2006 

P ERFORMANCE AND

A CCOUNTABILITY

R EPORT
MCC’S MISSION IS TO REDUCE POVERTY BY 

SUPPORTING SUSTAINABLE, TRANSFORMATIVE 

ECONOMIC GROWTH IN DEVELOPING COUNTRIES 

WHICH CREATE AND MAINTAIN SOUND POLICY 

ENVIRONMENTS. 

MISSION STATEMENT 
MESSAGE FROM THE CHIEF EXECUTIVE OFFICER

 am pleased to present the 2006 Performance and Accountability Report for 

the Millennium Challenge Corporation. We have come a long way in just 

two and a half years since MCC’s creation, under President Bush’s 

leadership and with the bipartisan support of Congress. We have grown 

significantly as an organization, based on our belief that a workforce that is 

diverse in knowledge, background, and talents can make a world of difference. 

Our progress is due, in large measure, to our emphasis on working with partner 

countries that have sound policies, a genuine sense of ownership, and a 

willingness to be accountable for results contributing to real improvements for 

their citizens. MCC’s partnership with these countries is helping to strengthen 

democratic, stable, and prosperous societies around the world. With 9 compacts already in place, we look 

forward to continued engagement with the 13 additional countries that are eligible to submit compact 

proposals and the 17 other countries eligible for the Threshold program. 

I 

I am equally proud to note the collateral benefits of our approach to aid with accountability, which we call 

“The MCC Effect.” Based on our focus on good policies, MCC has become a catalyst for reform in 

countries that are working independently to assess their legislative and regulatory structures to meet MCC 

qualifications. The promise of MCC compact support is a powerful incentive for governments to enact 

reforms that will contribute to their eligibility for funding—while promoting sound governance, 

strengthening political and economic freedoms, and attacking corruption. Our eligible and threshold 

countries have consistently demonstrated higher rates of reform than others in their income bracket. 

In addition to our programmatic accomplishments, I am pleased to address the state of MCC’s 

management controls, which protect our resources from risk of mismanagement and ensure proper 

investment of taxpayer dollars in support of MCC’s mission. I can certify with reasonable assurance that 

MCC’s systems of accounting and internal controls are in compliance with the provisions of Section 2 

(internal and administrative controls) and Section 4 (financial systems) of the Federal Managers’ 

Financial Integrity Act (FMFIA). I have also concluded that the systems of accounting and internal 

controls provide reasonable assurance of MCC compliance with the internal control objectives stipulated 

by the Office of Management and Budget in Circular A-123, Management’s Responsibility for Internal 

Control.
MESSAGE FROM THE CHIEF EXECUTIVE OFFICER

Finally, I have determined that MCC is currently in substantial compliance with pertinent requirements of 

the Federal Financial Management Improvement Act (FFMIA). The FFMIA report of the National 

Business Center (our financial services provider) indicates that compliance was achieved in the final 

quarter of FY 2006. 

We are enthusiastic about MCC’s prospects for the future and pledge to build on this year’s 

achievements, fortifying existing partnerships and forging new ones in the years to come. 

John J. Danilovich 

Chief Executive Officer 
MESSAGE FROM THE CHIEF FINANCIAL OFFICER

he 2006 Performance and Accountability Report of the Millennium 

Challenge Corporation reflects our commitment to the highest 

principles of federal management. 

Although MCC, as a small federal corporation, is not subject to the 

requirements of the Chief Financial Officers Act, we choose to follow the 

professional standards it incorporates along with other good government 

reforms applicable to the Executive Branch. In a similar vein, we are always 

mindful of the President’s Management Agenda for a government that is 

citizen-centered, results-oriented, and market-based, and seek to adopt model 

practices in financial improvement, budget and performance integration, human 

capital innovation, e-government, and the principles of competitive sourcing. 

T 

This has been a year of growth for the Corporation in terms of program expansion and reinforcement of 

staff expertise, and we have worked to match our administrative and financial capabilities to the task. We 

have established a vigorous program of compliance with Office and Management and Budget Circular A123, joining senior-level expertise in accounting and financial management with the best private-sector 

thinking on issues of governance. We have continued to work closely with the National Business Center 

of the Department of the Interior as our service center for payroll and financial reporting. The clean audit 

opinion on our annual financial statements for the past fiscal year demonstrates a valuable endorsement of 

the Corporation’s fiscal health. 

As more countries embrace the ideals of program ownership and accountability for results, we will 

employ a new system of managerial cost accounting to relate their successes to our efforts and the use of 

MCC resources. Our aim is to meet the highest standards for effective and transparent internal decisionmaking and describe more clearly the practical impacts of MCC’s innovative assistance model. We are 

inspired by our partners’ efforts to adopt best practices in transforming the lives of their poorest citizens, 

and we look forward to recounting their successes in greater detail in future Performance and 

Accountability Reports. 

Michael W. S. Ryan 

Vice President 

Administration & Finance 
TABLE OF CONTENTS

1. Management Discussion and Analysis ............................................................ 1

Our Mission and History....................................................................................................1

Guiding Principles .............................................................................................................2

Organizational Structure ...................................................................................................2

Millennium Challenge Corporation’s Organization ......................................................2

Staffing ........................................................................................................................5

Fiscal Year 2006 Highlights— October 1, 2005 to September 30, 2006 ..........................6

Millennium Challenge Corporation Strategic Goals and Results ......................................9

Financial Performance and Analysis...............................................................................13

Financial Statements Highlights................................................................................16

Financial Management Systems, Internal Controls, and Compliance With Laws 

and Regulations ........................................................................................................22

Future Financial Management Challenges................................................................30

2. Performance Section........................................................................................ 32

MCC Performance in FY 2006........................................................................................32

Strategic Goal 1—Achieve Sustainable, Transformative Development ....................35

Strategic Goal 2—Support Development of a Sound Policy Environment for 

Economic Growth and Poverty Reduction in the Developing World .........................38

Strategic Goal 3—Advance International Development Assistance Practice by 

Continually Improving MCC’s Operational Effectiveness..........................................43

Strategic Goal 4—Build MCC’s Capabilities to Achieve Its Primary Strategic 

Goals.........................................................................................................................46

3. Financial Section.............................................................................................. 49

Statements of Financial Position.....................................................................................50

Statements of Operations and Changes in Net Position.................................................52

Statements of Functional Expenses................................................................................53

Statements of Cash Flows ..............................................................................................54

Statements of Budgetary Resources ..............................................................................56

Notes to Financial Statements (As of September 30, 2006)...........................................59

Note 1—Summary of Significant Accounting Policies...............................................59

Note 2—Fund Balance with Treasury .......................................................................65

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Note 3—Advances/Accounts Receivable..................................................................65

Note 4—Fixed Assets................................................................................................66

Note 5—Other Liabilities ...........................................................................................66

Note 6—Net Position.................................................................................................66

Note 7—Permanent Rescission ................................................................................67

Note 8—Inter-Agency Agreements ...........................................................................68

MCC PAR Glossary ................................................................................................. 69

4. Audit of the Millennium Challenge Corporation’s Financial Statements, 

Internal Controls, and Compliance for the Period Ending September 30, 

2006 and 2005 (M-000-07-001-F, Nov. 14, 2006) – Office of Inspector General 

for the Millennium Challenge Corporation ..................................................... 71

LIST OF EXHIBITS

Exhibit 1. Division of Finance and National Business Center...............................14 

Exhibit 2. Annual Funding by Fiscal Year ...............................................................18 

Exhibit 3. Obligations by Fund Category ................................................................20 

Exhibit 4. Compact Obligations ...............................................................................21 

Exhibit 5. Financial Systems Architecture ..............................................................23 

Exhibit 6. MCC’s Corporate Performance Plan.......................................................32 

Exhibit 7. All LICs/Eligible Countries Percent GDP Change..................................36 

Exhibit 8. Policy Rates of Reform ............................................................................41 

Exhibit 9. Statements of Financial Position ............................................................49 

Exhibit 10. Statements of Operations and Changes in Net Position ......................51 

Exhibit 11. Statements of Functional Expenses.......................................................52 

Exhibit 12. Statements of Cash Flows.......................................................................53 

Exhibit 13. Statements of Budgetary Resources......................................................55 

Exhibit 14. Fund Balances with Treasury..................................................................64 

Exhibit 15. Other Liabilities ........................................................................................65 

Exhibit 16. Total Obligated and Committed Compact and 609(g) Funds ...............66 

Exhibit 17. FY 2006 Inter-Agency Agreements .........................................................67 

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1. MANAGEMENT DISCUSSION AND ANALYSIS

OUR MISSION AND HISTORY

The Millennium Challenge Corporation’s (MCC) mission is to reduce poverty by supporting 

sustainable, transformative economic growth in developing countries which create and maintain 

sound policy environments. 

In March 2002 in Monterrey, Mexico, President Bush called for a “new compact for global 

development,” which links greater contributions from developed nations to greater responsibility 

from developing nations. The President proposed a concrete mechanism to implement this 

compact—the Millennium Challenge Account (MCA)—in which development assistance would 

be provided to those countries that rule justly, invest in their people, and encourage economic 

freedom. With strong bipartisan support, MCC was established on January 23, 2004, to 

administer the MCA. Congress provided nearly $1 billion in initial funding for fiscal year 

(FY) 2004, $1.5 billion for FY 2005, and $1.8 billion for FY 2006. The FY 2007 President’s 

budget request for the MCA is $3 billion. The President also pledged to increase annual funding 

for the MCA to $5 billion in the future. 

The MCC is unlike any other organization in America’s history of foreign assistance. MCC 

specifically focuses on promoting sustainable economic growth that reduces poverty through 

investments in areas such as agriculture, education, private sector development, and 

infrastructure. MCC is designed to support innovative strategies and to ensure accountability 

with measurable results. 

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GUIDING PRINCIPLES

MCC incorporates lessons learned from decades of U.S. Government and other bilateral and 

multilateral donor agencies’ development experience. The following principles form the 

foundation for MCC operations: 

` Good policies support growth, reduce poverty, and make assistance more effective. 

Development assistance has a greater impact when it reinforces sound political, economic, 

and social policies, which are key to encouraging inflows of private capital and increased 

trade—the real “engines” of economic growth. Through a transparent process, MCC selects 

countries that have already demonstrated they perform better than their peers in three broad 

categories: ruling justly, investing in their citizens’ health and education, and encouraging 

economic freedom. Performance is measured by a broad range of independent, non-U.S. 

Government indicators, which are reassessed periodically. 

` Success is not measured by inputs but by results. Integrating monitoring and evaluation 

into the design of activities greatly enhances the probability of successful outcomes and 

boosts the effectiveness, accountability, and transparency with which taxpayer resources are 

used. MCC, therefore, integrates concrete, quantified results and methods for monitoring and 

evaluating into each Compact so that progress can be measured against targets agreed at the 

start of the program. 

` Country ownership is crucial for development. Recognizing that development is achieved 

by a country’s own efforts, policies, and people, MCC gives selected countries the 

opportunity to identify their own priorities for achieving sustainable economic growth and 

poverty reduction. Countries develop their MCA proposals in broad consultation with their 

own society, engendering country ownership that increases the likelihood of sustainability 

and ultimate success of the development programs. 

ORGANIZATIONAL STRUCTURE

Millennium Challenge Corporation’s Organization 

MCC is governed by a Board of Directors composed of the Secretary of State, the Secretary of 

the Treasury, the U.S. Trade Representative, the Administrator of the United States Agency for 

International Development (USAID), the Chief Executive Officer (CEO) of MCC, and four 

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public members appointed by the President and confirmed by the Senate.1

 The Secretary of State 

is the Chair of the Board and the Secretary of the Treasury is the Vice Chair. A CEO, appointed 

by the President and confirmed by the Senate, manages MCC. MCC is designed to make 

maximum use of flexible authorities to optimize efficiency in contracting, program 

implementation, and personnel. MCC is committed to hiring and retaining a small but highly 

talented workforce from diverse backgrounds. 

MCC carries out its work in accordance with the following organizational structure: 

` Office of the Chief Executive Officer. The Office of the CEO is responsible for managing 

MCC operations in a manner that reflects the policies of the Board of Directors and achieves 

MCC’s objectives in accordance with applicable laws and regulations and Congressional 

directives. 

` Department of Accountability. The Department of Accountability is responsible for 

overseeing the assessment of economic logic and growth impact of country proposals, the 

establishment of monitoring and evaluation plans and the collection and analysis of 

performance measurement data, and for conducting assessments related to environmental and 

social impacts and compliance with fiscal accountability and procurement procedures. 

` Department of Administration and Finance (A&F). A&F is responsible for planning and 

directing all activities related to financial management and budgeting, human resources 

management, information technology infrastructure, website management, procurement and 

acquisition, personal security, facilities management, administrative services, and corporate 

records management. In keeping with the principles laid out in the President’s Management 

Agenda, the majority of these services are outsourced to other federal agencies and the 

private sector, and the MCC staff working in these areas is responsible for effectively 

managing the contractual and inter-agency agreements that are put in place. 

` Department of Congressional and Public Affairs (CPA). CPA is responsible for managing 

MCC’s relationship with Congress, the Press, and Non-Governmental Organizations (NGOs) 

and working on issues relevant to MCC and other key groups that share in MCC’s mission. 

CPA coordinates all informal and formal Congressional consultation in addition to providing 

 

1

 Two public members were confirmed by the Senate in July 2004. The other two public Board member positions remain 

open. 

` 3 _
updates on MCC developments to Members of Congress and their staffs. This office also 

handles all media inquiries and interview requests and disseminates information to the public 

via statements and press releases. 

` Department of Operations. The Department of Operations manages MCC’s relationship 

with eligible countries; is responsible for providing technical expertise in specific sectors, 

such as education, finance, infrastructure, agriculture, and health; and maintains continuous 

contact with eligible countries for all phases of the relationship: proposal development, 

proposal due diligence, compact negotiation, and compact implementation. In particular, the 

Department manages contacts with the eligible countries as they undertake the process of 

identifying their constraints to poverty reduction and economic growth, prioritizing 

interventions to address these constraints, and developing their MCC program proposals. 

The Department provides the subject matter experts and acts as the coordinator for MCC’s 

due diligence activities relating to eligible country proposals, working closely as a team with 

MCC staff from the Department of Accountability and Office of General Counsel in carrying 

out such due diligence. After completion of due diligence, the Department participates in 

compact negotiation and works closely with the country during the program’s 

implementation. Department members travel frequently to eligible countries. MCC will 

generally maintain an Operations presence in compact countries during the program 

implementation phase. 

` Department of Policy and International Relations (PIR). PIR oversees MCC’s relations 

with all non-MCA-eligible countries. PIR is responsible for policy analysis and 

recommendations to improve MCC effectiveness, donor coordination, and administration of 

MCC’s selection process and Threshold Program. PIR coordinates MCC positions on 

international development initiatives and represents MCC on multilateral and donor issues. 

PIR maintains relationships with experts in the development community, donor 

organizations, and international organizations to inform them of MCC policies, programs, 

and approach to development and to learn about innovative ideas and best practices that can 

be integrated into MCC’s policies and practices. Working with the Department of 

Operations, PIR ensures overall coordination with other donors in MCA countries. 

` Office of General Counsel (OGC). OGC is responsible for providing advice to MCC’s 

Board of Directors and MCC staff on all legal issues affecting MCC. OGC assists teams 

from the Departments of Operations and Accountability by addressing and resolving legal 

` 4 _
issues associated with MCA program development, including in the areas of evaluating and 

conducting diligence on country proposals, compact negotiation, and compact 

implementation. OGC uses a team of in-house attorneys as well as outside counsel, where 

appropriate, to fulfill its mission. OGC provides advice to A&F on all issues affecting the 

internal operation of MCC, including personnel law, government contracts, fiscal law, 

information technology, and corporate records management. OGC also performs the function 

of Secretary to the MCC Board and manages MCC’s ethics program. 

Staffing 

As of September 30, 2006, MCC had 264 full-time employees, an increase of 86 percent during 

FY 2006. MCC established an aggressive hiring plan to keep pace with the substantive and 

organizational needs of the Corporation as it continues to provide funding to more countries. It is 

expected not only that staffing numbers will stabilize in calendar year (CY) 2007, but also that 

workload issues—determining what activities are kept as core competencies within MCC and 

what activities can be performed by outside entities—will be a key challenge in coming years. 

MCC continues to rely on a number of personal service and other contractors or contract vehicles 

to address its mission-related needs. 

` 5 _
FISCAL YEAR 2006 HIGHLIGHTS— 

OCTOBER 1, 2005 TO SEPTEMBER 30, 2006 

MCC provides assistance through the MCA to eligible countries for development projects that 

remove barriers to poverty reduction and economic growth. MCC assists each country it selects 

in developing and implementing a Compact. These Compacts reflect a broad consultative process 

undertaken by the countries themselves to identify and prioritize their development needs. They 

include measurable objectives by which success is evaluated. MCC assistance rewards and 

reinforces good policies, asks countries to take full ownership of their own development needs, 

and demands that countries be held accountable for the aid they receive—accountable not only to 

U.S. taxpayers who are providing the aid but also to their own people who expect nothing less 

than tangible results from that aid to lift them from poverty and toward economic prosperity. 

In November 2005, MCC’s Board of Directors selected a total of 23 countries as eligible to apply 

for MCA assistance in FY 2006 from a pool of candidate countries that met per capita income 

levels. 

Twenty countries were selected from the Low Income Country (LIC) category that measures 

annual per capita income at equal to or less than $1,575. These countries are Armenia, Benin, 

Bolivia, Burkina Faso, East Timor, The Gambia, Georgia, Ghana, Honduras, Lesotho, 

Madagascar, Mali, Mongolia, Morocco, Mozambique, Nicaragua, Senegal, Sri Lanka, Tanzania, 

and Vanuatu. All but Burkina Faso, East Timor, The Gambia, and Tanzania had been selected as 

MCA-eligible in previous years. Three additional countries, Cape Verde, El Salvador, and 

Namibia, were selected from the new Lower Middle Income Country (LMIC) category in 

FY 2006. These LMIC countries have per capita annual incomes between $1,576 and $3,255. 

Cape Verde was previously selected as MCA-eligible in the “low income” category and is 

currently implementing a Compact with MCC. 

Per the MCC selection process, the Board of Directors evaluates the policy performance of all 

candidate countries in the areas of Ruling Justly, Investing in People, and Encouraging Economic 

Freedom. In addition to evaluating whether countries perform above the median in relation to 

their peers on at least half of the indicators in each of these three policy categories and on the 

` 6 _
corruption indicator, the Board also considers appropriate supplemental materials.2

 Lastly, the 

Board of Directors critically evaluates whether a country’s policy environment is suited to lead to 

transformational growth and poverty reduction with funding through an MCC Compact. 

Of the 23 MCA-eligible countries, Compacts totaling nearly $2.1 billion have been signed to date 

with Armenia, Benin, Cape Verde, Georgia, Ghana, Honduras, Madagascar, Nicaragua, and 

Vanuatu. The Compacts with Armenia, Benin, Ghana, and Vanuatu were signed in FY 2006. 

These Compacts provide funding for a variety of programs, including infrastructure projects, 

agricultural and rural development, land tenure changes, and private sector initiatives that lead to 

poverty reduction and economic growth. 

Countries partnering with MCC are making great strides in stimulating private investment, 

promoting trade, and creating jobs. Consider the impact underway in MCC compact partner 

countries: 

` Armenia. Through rural road rehabilitation and irrigated agriculture projects, 75 percent of 

Armenia’s rural population is expected to increase annual incomes by 2010. 

` Benin. By improving land tenure, access to financial services, the Port of Cotonou’s 

operations and infrastructure, and the judicial system’s ability to resolve claims, an estimated 

250,000 Beninese will be lifted out of poverty by the year 2015 and another 5 million citizens 

will reap benefits as well. 

` Cape Verde. More than a quarter of the population will benefit from increased annual 

incomes totaling $10 million over 5 years through investments in water resources, 

agricultural productivity, port and road improvements, and private sector initiatives. 

` Georgia. Nearly 1.5 million people will be served, particularly in rural regions, through 

projects focusing on rehabilitating regional infrastructure and enterprise development. 

` Ghana. With projects aimed at reducing transportation costs and expanding the availability 

of basic community services such as access to education, water and sanitation, and electricity 

in rural areas, more than 1 million Ghanaians will experience increased incomes as a result of 

private sector-led agri-business development. 

 

2

 Policy performance indicators are defined in the Performance Section. 

` 7 _
` Honduras. The incomes of thousands of farmers will increase by transitioning from corn 

and basic grains to higher-profit crops and through road improvements that will enable these 

farmers to reach regional and international markets. 

` Madagascar. The lives of the poorest farmers will be transformed and annual household 

incomes will increase by focusing on property rights, the financial sector, and agricultural 

business investment. 

` Nicaragua. Reduced transportation costs and improved access to markets will result in 

increased incomes of rural farmers and entrepreneurs living in the Leon and Chinandega 

regions. 

` Vanuatu. In transforming the country’s unreliable transportation network through 

11 infrastructure projects, average per capita income will increase by 15 percent within 

5 years and improve the lives of more than 65,000 of the rural poor. 

As these Compacts proceed through full implementation, stories of success will provide further 

indication of MCC’s role in poverty reduction and economic growth. MCC’s success is already 

evident in accelerating homegrown interest and capacity-building among eligible countries to 

participate in their own development, galvanize the support of their own people, create their own 

proposals for funding, implement these projects themselves, and measure and monitor their own 

progress toward poverty reduction and economic growth. 

