SEMIANNUAL REPORT 

TO THE CONGRESS 

UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT 

OFFICE OF INSPECTOR GENERAL 

FOR THE 

MILLENNIUM CHALLENGE CORPORATION 

April 1, 2006 - September 30, 2006 
II

Mission 

The mission of the Office of Inspector General (OIG) is to contribute to and support 

integrity, efficiency, and effectiveness in all activities of the organizations for which it has 

oversight responsibilities. 

Values 

In accomplishing our mission, OIG is committed to the following: 

• Integrity 

• Excellence 

• Teamwork 

Strategic Goals 

• 	Promote sound accounting and reporting on financial activities and information 


security.


• 	Promote economy, efficiency, and effectiveness, and assess program results. 

• 	Preserve and protect program and employee integrity. 
CONTENTS


Message from the Inspector General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii


Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1


Summary of Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2


Strategic Goal 1: Promote sound accounting and reporting on financial


activities and information security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2


Strategic Goal 2: Promote economy, efficiency, and effectiveness, and


assess program results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4


Strategic Goal 3: Preserve and protect program and employee integrity . . . . . . . . . . . . . . . . . . . 5


Appendices: Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7


SEMIANNUAL REPORT TO THE CONGRESS i
ii
MESSAGE FROM THE 

INSPECTOR GENERAL 

This Semiannual Report to the 

Congress presents information regarding the United 

States Agency for International 

Development, Office of Inspector 

General’s (OIG) work and results 

achieved during the six-month 

period ending September 30, 2006. 

It is issued in accordance with the 

requirements of the Inspector 

General Act of 1978, as amended, 

and specifically addresses our 

responsibilities for the Millennium 

Challenge Corporation (MCC). 

The work reported was planned and 

executed in support of OIG/MCC’s 

three strategic goals: 

• 	 Promote sound accounting and 

reporting on fi nancial activities 

and information security; 

• Promote economy, effi ciency, and 

effectiveness, and assess program 

results; and 

• 	 Preserve and protect program and 

employee integrity. 

Significant OIG activity and 

achievements in support of these 

goals are described in this report, 

and comprehensive statistics and 

data regarding our efforts are also 

included. 

OIG continues to take a resultsoriented approach in support of the 

integrity, efficiency, and effectiveness 

of MCC during this critical phase 

of program and operations development. 

Donald A. Gambatesa 

Inspector General 

SEMIANNUAL REPORT TO THE CONGRESS iii
iv
EXECUTIVE SUMMARY


OIG’s collaborative working 

relationship with MCC 

continues to demonstrate 

positive results. During this 

reporting period, management 

decision was reached on 23 

recommendations. Final action was 

recorded on fi ve recommendations. 

Work continued and was initiated in 

support of three strategic goals, and 

progress was realized under each of 

the goals as follows: 

Strategic Goal 1: 

Promote sound 

accounting and 

reporting on fi nancial 

activities and 

information security 

OIG’s role in support of in-country 

auditing arrangements resulted in 

the identification and qualifi cation 

of audit firms in six countries to 

conduct audits of U.S. Government 

programs. Approval of fi rms in 

three additional countries is pending 

receipt of additional records and 

documentation. Additionally, OIG 

reviewed statements of work 

for audits in four countries to be 

conducted by local audit fi rms. 

Emphasis continues on building 

relationships with other organizations with experience or interest in 

international auditing of development projects. 

Three reports were issued: an 

audit of the financial system to be 

used to account for funds under 

an agreement with El Salvador;1 

a risk assessment of Millennium 

Challenge Account (MCA)/Cape 

Verde’s fi nancial operations;2 and 

an audit of MCC’s compliance 

with the provisions of the 

Federal Information Security Act 

of 2002.3 Vulnerabilities were 

identified that might lead directly 

to fraud, erroneous payment, or 

misappropriation of funds. The 

need for improvements to MCC’s 

information security program was 

identified, though OIG noted that 

MCC had made some improvements 

in addressing such weaknesses. 

Strategic Goal 2: 

Promote economy, 

effi ciency, and 

effectiveness, and assess 

program results 

An audit addressed MCC’s 

procedures for ensuring that 

Section 609(g)4 assistance funds, 

grants made to facilitate Compact 

implementation, are used for 

intended purposes.

5

 The report 

noted MCC’s compliance with 

its current policy and initiatives 

to track and monitor funds, but 

identified several areas needing 

further improvement. Another 

audit report was issued addressing 

MCC’s progress in developing 

its organizational structure and 

managing programs.

