchers totaling about $9.2 million to cover the 

unpaid expenditures. On May 15, 2008, USACE received formal written direction. Specifically, 

the Acting Deputy Chief Financial Officer, Office of the Under Secretary of Defense 

(Comptroller), in a memorandum to the Director for Resource Management, USACE, advised 

that “This memorandum serves as my approval to use the residual advanced seized funds to 

reimburse USACE for contracts completed for the Government of Iraq. The funds should only 

be used to pay balances attributable to actual contract payments, not to reimburse USACE for 

overhead charges.” 

SIGIR’s concerns are that the records supporting this transaction are unclear about (1) the type of 

funds used to reimburse USACE, that is, whether these funds were seized asset funds or DFI 

funds, and (2) what exactly USACE is being reimbursed for. During our review we have been 

unable to separately account for DFI funds and seized asset funds because the funds have been 

commingled. Also, initially USACE identified the expenses it reimbursed itself for as “unpaid 
8 

in-house expenses.” After we provided a draft report for comment USACE officials told us that 

the expenses were not for overhead costs, rather the funds were largely for employees directly 

supporting DFI activities. A few days later, USACE explained in an email and in its formal 

comments that $8.9 million was for actual contract expenses and $0.3 million was for direct 

USACE labor and associated overhead. Because these explanations were received after our draft 

report was sent for review, SIGIR has not had the opportunity to verify the information. 

However, we are presenting this new information at the request of USACE. 

Other DoD Components May Have Retained DFI Funds 

Preliminary indications are that USACE is not the only U.S. entity that may be retaining DFI 

funds. For example, in May 2008, the Army Audit Agency issued a report11 indicating that the 

Assistant Secretary of the Army Financial Management and Comptroller had retained about 

$16.5 million in DFI funds that were never distributed to fund managers. The report 

recommended that the Army query potential users of these funds and return unneeded funds to 

the GOI. SIGIR plans to conduct a series of audits to determine whether other DoD components, 

as well as other U.S. agencies, are holding DFI funds. 

 

 

11 Accounting for Seized Assets and Development Fund for Iraq Balances, U.S Army Audit Agency, Audit Report: 

A-2008-0109-FFM, 5/22/2008. 
9 

Conclusions, Recommendations and Lessons Learned 

Conclusions 

The GOI terminated its authorization for U.S. administration of the DFI program effective 

December 31, 2007; nonetheless, USACE currently has DFI contracts open and has retained DFI 

funds. However, DoD lacks adequate policy and guidance on the disposition and use of these 

funds. Consequently, it is unclear how the funds should be used. 

Issues that remain in question are USACE’s use of $9.2 million to pay reimbursable work order 

expenses it incurred in support of DFI activities and the authority to continue to hold $3.0 

million of DFI funds in its suspense account. Also, once DCAA completes its audit of the $2.2 

million of DFI funds currently being held by Washington Group International, DoD needs to 

provide guidance on how those funds can be used. Lastly, guidance is also lacking on what to do 

with interest that might have been earned by contractors when DCAA disallowed payments 

made to them by USACE for costs that had not been incurred. 

Recommendations 

SIGIR recommends that the Under Secretary of Defense (Comptroller)/Chief Financial Officer 

provide guidance to USACE on the 

1) use and ultimate disposition of DFI funds that it and one of its contractors are currently 

holding, 

2) whether GOI funds should have been used to pay reimbursable work order expenses, and 

3) how interest that might have been earned by several contractors on disallowed payments 

should be used. 

Lessons Learned 

Sound accounting practices are important to any organization and take on even greater 

importance when cash and other country’s money are involved as is the case with DFI. 

Weaknesses in accounting for DFI funds have been extensively documented; therefore, similar 

mistakes should not occur in other overseas contingency operations such as Afghanistan. 