This is a tremendous development in the MCC story because it demonstrates the organization’s 

role—even at this early stage—as a formidable catalyst for policy reform. MCC’s CEO 

Ambassador John J. Danilovich noted, “The incentive of becoming MCC eligible has prompted 

many countries to reevaluate their policies, regulations, and legislation related to good 

governance, health and education, and their business climate. This is a welcome result I call the 

MCC Effect.” The “MCC Effect” is driving political, social, and economic policy reforms in 

countries around the world that wish to qualify for funding to accelerate their own development 

goals. 

MCC also administers a Threshold Program designed to assist countries on the verge or 

“threshold” of qualifying for MCC compact funding. As a precursor to qualifying for compact 

funding, these countries must first improve their performance on certain eligibility criteria and 

` 8 _
demonstrate a significant commitment to undertaking the necessary reforms. For FY 2006, the 

Board of Directors selected 13 countries to participate in the Threshold Program: Guyana, 

Indonesia, Jordan, Kenya, Kyrgyz Republic, Malawi, Moldova, Paraguay, the Philippines, São 

Tomé and Principe, Ukraine, Uganda, and Zambia. 

As of September 30, 2006, MCC’s Board had approved some $200 million in Threshold Program 

funding to Albania, Burkina Faso, Jordan, Malawi, Paraguay, the Philippines, Tanzania, Ukraine, 

and Zambia. 

Looking ahead, MCC is actively negotiating additional compact and threshold agreements. 

Moreover, two new indicators, a Natural Resources Management Index and a Land Rights and 

Access Index, will be proposed for approval by the Board of Directors for use in selecting eligible 

countries. The use of these indicators will be gradually integrated into MCC’s selection 

framework as supplemental information prior to proposed full adoption. 

MILLENNIUM CHALLENGE CORPORATION

STRATEGIC GOALS AND RESULTS

The Government Performance and Results Act (GPRA) requires federal agencies to have a 

strategic plan that includes a comprehensive statement of mission and outcome-related goals and 

objectives to fulfill that mission. The MCC Board approved MCC’s Strategic Plan covering the 

years 2006 to 2011 in November 2005. The Strategic Plan has four goals that focus on achieving 

sustainable, transformative changes in developing countries; supporting development of sound 

policy environments for economic growth and poverty reduction; advancing the international 

development assistance practice; and building MCC capabilities to achieve these goals. MCC 

also developed a Performance Plan for FY 2006, which it shared with the Office of Management 

and Budget (OMB) in March 2006. The Performance Plan identifies inputs, outputs, and 

outcomes that facilitate accomplishment of these goals, and they are discussed in greater detail in 

the Performance Section of this report. 

Performance Plan outcomes include sustainable economic growth and poverty reduction and 

positive policy changes with long-term, transformative effects in developing countries. Outputs 

include quality Compacts that support poverty reduction, economic growth, and improved 

policies as well as recognition and support of the MCC approach to foreign aid. Inputs include 

` 9 _
execution of quality Compacts, partnerships with developing countries, efficiency and resource 

productivity, compliance with Compacts and due diligence activities, and effective staffing of 

MCC. 

Results for FY 2006 

While implementation of MCC Compacts began only in late FY 2005, initial results are 

promising: 

` The rate of growth in per capita Gross Domestic Product (GDP) for countries that were 

eligible for MCC compact assistance in 2005 increased compared to 2004, while the per 

capita GDP growth rate for all LICs fell during the same period. 

` Rates of reform since 2002 for MCC eligible and threshold countries exceeded those for 

MCC candidate countries in all three reform categories (Ruling Justly, Investing in People, 

and Economic Freedom). 

Anecdotal information also points to a strong “MCC Effect” that encourages countries to 

implement reforms needed to qualify for MCC assistance: 

` Officials from the World Bank, International Finance Corporation (IFC), and Heritage 

Foundation have all attributed observed performance improvements to the “MCC Effect.” 

` Two Harvard economists released a report earlier this year concluding that countries are 

responding to MCC’s clear and actionable incentives. 

MCC has also taken a number of critical steps to improve its capabilities to implement the 

steadily increasing number of Compacts and Threshold Programs it is responsible for, including: 

` Increasing MCC’s staff from 142 at the beginning of FY 2006 to 264 at the end of the fiscal 

year, only 36 below MCC’s planned corporate headquarters staffing level of 300. 

` Improving the internal control environment by implementing 26 new and 7 revised key 

policies or procedures. 

` 10 _
` Streamlining MCC’s procurement procedures and conducting procurements that fully comply 

with the Federal Acquisition Regulation while routinely beating federal norms for 

procurement lead times. 

` Opening new overseas offices in five countries and streamlining the process of placing MCC 

Resident Country Directors so that they are on the ground to support the initial 

implementation of Compacts. 

In some areas, MCC hopes to improve on the initial performance recorded for FY 2006 as we 

gather sufficient data to lead to more meaningful results and implement lessons learned in order 

to do our work more effectively and efficiently: 

` The ratio of administrative expenses to compact programs in implementation increased in 

FY 2006 as MCC nearly doubled its staff and undertook other significant investments in its 

operating capabilities. MCC expects this ratio to decrease significantly in FY 2007 as a 

number of new Compacts begin implementation. 

` While MCC was able to successfully implement a significant number of recommendations 

from the Inspector General (IG) in FY 2006, we expect to do even better in FY 2007 as we 

implement a comprehensive set of internal controls. 

Challenges in Measuring MCC Performance 

Development of measures that show the impact of MCC programs is challenging for a number of 

reasons: 

` While total funding for Compacts is obligated up front, funding is not disbursed to the 

recipient country until a country is actually ready to implement the programs agreed to in the 

Compact. For this reason, even initial results are not likely to occur in the year in which 

funding is obligated. In addition, because Compacts are normally implemented over a 5-year 

period, outcome data is often not available until well into this implementation period. To 

address this, compact countries are now formulating activity level monitoring plans that will 

enable them to report on output and process level results. 

` 11 _
` Wherever possible, MCC uses third-party sources for outcome data in order to remove any 

possibility of reporting bias. However, the types of outcome measures used to determine 

whether programs funded through a Compact are leading to economic growth and poverty 

reduction often rely on data that is not measured every year or for which there is a time lag. 

For other measures, such as the percentage of people who live on less than $2 per day, it is 

difficult to establish a baseline from which to measure because data is determined by national 

surveys that are conducted inconsistently. 

` Many of MCC’s partner countries also have limited capacity to measure outcome or output 

results. Because countries are the primary implementers of MCC compact projects, this lack 

of capacity can make it more difficult to measure results within the ambitious timeframes 

built into MCC monitoring and evaluation plans. MCC has provided technical assistance to a 

number of our partner countries in order to help them improve their technical capacity in 

these areas. As noted above, we are also helping them identify and track activity level 

indicators and incorporate them into activity monitoring plans. 

MCC is constantly reviewing its performance metrics to look for improvements in the way we 

measure our outcome, output, and input performance. For example, MCC is investigating 

measuring economic growth and poverty reduction at a level tailored more specifically to our 

programs. We are also planning to develop more explicit measures in areas such as recognition 

and support, country partnership, and staff effectiveness and satisfaction, where an independent 

survey will be conducted to measure results. 

` 12 _
` 13 _

FINANCIAL PERFORMANCE AND ANALYSIS

MCC’s financial management operations are managed and controlled by the Division of Finance, 

Department of Administration and Finance. The Division is headed by the Deputy Chief 

Financial Officer. The Division is responsible for implementing financial management policies, 

controls and financial systems; and providing a full range of financial management and budget 

services to MCC organizations and staff. The Division also oversees and manages the 

Corporation’s internal control implementation and assessments. 

The Division is composed of three functional teams: (1) accounting and financial operations, 

(2) budget formulation and execution, and (3) travel management and logistics. During FY 2006, 

MCC increased the Division’s staffing level from two full-time staff persons to eight persons. 

The Division’s strategy is to create an operating environment that accentuates the delivery of 

high-value and timely services to MCC employees and other stakeholders through the effective 

management of financial, personnel, and technological resources. 

The majority of MCC’s financial management services and all its financial management systems, 

including the core financial system and program “feeder” systems, are provided by the 

Department of Interior’s National Business Center (NBC) under an inter-agency agreement. 

NBC, one of the Federal Government’s financial management centers of excellence under 

OMB’s financial management line of business, performs MCC’s day-to-day financial transaction 

processing and internal and external financial reporting. The Division of Finance provides 

oversight and guidance to NBC accounting personnel on an interactive basis. Exhibit 1 illustrates 

the Division of Finance and NBC’s organizational structure. 
` 14 _

Exhibit 1. Division of Finance and National Business Center 

Budget Officer Budget Officer

Senior Budget 

Officer

Senior Budget 

Officer

Travel Assistant Travel Assistant

Director, Logistics 

and Travel

Director, Logistics 

and Travel

Vice President for 

Administration and Finance

Chief Financial Officer

Vice President for 

Administration and Finance

Chief Financial Officer

Deputy 

Vice President

Deputy 

Vice President

Deputy CFO Deputy CFO

General 

Accounting

Supervisor

General 

Accounting

Supervisor

Billings and 

Collections 

Supervisor

Billings and 

Collections 

Supervisor

Lead 

Accountant

Lead 

Accountant

General Accounting 

Branch Chief

General Accounting 

Branch Chief

Policy and Procedure 

Agreements/

SLA POC

Policy and Procedure 

Agreements/

SLA POC

Vendor 

Payments

Supervisor

Vendor 

Payments

Supervisor

PCS

Supervisor

PCS

Supervisor

Fiscal S

Branch 

Fiscal Se

Branch 

Accounting 

Operations

Division Chief

Accounting 

Operations

Division Chief

National Business Center

Senior Accountant 

Financial Analyses 

and Policy

Senior Accountant 

Financial Analyses 

and Policy

Accountants Accountants

Assistant CFO 

Financial 

Operations

Assistant CFO 

Financial 

Operations
For the Division of Finance, FY 2006 was a year of “ramp up,” with a focus on clearly defining 

the strategic direction for MCC’s financial operations. MCC, in existence for less than 3 years, 

began more firmly to institutionalize financial processes, controls, and operations in order to 

better ensure the propriety and viability of financial management operations as well as to provide 

routine and reliable financial management data to corporate decision-makers and other 

stakeholders. In addition to significantly increasing the number of financial staff members and 

the resulting functional capabilities, the Division of Finance also undertook several key initiatives 

to enhance financial management and internal controls and provide long-term benefits. For 

example, the Division of Finance: 

` Undertook a focused effort, with the assistance of a reputable international professional 

services firm, to develop and implement a comprehensive financial management policies and 

procedures manual for the use and guidance of all MCC employees. The inaugural edition of 

the manual is slated to be completed by December 31, 2006. 

` Instituted a comprehensive internal control assessment, evaluation, documentation, and 

testing program pursuant to requirements mandated by OMB Circular A-123, Management 

Responsibility for Internal Controls. 

` Initiated and completed a defined budget formulation process, consisting of cooperation and 

interaction with all other corporate organizations. 

` Further initiated a viable budget execution and performance monitoring process in which 

routine reporting and feedback is to be provided to corporate organizations regarding the use 

and status of funds. 

` Began strategic planning for implementation of a corporate-wide managerial cost accounting 

and performance monitoring and reporting capability. 

During FY 2006, MCC’s financial operations intensified with the signing of four Compacts with 

eligible countries resulting in cumulative commitments during the year of more than $1.1 billion.3

The Corporation’s cumulative level of compact funding increased significantly during the year 

and will continue to trend upward substantially as MCC formally enters into additional Compacts 

 

3

 MCC entered into Compacts with the following countries during FY 2006: Armenia, Benin, Vanuatu, and Ghana. 

` 15 _
with eligible countries in future years. The following sections present the Corporation’s overall 

perspectives and highlights of MCC’s financial performance through the end of FY 2006. 

Financial Statements Highlights 

For FY 2006, MCC received an unqualified (“clean”) opinion from its auditors on its annual 

financial statements. While the Corporation’s auditors rendered an unqualified opinion on the 

financial statements, they also reported several material weaknesses and deficiencies 

necessitating resolution (see the auditor’s report at the end of this document). 

While MCC is not a Chief Financial Officers (CFO) Act agency, the Corporation adheres to the 

requirements and principles imposed upon such agencies by the CFO Act, the Government 

Management Reform Act of 1994, and other pertinent laws and regulations. As such, MCC 

prepares annual financial statements for audit and presentation to OMB and other stakeholders. 

The Corporation’s financial statements present MCC’s financial position, results of operations, 

functional expenses, cash flows, and budgetary resources for the fiscal years ending 

September 30, 2006, and September 30, 2005. As of the end of FY 2006, the Corporation’s 

financial position was highly favorable with available assets more than sufficient to satisfy 

current and future liabilities and demands. 

Statement of Financial Position 

The Statement of Financial Position is a presentation of MCC’s financial condition at the end of a 

fiscal year. The statement shows the resources that the Corporation holds with which to meet its 

statutory requirements, the amounts it owes to other parties, and the difference between the two 

(net position). 

Assets and Unexpended Appropriations 

As of September 30, 2006, MCC reported total assets of almost $4.0 billion, an increase of 

$1.6 billion from September 30, 2005. This increase is primarily the result of funds appropriated 

by the Congress to carry out the Corporation’s programs that had not been expended as of the end 

of the year. At fiscal year-end, MCC held $3.9 billion in unexpended appropriations, of which 

$1.8 billion were unobligated and uncommitted. 

` 16 _
The Corporation’s fund balances with the Treasury constitute the vast majority (99.4 percent) of 

total assets. Because MCC does not own any facilities or other real property and leases office 

space and certain information technology equipment, the Corporation has comparatively little 

fixed or capital assets in relation to total assets. As of September 30, 2006, the Corporation 

reported fixed assets of $4.6 million, composed of leasehold improvements and capitalized 

equipment. The leasehold improvements are for enhancements made to office space and 

communications technology within the leased facility. 

Liabilities and Net Position 

As of September 30, 2006, MCC owed approximately $7.8 million to its vendors, contractors, 

and employees. The Corporation’s ratio of assets to liabilities as of September 30, 2006, was 

highly favorable—509 to 1. 

Due to the substantial value of assets in excess of liabilities, the Corporation’s overall net position 

as of September 30, 2006, was $3.9 billion. During FY 2006, MCC’s net position improved by 

$1.6 billion, or 67 percent from September 30, 2005. In summary, during the year, MCC 

received $1.77 billion in appropriated funds of which $17.7 million was rescinded and about 

$109 million was expended. Obviously, the available appropriations and highly positive net 

position is necessary to fund future Compacts that are to be covered from funds appropriated as of 

the end of the year. As of the end of FY 2006, MCC was working with 13 countries in 

developing Compacts for eventual implementation. 

Statement of Operations and Net Position and Statement of Functional Expenses 

The Statement of Operations and Net Position presents the Corporation’s operating results for a 

fiscal year and is similar to a private sector entity’s income statement. The statement reports 

expenses incurred by MCC and financing sources recognized to finance the expenses as well as 

the change in the Corporation’s end-of-year net position as a result of its operations (financing 

sources less expenses). The Statement of Functional Expenses is a supplemental statement that 

presents MCC’s annual expenses in more detail than presented in the Statement of Operations and 

Net Position. 

` 17 _
Financing Sources and Expenses 

During FY 2006, MCC recognized $92.5 million in financing sources (appropriations used) and 

incurred $92 million in operating expenses. As of the end of FY 2006, the Corporation had 

cumulatively provided $34 million to MCA accountable entities to cover anticipated compact 

expenses and related disbursements. 

Statement of Budgetary Resources 

The Statement of Budgetary Resources presents the sources of MCC’s budgetary resources, their 

status at the end of the year, and the relationship between budgetary resources and the outlays 

(disbursements) made against them. During FY 2006, a total of $3.8 billion in budgetary 

resources was available to MCC through appropriations. Appropriations are funding sources 

resulting from specific acts of the Congress that authorize a federal agency to incur obligations 

and make payments for specified purposes. As noted previously, MCC’s appropriations fund the 

full realm of the Corporation’s programs and activities. The following section provides 

additional details pertaining to MCC’s use of the funds appropriated to it by the Congress. 

Status and Use of Funds 

MCC’s programs and activities are funded by the Congress through annual no-year 

appropriations. No-year appropriations are generally available until expended. In short, this 

means that MCC can incur obligations against the appropriations indefinitely. Since its 

establishment, MCC has received total funding of more than $4.2 billion, including almost 

$1.8 billion in FY 2006 (see Exhibit 2). 

Exhibit 2. Annual Funding by Fiscal Year 

(in thousands) 

Fiscal Year 

Annual Funding 

(in thousands) 

2004 $ 994,000 

2005 1,488,100 

2006 1,752,300 

Total $4,234,400 

` 18 _
As of September 30, 2006, $1.8 billion of MCC’s realized resources remained available for 

commitment, obligation, or both. 

While MCC receives no-year funding, OMB apportions, per Congressional limits, the amount of 

funds that the Corporation may obligate for administrative purposes. Administrative costs 

include personnel salaries and benefits, leases, rentals, travel, and other miscellaneous expenses. 

For FY 2006, OMB apportioned $75 million for MCC to use for administrative purposes. During 

FY 2006, MCC obligated $71.1 million in administrative funds, or almost 95 percent of the total 

amount apportioned by OMB. The obligated amount represented about 4 percent of the total 

amount of funds appropriated to MCC by the Congress for the operating period. As noted in 

Exhibit 3, administrative funds represent a small proportion of the total funds provided by the 

Congress, while about 96 percent of MCC’s funds go toward program operations. Should MCC 

not obligate the total amount of administrative funds apportioned by OMB during the budget 

year, then the excess (unobligated) amount is no longer available for administrative purposes but 

“rolls over” and is subsequently available for program purposes. 

MCC and OMB have established several categories of “program funds,” as follows: 

` Compacts. Funds apportioned by OMB and obligated by MCC in the form of grants to cover 

programs through formal agreements, that is, Compacts, entered into between the 

Corporation and partner countries. 

` 609(g). Funds apportioned by OMB and used by MCC and MCA countries for compact 

development in the form of grants pursuant to Section 609(g) of the Millennium Challenge 

Act.4

` Due diligence. Funds apportioned by OMB and used by MCC to cover costs to assess 

Compact proposals, as well as costs incurred by MCC in providing oversight and monitoring 

of Compacts being developed and implemented by eligible countries. 

` Threshold. Funds apportioned by OMB and used by MCC (through USAID) to assist 

countries in meeting governance, economic, and social investment criteria for MCA 

 

4

 Section 609(g) of the Millennium Challenge Act of 2003 provides that the MCC CEO may 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. 

` 19 _
eligibility. (Such countries are considered “on the threshold” of qualifying for eligibility for 

an MCC Compact.) 

` Audit. Funds apportioned by OMB for the purpose of having audits conducted of MCC 

operations and programs. (The USAID Office of Inspector General [OIG] is responsible for 

MCC audits.) 

During FY 2006, MCC incurred total obligations of $1.0 billion for all program fund categories. 

Total obligations incurred by MCC since its inception (lifetime) exceed $1.5 billion. Exhibit 3 

presents total FY 2006 and lifetime obligations by fund categories. 

Exhibit 3. Obligations by Fund Category 

(in thousands) 

Funds Category 

FY 2006 Obligations 

(in thousands) 

Lifetime Obligations 

(in thousands) 

Administrative $ 71,111 $ 119,382 

Compacts 880,536 1,205,309 

609(g) 29,636 41,460 

Due diligence 42,850 49,194 

Threshold 83,230 117,930 

Audit 2,172 4,477 

Total $ 1,109,535 $ 1,537,707 

As noted in Exhibit 3, as of September 30, 2006, MCC had incurred total lifetime compact 

obligations of $1.2 billion. These obligations represent the total value of funding that the 

Corporation is formally required to provide to the MCA accountable entities during the lives of 

the associated Compacts. In short, at the time that MCC signs a Compact with a country, the 

Corporation commits the total amount of funds needed for the Compact and its constituent 

projects and activities. Once MCC and the country have completed necessary pre-compact 

activities and it is determined that the MCA accountable entity is ready to begin executing the 

projects in accordance with the formal document, the Compact “enters into force.” At this point, 

MCC obligates the total funding for the duration of the Compact (and reduces or “liquidates” the 

previously recorded commitment). As of the end of FY 2006, MCC had obligated funds for 

signed Compacts as shown in Exhibit 4. 

` 20 _
Exhibit 4. Compact Obligations 

(in thousands) 

MCA/Country 

Total Compact Obligations 

(in thousands) 

Madagascar $ 109,773 

Honduras 215,000 

Cape Verde 110,078 

Nicaragua 174,925 

Georgia 294,693 

Vanuatu 65,690 

Armenia 235,150 

Total $ 1,205,309 

MCC had also recorded commitments in the amount of about $843 million for signed Compacts 

with Benin ($306 million) and Ghana ($537 million) that had not entered into force during FY 

2006. 

Obviously, the vast majority of MCC’s appropriated funds are slated for programmatic functions. 

Funding received for any given fiscal year may not be obligated during that year due to the lead 

time necessary to plan and prepare for the formal implementation of Compacts. At any given 

time, a number of eligible countries are in the process of preparing necessary submissions and 

relevant proposals to receive approval from MCC for compact funding. 

` 21 _
` 22 _

 

Financial Management Systems, Internal Controls, and Compliance With Laws 

and Regulations 

As noted above, the Corporation uses NBC as a financial management shared-services provider 

for financial and selected program (feeder) systems. While NBC provides much of MCC’s dayto-day financial processes and related activities, Corporation management is still responsible for 

overseeing NBC and ensuring that financial systems and internal controls are in place to fulfill 

legislated and regulatory financial management requirements. The following sections present 

summary information regarding MCC’s financial systems, controls, and compliance with key 

laws and regulations. 