6

 The audit 

found that progress had been made 

but identified areas needing further 

attention. 

Strategic Goal 3: 

Preserve and protect 

program and employee 

integrity 

Fraud awareness briefi ngs were 

conducted in five countries and 

MCC headquarters. These briefi ngs 

highlighted potential contracting 

irregularities and educated those 

with responsibility for administering U.S. Government assistance 

programs to potential vulnerabilities. 

1.	 Information Sensitive But Unclassifi ed. 

2.	 “Risk Assessment of Millennium Challenge Account Cape Verde’s Financial Operations,” September 26, 2006 (Audit Report No. M-000-06-004-F). 

3.	 Information Sensitive But Unclassifi ed. 

4.	 Millennium Challenge Act of 2003, Section 609(g) – Assistance for Development Compact authorizes the Chief Executive Officer to enter into contracts 

or make grants for any eligible country for the purpose of facilitating the development and implementation of the Compact between the United States 

and the country. 

5.	 “Audit of the Millennium Challenge Corporation’s Management of Section 609(g) Funds,” September 28, 2006 (Audit Report No. M-000-06-002-P). 

6.	 “Review of the Millennium Challenge Corporation’s Progress in Achieving its Planned Organizational Structure and Beginning its Assistance Programs,” 

May 16, 2006 (Audit Report No. M-000-06-001-S). 

SEMIANNUAL REPORT TO THE CONGRESS 1
2

SUMMARY OF RESULTS


Strategic Goal #1: 

Promote sound accounting and reporting on 

financial activities and information security. 

OIG continues to address 

MCC’s challenge to 

develop effective fi nancial 

management systems and related 

internal controls by testing MCC’s 

systems to ensure they provide reliable and secure data. 

OIG also provides expertise to 

MCC’s in-country auditing arrangements. Prior to qualifi cation, OIG 

assesses local firms for eligibility to 

perform audits, reviews documents 

to facilitate the in-country audit 

process; and audit products are 

evaluated for quality concerns. In 

the last six months, audit fi rms have 

been qualified in Benin, Cape Verde, 

Georgia, Ghana, Nicaragua, and 

Vanuatu. Approval of local audit 

firms to perform MCC work in El 

Salvador, Nicaragua, and Vanuatu 

is pending submission of additional 

information. Also, during this 

reporting period, OIG reviewed 

statements of work for audits 

planned by implementing agencies 

in Cape Verde, Georgia, Honduras 

and Madagascar. 

OIG works to build relationships 

with other organizations that are 

active in the fi nancial auditing 

of development projects. This is 

particularly useful where USAID 

does not have a presence. During 

this reporting period, OIG met with 

representatives of The World Bank’s 

Europe and Central Asian Regions 

in Washington, DC to gain a better 

understanding of The World Bank’s 

performance reviews, fi nancial 

management and procurement 

practices. 

AUDIT AND ASSESSMENT WORK 

Audit of the General 

and Application 

Controls of the 

Government 

of El Salvador’s 

Integrated Financial 

Administration System 

The Integrated Financial Administration System is maintained by 

the Ministry of Hacienda and is 

the system expected to be used 

to account for MCC funds under 

an agreement with El Salvador. 

OIG tested it to determine if 

it meets current information 

technology control standards 

for confidentiality, integrity, and 

availability. Six control weaknesses 

that could lead directly to erroneous 

or fraudulent payments and 77 

additional weaknesses with potential 

to compromise the confi dentiality, 

integrity, or availability of the 

data or information systems were 

identifi ed. 

OIG’s audit report

7

 recommended 

that the six control weaknesses that 

could lead directly to erroneous or 

fraudulent payments be corrected 

or mitigated through compensating 

controls before MCC program 

funds are disbursed, and that 

MCC obtain an action plan for 

correcting the other 77 weaknesses 

before providing program funds to 

the Government of El Salvador. 

Management decision was reached 

on the report’s recommendations. 

Final action is pending. 

Risk Assessment of 

MCA/Cape Verde’s 

Financial Operations 

OIG conducted a risk assessment 

of MCA/Cape Verde,

8

 a $110 

million Compact program, during 

the implementation phase to detect 

vulnerabilities that could prevent 

the establishment of effective 

financial operations. Procurement 

7. Information Sensitive But Unclassifi ed. 

8. “Risk Assessment of MCA/Cape Verde’s Financial Operations,” September 26, 2006 (Audit Report No. M-000-06-004-F). 