 
10 

Management Comments and Audit Response 

SIGIR received written comments from the Office of the Under Secretary of Defense 

(Comptroller) and USACE. The Deputy Chief Financial Officer concurred with our 

recommendations and stated that guidance would be provided to USACE in January 2010. In the 

course of addressing agency management comments, we revised one of our recommendations to 

address a USACE concern about how the funds were used. SIGIR made a draft recommendation 

that the Comptroller provide guidance on whether GOI funds can be used to pay in-house and 

overhead expenses. USACE stated in its official comments that the funds were used to pay for 

direct in-house labor and overhead expenses associated with its DFI contracting activities. Our 

final recommendation states that guidance should be provided on whether GOI funds should 

have been used to pay reimbursable work order expenses. This addresses the general nature of 

how DFI funds should be used. We informed DoD officials about the change from our draft 

report and they concurred with the final recommendation. 

USACE also provided comments. Because our recommendations were directed to the Under 

Secretary of Defense (Comptroller) USACE did not comment on them directly. However, 

USACE disagreed with a SIGIR conclusion that $9.2 million in GOI funds had been used to pay 

for in-house labor and overhead expenditures associated with its DFI activities. According to 

USACE, it determined after it received the draft report that $0.3 million of the $9.2 million was 

used to pay direct labor and associated overhead expenses in support of DFI contracts, and that 

the remaining $8.9 million was used for actual contract payments. Because this information was 

received after our draft report was sent for review, SIGIR has not had the opportunity to verify 

the data and make all of the changes requested by USACE. However, we have included this 

explanation in the report at USACE’s request. 
11 

Appendix A—Scope and Methodology 

Scope and Methodology 

In March 2009, the Special Inspector General for Iraq Reconstruction (SIGIR) initiated Project 

9011 as the first in a series of reports that the Special Inspector General for Iraq Reconstruction 

(SIGIR) plans to issue on its evaluations of the extent to which U.S. government agencies can 

properly account for Development Fund for Iraq (DFI) funds they received. SIGIR’s objectives 

for this audit were to determine whether the U.S. Army Corps of Engineers (USACE) can 

properly account for DFI funds it received. This audit was performed under the authority of 

Public Law 108-106, as amended, which also incorporates the duties and responsibilities of 

inspectors general under the Inspector General Act of 1978. SIGIR conducted its work during 

from March 2009 through September 2009 in the United States. 

To determine the amount of DFI funding that USACE may have held following the December 

31, 2007, termination of U.S. government stewardship, we first attempted to determine the total 

amount of DFI funds USACE received. We requested access to financial transactional data—

receipts and disbursements—from the DFI sub-account maintained by the Federal Reserve Bank 

of New York. SIGIR is still working to gain access to government-wide accounting records at 

the Federal Reserve Bank of New York. We requested this information to gain insight into the 

distribution of funds to the various federal agencies including the total amount of DFI made 

available to USACE. SIGIR also asked USACE financial representatives to provide a report of 

DFI funding authorizations it received and related obligations and disbursements for each DFIfunded project. On two different occasions, USACE developed reports on its DFI funding 

activities. Based on other sources of data available from the public domain, we concluded and 

USACE agreed that the data as presented to us was not all-inclusive. 

To gain preliminary insight into the amount of DFI funding that USACE was holding following 

the December 31, 2007 termination of the U.S. government’s stewardship, SIGIR relied on 

information from its Hotline concerning potential improper contract and financial management 

practices, along with related information developed by the Defense Contract Audit Agency 

(DCAA) which disallowed payments USACE made to contractors for costs that were not 

incurred. We believe DCAA’s findings are reliable for the purposes of this audit. We also 

examined and analyzed key correspondence and guidance prepared by a variety of USACE and 

other governmental entities concerning the proper use of DFI funds. We refer to this 

documentation, where appropriate, within the body of this report. We analyzed additional 

collaborative information obtained from a series of data calls and interviews with officials 

assigned to the USACE-Transatlantic Programs Center in Winchester, Virginia, and the Finance 

Center in Millington, Tennessee. Lastly, we held discussions with officials from the U.S. Army 

Finance Command in Indianapolis, Indiana, and the U.S. Department of the Treasury in 

Washington, D.C. 