Financial Management Systems 

MCC leadership holds the view that a key to enhanced financial and program management in the 

future is improved and reliable financial management systems. Corporation managers require 

timely and reliable financial information in order to make informed and defendable programmatic 

decisions within limitations established by the Congress and OMB. As such, MCC management 

is committed to ensuring that the financial management systems used for the entity’s financial 

operations fulfill the requirements stipulated by OMB in Circular A-127, Financial Management 

Systems. In short, the circular requires each federal entity to implement a single, integrated 

financial management system that meets specified functional and technical requirements.5

During FY 2006, the NBC core financial system used for MCC’s financial functions was not fully 

electronically integrated with the various feeder systems.6

 For example, the travel management 

system7

 was not integrated with the core financial system to provide routine and controlled 

processing updates of financial impacts in the general ledger based upon official travel documents 

(authorizations, amendments, and vouchers). As such, NBC staff routinely made manual data 

entries and updates to MCC’s financial transactions and balances. 

Exhibit 5 illustrates at a high level NBC’s current financial management systems used for MCC 

financial management operations. 

5

 OMB Circular A-127, Section 7(a – l), prescribes requirements. The circular is available at: 

www.whitehouse.gov/omb/circulars. 6

 NBC uses Oracle Federal Financials as the core system software for the MCC suite of financial systems. 

7

 NBC uses the Carlson-Wagonlit E-travel solution for MCC’s operations. 
Exhibit 5. Financial Systems Architecture 

GRAPHIC MCC PAR-02(L)

10/2006

Functionalities:` Budgetary Resource 

Management

` Receivable Management` FBWT Management` General Ledger 

Management

` Cost Management` Payment Management

Core Financial 

System

Manual Input Standard

R

(under 

Standard

R

(under d

L

Core UndAutoMan

Grant Financial/

Compact 

MCA Systems

Property 

Management

Financial Reports

Acquisition/

Financial

Non-Financial

Human Resources 

and Payroll

E-Travel

` 23 _
` 24 _
During FY 2006, NBC’s financial systems used for MCC’s financial operations were not in full 

compliance with requirements mandated by the Federal Financial Management Improvement Act 

(FFMIA) of 1996. Specifically, during the year the subject systems did not comply with selected 

federal financial management systems requirements related to systems security. However, during 

the year NBC undertook various corrective actions to address the deficiencies. As of September 

30, 2006, NBC management asserted that the corrective actions that the Center had taken during 

the year had resolved the conditions causing the deficiencies and that the systems were FFMIAcompliant. 

MCC’s goal is to continue to improve its financial transaction processing and reporting by 

working with NBC to plan, design, and institute required tools and functionalities to meet the 

Corporation’s managers’ information requirements. Department of A&F managers are discussing 

a number of options to further enhance the suite of financial management systems used by the 

Corporation including: 

` Financial reporting software that will readily integrate with the NBC core financial system to 

permit timely and reliable financial reports, both standard reports and ad hoc queries/reports 

` Managerial cost accounting functionality 

` Budgetary planning and performance capabilities 

MCC desires that all its financial systems effectively interface or integrate with program and 

other systems, such as the federal travel and purchase card systems it uses. In deciding the 

specific systems architecture and functions to be planned and implemented, MCC management 

will follow sound investment principles by evaluating and selecting systems, software, and 

processes that fulfill managers’ needs within the Corporation’s portfolio of affordable capital 

assets. 

Internal Controls 

As with all federal agencies, MCC’s management is responsible for establishing and maintaining 

strong internal controls that provide reasonable assurance that the integrity of its programs and 

operations are protected. Specifically, Section 2 of the Federal Managers’ Financial Integrity Act 

of 1982 (FMFIA) requires the head of an agency to provide an annual statement of assurance 

regarding the agency’s internal controls and financial systems. Internal controls are the 

` 25 _
organization, policies, and procedures used to reasonably ensure that (i) programs achieve their 

intended results; (ii) resources are used consistent with agency mission; (iii) programs and 

resources are protected from waste, fraud, and mismanagement; (iv) laws and regulations are 

followed; and (v) reliable and timely information is obtained, maintained, reported, and used for 

decision-making. MCC’s management is responsible for ensuring that proper internal controls 

over financial reporting and systems are in place and are functioning effectively. 

In December 2004, OMB revised Circular A-123, Management’s Responsibility for Internal 

Control, to improve federal managers’ accountability and the effectiveness of federal programs 

by establishing, assessing, correcting, and reporting on internal control. Appendix A of the 

Internal Control Over Financial Reporting circular provides requirements and a methodology for 

agency management to assess, document, and report on internal control over financial reporting. 

The revised circular was effective for FY 2006 (and thereafter). 

During FY 2006, MCC instituted a focused internal control program in accordance with OMB 

Circular A-123. A key component of the Corporation’s program was the establishment of a 

Senior Assessment Board (SAB) to provide oversight of the internal control assessment process. 

The SAB’s responsibilities include: 

` Determining the scope of internal control assessments 

` Ensuring that internal control and assessment objectives are clearly communicated 

throughout the agency 

` Ensuring that internal control assessments are carried out in a thorough, effective, and timely 

manner 

` Determining assessment design and methodology 

` Analyzing the results of internal control testing and assessments 

` Reporting on the assessments results 

MCC developed an assessment plan that included assessing and reporting on entity and process 

level controls over financial functions performed at MCC headquarters and NBC. Controls over 

financial reporting for the MCA countries (i.e., countries for which formal Compacts between 

MCC and the countries had been signed during FY 2006 and which had entered into force) were 

` 26 _
not included in the assessment because all the countries were in the early stages of compact 

implementation.8

In accordance with MCC’s Circular A-123 implementation plan and the requirements contained 

in Appendix A of the circular, MCC conducted an assessment of the effectiveness of its internal 

controls over financial reporting. The assessment covered 11 key MCC business processes: 

` Acquisition Management 

` Program Assistance 

` Travel Management 

` Funds Management 

` Financial Reporting 

` Budget Formulation and Execution 

` Human Capital Management 

` Information Technology 

` Personnel Salary and Benefits 

` Reimbursable Agreement Management 

` Property, Plant, and Equipment 

MCC also obtained and considered the results of NBC’s Circular A-123 assessments and its 

statement of assurance related thereto. 

On the basis of the Corporation’s assessment and other relevant information (such as the 

Government Accountability Office [GAO] and OIG audit reports), the CEO concluded with 

reasonable assurance that MCC’s internal controls are in compliance with the provisions of 

FMFIA, Section 2, and that MCC is in compliance with the internal control objectives stipulated 

by OMB in Circular A-123. 

 

8

 Department of A&F leadership apprised pertinent OMB officials of the scope of the FY 2006 internal control assessment. 

The SAB concurred with the scope (exclusion of controls for MCA accountable entities’ financial reporting). 

` 27 _
Compliance With Laws and Regulations 

In addition to complying with FMFIA and OMB Circular A-123 requirements, MCC’s 

management is also responsible for ensuring the Corporation’s compliance with other relevant 

financial management laws and regulations. Principal among these are: 

` FFMIA 

` Prompt Payment Act 

` Debt Collection Improvement Act of 1996 (DCIA) 

` Improper Payments Information Act of 2002 

` Federal Information Security Management Act (FISMA) 

Federal Financial Management Improvement Act of 1996 

FFMIA requires federal agencies to implement and maintain financial management systems that 

are in substantial compliance with (i) federal financial management systems requirements, (ii) 

federal accounting standards, and (iii) the United States Standard General Ledger at the 

transaction level. Because the Corporation uses NBC for financial management and reporting 

services, MCC relies upon NBC’s evaluations of its financial management systems and its 

determinations of compliance with FFMIA. 

During FY 2006, NBC’s systems were not in substantial compliance with FFMIA requirements. 

In its assurance statement as of June 30, 2006, NBC asserted that its systems “were in substantial 

non-compliance with FFMIA requirements” because NBC had not completed all planned 

corrective actions to address system security issues previously identified by the Department of 

Interior’s Inspector General. However, as of September 30, 2006, NBC indicated that it had 

accomplished planned corrective actions and that the effectiveness of the actions was confirmed 

by the Department of Interior’s IG in a report issued on August 28, 2006. Therefore, NBC 

asserted that as of the end of FY 2006, the financial management systems that it uses for MCC’s 

financial management and reporting functions substantially comply with the three categories of 

FFMIA requirements. 

` 28 _
Prompt Payment Act 

The Prompt Payment Act (Public Law 100-496), as amended, requires federal agencies to pay 

vendors transacting business with them in a timely manner. With certain exceptions, the Act 

requires agencies to make payments within 30 days of the later of (1) receipt of properly prepared 

invoices or (2) the receipt of goods or services. For amounts owed and not paid within the 

specified payment period, agencies are required to pay interest on the amount owed at a rate 

established by the Department of the Treasury. 

An agency’s performance under the Act for any given period is most often measured by the 

percentage of payments made within the specified timeframes out of all payments subject to the 

Act’s provisions. For FY 2006, MCC’s “prompt payment” performance was 95.6 percent. 

During the year, MCC paid $10,490 in late payment interest to vendors. 

Also, during the year, NBC made 96.4 percent of MCC’s vendor and compact payments via 

electronic funds transfer. 

Debt Collection Improvement Act of 1996 

In 1996, Congress passed the DCIA in response to steady increases in the amount of delinquent 

debt owed to the Government. Under the Act, all federal agencies must refer past due, legally 

enforceable, non-tax debts that are more than 180 days delinquent to the Department of the 

Treasury’s Financial Management Service (FMS) for collection through the Treasury Offset 

Program. A debt is considered delinquent if it is 180 days past due and is legally enforceable. A 

debt is legally enforceable if there has been a final agency decision that the debt, in the amount 

stated, is due and there are no legal bars to collection action. 

During FY 2006, MCC referred no debts to FMS for collection. 

Improper Payments Information Act of 2002 

An improper payment is any payment that should not have been made or was made in an 

incorrect amount. The President has made the development of management controls to detect and 

prevent improper payments a major focus of his Management Agenda. The Congress, following 

the President’s lead, passed the Improper Payments Information Act of 2002 (Public Law 107-

300). The Act requires agencies to review annually all programs and activities to identify those 

` 29 _
that are susceptible to improper payments, estimate the annual improper payments in susceptible 

programs and activities, and report the result of their improper payment reduction plans and 

activities. OMB Memorandum 03-13 defines a program as susceptible to improper payments if it 

has improper payments that exceed 2.5 percent and $10 million of program spending. MCC can 

report excellent payment performance that was significantly below the OMB ceiling. 

Federal Information Security Management Act 

In preparation for MCC’s annual FISMA review and OMB filing in October 2006, MCC engaged 

an outside expert to perform an independent security audit and to work collaboratively with the 

OIG to prepare all necessary documentation for the review. The contractor also completed some 

of the work necessary for the Certification and Accreditation (C&A) of MCCnet, MCC’s internal 

LAN/WAN network, and developed several policy and procedure statements. The IG’s audit 

indicates MCC is in partial compliance with the FISMA requirements and has made 

improvements in addressing security weaknesses. 

After reviewing the audit report, MCC agreed with the IG’s finding that seven of eight IG 

recommendations made in its previous audit (for FY 2005) remain open. MCC, however, had 

recommended they be closed based on actions taken in response to those recommendations and 

had received preliminary approval from the IG to do so. Three new recommendations were 

made. The new recommendations include completing the C&A process on MCCnet, holding 

NBC accountable for its own FISMA compliance, and providing other quarterly FISMA filings to 

OMB. The original recommendations were on issues related to risk assessments and security 

audits, having documented policies and procedures, security training for the staff, and 

establishing a comprehensive Continuity of Operations Plan (COOP). MCC agreed with the 

OIG’s findings and has committed to completing all the work necessary in order to be able to 

close six of the seven original open recommendations and two of the three new recommendations 

by December 2006. The remaining two recommendations will be closed in FY 2007. 

Future Financial Management Challenges 

MCC is a young agency with a highly important and visible mission, and it has made substantial 

progress in its short existence in establishing a sound foundation upon which to continue 

improving its financial management systems, processes, and controls. As conveyed earlier, the 

` 30 _
Division of Finance strives to deliver high-value and timely services to MCC employees and 

stakeholders through the effective management of available resources. 

While the Corporation has received unqualified opinions on its annual financial statements, 

improvements and refinements are warranted in its financial management operations to further 

enhance efficiencies and effectively resolve identified deficiencies. Following are brief 

summaries of a number of challenges that the Division of Finance will address in future fiscal 

periods: 

` Financial management systems. We will continue to work interactively with the financial 

services provider to maximize the electronic integration of the suite of systems used for 

MCC’s financial management functions. Also, we will pursue additional automated 

capabilities for procurement, budget formulation, performance monitoring and reporting, 

managerial cost accounting, and financial reporting. 

` Internal controls. We will continue to devise, enhance, implement, and maintain strong 

internal controls over all aspects of the Corporation’s financial management operations. We 

will establish viable and effective processes and mechanisms to better ensure the consistency 

and reconcilability of financial data in the NBC suite of financial systems with related 

financial data recorded and reported by the MCAs relative to Compacts. 

` Financial reports and feedback to managers. We will further develop and routinely 

disseminate to MCC’s managers viable and pertinent information on funds status and other 

attributes to assist in decision-making and monitoring financial performance. 

` Integration of budgetary, financial, and performance information. We will develop and 

implement effective financial and business models that use and integrate budget plans, 

financial results, and performance data so that program and financial managers have the 

necessary data views to run a world-class organization. 

` 31 _
2. PERFORMANCE SECTION

MCC PERFORMANCE IN FY 2006 

In accordance with the GPRA, MCC’s Board of Directors approved its Strategic Plan on 

November 8, 2005, covering the years 2006 to 2011. The Strategic Plan defines MCC’s mission 

as follows: 

MCC’ S M ISSION I S T O R EDUCE P OVERTY BY S UPPORTING 

S USTAINABLE , T RANSFORMATIVE E CONOMIC G ROWTH IN 

D EVELOPING C OUNTRIES W HICH C REATE AND M AINTAIN 

S OUND P OLICY E NVIRONMENTS . 

The Strategic Plan defines four strategic goals for MCC: 

` Strategic Goal 1. Achieve sustainable, transformative development. 

` Strategic Goal 2. Support development of a sound policy environment for economic growth 

and poverty reduction in the developing world. 

` Strategic Goal 3. Advance international development assistance practice by continually 

improving MCC’s operational effectiveness. 

` Strategic Goal 4. Build MCC’s capabilities to achieve its primary strategic goals. 

MCC developed and shared a FY 2006 Performance Plan with OMB in March 2006. The 

Performance Plan includes a number of outcome, output, and input measures that track back to 

the Strategic Plan. Exhibit 6 shows the mapping between measures in the FY 2006 MCC 

Performance Plan and MCC’s strategic goals. 

` 32 _
Exhibit 6. MCC’s Corporate Performance Plan 

GRAPHIC MCC PAR-04

10/2006

GRAPHIC Millennium (MCC) PAR Report 10/06

Reduce poverty by supporting sustainable, transformative Reduce poverty by supporting sustainable, transformative economic growth in developing countries which create and economic growth in developing countries which create and maintain sound policy environments maintain sound policy environments 

Strategic 

Goals Outcomes Outputs Inputs

Economic Growth Economic Growth

Poverty Reduction Poverty Reduction

Sustainability Sustainability

Economic Growth Economic Growth

Poverty Reduction Poverty Reduction

Sustainability Sustainability

Transformative Impact Transformative Impact

Policy Performance Policy Performance

Recognition 

and Support

Recognition 

and Support

Compact 

Execution Quality

Compact 

Execution Quality

Country Partnership Country Partnership

Mission

Achieve sustainable 

transformative 

development

Achieve sustainable 

transformative 

development

Support development of 

sound policy environment 

for economic growth and 

poverty reduction in the 

developing world

Support development of 

sound policy environment 

for economic growth and 

poverty reduction in the 

developing world

Advance international 

development assistance 

practice by continually 

improving MCC's 

operational effectiveness

Advance international 

development assistance 

practice by continually 

improving MCC's 

operational effectiveness

Build MCC's capabilities 

to achieve its primary 

strategic goals

Build MCC's capabilities 

to achieve its primary 

strategic goals

Efficiency/Resource 

Productivity

Efficiency/Resource 

Productivity

Compliance Practices Compliance Practices

Staffing Staffing

Quality 

Compact Programs

Quality 

Compact Programs

Outcome Measures 

MCC signed its first Compacts in FY 2005. These first Compacts will not be completed and 

evaluated until FY 2010. As a result, there is limited outcome data available to report for 

FY 2006. Accordingly, the Performance Plan weights outcome measures at a relatively low 

5 percent in FY 2006. This weight will increase significantly to more than 50 percent by 

FY 2010 when we expect to have significant outcome data to evaluate. 

Despite the current lack of data on most outcome measures, we have provided results for one 

measure, the change in per capita GDP for countries that were eligible for MCC assistance in 

FY 2004 and FY 2005. MCC has developed a robust data set about performance on country 

selection indicators, and we have provided assessments of the relative improvement in MCC 

country selection indicators for MCC eligible, threshold, and candidate countries. 

` 33 _
Output Measures 

MCC has designed a number of output measures to assess the shorter term impacts of MCC 

programs. These measures include assessments of the relative improvement in MCC country 

selection indicators for MCC eligible, threshold, and candidate countries as well as performance 

by MCC compact countries on specific performance targets. MCC has developed a robust data 

set about performance on country selection indicators. However, compact implementation only 

began in a number of countries in FY 2006, and with the exception of the policy performance 

measures the performance data on specific targets is still very limited. 

Input Measures 

MCC has defined a number of measures to assess how effectively and efficiently we are 

managing compact development and implementation as well as our Threshold and other 

programs. Key measures include: 

` The percentage of Conditions Precedent (CP) that had to be waived or delayed for a compact 

project disbursement to occur. CPs are actions that a compact country needs to take before 

MCC will release a specific disbursement of funds. CPs can include such actions as 

appointing key personnel, completing feasibility studies or environmental impact 

assessments, or reaching specific implementation milestones. 

` A comparison of administrative expenses and due diligence resources to the amount of 

funding that has been committed under Compacts. Administrative expenses are those costs 

associated with the routine operations of MCC, such as salaries and benefits, rent, and travel. 

Due diligence expenses are expenses incurred while determining whether projects proposed 

by MCA-eligible countries meet MCC standards in areas such as technical feasibility, 

economic growth and poverty reduction, environmental impact, and financial management 

and whether projects in implementation continue to meet these standards. 

` A measurement of the number of recommendations by the IG that MCC has fully 

implemented. 

` 34 _
Strategic Goal 1—Achieve Sustainable, Transformative Development 

The MCC Strategic Plan defines the expected outcome for this strategic goal to be significant 

reduction in poverty through sustainable, material economic growth for a significant number of 

people. MCC has defined a number of outcome, output, and input measures to assess progress 

toward this strategic goal. In the coming year, MCC will consider further refinements to these 

measures, including the possibility of measuring criteria relative to trend, dealing with the 

problem of infrequently measured data, and considering alternative data sources. MCC will also 

investigate measuring economic growth and poverty reduction at a level tailored more 

specifically to our programs: 

` Outcome Measure 1⎯The ratio of the Economic Rate of Return (ERR) before compact 

implementation begins compared to that after compact implementation is completed (The exante and ex-post measurements used for this ratio will normally be separated by at least 

5 years.) 

Description of metric and targets: Because of the short period of time that MCC projects 

have been in implementation in compact countries, it is premature for MCC to measure 

results against this outcome measure. MCC will not set specific targets for this measure until 

FY 2010 or later. 

` Outcome Measure 2⎯Change in the percentage of the population below the poverty line at 

$2 per day 

Description of metric and targets: MCC originally planned to begin to measure results 

against this outcome measure in FY 2006. However, it has proven to be very difficult to set a 

baseline for this measure. The number of people who live on less than $2 per day is 

measured through national surveys that are done inconsistently, but typically every 3 years. 

As a result, there is little recent data to use as a baseline, and in the case of one MCC-eligible 

country, the most recent available data is from 1995. 

Because of this difficulty, MCC will reassess this measure and may choose a different metric, 

such as one that has more consistent data availability and can be measured more consistently 

for its FY 2007 Performance Plan. 

` 35 _
` Outcome Measure 3⎯Organizational capacity 

Description of metric and targets: MCC has not yet developed a metric to measure the 

organizational capacity of our counterpart entities accountable in compact countries. MCC 

will develop this measure in the coming year, but will not set specific targets for this metric 

until FY 2008 or later. 

` Outcome Measure 4⎯Change in per capita GDP relative to other countries in low or lowermiddle income groups 

Description of metric and targets: MCC has begun to measure the change in per capita 

GDP for compact countries, comparing the latest available per capita GDP data (from CY 

2005) to a baseline level of CY 2004. For FY 2006, MCC will not measure impacts of MCAfunded projects on per capita GDP because compact programs will not have been in place 

long enough to have such an impact. However, the measure will help us determine whether 

countries selected as eligible for MCC assistance demonstrate on average a greater increase in 

per capita GDP due to their adoption of key economic and other reforms in response to the 

incentives created by MCC’s selection process. 

Results: For the 17 countries that were eligible for compact assistance in FY 2005, the rate 

of growth of per capita GDP increased from 3.60 percent in 2004 to 4.19 percent in 2005 (see 

Exhibit 7). The rate of growth in per capita GDP for all LICs during that same period fell 

from 3.30 percent in 2004 to 3.11 percent in 2005. 