2 SEMIANNUAL REPORT TO THE CONGRESS 
policies have been implemented 

in compliance with guidelines 

established by MCA and MCC. 

However, MCA/Cape Verde’s cash 

management process was identifi ed 

as being at medium to high risk for 

misappropriation of funds and in 

need of improvement to its process 

for estimating immediate cash needs. 

Improvements are also needed in 

MCA/Cape Verde’s review and 

approval process for disbursement 

requests and in its provision of 

guidance and oversight related to 

contractors’ advances. 

Audit of the Millennium 

Challenge Corporation’s 

Compliance with the 

Provisions of the Federal 

Information Security 

Management Act of 

2002 for Fiscal Year 2006 

An audit was conducted to determine 

if MCC’s information security 

program met the requirements of 

the Federal Information Security 

Management Act of 2002 (FISMA) 

for an agency-wide information 

security program that protects MCC’s 

information and assets.

9 

MCC made improvements to its 

information security program but 

did not meet all of the requirements 

of FISMA. Several important 

challenges remain: certifi cation and 

accreditation of its general support 

system; a process to manage remedial 

actions to strengthen information 

security; and oversight and evaluation 

of the contractor operated system. 

9. Information Sensitive But Unclassifi ed. 

SEMIANNUAL REPORT TO THE CONGRESS 3
4

Strategic Goal #2: 

Promote economy, efficiency, and 

effectiveness, and assess program results. 

OIG directs its efforts to 

evaluating MCC’s response 

to management challenges 

and provides management with 

recommendations to address 

vulnerabilities. The challenges relate 

to human capital; the application of 

laws and regulations; and development of effective management 

oversight methodologies and 

programs. 

AUDIT AND ASSESSMENT WORK 

Audit of the 

Millennium Challenge 

Corporation’s 

Management of Section 

609(g) Funds 

OIG reviewed compliance with 

policy and procedures to ensure 

funds issued under grants to 

facilitate Compact implementation, 

called Section 609(g) assistance 

funds, are used for intended 

10 

purposes. 

MCC has developed initiatives to 

track and monitor Section 609(g) 

funds to ensure such funds were 

used for the purposes intended 

under the Millennium Challenge Act 

of 2003. Section 609(g) assistance 

funds awarded after policy was 

implemented in June 2005, were 

found to be in accordance with 

policy. However, Section 609(g) 

funds were awarded to MCC’s initial 

five recipient countries before the 

policy was implemented. 

OIG identified several areas needing 

further improvement to the Section 

609(g) program and made specifi c 

recommendations to address the 

lack of Section 609(g) bridgefunding policies and procedures; 

inadequate monitoring and tracking 

of Section 609(g) funds, specifi cally 

in the areas of fi nancial controls 

and country capacity procurement assessment guidelines; and 

inadequate oversight of overseas 

procurement activities. 

Review of the 

Millennium Challenge 

Corporation’s Progress 

in Achieving Its 

Planned Organizational 

Structure and 

Beginning Its Assistance 

Programs 

OIG reviewed MCC’s progress 

in organizational and program 

management.11 MCC made strides 

in implementing its organizational 

plan; entering into Compacts with 

eligible countries; complying with 

the Millennium Challenge Act of 

2003; and assessing the applicability of other federal laws and 

regulations to its operations. 

Further attention is needed to 

policy development in the following 

areas: security clearance requirements; Section 609(g) pre-Compact 

funds; and countries’ participation 

in both the threshold and eligible 

country programs. Short-and 

long-range plans are needed for 

an integrated human resource 

management system that will 

maintain and track personnel data 

and interface with external systems. 

Procedures to designate Contracting 

Offi cer’s Technical Representatives 

(COTR) and to define the type 

and frequency of information 

that USAID should include in its 

progress reports on the threshold 

program. 

Six recommendations were made, 

and management decision was 

reached on all. Final action was 

taken on one recommendation. 

10. “Audit of the Millennium Challenge Corporation’s Management of Section 609(g) Funds,” September 28, 2006 (Audit Report No. M-000-06-002-P). 

11. “Review of the Millennium Challenge Corporation’s Progress in Achieving Its Planned Organizational Structure and Beginning Its Assistance Programs,” 

May 16, 2006 (Audit Report No. M-000-06-001-S). 

4 SEMIANNUAL REPORT TO THE CONGRESS 
Strategic Goal #3: 

Preserve and protect program and employee 

integrity. 