To ascertain the amount of funding that USACE should consider returning to GOI, we examined 

the rationale and basis for previous returns of funds to the GOI and considered the Minister of 

Finance’s memorandum requesting that all unused DFI funds be returned to GOI by the end of 

December 2007. 
12 

The audit was conducted in accordance with generally accepted government auditing standards. 

Those standards require that SIGIR plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions based on our audit 

objectives. SIGIR believes that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives. 

Use of Computer-processed Data 

To identify the total DFI funding that USACE received, we relied on information contained in 

the Corps of Engineers Financial Management System (CEFMS). While this data analysis is still 

incomplete, SIGIR considers the initial computer-processed data provided by USACE to be 

sufficiently reliable to support the conclusions and recommendations provided in this report. For 

example, we compared summary listings of DFI funding generated by CEFMS to other data 

contained in independent audit reports prepared for the Government of Iraq and the International 

Advisory and Monitoring Board. We determined that, to date, CEFMS generated information 

did not provide a comprehensive picture of USACE’s DFI funding activities. We presented the 

results of our review in the body of the report. 

Internal Controls 

To achieve the audit objectives, SIGIR discussed general operating procedures related to 

USACE’s DFI financial management process. We also reviewed internal controls and processes 

that USACE used in managing and administering the DFI contracting process. We determined 

that internal controls within USACE’s accounting system were not sufficiently transparent to 

easily track the DFI funding it received. To complete our review, we examined documents in the 

contract file and held discussions with key officials to gain an understanding of the internal 

controls governing the use of DFI. We also considered comments and conclusions contained in 

independent audit reports and management letters concerning DFI internal controls. These 

reports were developed for use of the GOI and the International Advisory and Monitoring Board. 

We did not examine the contractor’s internal management and financial controls and other 

organizations outside of USACE. We presented the results of our review of internal controls in 

the body of this report as appropriate. 

Related Audit Reports 

We reviewed the following applicable audit reports issued by SIGIR, the Department of Defense 

(DoD), the U.S. Army Audit Agency, DCAA, and the U.S. Government Accountability Office. 

Special Inspector General for Iraq Reconstruction 

Administration of Contracts Funded by the Development Fund for Iraq, SIGIR 05-008, 

4/30/2005. 

Iraq Reconstruction-Lessons in Contracting and Procurement, SIGIR, July 2006. 

Management of the Iraqi Interim Government Fund, SIGIR 06-31, 10/27/2006. 
13 

Follow-up on SIGIR Recommendations Concerning the Development Fund for Iraq (DFI), 

SIGIR 06-36, 1/29/2007. 

Iraq Reconstruction-Lessons in Program and Project Management, SIGIR, March 2007.

Attestation to Development Fund for Iraq Cash in the Possession of the Joint Area Support 

Group-Central, SIGIR 08-012, 4/13/2008. 

Department of Defense 

Internal Controls Over Payments Made in Iraq, Kuwait and Egypt, Department of Defense, 

Inspector General, Report No. D-2008-098, 5/22/2008. 

U.S. Army Audit Agency 

Accounting for Seized Assets and Development Fund for Iraq Balances, USAAA, Audit Report: 

A-2008-0109-FFM, 5/22/2008. 

Defense Contract Audit Agency 

Report on Voucher No. 151-FM-061, Dated November 9, 2006, Under Prime Contract No. 

DACA78-03-D-0006, D.O. 0002, DCAA-02161-2008V17900002, 1/31/2008. 

Report on Voucher No. 58, Dated November 9, 2006, Contract No. DACA78-03-D-0005, Task 

Order 0006, DCAA-4411-2008N17900005, 8/20/2008. 