` 36 _
Exhibit 7. All LICs/Eligible Countries 

Percent GDP Change 

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Eligible Countries All Countries

GDP Change

2004

2005

3.6

4.19

3.3

3.11

` Outcome Measure 5⎯Change in the United Nations’ Human Development Index (HDI) 

relative to other countries in low or low-middle income groups 

Description of metric and targets: MCC will begin to measure the change in the HDI of 

compact countries when sufficient data is available. The HDI measures a country’s 

achievements in three dimensions of human development—life expectancy at birth; adult 

literacy rate and the combined primary, secondary, and tertiary gross school enrollment ratio; 

and GDP per capita. 

The HDI in the most recent UN Human Development Report is based on 2003 data and is 

therefore not usable either as a measure of results or as a baseline. MCC will use HDI 

information based on 2004 data as a baseline and will begin measuring results for this 

measure when 2005 data is available. 

` Output Measure 1⎯Percentage of compact performance targets met on time 

Description of metric and targets: MCC defines annual performance targets for specific 

projects in its Compacts and measures the results of these targets on an annual basis. While 

` 37 _
MCC has begun to measure the results of this metric for FY 2006, the only country for which 

MCC has performance data for all four quarters is Madagascar. MCC expects that a much 

more robust measurement of this metric will be able to be made for FY 2007 when additional 

progress will have been made on implementation and more results are available. 

Results: Madagascar had four performance targets set for the first year of implementation, of 

which one was deferred. Of the three remaining targets, two, or 67 percent of the total 

applicable targets, were met on time. 

` Input Measure 1⎯Percentage of performance benchmarks met for a given disbursement 

MCC has begun to measure results for this metric in FY 2006, based on 13 disbursements in 

six countries. While the metric in the FY 2006 performance plan refers to performance 

benchmarks, this metric in fact is based on the number of CPs met by the country prior to 

each disbursement and how many have to be waived or deferred. Subsequent performance 

plans will reflect this clarification. 

Results: For the 13 disbursements made during FY 2006, 250 CPs, or 73 percent of the total, 

were met on time and 92 CPs, or 27 percent, were deferred. No CPs were waived. 

Strategic Goal 2—Support Development of a Sound Policy Environment for 

Economic Growth and Poverty Reduction in the Developing World 

One of MCC’s main strategic objectives is to create incentives for countries to adopt good 

policies that create a foundation for poverty reduction and economic growth. The MCC Strategic 

Plan defines the expected outcome for this strategic goal to be measurable policy reform in three 

policy areas: Ruling Justly, Encouraging Economic Freedom, and Investing in People. Sound 

policies in these areas have been shown to contribute to a sound environment for economic 

growth and poverty reduction. MCC uses 16 objective, transparent, and broadly available policy 

indicators produced by independent, non-government institutions to evaluate the policy 

environment. 

Assumptions 

To calculate rates of reform for various indicators and comparison groups we made a number of 

assumptions. First, we chose to calculate proportional changes in the median performance of 

individual peer groups. We divided all LICs and LMICs into three categories: eligible countries, 

threshold countries, and the remaining candidate countries. 

` 38 _
To calculate rates of reform, we first measured absolute changes in median performance, using 

2002 as the base year and the most recent year for which data is available as the end year. We 

then divided the absolute change in a particular peer group’s median performance by the data 

range. We define the data range as the difference between the 90th percentile and the 10th 

percentile. We chose to include the data range in the denominator, rather than the base year 

value, in order to improve comparability across indicators and peer groups. So, for example, the 

median for eligible LICs and LMICs improved from 63 days to start a business in 2002 to 39 days 

in 2006. Therefore, the absolute change in their median performance is 24 days. The 24 days is 

then divided by the difference between the 90th percentile (98 days) and the 10th percentile 

(18 days), yielding a “rate of reform” of 30.77 percent. 

Categorical rates of reform (Ruling Justly, Investing in People, and Economic Freedom) were 

calculated as the simple average of the rates of reform on all indicators in that category. The only 

exception is Economic Freedom, where we excluded the rate of reform data for inflation due to 

the exogenous influence of rising oil prices, which led to large declines across all peer groups. 

Finally, we note that this is our first effort to measure rates of reform and that we will likely 

refine our approach over time. 

` Outcome Measure 1⎯Rate of Reform for Ruling Justly 

Description of metric and targets: The six indicators in this category are: Civil Liberties, 

Political Rights, Voice and Accountability, Government Effectiveness, Rule of Law, and 

Control of Corruption. These indicators measure just and democratic governance, including a 

country’s demonstrated commitment to promote political pluralism, equality, and the rule of 

law; respect human and civil rights, including the rights of people with disabilities; protect 

private property rights; encourage transparency and accountability of government; and 

combat corruption. 

Results: Threshold countries are registering a higher rate of reform on the Ruling Justly 

indicators than eligible countries and remaining candidate countries: 

− Since 2002, threshold countries have registered an average rate of reform of 7.26 percent 

on the Ruling Justly indicators. By contrast, eligible countries registered a 5.36 percent 

rate of reform, and the remaining candidate countries registered a 5.1 percent erosion of 

performance. 

` 39 _
− Since 2002, threshold countries have registered a 12.64 percent rate of reform on the 

Control of Corruption index, while eligible countries have registered a 7.5 percent rate of 

reform and the remaining candidate countries have registered a 4.21 percent erosion of 

performance. 

For example: 

à Ukraine improved from the 40th percentile to the 72nd percentile. 

à Moldova improved from the 46th percentile to the 55th percentile. 

à Indonesia improved from the 39th percentile to the 45th percentile. 

− Since 2002, threshold countries have registered a positive rate of reform on all three of 

the democracy indicators. Eligible countries registered a positive rate of reform on two 

of the democracy indicators and the remaining candidate countries turned in a positive 

rate of reform on only one of the democracy indicators. 

− On the Government Effectiveness and Rule of Law indicators, eligible countries have 

outperformed threshold countries and the remaining candidate countries. Since 2002, 

eligible countries have registered a 7.36 percent rate of reform on Government 

Effectiveness and a 13.27 percent rate of reform on Rule of Law. By contrast, threshold 

countries have shown a 10.22 percent erosion of performance on Government 

Effectiveness and a 2.72 percent improvement on Rule of Law. 

` Outcome Measure 2⎯Rate of Reform for Economic Freedom 

Description of metric and targets: This category measures the extent to which a 

government encourages economic freedom, including a demonstrated commitment to 

economic policies that encourage individuals and firms to participate in global trade and 

international capital markets, promote private sector growth and the sustainable management 

of natural resources, strengthen market forces in the economy, and respect worker rights 

including the right to form labor unions. 

The six indicators in this category are: Regulatory Quality, Cost of Starting a Business, 

Inflation, Fiscal Policy, Days to Starting a Business, and Trade Policy. The Economic 

Freedom rate of reform was calculated using the same methodology used for the Ruling 

Justly category. The only exception is that inflation was excluded because of the exogenous 

influence of rising oil prices, which led to large declines across all peer groups. 

` 40 _
Results: Threshold countries are registering a higher rate of reform on the Economic 

Freedom indicators than eligible countries and the remaining candidate countries: 

− Over the last year threshold countries registered an average rate of reform of 14.8 percent 

on the Economic Freedom indicators. Eligible countries registered an average rate of 

reform of 11.3 percent. The remaining candidate countries registered a 5.78 percent 

average rate of reform. 

− This year eligible countries improved their median performance on the Cost of Starting a 

Business indicator by 14.6 percent. Threshold countries registered a 13.8 percent 

improvement. The remaining candidate countries also reformed, but at a slower pace of 

0.57 percent. 

− This year threshold countries were the only countries to register a positive rate of reform 

on the Regulatory Quality indicator (1.01 percent). Eligible countries and the remaining 

candidate countries registered negative rates of change: −6.55 percent and −0.64 percent, 

respectively. 

` Outcome Measure 3⎯Rate of Reform on Investing in People 

Description of metric and targets: This category measures the investments in the people of 

each country, particularly women and children, including programs that promote broad-based 

primary education and strengthen and build capacity to provide quality public health and 

reduce child mortality. 

The four indicators in this category are: Total Public Expenditure on Health, Total Public 

Expenditure on Primary Education, Immunization Rates, and Girls’ Primary Education 

Completion Rate. The Investing in People rate of reform was calculated using the same 

methodology used for the Ruling Justly category. 

Results: MCA eligible and threshold countries are registering a significantly higher rate of 

reform on the Investing in People indicators than the remaining candidate countries: 

− Since 2002, eligible countries registered an average rate of reform of 7.58 percent on the 

Investing in People indicators. Threshold countries registered an average rate of reform 

of 4.15 percent. The remaining candidate countries registered a −1.65 percent rate of 

change. 

` 41 _
− Since 2002, Immunization Rates have risen by 8.18 percent among eligible countries, 

8.7 percent among threshold countries, and 2.5 percent among the remaining candidate 

countries. 

− Since 2002, Primary Education Expenditures have risen by 32.1 percent among eligible 

countries and 7.8 percent among threshold countries. Primary Education Expenditures 

have declined by 2.1 percent among the remaining candidate countries. 

Exhibit 8 illustrates the Strategic Goal 2 policy rates of reform. 

Exhibit 8. Policy Rates of Reform 

-5%

0%

5%

10%

15%

Rates of Reform

5.1%

7.26%

5.36%

Category of Countries

Rates of Reform

for Ruling Justly

-5%

0%

5%

10%

15%

Rates of Reform

Category of Countries

5.78%

14.8%

11.3%

Rates of Reform

for Economic Freedom

-5%

0%

5%

10%

15%

Rates of Reform

Category of Countries

-1.65%

7.58%

4.15%

Rates of Reform

for Investing in People

Candidate Threshold Eligible

` 42 _
Strategic Goal 3—Advance International Development Assistance Practice by 

Continually Improving MCC’s Operational Effectiveness 

MCC identifies best practices, internally and externally, and adopts them to improve its 

operations. According to MCC’s Strategic Plan, the expected outcome of this strategic goal is 

that MCC will be at the forefront of providers of development assistance and viewed as a model 

of effectiveness by other development practitioners: 

` Output Measure 1⎯Recognition and Support 

Description of metric and targets: MCC’s goal is to have broad domestic and international 

support to further strengthen our model. Our outreach efforts will help garner support from 

domestic and international constituencies for MCC’s approach. These constituencies will 

provide constructive feedback and support for adequate resources for MCC to achieve its 

goals. MCC does not currently have metrics for measuring recognition and support. 

However, there is significant evidence indicating a positive result for this goal. 

Results: MCC has actively sought broad input from think-tank organizations, NGOs, 

scholars, Congress, various U.S. Government offices, and key stakeholders in developing 

more robust indicators. At the same time, other organizations working in or studying 

international development have used MCC’s approach to improve their own measurements: 

− To strengthen MCC’s model by improving its policy indicators, after issuing a public 

“call for ideas” and assembling a group of economists and natural resources management 

experts MCC identified two indicators to assess a country’s economic policies promoting 

the sustainable management of natural resources. The indicators are a Natural Resource 

Management Index from Columbia University’s Center for International Earth Science 

Information Network and the Center for Environmental Law and Policy, and an Access to 

Land indicator from the International Fund for Agricultural Development (IFAD). 

− Freedom House has re-scaled its Political Rights and Civil Liberties measures to provide 

greater differentiation, which will help MCC to better discriminate between high- and 

low-performing countries. 

− The Heritage Foundation has also re-scaled its Trade Policy indicator to help MCC better 

differentiate between high and low performers. 

` 43 _
− The World Bank Institute, which previously released its data every other year, has 

decided that it will now update the Control of Corruption, Rule of Law, Government 

Effectiveness, Voice and Accountability, and Regulatory Quality indices annually. The 

World Bank Institute has also made each of the sub-component indicators that make up 

its indices publicly available, which will be an extremely valuable tool for MCA 

candidate countries interested in diagnosing and improving their performance. 

− Due in part to MCA candidate country interest in the MCA, the IFC has expanded the 

coverage of its “Doing Business” report from 155 to 175 countries in 2006. When the 

MCA was first created, the IFC covered 120 countries.9

− Many countries, such as Tanzania, São Tomé and Principe, East Timor, Bhutan, and 

Cape Verde, have specifically requested that they be measured by the “Doing Business” 

team in order to increase their chances of being selected for MCA eligibility. 

` Input Measure 1⎯Country Partnership 

Description of metric and targets: MCC will have a stronger operating model based on 

lessons learned and shared experiences. MCC will operate more efficiently, and its 

development assistance will be more effective in achieving results. MCC currently does not 

have metrics for this goal. 

Results: MCC’s competitive country selection process is creating incentives that have 

prompted many countries to reevaluate their policies, regulations, and legislation related to 

good governance, health and education, and their business climate: 

− According to the IFC Doing Business 2007 report, Georgia led the world last year in its 

reform efforts. Its government streamlined customs procedures, reduced the time and 

cost of business registration, and made it easier for employers to hire new workers. In 

FY 2005, MCC signed a $298 million development Compact with Georgia.10

− According to the IFC, 24 candidate countries have specifically cited the MCA as the 

primary motivation for their business start-up reform efforts. For example, the 

Government of El Salvador, which was inspired by the MCA to reduce the time it takes 

 

9

 World Bank. 2006. Doing Business 2007: How to Reform. Washington, DC: World Bank and International Finance 

Corporation. 10 World Bank. 2006. Doing Business 2007: How to Reform. Washington, DC: World Bank and International Finance 

Corporation. 

` 44 _
to start a business from 115 days to 26 days, has seen a 500 percent increase in business 

registrations and a sharp spike in customer satisfaction: from 32 percent to 87 percent. 

The IFC has found that these reforms “can add between a quarter and half a percentage 

point to growth rates in the average developing economy.” 

− MCC signed a 2-year, $21 million Threshold Program with the Republic of the 

Philippines this past July to improve revenue administration and fight corruption. In an 

unprecedented move, President Gloria Macapagal-Arroyo matched MCC’s Threshold 

Program with an additional $19 million of her country’s own money to fight corruption. 

This is an impressive commitment, and it complements MCC’s efforts. 

− Simeon Djankov, the manager of the World Bank’s Doing Business project, reports, “We 

have ... seen a number of reforms around the world in both rich and poor countries, but 

... in many of the developing countries the reform has actually been primarily as a result 

of the inclusion in the Millennium Challenge Account.” 

− The Heritage Foundation has said that “another example [of the MCA incentive effect] is 

the interest MCA candidate countries have expressed in how the Index of Economic 

Freedom measures trade policy (another MCA measure) and how they could improve 

their score. This interest has arisen among MCA-eligible countries and those hoping to 

qualify in the future.” 

− The IFC’s latest annual report highlights MCC’s incentive effect as a catalyst for reform. 

The report says, “Since the Millennium Challenge Corporation introduced conditions for 

grant eligibility based on performance in the time and cost of business start-up, 13 

countries have started reforms aimed at meeting the criteria.” 

− Two Harvard economists studied “The MCC Effect.” The report they released earlier this 

year concluded that countries are responding to MCC’s clear and actionable incentives. 

` 45 _
Strategic Goal 4—Build MCC’s Capabilities to Achieve Its Primary Strategic 

Goals 

The Strategic Plan defines the key outcome for this strategic goal to be the efficient and effective 

operation of MCC. The CEO has stressed the importance of this goal and meets weekly with the 

Vice President for the Department of A&F to review progress. 

In FY 2006, MCC undertook a multi-pronged approach to improve its capacity to implement its 

key programs while simultaneously improving the internal control environment so that MCC 

fully complies with federal rules and regulations. Highlights of this effort include: 

` Increasing MCC’s staff from 142 at the beginning of FY 2006 to 264 at the end of the fiscal 

year, only 36 below MCC’s planned corporate headquarters staffing level of 300. As part of 

this effort, MCC made steady progress toward the goal of a diverse workforce at all levels 

and instituted a diversity-focused outreach and recruitment program. 

` Improving the internal control environment by implementing 26 new and 7 revised key 

policies or procedures, including a comprehensive procurement manual and a new set of 

travel policies and procedures that fully comply with Federal Travel Regulations. 

` Streamlining MCC’s procurement procedures and conducting procurements that fully comply 

with the Federal Acquisition Regulation while routinely beating federal norms for 

procurement lead times. 

` Opening new overseas offices in five countries—Madagascar, Cape Verde, Georgia, 

Armenia, and Benin—and streamlining the process of placing MCC Resident Country 

Directors so that they are on the ground to support the initial implementation of Compacts. 

The FY 2006 MCC Performance Plan defined three input measures for this strategic goal: 

` Input Measure 1—The ratio of total administrative and due diligence obligations to total 

funds committed under current Compacts 

Description of metric and targets: MCC began to measure results for this metric in 

FY 2006 and compared it to the FY 2006-to-FY 2005 data. The purpose of this measure is to 

capture the comprehensive program development costs for the year, defined as obligations of 

administrative expenses and due diligence funds, as a percentage of the amounts committed 

` 46 _
to Compacts that are signed and being implemented during the year. Because MCC commits 

and obligates compact funding up-front for 5 years of program implementation, this measure 

most accurately captures the cost of managing a portfolio of Compacts. 

Results: In FY 2006 the ratio of total administrative and due diligence obligations to total 

funds committed under current Compacts increased to 5.1 percent, from 3.4 percent in 

FY 2005. While funds committed under Compacts more than doubled, from $938 million to 

$2.16 billion, total obligations for administrative expenses and due diligence more than 

tripled, from $32 million to an estimated $110 million. 

The rapid increase in administrative and due diligence expenses is due primarily to the startup costs that MCC continued to incur in FY 2006, most notably for the significant increase in 

staffing, obtaining and building out additional office space, and opening overseas offices. 

MCC expects administrative and due diligence costs to increase much more modestly in 

FY 2007 and expects the ratio of these costs to funds committed under Compacts to fall to 

under 3.0 percent. 

` Input Measure 2⎯The number of outstanding issues from IG annual financial statement 

audit and interim performance reviews satisfactorily resolved within agreed-upon timetables 

Description of metric and targets: The USAID IG, who also serves as MCC’s IG, 

publishes a number of audit reports and performance reviews each year on various aspects of 

MCC operations. When the IG publishes an audit, review, or risk assessment, MCC provides 

written comments that are included with the report. In those cases where MCC concurs with 

the recommendation, the IG records a “management decision” and assigns a target date for 

final action. When MCC determines that final action has been taken to implement a 

recommendation, it considers the recommendation closed, although the IG retains the right to 

reopen a recommendation if it disagrees that the final action taken was satisfactory: 

− In FY 2006, the IG completed nine audits, reviews, and risk assessments that contained 

39 recommendations. Four of these reports, accounting for 20 of the recommendations, 

have passed the target dates for final action on the recommendations, while the target 

dates for final action have not yet been reached for the other five reports, which account 

for the remaining 19 recommendations. In addition, 12 recommendations from previous 

fiscal years were carried into FY 2006. 

` 47 _
− In February 2006, MCC designated the Deputy Vice President for the Department of 

A&F as the central point of contact for the IG and made this position responsible for 

coordinating all MCC activities on IG recommendations. MCC also agreed to use the IG 

tracking system as the basis for its own internal tracking system for IG recommendations. 

Results: Of the 12 recommendations that carried over from previous years into FY 2006, six 

have been closed, although none by the original target dates. Of the 20 recommendations 

from FY 2006 that have passed the target dates for final action, 14 have been closed, all of 

them on time. Therefore, of the 32 total recommendations that have passed the date for final 

action, 20 of them (or 63 percent of total) have been closed. Fourteen of these (or 44 percent 

of total) were closed by the original target dates. 

Of the remaining 19 recommendations that have not yet reached target dates for final action, 

MCC has concurred with 17 and has closed two. 

MCC has set revised target dates during FY 2007 for all 12 of the recommendations from 

FY 2006 or prior years that have passed the target dates but have not yet been closed. 

` Input Measure 3⎯Staff survey of effectiveness and satisfaction 

Description of metric and targets: MCC participated in FY 2006 in the Office of Personnel 

Management’s (OPM) Federal Human Capital Survey that is conducted across the Federal 

Government. Unfortunately, while the survey was completed in June 2006, the results will 

not be available until at least December 2006, and therefore cannot be included in this report. 

In addition, the OPM survey is conducted only for permanent, full-time federal staff and does 

not apply to limited-term appointments, who account for approximately one-third of MCC’s 

direct hire staff. 

Because of these limitations, MCC plans for an independent survey of staff effectiveness and 

satisfaction to be conducted in the second quarter of FY 2007. This survey will be conducted 

for all MCC staff regardless of their type of appointment and will address a broader range of 

issues than the OPM survey. The results will be included in MCC’s FY 2007 Performance 

and Accountability Report. 

` 48 _
` 49 _

3. FINANCIAL SECTION

Exhibits 9 through 13 outline the following financial statements: 

` Statements of Financial Position 

` Statements of Operations and Changes in Net Position 

` Statements of Functional Expenses 

` Statements of Cash Flows 

` Statements of Budgetary Resources 

Columns may not add due to rounding. 