OIG’s Fraud Awareness 

program focuses on 

prevention and protection 

of resources and consists of 

briefings and a manual that 

highlights potential contracting 

irregularities. Semi-annual briefi ngs 

are conducted at MCC Headquarters for MCC, MCA entities of 

host countries, and other interested 

parties. During this reporting 

period, OIG also conducted 

Fraud Awareness briefings in Cape 

Verde, Georgia, Benin, Ghana, 

and Vanuatu for local government, 

implementing agencies, and audit 

firm staff, foreign government 

officials, and Supreme Audit 

Institute members. 

SEMIANNUAL REPORT TO THE CONGRESS 5
6
A


P


P


REPORTING E 

REQUIREMENTS N 

D 

I


C


E 

S 

7 
DESCRIPTION OF RECOMMENDATIONS FOR


CORRECTIVE ACTION MADE DURING THE


REPORTING PERIOD WITH RESPECT TO SIGNIFICANT


PROBLEMS,ABUSES OR DEFICIENCIES IDENTIFIED


As of September 30, 2006 

IG Act, Section 5(a)(2) 

Report Recommendations for Corrective Action 

M-000-06-001-S 1. Personnel Security Procedures:

 Need for security–related policies and procedures that (1) identify clearance level for each employee and

 (2) require a preliminary background investigation at a minimum. 

2. Program Policy improvements:

 Need to update Section 609 (g) policy regarding concept, requirements, limitations, methodology and 

application. 

3. Program Policy improvements:

 Need for policy guidance on whether a country should be in both the “Eligible” and “Threshold” country

 programs. 

4. Information Technology: 

Assessment recommended for automated options to integrate human resource functions and interface 

with Department of Interior’s National Business Center. 

5. Procurement - Contracting Officer’s Technical Representative: 

MCC should provide each Contracting Officer’s Technical Representative with a designation letter for each 

contract they manage. 

6. Program Development - Progress Reports: 

MCC should formally define the frequency and contents of progress reports for the Threshold Program 

and communicate these requirements to USAID. 

M-519-06-002-P 1. Information Technology:

 Deficiencies in information technology system for the Financial Accounting System should be corrected 

prior to awarding MCC program funds. 

2. Information Technology - Timeline for Improvements

 Require an action plan with timeframes to correct information technology deficiencies prior to awarding 

MCC program funds. 

8 SEMIANNUAL REPORT TO THE CONGRESS Appendix A 
Report Recommendations for Corrective Action 

M-000-06-004-F 1. Financial Management - Cash Management

 Establish policies and procedures to evaluate disbursement requests from recipient countries and require 

excess cash to be refunded to MCC. 

2. Financial Statements - Accounting for MCC Funds by the Recipient Country 

 Require financial statements covering MCC funds managed by the recipient country to be on the accrual 

basis of accounting or provide data to inform MCC of accrual expenditures. 

3. Financial Management - Cash Management 

 Establish policies and procedures to guide the recipient country in disbursements to secondary recipients. 

M-000-06-002-P 1. Financial Management – Procurement

 Establish procedures to ensure validity of the invoice and improve voucher approval and payment. 

2. Financial Management - Procurement

 Establish a policy for the process of approving deviations to the Procurement Agreement. 

3. Financial Management – Procurement

 Issue guidance for assessing procurement capacity by a government or others. 

4. Financial Management – Procurement 

 Define MCC responsibility for monitoring and reviewing the recipient country’s procurement. 

M-000-06-003-P 1. Information Technology – FISMA Compliance 

 Complete certification and accreditation of the general support system for MCC 

2. Information Technology – FISMA Compliance

 Develop a process to ensure compliance with FISMA 

3. Information Technology - FISMA Compliance 

Develop a process to improve FISMA compliance and submit a Plan of Action and Milestone Report to the 

Office of Management and Budget quarterly. 

4. Reopened:- from M-000-05-003-P (Recommendation 2)

 Information Technology – Security

 Conduct periodic risk assessments. 

5. Reopened – from M-000-05-003-P (Recommendation 3) 

 Information Technology – Security 

 Establish policies and procedures to address risks identified in assessments 

6. Reopened – from M-000-05-003-P (Recommendation 4)

 Information Technology - Security

 Document a process to periodically evaluate the effectiveness of information security 

7. Reopened – from M-000-05-003-P (Recommendation 5) 

Information Technology – Security 

Delegate the Chief Information Officer authority to ensure compliance with Information systems policy and 

designate a Information Security Officer 

Appendix A SEMIANNUAL REPORT TO THE CONGRESS 9
SIGNIFICANT AUDIT RECOMMENDATIONS DESCRIBED IN A 


PREVIOUS SEMIANNUAL REPORT ON WHICH CORRECTIVE 


ACTION (FINAL ACTION) HAS NOT BEEN COMPLETED


IG Act, Section 5 (a) (3)