Report on Voucher No. 1409-27, Dated November 9, 2006, Under Prime Contract No. DACA78-

03-D-0004, Task Order 0002, DCAA-4261-2008W17900004, 9/5/2008. 

U.S. Government Accountability Office 

Recovering Iraq’s Assets: Preliminary Observations on U.S. Efforts and Challenges, GAO-04-

579T, 3/18/2004. 

Stabilizing and Rebuilding Iraq: Iraqi Revenues, Expenditures, and Surplus, GAO-08-1031, 

8/5/2008. 

Stabilizing and Rebuilding Iraq: Iraqi Revenues, Expenditures, and Surplus, GAO-08-1044T, 

9/16/2008. 

International Advisory and Monitoring Board 

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the period from 29 

June 2004 to 31 December 2004, Independent Auditor’s Report, KPMG, 4/6/2005. 

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the period from 1 

January 2005 to 30 June 2005, Independent Auditor’s Report, KPMG, 9/29/2005. 

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the period from 1 

July 2005 to 31December 2005, Independent Auditor’s Report, Ernst and Young, 9/13/2006. 
14 

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the year ended 31 

December 2006, Independent Auditor’s Report, Ernst and Young, 7/5/2007. 

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the year ended 31 

December 2007, Independent Auditor’s Report, Ernst and Young, 6/12/2008.
15 

Appendix B—Acronyms 

ACRONYM DESCRIPTION 

CEFMS Corps of Engineers Financial Management System 

CPA Coalition Provisional Authority 

DCAA Defense Contract Audit Agency 

DFI Development Fund for Iraq 

DoD Department of Defense 

GAO U.S. Government Accountability Office 

GOI Government of Iraq 

JCC-I/A Joint Contracting Command-Iraq/Afghanistan 

SIGIR Special Inspector General for Iraq Reconstruction 

TAC Transatlantic Programs Center 

USACE U.S. Army Corps of Engineers 
16 

Appendix C—Audit Team Members 

This report was prepared and the audit conducted under the direction of David R. Warren, 

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

Reconstruction. 

The staff members who conducted the audit and contributed to the report include: 

Benjamin H. Comfort 

M. Glenn Knoepfle 

Jason G. Venner 

L. Michael Welsh 
17 

Appendix D—Management Comments 
18 
19 
20 

Appendix E—SIGIR Mission and Contact Information 

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

operations in Iraq, the Special Inspector General for Iraq 

Reconstruction provides independent and objective: 

• oversight and review through comprehensive audits, 

inspections, and investigations 

• advice and recommendations on policies to promote 

economy, efficiency, and effectiveness 

• deterrence of malfeasance through the prevention and 

detection of fraud, waste, and abuse 

• information and analysis to the Secretary of State, the 

Secretary of Defense, the Congress, and the American 

people through Quarterly Reports 

Obtaining Copies of SIGIR 

Reports and Testimonies 

To obtain copies of SIGIR documents at no cost, go to 

SIGIR’s Web site (www.sigir.mil). 

To Report Fraud, Waste, and 

Abuse in Iraq Relief and 

Reconstruction Programs 

Help prevent fraud, waste, and abuse by reporting 

suspicious or illegal activities to the SIGIR Hotline: 

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

• Phone: 703-602-4063 

• Toll Free: 866-301-2003 

Congressional Affairs Hillel Weinberg 

Assistant Inspector General for Congressional 

Affairs 

Mail: Office of the Special Inspector General 

for Iraq Reconstruction 

 400 Army Navy Drive 

 Arlington, VA 22202-4704 

Phone: 703-604-0368 

Email: hillel.weinberg@sigir.mil 

Public Affairs Daniel Kopp 

Assistant Inspector General for Public Affairs 

Mail: Office of the Special Inspector General 

for Iraq Reconstruction 

 400 Army Navy Drive 

 Arlington, VA 22202-4704 

Phone: 703-428-1217 

Fax: 703-428-0818 

Email: PublicAffairs@sigir.mil