Further details are provided in the Notes to Financial Statements section that follows. 
Exhibit 9 

Statements of Financial Position 

(As of September 30, 2006 with Summary Totals for 2005) 

2006 Total Compacts 609(g) Funding Threshold 

Evaluation and 

Support Administrative 

Assets Current Assets 

Fund Balance With Treasury (Note 2) 

 $3,931,404,752 $3,610,671,774 $55,951,660 $193,230,000 $32,200,504 $37,567,478 $ 

Receivables/Advances/ Prepayments (Note 3) 

 18,893,478 16,587,952 511,426 – 1,731,899 62,202 

Fixed Assets 

Leasehold Improvements and Capital Equipment (Note 4) 

 4,632,785 – – – – 4,632,785 

Total Assets $3,954,931,016 $3,627,259,725 $56,463,086 $193,230,000 $33,932,403 $42,262,466 $ Liabilities 

Accounts Payable 2,552,277 – 774,246 – 731,258 1,046,773 Other Liabilities (Note 5) 2,516,786 – – – (461,774) 2,978,560 Accrued Funded Annual Leave 

 2,698,070 – – – – 2,698,070 

Total Liabilities $ 7,767,133 $ – $ 774,246 $ – $ 269,484 $ 6,723,404 $ Net Position 

Unexpended Appropriations 

Obligated 1,283,003,459 1,187,867,694 43,098,943 0 23,298,781 26,954,705 Commitments 856,804,163 842,399,600 5,052,595 0 8,495,391 856,576 

` 50 _
Exhibit 9 (continued) 

Statements of Financial Position 

(As of September 30, 2006 with Summary Totals for 2005) 

2006Total Compacts 609(g) Funding Threshold 

Evaluation and 

Support Administrative 

Allotments—Realized Resources 

 1,802,661,274 1,596,992,431 7,537,301 193,230,000 1,868,748 3,032,794 

Cumulative Results of Operations 

 4,694,987 – – – – 4,694,987 

Total Net Position (Note 6) $3,947,163,882 $3,627,259,725 $55,688,839 $193,230,000 $33,662,920 $35,539,063 $ Total Liabilities and Net Position 

$3,954,931,016 $3,627,259,725 $56,463,086 $193,230,000 $33,932,403 $42,262,466 $ 

* The notes are an integral part of these financial statements. 

` 51 _
Exhibit 10 

Statements of Operations and Changes in Net Position 

(For the Year Ended September 30, 2006 with Summary Totals for 2005) 

2006 Total Compacts 609(g) Funding Threshold 

Evaluation and 

Support Administrative 

Financing Sources 

Appropriations Used $ 92,455,115 $ 16,747,194 $ 5,895,167 $ – $ 15,137,340 $ 54,055,700 $ 

Expenses 92,036,960 16,747,194 5,895,167 – 15,137,340 53,637,545 Excess of Financing Sources Over Expenses 

 $ 418,155 $ – $ (0) $ – $ 0 $ 418,155 $ 

Net Position 

Excess of Financing Sources Over Expenses 

 418,155 – (0) – 0 418,155 

Increase in Unexpended Appropriations 

Appropriated – 

Obligated 933,850,069 863,789,695 36,954,637 – 14,498,521 17,054,930 Commitments 856,804,163 842,399,600 5,052,595 0 8,495,391 856,576 Allotments—Realized Resources 

 (168,109,345) (358,233,833) (8,007,054) 193,230,000 1,868,748 3,032,794 

Transfers In/(Out) (20,000,000) – – (20,000,000) – – Permanent Rescission (17,700,000) (17,700,000) – – – – 

Total Increase in Unexpended Appropriations 1,585,263,041 1,330,255,462 34,000,178 173,230,000 24,862,660 21,362,455 Beginning Net Position 2,361,900,842 2,297,004,263 21,688,661 20,000,000 8,800,260 14,176,608 Ending Net Position $3,947,163,882 $3,627,259,725 $ 55,688,839 $ 193,230,000 $ 33,662,920 $ 35,539,063 $ 

* The notes are an integral part of these financial statements. 

` 52 _
Exhibit 11 

Statements of Functional Expenses 

(For the Year Ended September 30, 2006 with Summary Totals for 2005) 

2006 Total Compacts 609(g) Funding Threshold 

Evaluation and 

Support Administrative 

Salary and Benefits $27,587,426 $ – $ – $ – $ – $27,587,426 Travel 6,362,880 – – – 317,509 6,045,371 Rent/Lease 4,404,013 – – – – 4,404,013 Utilities 766,206 – – – – 766,206 Information Technology Services 

 2,562,575 – – – – 2,562,575 

Accounting Services 4,244,677 – – – – 3,624,963 Inter-Agency Agreements 4,636,977 – – – 4,636,977 – Other Services 13,563,769 – – – 9,755,703 3,808,066 Supplies and Equipment 2,211,918 – – – – 2,211,918 Grants 22,642,361 16,747,194 5,895,167 – – – Miscellaneous 3,054,158 – – – 427,151 2,627,007 

Total Expenses $92,036,960 $16,747,194 $5,895,167 $ – $ 15,137,340 $53,637,545 

* The notes are an integral part of these financial statements. 

` 53 _
Exhibit 12 

Statements of Cash Flows 

(For the Year Ended September 30, 2006 with Summary Totals for 2005) 

2006Total Compacts 609(g) Funding Threshold 

Evaluation 

and Support Administrative 

Cash Flows From Operating Activities 

Excess of Financing Sources Over Expenses 

 $ 418,155 $ – $ (1) $ – $ 0 $ 418,155 $ 

Adjustments Affecting Cash Flow: 

Appropriated Capital Used (92,455,115) (16,747,194) (5,895,167) – (15,137,340) (54,055,700) Increase in Advances/ Receivables/Prepayments 

 (14,554,780) (14,782,028) (511,426) 768,101 (29,428) 

Increase in Accounts Payable 2,251,560 – 774,246 – 659,128 818,186 Decrease in Other Liabilities (1,024,769) – (154,528) – (1,459,696) 1,040,263 Increase in Annual Funded Leave Liabilities 

 1,311,427 – – – – 1,311,427 

Total Adjustments (104,471,677) (31,529,222) (5,786,874) – (15,169,807) (50,915,252) (1

Net Cash Used in Operating Activities 

 $(104,053,522) $ (31,529,222) $(5,786,874) $ – $ (15,169,806) $(50,497,097) $(

Cash Flows From Investing Activities 

Purchase of Property $ (388,727) $ – $ – $ – $ – $ (388,727) $ Net Cash Used in Investing Activities 

 $ (388,727) $ – $ – $ – $ – $ (388,727) $ 

` 54 _
Exhibit 12 (continued) 

Statements of Cash Flows 

(For the Year Ended September 30, 2006 with Summary Totals for 2005) 

2006Total Compacts 609(g) Funding Threshold 

Evaluation 

and Support Administrative 

Cash Flows From Financing Activities 

Appropriations Received Net of Rescissions 

 $1,752,300,000 $1,347,002,655 $ 39,895,345 $248,230,000 $ 40,000,000 $ 75,000,000 $ 

Transfers Out (75,000,000) (75,000,000) Net Cash Provided by Financing Activities 

 1,677,300,000 1,347,002,655 39,895,345 173,230,000 40,000,000 75,000,000 

Net Increase in Cash 1,572,857,752 1,315,473,433 34,108,471 173,230,000 24,830,194 24,114,176 Fund Balance With Treasury, Beginning 

 2,358,547,000 2,295,198,340 21,843,188 20,000,000 7,370,311 13,453,302 

Fund Balance With Treasury, Ending 

 $3,931,404,752 $3,610,671,774 $ 55,951,660 $193,230,000 $ 32,200,504 $ 37,567,478 $

* The notes are an integral part of these financial statements. 

` 55 _
Exhibit 13 

Statements of Budgetary Resources 

(For the Year Ended September 30, 2006 with Summary Totals for 2005) 

2006 Total Compacts 

609(g) 

Funding Threshold 

Evaluation 

and Support Administrative 

Budgetary Resources: 

Budget Authority: 

Appropriations 1,770,000,000 1,364,702,655 39,895,345 248,230,000 40,000,000 75,000,000 2Net Transfer, Current Year Authority 

Unobligated Balance—Beginning of Period 

2,053,722,184 1,972,926,264 15,544,354 65,251,566 

Unobligated Balance—Transferred Spending Authority From Offsetting Collections 

–

Advances Received –Adjustments: 

Recoveries of Prior Years Obligations 

–

Permanently Not Available (Note 7) 

 (17,700,000) (17,700,000) – – – – 

Total Budgetary Resources 

 $ 3,806,022,184 $ 3,319,928,919 $ 55,439,699 $ 313,481,566 $ 40,000,000 $ 75,000,000 $ 2

` 56 _
Exhibit 13 (continued) 

Statements of Budgetary Resources 

(For the Year Ended September 30, 2006 with Summary Totals for 2005) 

2006 Total Compacts 

609(g) 

Funding Threshold 

Evaluation 

and Support Administrative 

Status of Budgetary Resources: 

Obligations Incurred $ 1,109,535,594 $ 880,536,888 $ 42,849,803 $ 83,230,412 $ 29,635,861 $ 71,110,630 $ 2Unobligated Balance Available: 

Apportioned 877,383,424 842,399,600 10,644,896 10,085,419 10,364,139 3,889,370 

Unobligated Balance Not Available: 

 1,819,103,166 1,596,992,431 1,945,000 220,165,735 – – 

Total Status of Budgetary Resources 

 $ 3,806,022,184 $ 3,319,928,919 $ 55,439,699 $ 313,481,566 $ 40,000,000 $ 75,000,000 $ 2

Relationship of Obligations to Outlays: 

Obligated Balance, Net— as of October 1, 2005 

 $ 384,862,005 $ 322,272,076 $ 6,298,834 $ 34,699,991 $ 7,370,311 $ 13,538,935 $ 

Obligations Incurred 1,109,535,594 $ 880,536,888 $ 42,849,803 $ 83,230,412 $ 29,635,861 $ 71,110,630 $ 2Recoveries of Prior Years Obligations 

–

Adjustments Obligated Balance, Net—End of Period 

Accounts Payable (8,881,212) 0 (774,246) 0 (1,670,526) (6,436,440) Obligations (1,376,397,315) (1,171,279,742) (42,587,517) (112,225,132) (21,566,882) (26,954,705) (1

Total Outlays $ 109,119,072 $ 31,529,222 $ 5,786,873 $ 5,705,271 $ 13,768,764 $ 51,258,420 $ 1

` 57 _
` 58 _

Exhibit 13 (continued) 

Statements of Budgetary Resources 

(For the Year Ended September 30, 2006 with Summary Totals for 2005) 

2006 Total Compacts 

609(g) 

Funding Threshold 

Evaluation 

and Support Administrative 

Outlays: 

Disbursements 109,119,072 31,529,222 5,786,873 5,705,271 13,768,764 51,258,420 1Collections/Refunds – 

Net Outlays $ 109,119,072 $ 31,529,222 $ 5,786,873 $ 5,705,271 $ 13,768,764 $ 51,258,420 $ 

* The notes are an integral part of these financial statements. 
NOTES TO FINANCIAL STATEMENTS

(AS OF SEPTEMBER 30, 2006) 

Note 1—Summary of Significant Accounting Policies 

A. Basis of Presentation 

The accompanying financial statements have been prepared to report the financial position, 

results of operations, cash flows, and budgetary resources for MCC (the Corporation), as required 

by Section 613 of the Millennium Challenge Act of 2003 and the Government Corporation 

Control Act (31 U.S.C. §9106). These financial statements have been prepared from the 

Corporation’s books and records and are presented in accordance with the applicable 

requirements of OMB, the Secretary of the Treasury, and the Government Management and 

Reform Act of 1994. 

The Corporation’s accounting policies conform to and are consistent with generally accepted 

accounting principles for the Federal Government, as promulgated by OMB and prescribed by the 

Federal Accounting Standards Advisory Board (FASAB). 

The Corporation’s principal financial statements are: 

` Statements of Financial Position 

` Statements of Operations and Changes in Net Position 

` Statements of Functional Expenses 

` Statements of Cash Flows 

` Statements of Budgetary Resources 

MCC has presented comprehensive statements for FY 2006, with summary totals for FY 2005 for 

comparative purposes. These notes are considered an integral part of the financial statements. 

B. Reporting Entity 

The Corporation was formed in January 2004 pursuant to the Millennium Challenge Act of 2003 

(Public Law 108-199). The Corporation’s mission is to reduce poverty by supporting sustainable, 

transformative economic growth in developing countries which create and maintain sound policy 

` 59 _
environments. The assistance is intended to provide economic growth and the elimination of 

extreme poverty, strengthen good governance, encourage economic freedom, and promote 

investments in people. 

C. Budgets and Budgetary Accounting 

The Corporation’s programs and activities are funded through no-year appropriations. Such funds 

are available for obligation without fiscal year limitation and remain available until expended. 

MCC was provided total appropriations of almost $1.8 billion and $1.5 billion in FY 2006 and 

FY 2005, respectively. OMB apportions MCC administrative funds on an annual basis pursuant 

to statutory limitations in the appropriations bill. In addition, MCC receives from OMB a separate 

apportionment for due diligence funds, which MCC uses for compact evaluations and support, 

compact programs, 609(g) funds, the Threshold Program, and audit funds. Because of the no-year 

status of MCC appropriations, unobligated administrative, audit, and due diligence funds 

(apportioned on annual bases) are not returned to the Treasury. MCC’s policy is to transfer any 

unobligated balances as of September 30 for these three categories of funds to compact funds at 

the beginning of the subsequent fiscal year. 

D. Basis of Accounting 

Financial transactions are recorded on accrual and budgetary bases in accordance with pertinent 

federal accounting and financial reporting requirements. Under the accrual method of accounting, 

financing sources are recognized when used and expenses are recognized when incurred, without 

regard to receipt or payment of cash. Budgetary accounting facilitates the Corporation’s 

compliance with legal constraints and controls over the use of federal funds. 

The accompanying Statements of Financial Position, Operations and Changes in Net Position, 

Cash Flows, and Functional Expenses have been prepared on the accrual basis. The Statement of 

Budgetary Resources has been prepared in accordance with budgetary accounting rules. The 

Statement of Cash Flows has been prepared to reconcile budgetary to financial (proprietary) 

accounting information. 

` 60 _
E. Fund Balance with Treasury 

The Corporation does not maintain cash in commercial bank accounts. Rather, the Corporation’s 

funds are maintained in Treasury accounts. The Department of the Treasury processes all cash 

receipts and disbursements for the Corporation. The Fund Balances with Treasury represent noyear funds, which are maintained in appropriated funds that are available to pay current and 

future commitments. 

F. Advances to Others 

The Corporation advances funds in response to compact countries and federal agency drawdown 

requests in order to implement compact projects in an MCA country or inter-agency agreements. 

Funds advanced to compact countries are used to pay legitimate costs and expenses incurred per 

the formal Compacts entered into by MCC and the countries. 

G. Property and Equipment 

The Corporation’s accounting policies require that property and equipment with original cost of 

$25,000 or more and an estimated useful life of 2 or more years to be capitalized. Such assets 

include leasehold improvements, telephone equipment, computer systems equipment, copiers, 

computer software, furniture, and assets under capital leases. The assets are to be depreciated (or 

amortized) over their estimated useful lives. 

H. Compact and Pre-Compact (609(g)) Funding Payable 

Compact funding, including 609(g) funds, are made to eligible countries with approved compact 

or pre-compact funding agreements. Upon formally entering into a Compact with a country, the 

Corporation records a commitment of funds (i.e., administrative reservation) in its financial 

records for the total value of the Compact. Once a Compact enters into force, the value of the 

Compact is obligated on MCC’s financial books (and the related commitment 

reduced/liquidated). At the end of the fiscal year, the Corporation records the total estimated 

amount of compact expenses incurred for work performed but not paid as liquidations of the 

advances. The estimated amount of such expenses at September 30, 2006, and September 30, 

2005, were $1.956 million and $0, respectively. 

` 61 _
I. Accounts Payable 

The Corporation records as liabilities all amounts due to others as a direct result of transactions or 

events that have occurred. Accounts payable represent amounts due to federal and non-federal 

entities for goods and services received by the Corporation, but not paid at the end of the fiscal 

year. 

J. Actuarial FECA Liability 

The Federal Employees’ Compensation Act (FECA) provides income and medical cost protection 

to covered federal civilian employees injured on the job, employees who have incurred a workrelated occupational disease, and beneficiaries of employees whose deaths are attributable to a 

job-related injury or occupational disease. 

Claims incurred for benefits for Corporation employees under FECA are administered by the 

Department of Labor (DOL) and later billed to the Corporation. The Corporation’s actuarial 

liability for workers’ compensation includes any costs incurred but unbilled as of year-end, as 

calculated by DOL, and is not funded by current appropriations. 

The Corporation incurred no FECA liabilities during FY 2006 and FY 2005. 

K. Other Liabilities 

Other liabilities include amounts owed, but not paid, at the end of the fiscal year for employee 

payroll and benefits and FECA charges (see Exhibit 15). 

L. Accrued Annual Leave 

The value of employees’ unused annual leave at the end of the fiscal year is accrued as a liability. 

At the end of each fiscal year, the balance in the accrued annual leave account is adjusted to 

reflect current year pay rates and leave balances. Annual leave is funded from current 

appropriations. Sick leave and other types of non-vested leave are expensed when used and, in 

accordance with federal requirements, no accruals are recorded for unused leave. 

` 62 _
M. Net Position 

Net position is composed of unexpended appropriations and cumulative results of operations. 

Unexpended appropriations are funds appropriated by the Congress to the Corporation that are 

still available for expenditure at the end of the fiscal year. Cumulative results of operations 

represent the net differences between financing sources and expenses from the Corporation’s 

inception. 

N. Financing Sources 

Per note 1.C, the Corporation funds its program and operating expenses through no-year 

appropriations. Appropriations are recognized as an accrual-based financing source at the time 

they are used to pay program or administrative expenses, except for expenses to be funded by 

future appropriations. 

O. Retirement Benefits 

The Corporation’s employees participate in either the Civil Service Retirement System (CSRS) or 

the Federal Employees Retirement System (FERS). FERS was established by Public Law 99-335. 

Pursuant to this law, most U.S. Government employees hired after December 31, 1983, are 

covered by FERS and Social Security. Federal employees hired prior to January 1, 1984, were 

allowed to elect whether they desired to participate in FERS (with Social Security coverage) or 

remain in CSRS. 

For employees covered by CSRS, the Corporation contributes 7 percent of their gross pay toward 

their retirement benefits. For those employees covered by FERS, the Corporation contributes 

11 percent of their gross pay toward retirement. Employees are also allowed to participate in the 

federal Thrift Savings Plan (TSP). For employees under FERS, the Corporation contributes an 

automatic 1 percent of basic pay to TSP and matches employee contributions up to an additional 

4 percent of pay, for a maximum Corporation contribution amounting to 5 percent of pay. 

Employees under CSRS may participate in the TSP, but will not receive either the Corporation’s 

automatic or matching contributions. 

` 63 _
During FY 2006, the Corporation made retirement contributions of $761,000 to CSRS, 

$1.977 million to FERS, and $620,700 to TSP. In FY 2005, the Corporation made contributions 

of $30,000 to CSRS, $876,000 to FERS, and $226,000 to TSP. 

P. Use of Estimates 

The preparation of financial statements requires management to make estimates and assumptions 

that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and 

liabilities at the date of the financial statements, and the reported amounts of financing sources 

and expenses during the reporting period. Actual results could differ from such estimates. 

Q. Contingencies 

The Corporation can be a party to various routine administrative proceedings, legal actions, and 

claims brought by or against it, including threatened or pending litigation involving labor 

relations claims, some of which may ultimately result in settlements or decisions against the 

Corporation. In the opinion of the Corporation’s management and legal counsel, there are no 

proceedings, actions, or claims outstanding or threatened that would materially impact the 

Corporation’s financial statements. 

R. Judgment Fund 

Certain legal matters to which the Corporation can be named as a party may be administered and, 

in some instances, litigated and paid by other federal agencies. In general, amounts paid in excess 

of $2,500 for Federal Tort Claims Act settlements or awards pertaining to these litigations are 

funded from a special appropriation administered by the Department of the Treasury called the 

Judgment Fund. Although the ultimate disposition of any potential Judgment Fund proceedings 

cannot be determined, management expects that any liability or expense that might ensue would 

not be material to the Corporation’s financial statements. 

S. Custodial Receivables and Liabilities 

Under current policy and procedures, the Corporation funds all Compacts with other countries by 

advancing funds on a monthly basis to cover projected needs. Such funds provided to the 

countries are required to be deposited in interest-bearing accounts, if legally feasible, until 

disbursed. The interest earned on these accounts is remitted to the Corporation and deposited into 

` 64 _
an account at the U.S. Treasury. Such interest may not be retained or used by the Corporation, but 

periodically is returned to the Treasury’s general funds. As of September 30, 2006, receivables 

for amounts of interest to be remitted by the countries and the related liabilities are not reflected 

in these financial statements. As of September 30, 2006, the Corporation had outstanding 

advances related to compact financing of approximately $16.6 million. During FY 2006, the 

Corporation received and deposited $304,000 in interest remittances. At the end of FY 2006, 

approximately $174,000 of interest earned on compact advances to the MCAs was due to be 

remitted to MCC. At the end of FY 2005, the Corporation had advances of $1.8 million and 

received interest remittances of approximately $17,000 during the year. 

Note 2—Fund Balance with Treasury 

The U.S. Treasury accounts for all U.S. Government funds on an overall consolidated basis. The 

Fund Balance with Treasury line items on the Statements of Financial Position for FY 2006 and 

FY 2005 consisted of amounts presented in Exhibit 14. 

Exhibit 14. Fund Balances with Treasury 

(in thousands) 

Appropriated 

Funds 2006 2005 

Unobligated $ 2,546,127 $ 1,973,685 

Obligated 1,385,278 384,862 

Total $ 3,931,405 $ 2,358,547 

Note 3—Advances/Accounts Receivable 

Advances reflect amounts provided to MCA compact countries and other federal agencies in 

accordance with formal Compacts or inter-agency agreements, respectively. Accounts receivable 

reflect overpayments of payroll and travel expenses to current employees of the Corporation. As 

such, no allowance for doubtful accounts is necessary. As of September 30, 2006, the Corporation 

reported $18.9 million in advances and receivables, of which $18.8 million related to advances 

for compact implementation and approximately $62,000 for receivables. 