As of September 30, 2006


Report Number Issue Date Recommendation 

Number Recommendation 

M-000-05-003-P June 20, 2005 8 Establish and document plans to ensure continuity of operations 

for information systems 

M-000-06-001-C December 6, 2005 1 Revise and reissue written policies and procedures that provide 

additional specificity including the Fund Balance with Treasury, 

financial reporting, payroll processing, accrual generation and 

reporting, interagency reporting, fixed assets, travel, monitoring 

and internal grant processes. 

3.1 Develop policies and procedures to ensure that the payment 

schedules and other agreements entered into with the grantees 

reflect U.S.Treasury requirements concerning advances and 

immediate cash needs. 

3.2 Establish policies and procedures to ensure that any custodial 

liabilities, e.g. interest owed to the U.S. government resulting from 

the grantee advances, are properly recorded. 

5.2 Assess the automated options available to handle MCC 

operations and develop short range and long range plans for the 

implementation of the most appropriate information technology 

structure to address electronic integration of at lease the payroll, 

procurement and travel functions and systems to increase 

the efficiencies and effectiveness of the process of financial 

transactions, and decrease the risk of errors. 

M-000-06-003-F 1 Establish and provide a set of detailed accounting policies and 

procedures to recipient countries prior to the initial cash 

disbursement, which can be used during their implementation 

phase. 

2 Establish and distribute a set of policies and procedures for 

managing assets purchased with MCC funds. 

10 SEMIANNUAL REPORT TO THE CONGRESS Appendix B 
REPORTING REQUIREMENTS FOR WHICH


THERE IS NOTHING TO REPORT


As of September 30, 2006


Reporting Requirement IG Act Reference 

Summary of matters referred to prosecutive authorities and the prosecutions and 

convictions that have resulted 

Section 5 (a) (4) 

Summary of instances in which information or assistance was refused: 

The Inspector General Act of 1978 (Public Law 95-452), as amended, 

requires the identification of any reports made to the head of an agency 

describing where information or assistance was refused or not provided. 

During this reporting period, there were no reports to the Millennium 

Challenge Corporation describing instances where information or 

assistance was unreasonably refused or not provided. 

Section 5(a) and 6(b)(2) 

Audit reports issued by subject matter with questioned costs, unsupported costs 

and the dollar value of recommendations that funds be put to better use. 

Section 5(a)(6) 

Number of audit reports issued, with questioned costs, and unsupported costs Section 5(a)(8) 

Number f audit reports, with the dollar value of recommendations that funds be 

put to better use. 

Section 5(a)(9) 

Summary of each audit report issued before the start of the reporting period for 

which no management decision has been made by the end of this reporting period 

Section 5(a)(10) 

Decisions and reasons for significant revised management decisions Section 5 (a) (11) 

Information concerning significant management decision with which the IG is in 

disagreement 

Section 5(a)(12) 

Information under the Federal Financial Management Improvement Act of 1996 

(Section 05B) – Remediation Plan Information 

Section 5(a)(13) 

OIG review of legislation and regulation Section 4 (a) (2) 

Particularly serious or flagrant problems, abuses or deficiencies relating to the 

administration of programs and operations 

Section 5 (d) 

Appendix C SEMIANNUAL REPORT TO THE CONGRESS 11
12
Inspector General 

HOTLINE 

OIG’s Hotline makes it easy to report allegations of fraud, 

waste, abuse, mismanagement or misconduct in programs 

and operations of the USAID, IAF, ADF, and MCC. 

Employees, contractors, program participants and the 

general public may report allegations directly by e-mail, 

telephone, or mail to: 

Phone 	1-202-712-1023

 1-800-230-6539 

E-mail 	 ig.hotline@usaid.gov 

Mail 	USAID OIG HOTLINE

 P.O. Box 657


 Washington, DC 20044-0657


U.S. Agency for International Development 

1300 Pennsylvania Avenue, N.W. 

Washington, D.C. 20523 

www.usaid.gov 
U.S.Agency for International Development 


Office of Inspector General 


for the


Millennium Challenge Corporation


1300 Pennsylvania Avenue, N.W.


Room 6.6D 


Washington, DC 20523


www.usaid.gov/oig 

The Semiannual Report to the Congress is available on the internet at 


wwww.usaid.gov/oig/public/semiann/mcc1.htm