` 65 _
Note 4—Fixed Assets 

The Corporation’s fixed (capital) assets are predominantly composed of leasehold improvements 

related to the MCC headquarters offices located in Washington, D.C. As of September 30, 2006, 

the Corporation reported $5.1 million of which $4.8 million represented leasehold improvements 

and $280,000 represented capitalized equipment. At the end of the fiscal year, $483,000 of 

amortization and depreciation had been recorded for the two categories of assets. 

Note 5—Other Liabilities 

The Corporation is liable for amounts owed to other parties, including employees and other 

federal groups. Exhibit 15 presents the amounts of such liabilities as of September 30, 2006, and 

September 30, 2005. 

Exhibit 15. Other Liabilities 

(in dollars) 

Type 2006 2005 

Evaluation and Support $ (461,744)* $ 997,921 

Travel 300,000 747,143 

Office of the Inspector General 0 450,809 

Miscellaneous 1,566,695 326,935 

Payroll 1,111,865 0 

Total $ 2,516,786 $ 2,522,808 

* This amount represents the difference in funds drawn from MCC’s accounts by other federal parties per 

inter-agency agreements (through the Department of the Treasury’s Intra-Governmental Payment and 

Collection System [IPAC]) and the liability amounts recorded by MCC. In short, as of September 30, 2006, 

other federal entities had drawn approximately $1.401 million from MCC’s accounts with Treasury. MCC 

had recorded liabilities of $.939 million for the pertinent charges—$.462 million less than the amounts 

“drawn” by the entities. At the end of the fiscal year, MCC and its financial services provider (the 

Department of Interior’s National Business Center) were researching the differences and reconciling 

supporting records. 

Note 6—Net Position 

The reported net position consists of unexpended appropriations and cumulative results of 

operations, which reflects the difference between financing sources and expenses since the 

Corporation’s inception. 

` 66 _
Exhibit 16 presents total obligated and unobligated compact and 609(g) funds as of 

September 30, 2006, and September 30, 2005. 

Exhibit 16. Total Obligated and Committed Compact and 609(g) Funds 

(in dollars) 

2006 Compacts 609(g) Funding 2005 

Obligations 

Armenia $ 235,646,174 $ 235,150,000 $ 496,174 

Benin 1,062,985 1,062,985 

Cape Verde 106,077,520 106,014,782 62,738 $ 84,617 

Georgia 296,178,084 292,802,057 3,376,027 4,111,000 

Ghana 13,584,891 13,584,891 48,688 

Honduras 213,166,147 213,166,147 215,000,000 

Lesotho 902,934 902,934 600,000 

Madagascar 103,290,130 101,990,130 1,300,000 110,378,000 

Mali 4,421,534 4,421,534 

Mozambique 12,956,078 12,956,078 

Nicaragua 173,583,320 173,529,975 53,345 

Senegal 4,882,237 4,882,237 

Vanuatu 65,214,603 65,214,603 

Total Obligations $1,230,966,637 $ 1,187,867,694 $ 43,098,943 $330,222,305 

Commitments 

Benin $ 305,781,626 $ 305,761,550 $ 20,076 

Cape Verde – $110,078,488 

Georgia – 295,300,000 

Ghana 536,638,050 536,638,050 2,870,502 

Mali 4,606,861 4,606,861 

Mozambique – 6,000,000 

Nicaragua – 175,000,000 

Senegal 425,658 425,658 6,528,299 

Total Commitments $ 847,452,195 $ 842,399,600 $ 5,052,595 $595,777,289 

Note 7—Permanent Rescission 

In FY 2006 and FY 2005, respectively, $17.7 million and $12 million of amounts previously 

appropriated under the FY 2006 and FY 2005 Foreign Operations, Export Financing, and Related 

Programs Appropriations Acts (Public Law 109-148 and Public Law 108-447, respectively) were 

` 67 _
rescinded. The rescissions were part of the Across-the-Board Rescissions enacted for FY 2006 

and FY 2005, respectively. 

Note 8—Inter-Agency Agreements 

MCC is party to various inter-agency agreements (IAAs) with other federal agencies for services 

to be provided by those entities. Such services include financial and travel management and other 

administrative functions, technical and engineering services, personnel background records 

checks, and information technology services. During FY 2006, MCC executed 20 IAAs with 

other federal agencies totaling almost $9.1 million. At the end of the year, approximately 

$6.8 million remained available for paying future services to be provided under the subject IAAs. 

Exhibit 17 provides a summary of the IAAs by federal entity. 

Exhibit 17. FY 2006 Inter-Agency Agreements 

(in dollars) 

Agency 

Number of 

IAAs Dollar Value 

Remaining Funds—

End of FY 

NBC, Department of Interior 6 $1,216,313 $ 0 

State Department 4 437,668 242,160 

U.S. Agency for International Development 1 140,000 140,000 

Department of Agriculture 1 228,478 44,820 

U.S. Army Corps of Engineers 3 5,441,379 5,004,390 

Department of Transportation 1 109,083 83,794 

Department of Health and Human Services 1 1,500,000 1,241,422 

Department of Labor 1 2,912 0 

Government Printing Office 1 3,000 3,000 

Office of Personnel Management 1 5,000 220 

Total 20 $9,083,833 $ 6,759,806 

` 68 _
MCC PAR GLOSSARY

Term Description 

A&F Administration and Finance, Department of 

C&A Certification & Accreditation 

CEO Chief Executive Officer 

CFO Chief Financial Officer 

CSRS Civil Service Retirement System 

CP Conditions Precedent 

CPA Congressional and Public Affairs, Department of 

COOP Continuity of Operations 

CY Calendar Year 

DCIA Debt Collection Improvement Act 

DOL Department of Labor 

ERR Economic Rate of Return 

FASAB Federal Accounting Standards Advisory Board 

FBWT Fund Balance With Treasury 

FECA Federal Employees’ Compensation Act 

FERS Federal Employees Retirement System 

FFMIA Federal Financial Management Improvement Act 

FISMA Federal Information Security Management Act 

FMFIA Federal Managers’ Financial Integrity Act of 1982 

FMS Financial Management Service 

FY Fiscal Year 

GAO Government Accountability Office 

GDP Gross Domestic Product 

GPRA Government Performance and Results Act 

HDI Human Development Index 

IAA Inter-Agency Agreement 

` 69 _
Term Description 

IFC International Finance Corporation 

IFAD International Fund for Agricultural Development 

IPAC Intra-Governmental Payment and Collection System 

LIC Low Income Countries 

LMIC Lower Middle Income Countries 

MCA Millennium Challenge Account 

MCC Millennium Challenge Corporation 

NBC National Business Center 

NGO Non-Governmental Organization 

OGC Office of General Counsel 

OIG Office of Inspector General 

OMB Office of Management and Budget 

OPM Office of Personnel Management 

PCS Permanent Change of Station 

PIR Policy and International Relations, Department of 

POC Point of Contact 

SAB Senior Assessment Board 

SLA Service Level Agreement 

TSP Thrift Savings Plan 

USAID United States Agency for International Development 

` 70 _
4. AUDIT OF THE MILLENNIUM CHALLENGE 

CORPORATION ’S FINANCIAL STATEMENTS,

I NTERNAL CONTROLS, AND COMPLIANCE FOR THE 

PERIOD E NDING SEPTEMBER 30, 2006 AND 2005

(M-000-07-001-F, NO V. 14, 2006) – OFFICE OF 

I NSPECTOR GENERAL FOR THE MILLENNIUM 

CHALLENGE CORPORATION

` 71 _
OFFICE OF INSPECTOR GENERAL 

for the Millennium Challenge Corporation 

AUDIT OF THE MILLENNIUM 

CHALLENGE CORPORATION’S 

FINANCIAL STATEMENTS, INTERNAL 

CONTROLS, AND COMPLIANCE 

FOR THE PERIOD ENDING 

SEPTEMBER 30, 2006 AND 2005 

AUDIT REPORT NO. M-000-07-001-F 

November 14, 2006 

WASHINGTON, DC
U.S. Agency for International Development 

Office o Inspector General 

 for the 

Millennium Challenge Corporation 

f

November 14, 2006 

The Honorable John J. Danilovich 

Chief Executive Officer 

Millennium Challenge Corporation 

875 15TH Street, NW 

Washington, DC 20005-2203 

Subject: Audit of the Millennium Challenge Corporation’s Financial Statements, Internal 

Controls, and Compliance for the Period Ending September 30, 2006 and 2005 

Report No. M-000-07-001-F 

Dear Mr. Ambassador: 

Enclosed is the final report on the subject audit. The Office of Inspector General (OIG) 

contracted with the independent certified public accounting firm of Williams, Adley & Company, 

LLP to audit the financial statements of the Millennium Challenge Corporation (MCC) for the 

period ending September 30, 2006. The contract required that the audit be performed in 

accordance with generally accepted government auditing standards (GAGAS), Office of 

Management and Budget (OMB) Bulletin 06-03, Audit Requirements for Federal Financial 

Statements, and the GAO/PCIE Financial Audit Manual. 

In its audit of the MCC’s financial statements for the period ending September 30, 2006 the 

auditors found: 

• that the financial statements were fairly presented in conformity with generally accepted 

accounting principals (GAAP), 

• six reportable conditions in the internal controls over financial reporting and its operation. 

Five of the six reportable conditions are material weaknesses, and 

• three instances of material noncompliance with laws, regulations, contracts, and 

agreements.

1300 Pennsylvania Avenue, NW 

Washington, DC 20523 

www.usaid.gov 
The material weaknesses identified in MCC’s internal controls process increases the need for 

MCC to develop written policies and procedures to streamline its financial operations. Under 

current operating procedures, the material weaknesses, increases the risk of improper 

recording, unauthorized transactions, omissions, potential funds control violations and 

noncompliance with laws, regulations, contracts and grant agreements. Williams Adley & 

Company LLP reported the following internal control weaknesses: 

1. MCC’s policies and procedures were not always complete and consistent. (material 

weaknesses) 

2. MCC’s policies for disbursing advances to grantees do not accommodate effective 

cash management. (material weakness and noncompliance) 

3. MCC does not have a property management system. (material weakness) 

4. MCC did not properly record compact expenses during the fiscal year. (material 

weakness) 

5. MCC’s Chief Financial Officer was not an integral part of the compact/grant processes. 

(material weakness). 

6. MCC’s travel disbursement controls and procedures do not permit effective and 

efficient management of travel. 

Williams, Adley & Company, LLP also reported instances of noncompliance with laws, 

regulations, contracts, and grant agreements, inclusive of those referred to in the Federal 

Financial Management Improvement Act of 1996 (FFMIA) and disclosed instances of 

noncompliance or other matters that are required to be reported under Government Auditing 

Standards, issued by the Comptroller General of the United States, and OMB Bulletin 06-03, 

Audit Requirements for Federal Financial Statements. The instances of noncompliance are: 

1. MCC did not fully comply with FFMIA and the Government Performance Results Act 

(GPRA). (material noncompliance) 

2. MCC did not fully comply with Federal Information Security Management Act (FISMA). 

(material noncompliance) 

3. MCC’s policies for disbursing advances to grantees do not accommodate effective 

cash management. (material noncompliance) 

In carrying out its oversight responsibilities, the OIG reviewed Williams, Adley & Company, 

LLP’s report and related audit documentation. This review, as differentiated from an audit in 

accordance with GAGAS was not intended to enable the OIG to express, and we do not 

express, opinions on MCC’s financial statements, or internal control; on whether MCC’s 

financial management systems substantially complied with FFMIA; or on MCC’s compliance 

with other laws and regulations. Williams, Adley & Company, LLP is responsible for the 

attached auditor’s report, dated November 14, 2006, and the conclusions expressed in the 
report. However, our review disclosed no instances on where Williams, Adley & Company, LLP 

did not comply, in all material respects, with applicable standards. 

To address the internal control weaknesses and the noncompliance findings reported by 

Williams Adley & Company, LLP, we are making the following recommendations to MCC’s 

management: 

Recommendation No. 1: We recommend that the Millennium Challenge 

Corporation’s Department of Administration and Finance complete the Financial 

Management Policies and Procedures (FMPP) manual and implement the written 

policies and procedures for all areas that result in a financial event. 

Recommendation No. 2: We recommend that the Millennium Challenge 

Corporation: 

2.1 Develop and implement policies and procedures to ensure that the 

payment schedules and other agreements entered into with grantees are 

reflective of the U. S. Treasury requirements concerning advances and 

immediate cash advances. 

2.2 Develop and implement policies and procedures to ensure that 

disbursement requests from the accountable entity of the recipient 

countries follow the official format that documents the cash 

requirements for each month of the quarterly period. 

2.3 Make and document all payments to the recipient countries on a monthly 

basis instead of a quarterly basis. 

2.4 Establish and implement 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. 

Recommendation No. 3: We recommend that the Millennium Challenge 

Corporation develop and maintain appropriate fixed asset records to ensure 

accurate reporting and physical control. 

Recommendation No. 4: We recommend that the Millennium Challenge 

Corporation’s management: 

4.1 Require that the final quarterly disbursement requests received from the 

accountable entity of the recipient countries be made available to the 

Department of Administration and Finance and the Fiscal Accountability 

Office. 

4.2 Develop and implement policies and procedures that require compact 

expenses are properly and accurately recorded and reported on a 

quarterly basis. 
4.3 Implement written procedures requiring that appropriate and timely 

follow-up measures are performed and recorded on late and/or 

outstanding fund disbursements and/or advances requests. 

4.4 Develop and implement policies and procedures that require the 

Department of Administration and Finance to perform a thorough review 

of the financial statements to ensure that costs are not omitted. 

Recommendation No. 5: We recommend that the Millennium Challenge 

Corporation’s management revise their policies and procedures to invest the 

Office of the Chief Financial Officer with the level of responsibility, including role 

and all levels of authority established by the Chief Financial Officer Act. 

Recommendation No. 6: We recommend that Millennium Challenge Corporation 

management develop and implement internal controls to reject travel expense 

reimbursement requests that exceed the allowable country per diem limits unless 

additional electronic authorization is provided. 

Recommendation No. 7: We recommend that the Millennium Challenge 

Corporation’s management: 

7.1 Develop performance goal templates and follow-up training to ensure 

that Government Performance Results Act (GPRA) requirements are 

adequately addressed and consistent. We also recommend that 

baseline data be finalized or performance indicators reviewed and 

amended such that they can be measured against obtainable data. 

7.2 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 least the payroll, procurement and travel functions and 

systems to increase the efficiencies and effectiveness of the processing 

of financial transactions and decrease the risk of errors. 

In finalizing the report, we have received and considered MCC’s response to the draft report 

and the recommendations included therein. 

In its comments, MCC accepted all of the report’s recommendations except for 2.1. 

At the time of this report, MCC had not accepted recommendation 2.1 and no management 

decision has been made. Essential elements of a management decision include specific 

actions, estimated completion dates for implementation, or an explanation and justification 

regarding why a recommendation is not considered valid by MCC management officials. For 

recommendation 2.1, MCC has not clearly stated why the recommendation is not valid. 
MCC has agreed with recommendations 4 and 6 and has taken actions that implement the 

recommendation. Accordingly, we are closing these two recommendations upon issuance of the 

report. 

Based on MCC’s response to the remaining recommendations, we consider that a management 

decision has been reached on recommendation no. 1. However, we believe a management 

decision has not been reached on recommendations nos. 2.2, 2.3, 2.4, 3, 5, 7.1 and 7.2 

because the decisions did not specifically identify the activities that MCC plans to conduct to 

implement the recommendation and/or the decision did not specify a target implementation date 

by which the recommendation will be implemented. Specifically: 

Recommendation: 2.2 --not specific and no target implementation date 

Recommendation: 2.3 --no target implementation date 

Recommendation: 2.4 --not specific and no target implementation date 

Recommendation: 3 --no target implementation date 

Recommendation: 5 --no target implementation date 

Recommendation: 7.1 --not specific and no target implementation date 

Recommendation: 7.2.--no target implementation date 

We discussed the lack of specificity and target dates in the management decisions with the 

MCC staff and they stated that they will study these decisions and revise them accordingly. 

Please forward to us within 30 days your revised management decisions for the above 

recommendations. 

Please inform us when you have taken final action on the recommendations. 

The OIG appreciates the cooperation and courtesies extended to our staff and the staff of 

Williams, Adley & Company, LLP during the audit. Please contact me or Mr. Manuel S. Avila, 

IG/MCC/FA at (202) 712-1897, if you have any questions concerning this report. 

Sincerely, 

John M. Phee /s/ 

Assistant Inspector General/MCC 
TABLE OF CONTENTS 

Page 

Independent Auditor’s Report ........................................................................................... 1 

Opinion on the Financial Statements .......................................................................... 2 

Internal Control Over Financial Reporting .................................................................. 3 

Compliance with Laws and Regulations ................................................................... 15 

Status of Prior Year Findings – Appendix A.............................................................. 20 

Management Comments and Our Evaluation – Appendix B..................................... 26 

Management Comments – Appendix C .................................................................... 30 

Statements of Financial Position .................................................................................... 35 

Statements of Operations and Changes in Net Position................................................. 36 

Statements of Functional Expenses ............................................................................... 37 

Statements of Cash Flows .............................................................................................. 38 

Statements of Budgetary Resources .............................................................................. 39 

Notes to Financial Statements ........................................................................................ 40 
Williams Adley & Company, LLP 

Certified Public Accountants/Financial Management Consultants 

Independent Auditors’ Report 

Inspector General 

United States Agency for International Development 

Board of Directors 

Millennium Challenge Corporation 

We have audited the accompanying Statements of Financial Position of the Millennium 

Challenge Corporation (MCC or Corporation) as of September 30, 2006 with summary totals for 

September 30, 2005, and the related Statements of Operations and Changes in Net Position, Cash 

Flows, and Budgetary Resources for the year ended September 30, 2006 with summary totals for 

September 30, 2005. These financial statements are the responsibility of Corporation 

management. Our responsibility is to express an opinion on these financial statements based on 

our audit. 

In connection with our audit, we also considered the MCC’s internal control over financial 

reporting and tested the MCC’s compliance with certain provisions of applicable laws, 

regulations, contracts and grant agreements that could have a direct and material effect on the 

financial statements. 

SUMMARY 

As stated in our opinion, we concluded that the MCC’s financial statements as of and for the year 

ended September 30, 2006 with summary totals for September 30, 2005 are presented fairly, in 

all material respects, in conformity with accounting principles generally accepted in the United 

States of America. 

Our consideration of internal control over financial reporting and its operation resulted in six 

matters that we consider to be reportable conditions. We believe that five of the six reportable 

conditions are material weaknesses. 

1 MCC’s Policies and Procedures Were Not Always Complete and Consistent (material 

weakness) 

2. MCC Policies for Disbursing Advances to Grantees Do Not Accommodate Effective 

Cash Management (material weakness and noncompliance)

1250 H Street, NW, Suite 1150 ● Washington, DC 20005 ● (202) 371-1397 ● Fax: (202) 371-9161
3. MCC Does Not Have a Property Management System (material weakness) 

4. MCC Did Not Properly Record Compact Expenses During the Fiscal Year (material 

weakness) 

5. MCC’s Chief Financial Officer Was Not an Integral Part of the Compact/Grant 

Processes (material weakness) 

6. MCC’s Travel Disbursement Controls and Procedures Do Not Permit the Effective and 

Efficient Management of Travel (reportable condition) 

The results of our tests of compliance with certain provisions of laws, regulations, contracts, and 

grant agreements, inclusive of those referred to in the Federal Financial Management

Improvement Act of 1996 (FFMIA), disclosed three instances of noncompliance or other matters 

that are required to be reported herein under Government Auditing Standards, issued by the 

Comptroller General of the United States, and Office of Management and Budget (OMB) 

Bulletin No. 06-03, Audit Requirements for Federal Financial Statements: 

1. MCC did not fully comply with FFMIA and Government Performance and Results Act 

(GPRA) (material noncompliance) 

2. MCC did not fully comply with Federal Information Security Management Act 

(material noncompliance) 

3. MCC Policies for Disbursing Advances to Grantees Does Not Accommodate Effective 

Cash Management (material weakness and noncompliance) 

The following sections discuss our opinion on the MCC’s financial statements, our consideration 

of the MCC’s internal control over financial reporting, our tests of the MCC’s compliance with 

certain provisions of applicable laws, regulations, contracts, and grant agreements, and the 

distribution of our report. The status of prior year findings is included as Appendix A. 

Management’s response to the findings and our evaluation of said response is included as 

Appendix C and Appendix B, respectively. 

OPINION ON THE FINANCIAL STATEMENTS 

We have audited the accompanying Statements of Financial Position of the Corporation as of 

September 30, 2006 with summary totals for September 30, 2005, and the related Statements of 

Operations and Changes in Net Position, Cash Flows, and Budgetary Resources for the year 

ended September 30, 2006 with summary totals for September 30, 2005. These financial 

statements are the responsibility of Corporation management. Our responsibility is to express an 

opinion on these financial statements based on our audit. 

We conducted our audit in accordance with auditing standards generally accepted in the United 

States of America and standards applicable to financial statement audits contained in 

Page 2 of 48 
Government Auditing Standards, issued by the Comptroller General of the United States, and the 

Office of Management and Budget (OMB) Bulletin No. 06-03, Audit Requirements for Federal 

Financial Statements. Those standards require that we plan and perform the audit to obtain 

reasonable assurance that the financial statements are free of material misstatement. An audit 

includes examining, on a test basis, evidence supporting the amounts and disclosures in the 

financial statements. An audit also includes assessing the accounting principles used and 

significant estimates made by management, as well as evaluating the overall financial statement 

presentation. We believe that our audit provides a reasonable basis for our opinion. 

In our opinion, the financial statements referred to above present fairly, in all material respects, 

the financial positions of the Corporation as of September 30, 2006 with summary totals for 

September 30, 2005, and changes in net position, cash flows and budgetary resources for the year 

ended September 30, 2006 with summary totals for September 30, 2005, in conformity with 

accounting principles generally accepted in the United States of America. 

Our audit was made for the purpose of forming an opinion on the basic financial statements of 

the Corporation taken as a whole. The information contained in the Management’s Discussion 

and Analysis and Performance Section is not a required part of the financial statements, but is 

supplementary information required by the Federal Accounting Standards Advisory Board 

guidance. We have applied certain limited procedures, which consisted principally of inquiries 

of management regarding the methods of measurement and presentation of the information. 

However, we did not audit the information and do not express an opinion thereon. 

The accompanying Statements of Functional Expenses for the year ended September 30, 2006, 

and as summarized for year ended September 30, 2005, are presented for purposes of additional 

analysis and are not a required part of the basic financial statements. This statement is the 

responsibility of the management of the Corporation. The information in this statement has been 

subjected to the auditing procedures applied in our audit of the basic financial statements and, in 

our opinion, is fairly stated in all material respects when considered in relation to the basic 

financial statements taken as a whole. 

INTERNAL CONTROL OVER FINANCIAL REPORTING 

In planning and performing our fiscal year 2006 audit, we considered MCC’s internal control 

over financial reporting by obtaining an understanding of MCC’s internal control, determined 

whether internal controls had been placed into operation, assessed control risk, and performed 

tests of controls in order to determine our auditing procedures for the purpose of expressing an 

opinion on the financial statements. We limited our internal control testing to those controls 

necessary to achieve the objectives described in OMB Bulletin No. 06-03 and Government 

Auditing Standards. We did not test all internal controls relevant to operating objectives as 

broadly defined by the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), such as 

those controls relevant to ensuring efficient operations. The objective of our audit was not to 

provide assurance on internal control; accordingly, we do not provide an opinion on internal 

control. 

Page 3 of 48 
Our consideration of internal control over financial reporting would not necessarily disclose all 

matters that might be reportable conditions. Under standards issued by the American Institute of 

Certified Public Accountants, reportable conditions are matters coming to our attention relating 

to significant deficiencies in the design or operation of the internal control over financial 

reporting that, in our judgment, could adversely affect MCC’s ability to record, process, 

summarize, and report financial data consistent with the assertions by management in the 

financial statements. 

Material weaknesses are reportable conditions in which the design or operation of one or more of 

the internal control components does not reduce to a relatively low level the risk that 

misstatements, in amounts that would be material in relation to the financial statements being 

audited, may occur and not be detected within a timely period by employees in the normal course 

of performing their assigned functions. Because of inherent limitations in internal controls, 

misstatements, losses or noncompliance may occur and not be detected. 

We noted six matters involving the internal control over financial reporting and its operation that 

we consider to be reportable conditions. We believe that five reportable conditions are material 

weaknesses. All material weakness and the reportable condition are described on pages 4–15. 

MATERIAL WEAKNESSES 

MCC’s Policies and Procedures Were Not Always Complete and Consistent (material 

weakness) 

Condition: 

During fiscal year (FY) 2006, the Millennium Challenge Corporation (MCC) used various 

processes to address the financial aspects of its operations. These processes evolved during the 

year as the organization grew in both number of personnel and span of operations. However, 

during this growth, the development and implementation of final written policies and procedures 

to guide MCC’s streamlined operational structure was not adequately addressed. During the 

fiscal year, MCC lacked final written policies and procedures. Written policies and procedures 

must be in place to ensure operational efficiencies, risk reduction, and consistent application. 

Several policies and procedures, i.e. advances, budget, and accruals, remained in draft form, 

throughout the year. Additionally, several procedures do not address the responsible positions at 

the various control levels for the processing of data/data entry functions, or submission and 

approval levels and procedures in the areas of fixed assets and the open obligations review 

required revision. 

While the current Department of Administration and Finance (A&F) management team has 

emphasized the preparation and issuance of a comprehensive financial management policies and 

procedures (FMPP) manual, as of the end of the FY, such a manual was being drafted. MCC has 

hired contractors to assist in the production of the FMPP manual by December 31, 2006. 

Page 4 of 48 
Criteria: 

The GAO “Standards for Internal Control in the Federal Government” states that internal 

control and all transactions and other significant events need to be clearly documented and the 

documentation should be readily available for examination. The documentation should appear in 

management directives, administrative policies, or operating manuals. Also, information should 

be recorded and communicated to management and others within the entity who need it and in a 

form and within a timeframe that enables them to carry out their internal control and other 

responsibilities. 

Additionally, management and employees should establish and maintain an environment 

throughout the organization that sets a positive and supportive attitude toward internal control 

and conscientious management. A positive control environment is the foundation for all other 

standards. It provides discipline and structure as well as the climate which influences the quality 

of internal controls. 

Cause: 

Division of Finance (within the Department of A&F) management stated that they have not had 

the available personnel to sufficiently dedicate to the development and issuance of final policies 

and procedures during the year. 

Effect: 

The lack of sufficient detail and accountability in the procedures produced inconsistent 

application of controls and processes, and increased the risk of errors, improper recording, 

unauthorized transactions, omissions and potential funds control violations. Furthermore, the 

lack of formal procedures can result in noncompliance with laws and regulations. Also, the 

effective and efficient processing of financial transactions is diminished. Examples of the effect 

of the lack of final MCC policies and procedures include: 

3⁄4 The policy established for the proper recording of fixed assets was not followed during 

the year, thereby resulting in potentially incorrect posting of asset transactions. 

3⁄4 Employees travel claims were greater than the approved per diem rates. 

3⁄4 Compact expenses were not reported in the third quarter financial statements. 

Recommendation #06-01: 

We recommend that Millennium Challenge Corporation’s Department of Administration and 

Finance complete the Financial Management Policies and Procedures (FMPP) manual and 

implement the written policies and procedures for all areas that result in a financial event. 

Page 5 of 48 
Management Response: 

MCC accepts the recommendation and is currently implementing relevant corrective action. 

Specifically, the Division of Finance (within the Department of Administration and Finance) 

initiated an effort during the summer 2006 to develop and implement a comprehensive corporate 

Financial Management Policies and Procedures (FMPP) manual. The Division is utilizing 

contractor support in this endeavor. The initial version of the FMPP manual is slated to be 

completed and formally institutionalized by December 31, 2006. 

MCC Policies for Disbursing Advances to Grantees Do Not Accommodate Effective Cash 

Management (material weakness and noncompliance) 

Condition: 

MCC entered into various compacts and provided several advances during fiscal year 2006. 

MCC personnel indicated that monthly disbursements were made based upon the quarterly 

request. However, we noted that for most Millennium Challenge Authorities (MCAs), MCC 

disbursed funds on a quarterly basis based upon the disbursement request, rather than monthly. 

We noted that several disbursements were not used within 30 days nor the quarter. 

Country 

Date of 

Disbursement 

Amount of 

Disbursement 

Projected Cash 

Balance at 

September 30, 2006 

Date when 

disbursement was 

completely expended 

July 28, 2005 $ 2,500,924 - March 30, 2006 

December 13, 2005 $ 1,755,506 - June 30, 2006 

Madagascar 

May 31, 2006 $ 5,391,665 $ 2,311,342 Not expected to be 

expended by September 

30, 2006 

Georgia May 2, 2006 $ 3,603,404 $ 221,594 

September 15, 2006 $ 6,509,706 6,509,706 

Not expected to be 

expended by September 

30, 2006 

Honduras February 28, 2006 $ 1,646,545 $ 138,840 

September 29, 2006 $ 1,369,849 $ 1,369,849 

Not expected to be 

expended by September 

30, 2006 

Cape Verde February 1, 2006 $ 7,526,864 $ 3,913,663 Not expected to be 

expended by September 

30, 2006 

June 30, 2006 $ 1,127,055 $ 1,023,658 

August 9, 2006 $ 219,504 $ 219,504 

September 6, 2006 $ 111,688 $ 111,688 

Vanuatu 

September 18, 2006 $ 116,377 $ 116,377 

Not expected to be 

expended by September 

30, 2006 

June 30, 2006 $ 1,483,399 433,889 

August 28, 2006 $ 378,550 378,550 

Nicaragua 

August 31, 2006 $ 289,110 289,110 

Not expected to be 

expended by September 

30, 2006 

Page 6 of 48 
The Department of the Treasury’s Financial Management Service publications did not envision 

the inclusion of sovereign governments; however, in the analysis of cash management, we used 

the Treasury Financial Manual (TFM) as a valuable source of sound business practices. The 

TFM is the Department of the Treasury’s official publication for financial accounting and 

reporting of all receipts and disbursements of the Federal Government. The purpose of the TFM 

is to provide policies, procedures, and instructions for Federal departments and agencies to 

follow in carrying out their fiscal responsibilities. 

Also, through various OMB Circulars, OMB has attempted to address the need for advances to 

cover immediate cash needs or timely disbursements of an entity for direct program costs for 

carrying out the purpose of the approved program or project. Thus, funds paid to a grantee are 

not to be held, but are to be promptly applied to the grant purpose. Although the timeframe for 

immediate cash needs has not been clearly defined by OMB, the general rules employed by 

various Federal agencies are 30 days for non-governmental entities as outlined in the TFM. 

Based upon this definition, MCC has provided Federal funds in excess of immediate cash needs. 

Criteria: 

Per the Appropriations Law Volume II, advances under an assistance program are intended to 

accomplish the program purposes and not to profit the recipient other than in the manner and 

extent specified in the program. Section 2025 of the Treasury Financial Manual –Volume 1, Part 

6-Chapter 2000, states that advances to a recipient organization will be limited to the minimum 

amounts necessary for immediate disbursement needs and will be timed to be in accordance with 

the actual immediate cash requirements of the recipient organization in carrying out the purpose 

of an approved program or project. The timing and amount of cash advances will be as close as 

is administratively feasible to actual disbursements by the recipient organization. 

Best business practice defines immediate cash needs as money used for the purpose of carrying 

out the Compact’s approved programs within a thirty day period. Also, when funds are drawn 

from Treasury before it is needed, or in excess of current needs, the government loses the use of 

the funds. 

Cause: 

The approved agreements entered into by MCC with MCA Madagascar and other compact 

grantees indicate that quarterly advances will be provided based upon their estimated costs. 

Although, MCC’s management has changed the policy, it has not been effectively implemented 

and monitored to ensure that it occurs. 

Effect: 

MCC received a total of $304,000 in interest from compact countries during the first three 

quarters of FY 2006 and remitted this amount to Treasury. As of the end of FY 2006 the 

additional $174,402 of interest is due to MCC. MCC has not adopted an approach that provides 

funds only for a grantee’s immediate cash needs and reduces the risk of misappropriation. 

Page 7 of 48 
Recommendation # 06-02: 

We recommend that Millennium Challenge Corporation: 

(1) Develop and implement policies and procedures to ensure that the payment schedules 

and other agreements entered into with grantees are reflective of the U.S. Treasury 

requirements concerning advances and immediate cash needs. 

(2) Develop and implement policies and procedures to ensure that all disbursement 

requests from the accountable entity of the recipient countries follow the official format 

that documents the cash requirements for each month of the quarterly period. 

(3) Make and document all payments to the recipient countries on a monthly basis instead 

of a quarterly basis. 

(4) Establish and implement 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. 

Management Response: 

MCC Management accepts recommendations 2.2, 2.3, and 2.4. Regarding recommendation 2.1, 

MCC intends to follow sound cash management practices, will disburse funds consistent with the 

GAO policy based upon what is needed to meet grant purposes in any given quarter, though the 

funds will be released in tranches following a monthly schedule. 

MCC has begun implementing needed corrective actions. The MCC FMPP manual (currently 

being developed – see above management response to recommendation 1) will contain definitive 

documentation and disbursement requirements for transferring funds to compact countries. 

Furthermore, the Division of Finance, in coordination with the National Business Center (MCC’s 

financial services provider) has already implemented procedures to disburse funds to compact 

countries monthly in accordance with identified funding needs per pertinent quarterly 

disbursement requests. 

MCC Does Not Have a Property Management System (material weakness) 

Condition: 

We noted that MCC reported $5,656,567 in property as of June 30, 2006; however, they were 

unable to provide detailed records to support the amount reported. The MCC does not have a 

property management system that provides detail information on original cost, date of purchase, 

location, useful life, depreciation, and accumulated depreciation. 

Page 8 of 48 
For the year end financial statements, sufficient analysis was performed to ensure consistent 

application of the capitalization policy and to determine an appropriate measure of depreciation 

expense to ensure that fixed assets would be fairly stated. 

Criteria: 

OMB Circular A-127 “Policies and Standards for Financial Management Systems” states that 

financial management in the Federal government requires accountability of financial and 

program managers for financial results of actions taken, control over the Federal government’s 

financial resources and protection of Federal assets. To enable these requirements to be met, 

financial management systems must be in place to process and record financial events effectively 

and efficiently, and to provide complete, timely, reliable and consistent information for decision 

makers and the public. 

The Joint Financial Management Improvement Program (JFMIP) standards require that property 

management systems assist managers in collecting and maintaining information for financial 

reporting in accordance with generally accepted accounting principles and managing the various 

types of property. Additionally, they should assist managers in ensuring that assets are 

safeguarded against improper use or disposition. 

Cause: 

MCC did not create a property management system to support its property financial policy nor 

did management ensure that an accountable employee was assigned to ensure its implementation. 

Effect: 

The quarterly financial statements may be misstated due to the inaccurate recording and 

reporting of property and depreciation expense. In the June 30, 2006 financial statements, no 

depreciation expense was recorded. Lack of sufficient controls over property can result in loss, 

waste and abuse of federal resources. 

Recommendation #06-03: 

We recommend that Millennium Challenge Corporation develop and maintain appropriate fixed 

asset records to ensure accurate reporting and physical control. 

Management Response: 

MCC management accepts the recommendation. The Department of Administration and Finance 

has begun planning and defining requirements for implementing a viable property management 

system and associated controls and processes, including periodic physical counts to verify the 

Corporation’s property holdings and ensure the propriety of perpetual property records and 

related financial balances. 

Page 9 of 48 
MCC Did Not Properly Record Compact Expenses During the Fiscal Year (material 

weakness) 

Condition: 

As a result of our review of the third quarter financial statements, we noted that MCC did not 

report any compact program costs. Although MCC had received disbursement requests that can 

be used to post the expenses incurred, nothing was recorded. According to the compact and 

disbursement agreement, each MCA is required to submit quarterly disbursement requests that 

include the expenses incurred to date. These requests are due regardless of the need for funding. 

The requests should provide the following: 

• Previous quarter advances; 

• Previous quarter disbursements; 

• Estimated expenses; and 

• Next quarter’s advance request. 

For the year end financial statements, MCC recorded compact expenses of $8,493,394. 

Additional analysis was performed utilizing the disbursement requests to increase expenses 

recorded and to ensure that advances and compact expenses were fairly stated. 

Criteria: 

OMB Circular A-136 “Financial Reporting Requirements”, Section II.4.4.3, Program Costs, 

states that the reporting entity should report the full cost of each program’s output, which 

consists of (a) direct cost and indirect costs of the output, and (b) the costs of identifiable 

supporting services provided by other segments within the reporting entity and by other reporting 

entities. The reporting entity should accumulate and assign costs in accordance with the costing 

methodology in Statement of Federal Financial Accounting Standard (SFFAS) No. 4. 

In Section 3.2 of the disbursement agreements, it states that the MCA shall deliver to MCC a 

completed MCC disbursement request in the form attached hereto as Exhibit A, and otherwise 

satisfactory to MCC in content. Exhibit A section E, commitment and expenditure report 

provides for the reporting of cumulative actual redisbursements and projected redisbursements. 

Cause: 

The Fiscal Accountability Office is responsible for the collection of the required quarterly 

expense/disbursement requests, and they have encountered many problems recovering the 

reports from the various MCAs. The requests are not sent directly to the Division of Finance and 

must be provided by the Fiscal Accountability Office. Additionally, MCC is not enforcing the 

requirement and the compact and disbursement agreements appear to lack sufficient strictures for 

noncompliance. 

Page 10 of 48 
MCC did not perform a sufficient review of the financial statements to address the omission of 

the compact expenses. 

Effect: 

As a result of the nonrecording of compact expense, the MCC quarterly financial statements 

were inaccurate and MCC management’s ability to rely on the financial statements to make 

informed decisions was impaired. 

Recommendation #06-04: 

We recommend that Millennium Challenge Corporation’s management: 

(1) Require that the final quarterly request received from the accountable entity of the 

recipient countries be made available to the Department of Administration and Finance 

and the Fiscal Accountability Office. 

(2) Develop and implement policies and procedures that ensure compact expenses are 

properly and accurately recorded and reported on a quarterly basis 

(3) Implement written procedures requiring that appropriate and timely follow-up measures 

are performed and are recorded for historical reference on incomplete, outstanding, or 

late disbursement requests. 

(4) Develop and implement policies and procedures that require the Department of 

Administration and Finance to perform a thorough review of the financial statements to 

ensure that costs are not omitted. 

Management Response: 

MCC management accepts the recommendations. The Division of Finance has already 

implemented quality assurance and review procedures to help ensure that compact disbursement 

requests/reports, which are to include compact expense information, are received timely, are 

complete, and that relevant financial information from such requests are properly included in 

quarterly financial statements and reports prepared by NBC. In the event of missing or late 

reports/requests, Division of Finance personnel will contact the pertinent accountable officials to 

obtain the reports/requests, and document such. Relevant policies and procedures will be 

included in the FMPP manual. 

MCC’s Chief Financial Officer Was Not an Integral Part of the Compact/Grant Processes 

(material weakness) 

Condition: 

Based on interviews and observations, we noted that MCC’s Division of Finance was not 

integrally involved in the compact/grant processes to ensure that the financial aspects are 

Page 11 of 48 
addressed, recorded and reported in their proper sequence and appropriate timing. The Chief 

Financial Officer or his designees should be integrally involved in all MCC operations that result 

in a financial transaction. The CFO should be integrally involved in the: 

1. establishment of the compact amount to ensure that there is sufficient appropriations 

available, 

2. development of grant policies and procedures to ensure that they are in compliance with 

Federal government laws and regulations and to ensure that sufficient financial 

information is provided to MCC to accomplish its responsibilities, 

3. review of compacts in order to initiate accounting transactions in the system and budget 

transactions with OMB, and 

4. establishment of the reporting structure to ensure that financial information is provided 

timely and in the format necessary for required financial reporting. 

Criteria: 

According to the CFO Act of 1990, “An agency Chief Financial Officer shall oversee all 

financial management activities relating to the programs and operations of the agency.” Under 

the Act, an agency CFO’s responsibility will extend to every aspect of financial management 

related to operating agency programs. Government wide organizational change is needed to vest 

the CFOs with authority related to accounting, budget execution, and other financial 

management operations. This will ensure that one person, who is part of top management, has 

overall responsibility for establishing and implementing effective financial management policies, 

internal controls, and financial management systems. 

Cause: 

During fiscal year 2005, MCC management developed the selected compacts based on informal 

procedures. Therefore, the Chief Financial Officer’s involvement was based on an informal 

basis, and was not included in the official procedures that were developed during fiscal year 

2006. 

Effect: 

This condition can result in the lack of (1) control over pertinent financial management activities, 

(2) sufficient information to accurately report on compact expenses and advances, and (3) control 

over disbursement to ensure compliance with Treasury cash management requirements. 

Additionally, it can result in confusion over the financial reporting required and the timeframe 

required. 

Page 12 of 48 
Recommendation #06-05: 

We recommend that Millennium Challenge Corporation’s management revise their policies and 

procedures to invest the Office of the Chief Financial Officer with the level of responsibility, 

role, and all levels of authority established by the Chief Financial Officer Act. 

Management Response: 

MCC management accepts the recommendation and will take necessary steps to establish and 

implement required policies, procedures, and organizational protocol to ensure that the 

Corporation’s CFO is appropriately involved with the financial management operations entitywide. 

REPORTABLE CONDITION 

MCC’s Travel Disbursement Controls and Procedures Do Not Permit the Effective and 

Efficient Management of Travel (reportable condition) 

Condition: 

MCC follows the Federal Travel Regulations and has an overall policy related to travel. 

However, prior to February 2006, MCC was using blanket travel authorizations (TA) to serve as 

an approval for employee travel. Once MCC approved the blanket TA, it was submitted to 

National Business Center (NBC) to post an obligation within Oracle. After February, MCC 

modified the travel policy that instituted the individual TA’s that outlined the specific purpose of 

the employee’s travel. NBC no longer posts travel obligations in advance in Oracle but obligates 

and pays the travel vouchers, simultaneously. 

Similar to FY 2005, MCC requires all employees to post their travel expenses online in E-Travel. 

Although the travel voucher process is electronic, E-Travel does not interface with Oracle 

Federal Financials. Therefore, an NBC accounting technician must manually enter each 

voucher. During our travel testing, we noted twenty-six instances totaling $97,802 for which 

employees’ receipts were not available. We also noted the following: 

1. Eleven of 115 (10%) travel vouchers totaling $869 exceeded per diem rates; 

2. Six of 115 (5%) vouchers equaling $557 consisted of expenses in excess of $75 and 

were not supported; and 

3. Four of 115 (3%) vouchers totaling $35,663 were not approved by the travel manager 

within E-Travel. 

MCC enhanced its travel policy in August 2006. MCC management changed the Corporation’s 

supporting documentation requirements to require travelers to scan into the E-travel system and 

electronically attach to the pertinent travel vouchers receipts for claimed expenses of $75 or 

Page 13 of 48 
more. Division of Finance personnel are responsible for reviewing submitted vouchers to 

ascertain that required receipts are electronically attached to travelers’ vouchers. Travelers who 

do not scan and attach their required receipts to vouchers are contacted by Division of Finance 

staff to obtain “missing” receipts. 

Criteria: 

U.S. General Services Administration (GSA) Federal Travel Regulations Chapter 301 

“Temporary Duty (TDY) Travel Allowances” states that traveler is responsible for expenses over 

the reimbursement limits established in this chapter. The traveler’s agency will not pay for 

excess costs resulting from circuitous routes, delays, or luxury accommodations or services 

unnecessary or unjustified in the performance of official business. Also, receipts shall be 

required to support all lodging costs for which an allowance is claimed under the lodgings-plus 

per diem system except that a statement instead of a receipt may be accepted for the fee or 

service charge incurred for the use of Government quarters. 

Federal Travel Regulations Chapter 301-7.2 states that it is the responsibility of the head of each 

agency, or his/her designee, to authorize or approve only those per diem allowances that are 

justified by the circumstances affecting the travel and are allowable under the specific rules in 

this part. 

Additionally, the “Standards for Internal Control in the Federal Government” states that internal 

controls and all transactions and other significant events need to be clearly documented and the 

documentation should be readily available for examination. The documentation should appear in 

management directives, administrative policies, or operating manuals. Also, information should 

be recorded and communicated to management and others within the entity who need it and in a 

form and within a timeframe that enables them to carry out their internal control and other 

responsibilities. 

Cause: 

Prior to the finalized procedures distributed in August 2006, management worked from 

incomplete draft travel procedures. Additionally, the travel manager did not approve the online 

vouchers in E-travel consistently. Employees are required to retain all receipts that are $75 or 

greater and thus, are not required to submit their receipts to the agency. Therefore, for 

employees on travel during the time of testing, their receipts were unavailable for audit. 

Effect: 

The lack of sufficient detail and accountability in the procedures can produce inconsistent 

application of the travel policies and increase the risk of errors, improper recording, unauthorized 

transactions, omissions, potential funds control violations due to the lack of obligations and 

noncompliance with laws and regulations. This also diminished the effectiveness and efficiency 

with which the financial transactions were being processed. 

Page 14 of 48 
Recommendation #06-06: 

We recommend that Millennium Challenge Corporation’s management develop and implement 

controls to reject travel expense reimbursement requests that exceed the allowable country per 

diem unless additional electronic authorization is provided. 

Management Response: 

MCC management accepts the recommendation. The Deputy Chief Financial Officer has 

instructed the Division of Finance staff not to approve any claimed travel expenses that exceed 

established limitations as defined by the Federal Travel Regulation (FTR). Furthermore, the 

Division has instituted procedures to require that a traveler’s responsible manger/supervisor be 

apprised of claimed expenses that are not in compliance with the FTR and/or MCC requirements, 

and that the manager/supervisor explicitly approve such expenses, but only if allowable per the 

FTR. 

The status of prior years findings is provided in Appendix A. Management’s response in its 

entirety is included in Appendix C. 

As required by OMB Bulletin No. 06-03, with respect to internal controls related to performance 

measures determined by management to be key and reported in the Management’s Discussion 

and Analysis, we obtained an understanding of the design of significant internal controls relating 

to the existence and completeness assertions. Our procedures were not designed to provide 

assurance on internal control over performance measures and, accordingly, we do not provide an 

opinion thereon. 

COMPLIANCE WITH LAWS AND REGULATIONS 

MCC’s management is responsible for complying with laws and regulations applicable to MCC. 

As part of obtaining reasonable assurance that MCC’s balance sheet is free of material 

misstatements, we performed tests of its compliance with certain provisions of laws and 

regulations, noncompliance with which could have a direct and material effect on the 

determination of financial statement amounts, and certain other laws and regulations specified in 

OMB Bulletin No. 06-03, including the requirements referred to in the FFMIA. We limited our 

tests of compliance to these provisions and we did not test compliance with all laws, regulations, 

contracts, and agreements applicable to MCC. Providing an opinion on compliance with laws, 

regulations, contracts, and grant agreements was not an objective of our audit and, accordingly, 

we do not express such an opinion. 

Under OMB Bulletin No. 06-03 and FFMIA, we are required to report whether MCC’s financial 

management systems substantially comply with: (1) Federal financial management systems 

requirements, (2) applicable Federal accounting standards, and (3) the United States Government 

Standard General Ledger at the transaction level. To meet this requirement, we relied on the 

results of a SAS 70 review of the Department of Interior’s Oracle Federal Financial System 

performed by an Independent Audit Firm. The results of that review have been presented to 

Page 15 of 48 
MCC in a separate report. Providing an opinion on compliance with those provisions was not, 

however, an objective of our audit and, accordingly, we do not express such an opinion. 

The results of our tests disclosed that the Corporation did not fully comply with the FFMIA, 

which is required to be reported under Government Auditing Standards or OMB Bulletin No. 06-

03. 

Under FFMIA, we are required to report whether the Corporation’s financial management 

systems substantially comply with the Federal financial management systems requirements, 

applicable Federal accounting standards, and the United States Government Standard General 

Ledger at the transaction level. To meet this requirement, we performed tests of compliance 

with FFMIA section 803(a) requirements. 

The results of our tests disclosed three instances of noncompliance with laws and regulations. 

MATERIAL NONCOMPLIANCE 

MCC Did Not Fully Comply with FFMIA and GPRA 

Condition: 

Millennium Challenge Corporation has not fully complied with the following laws and 

regulations: 

• Government Performance and Results Act (GPRA) 

• Federal Financial Management Improvement Act (FFMIA) 

We noted that the agency performance plans provided to us did not fully comply with GPRA 

requirements, for example: human, capital and other resources needed to achieve performance 

goals were not quantified as required. Also, agency performance goals were not written in a 

manner that could be quantified in several instances and milestones were not included. 

Therefore, we could not directly link measurement of agency performance goals with the overall 

strategic plan. In addition, baseline data to be used as performance indicator measurement 

thresholds were not provided for some indicators. 

The FFMIA requires an integrated financial management system. MCC does not have an 

integrated financial management system. When MCC decided to outsource its accounting 

operations, MCC selected NBC from the available Federal Centers of Excellence as the best 

choice to meet its needs. In order to address the needs of MCC, multiple systems, i.e. E-Travel, 

procurement, and Federal Personnel and Payroll System (FPPS), are used, but these systems 

cannot exchange data electronically. The entry of the travel expenses and disbursements must be 

done manually. The entry of obligations and commitments requires a process of emails, 

scanning and manual entry into Oracle Federal Financial (OFF) System application. The payroll 

expenses and disbursements must be uploaded into OFF from FPPS. 

Page 16 of 48 
Additionally, we obtained and reviewed the Financial Management Controls and Assertion letter 

and noted the following assertion, “During FY 2006, NBC’s systems were not in substantial 

compliance with FFMIA requirements. In its assurance statement as of June 30, 2006, NBC 

asserted that ‘were in substantial non-compliance with FFMIA requirements’.” Subsequently, 

NBC instituted several corrective actions to address the issues raised and were in substantial 

compliance by September 30, 2006, per their representation. 

Criteria: 

The GPRA under United States Code Title 5, Chapter 3, section 306(a)(3) states that strategic 

plans shall contain, “a description of how the goals and objectives are to be achieved, including a 

description of the operational processes, skills and technology, and the human, capital, 

information, and other resources required to meet those goals and objectives.” In addition, under 

section 306(a)(4), it also requires “a description of how the performance goals included in the 

plan required by section 1115(a) of Title 31 shall be related to the general goals and objectives in 

the strategic plan.” Under section 4(b), “Annual Performance Plans and Reports,” it amends 

section 1115 of Title 31 to, “express such goals in an objective, quantifiable, and measurable 

form unless authorized to be in an alternative form under subsection (b).” Also, the performance 

report should evaluate the performance plan for the current fiscal year relative to the 

performance achieved toward the performance goals in the fiscal year covered by the report. 

The FFMIA requires MCC to implement and maintain a financial management system that 

complies substantially with Federal requirements for an integrated financial management system. 

Cause: 

MCC is still developing the GPRA process and has not developed system-wide strategic plan 

implementation standards, formats or procedures at the departmental level. Also, performance 

measures baseline data is incomplete and as such, in some instances there are no indicators 

available to measure progress made. 

The MCC does not have its own financial system. The Corporation has contracted with NBC to 

provide accounting and IT services including usage of its OFF application. The MCC is required 

by government regulations to use Federal Centers of Excellence, of which NBC is one. 

According to MCC officials, the Corporation has been directed to use the systems available 

through NBC. MCC believes that in fiscal year 2006, it used the only options available. NBC is 

working with MCC to provide enhancement to the system to accommodate MCC’s needs within 

the context of the OMB requirements for Centers of Excellence. 

Effect: 

Without a performance plan that meets key GPRA requirements MCC management may not 

have meaningful performance data linked to the strategic objectives and goals of the MCC. The 

reader of the financial statements is not provided with a clear picture of the accountability and 

achievements of the Corporation. 

Page 17 of 48 
Furthermore, because MCC does not have an integrated financial management system, the users 

may not receive complete, accurate, and timely financial information needed for decisionmaking purposes because of the inefficiencies caused by the manual processes. 

Recommendation #06-07: 

We recommend that MCC management: 

1. Develop performance goal templates and follow-up training to ensure that Government 

Performance and Results Act (GPRA) requirements are adequately addressed and 

consistent. We also recommend that baseline data be finalized or performance 

indicators reviewed and amended such that they can be measured against obtainable 

data. 

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 least the payroll, 

procurement and travel functions and systems to increase the efficiencies and 

effectiveness of the processing of financial transactions; and decrease the risk of errors. 

Management Decision: 

MCC accepts the recommendations. Relative to GPRA, the Department of Administration and 

Finance management is working with various corporate organizations to help ensure that 

strategic and operational performance goals, including financial management performance, and 

inter-related and resulting performance data is reliable and consistent. 

In regards to system integration, the Department of Administration and Finance is currently 

considering various potential options and alternatives for increasing the electronic integration, 

responsiveness, and efficiency of the financial management systems used by the Corporation. 

The Division of Finance is working with NBC to identify potential opportunities for various 

financial management systems functions, including enhanced automated financial reporting and 

cost accumulation. Since MCC outsources its financial management and administrative 

functions, the Corporation is highly dependent upon its financial and administrative services 

provider (NBC) to help ensure operation of effective financial systems. 

MCC Does Not Fully Comply With The Federal Information Security Management Act 

(FISMA) 

An OIG audit identified significant non-compliance with FISMA requirements. Also, MCC 

engaged an outside expert to perform an independent security audit. MCC acknowledged that it 

had not met the majority of the FISMA requirements and proposed a timetable for compliance. 

Page 18 of 48 
We are reporting this deficiency as required by the guidance issued by the Office of Management 

and Budget. However, because this deficiency was addressed in a prior OIG audit report, we are 

not making any recommendation in this report. 

MCC Policies for Disbursing Advances to Grantees Does Not Accommodate Effective Cash 

Management 

The internal control finding “MCC Policies for Disbursing Advances to Grantees Does Not 

Accommodate Effective Cash Management” is also a noncompliance with laws and regulations. 

The complete finding and recommendation for this finding is presented in the internal control 

section of this report. We are not making any recommendations for this finding because we 

reported and made recommendations for corrective actions in the internal control section. 

DISTRIBUTION 

This audit was performed pursuant to the Government Corporation Control Act, and is intended 

solely for the information and use of the United States Congress, the President, the Director of 

the Office of Management and Budget, Comptroller General of the United States, the 

Corporation and its Inspector General, and is not intended to be, and should not be, used by 

anyone other than these specific parties. 

Williams, Adley & Company, LLP /s/ 

October 25, 2006 

Washington, D.C. 

Page 19 of 48 
Appendix A 

STATUS OF PRIOR YEAR FINDINGS 

Review of Oracle Federal Financial System 

The Millennium Challenge Corporation (Corporation) does not have its own financial system. 

The Corporation contracted with the Department of Interior, National Business Center (NBC) to 

provide accounting and IT services including usage of its Oracle Federal Financial (OFF) System 

application. The NBC has not conducted an internal control review, such as a Statement of 

Auditing Standards (SAS) 70 review of the Oracle Federal Financials System nor has MCC 

directed NBC as its third-party servicer to have a review conducted in accordance with the 

federal system requirements. 

Recommendation 

We recommend that MCC direct the National Business Center to conduct an internal control 

review, such as a SAS 70 review to assess the control environment of the Oracle Federal 

Financial System. 

Status 

The NBC performed a SAS 70 review of the Oracle Federal Financial System for the period 

March 1, 2005 to July 31, 2005. The independent auditors reported that the relevant aspects of 

the NBC’s controls that had been placed in operation are suitably designed to provide reasonable 

assurance that the specified control objectives would be achieved, except for the following two 

items: 

• OFF requires transactions exceeding a dollar threshold to be approved by certifying 

officers. The electronic workflow in OFF currently does not require the approval by 

certifying officers of all such transactions. 

• NBC is responsible for monitoring budgetary accounts for MCC. However, OFF limit 

edits are not designed to prevent obligations from exceeding the allotment. 

NBC provided a self-certification asserting no change in the system controls from August 1 to 

September 30, 2005. No system review was performed for the period October 1, 2004 to 

February28, 2005 to assess operational efficiency, effectiveness and transparency 

In fiscal year 2006, NBC performed a SAS 70 review for the period October 1, 2005 to July 31, 

2006. The independent auditors reported that the relevant aspects of the NBC’s controls that had 

been placed in operation are suitably designed to provide reasonable assurance that the specified 

control objectives would be achieved, except for the following item: 

• OFF requires transactions exceeding a dollar threshold to be approved by certifying 

officers. The electronic workflow in OFF currently does not require the approval by 

certifying officers of all such transactions. 

Page 20 of 48 
Appendix A 

MCC’s Policies and Procedures Were Not Always Complete and Consistent 

During the fiscal year, the Millennium Challenge Corporation (MCC) has used various processes 

to address the financial aspects of their operations. These processes have evolved during the 

year as the organization has grown in personnel and operations. In this growth, however, the 

development of written policies and procedures to guide MCC’s streamlined operational 

structure has not been a high priority for MCC in several areas. However, written policies and 

procedures must be in place to ensure operational efficiencies, risk reduction, and consistent 

application. 

Recommendation 05-1: 

We recommend that MCC’s Office of Finance and Administration revise and reissue written 

policies and procedures that provide additional specificity in the areas noted above including the 

Fund Balance with Treasury, financial reporting, payroll processing, accrual generation and 

reporting, interagency reporting, fixed assets, travel, monitoring and internal grant processes. 

These policies and procedures should provide the following information at a minimum: 

• Position accountable for each step in the process, 

• Position responsible for approving/reviewing the information, 

• The acceptable internal and external timelines for each step in the process, and 

• The specific documentation required determining the authorization, timeliness and review 

of transaction. 

Status 

MCC had not issued final policies and procedures in several areas. Therefore, the finding is 

repeated but revised as finding # 06-1. 

MCC’s Travel Disbursement Controls and Procedures Do Not Permit the Effective and 

Efficient Management of Travel 

According to MCC’s management, MCC has adopted the Federal Travel Regulations as its 

overall policy related to travel. MCC’s internal travel policies and procedures do not permit the 

effective and efficient management of travel. These procedures do not ensure that travel is 

adequately planned and managed. Because a blanket travel authorization is used, there is no 

record that individual travel has taken place and that accounting has occurred for each instance. 

Additionally, the policy does not require that appropriate coordination include the Office of 

Finance. For example, the Office of Finance should have knowledge of planned trips, the 

timing, exceptions to the standard travel policy, and the estimated costs in order to ensure that 

sufficient obligations have been recorded to cover expenses incurred by MCC travelers. 

Currently, an initial estimate is prepared annually to fund the blanket travel authorization and the 

estimate is adjusted quarterly by the controller based upon expense patterns. There are, however, 

no automated processes in place to ensure that the estimate is sufficient to cover the travel 

Page 21 of 48 
Appendix A 

expenses incurred. This problem is compounded by the untimely filing of travel vouchers 

thereby increasing the difficulty and reducing the accuracy of the estimation process performed 

by the controller. 

Recommendation #05-2: 

We recommend that MCC management: 

(1) Develop and disseminate explicit policies to ensure that employees are aware of and 

follow the Federal Travel Regulations. Any exception should be documented and 

approved by a manager/supervisor in writing. 

(2) Institute policies and procedures to ensure proper authorizations and approvals are 

obtained and coordination with the Office of Finance has occurred for each planned trip 

prior to travel to ensure that the information is properly captured in the financial 

management system. 

(3) Develop and institute controls to reject those expenses claimed that exceed the 

allowable country per diem unless explicit written authorization is provided prior to 

travel. 

Status: 

MCC issued a revised policies and procedures in fiscal year 2006. However, we found 

additional exceptions in fiscal year 2006 related to travel expenses that exceed per diem, and 

lacked documentation. Also, we noted that no obligations are recorded prior to processing the 

travel voucher for reimbursement. The finding has been revised. Recommendations 2 and 3 

were retained and a new recommendation was added. See recommendation #06-06 

MCC Policies for Disbursing Advances to Grantees Does Not Accommodate Effective Cash 

Management Nor the Appropriate Recording of Custodial Interest Receivable and Payable 

MCC entered into a compact with Madagascar in April 2005. The Compact became effective in 

July 2005, and an immediate advance was provided to MCA Madagascar amounting to 

$2,500,924. Based upon information obtained at year-end, MCA Madagascar has expended 

$650,000 of the initial advance. 

Through various OMB Circulars, OMB has attempted to address the need for advances to cover 

immediate cash needs or timely disbursements of an entity for direct program costs for carrying 

out the purpose of the approved program or project. Thus, funds paid to a grantee are not to be 

held but are to be promptly applied to the grant purpose. Although the timeframe for immediate 

cash needs has not been clearly defined by OMB, the general rules employed by various Federal 

agencies are 30 days for non-governmental entities. Based upon this definition, MCC has 

provided Federal funds in excess of immediate cash needs. 

Page 22 of 48 
Appendix A 

Recommendation #05-3: 

We recommend that management: 

(1) Develop policies and procedures to ensure that the payment schedules and other 

agreements entered into with grantees are reflective of the Treasury requirements 

concerning advances and immediate cash needs. 

(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. 

Status: 

MCC’s policies and procedures have not changed in this area. In fiscal year 2006 more funds 

have been provided to various MCAs and the timelines between requesting the funds and their 

use has not improved but worsened. The finding was revised with additional data and 

recommendations. See recommendation #06-02. 

MCC’s Human Resources Responsible for Managing Its Financial Operations are Inadequate 

During our internal control and substantive testing, we noted that the MCC relies solely on the 

Controller, with contract assistance, to perform the substantial duties of the Office of Financial 

Management (OFM). The current range of Controller responsibilities include, but are not limited 

to, the approval of miscellaneous obligations; monthly, quarterly and yearly financial 

information review; development of financial policies and procedures; financial statement 

review; audit coordination; coordination with other agencies including OMB, USAID/OIG, and 

NBC; and approval of funds availability. 

Recommendation #05-4: 

We recommend that MCC evaluate and document the need for additional employees in OFM to 

ensure that proper internal controls are in place to meet the agency’s objective and thus, 

providing the Controller with adequate delegation of authority. Additionally, the roles and 

responsibilities of the current Controller position and the new positions in OFM should be clearly 

delineated and communicated. 

Status: 

MCC took significant steps to improve their human resources in the Office of Finance. They 

hired an additional five employees including a Chief Financial Officer, Deputy Chief Financial 

Officers and several accountants. The delineation of their roles and responsibilities will be 

outlined clearly in the newly revised policies and procedures. 

Page 23 of 48 
Appendix A 

MCC Did Not Fully Comply with FFMIA and GPRA 

Millennium Challenge Corporation has not complied with the following laws and regulations: 

• Government Performance and Results Act (GPRA) 

• Federal Financial Management Improvement Act (FFMIA) 

MCC has not developed performance goals and objectives that comply with the requirements of 

the GPRA. Although MCC has several guiding objectives, they do not meet the requirements of 

GPRA. The information in Management’s Discussion and Analysis are not sufficient to meet 

GPRA requirements and the goals presented are on a calendar year basis rather than a fiscal year. 

The FFMIA requires an integrated financial management system. MCC does not have an 

integrated financial management system. When MCC decided to outsource its accounting 

operations, MCC selected NBC from the available Federal Centers of Excellence as the best 

choice to meet its needs. In order to address the needs of MCC, multiple systems, i.e. E-Travel, 

procurement, and FPPS, are used but these systems cannot exchange data electronically. The 

entry of the travel expenses and disbursements must be done manually. The entry of obligations 

and commitments requires a process of emails, scanning and manual entry into OFF. The 

payroll expenses and disbursements must be uploaded into OFF from FPPS. 

Recommendation #05-5: 

We recommend that MCC management: 

(1) Implement their intended corrective actions for preparation of a GPRA based 

performance goals and objectives by March 2006, as specified in its FMFIA 

assessment, specifically: 

• Complete the development of a strategic plan for the next six fiscal years that meets 

OMB requirements. 

• Involve MCC staff in the determination of corporate performance goals. 

• Articulate operational performance goals for FY 2006, that align with the defined 

strategic goals and submit to the Board and OMB. 

(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 least the payroll, 

procurement and travel functions and systems to increase the efficiencies and 

effectiveness of the processing of financial transactions; and decrease the risk of errors. 

Page 24 of 48 
Appendix A 

Status: 

MCC has made improvements in these areas. However, there are remaining issues and thus the 

finding has been repeated with a revision to the finding for GPRA. See recommendation # 06-

07. 

MCC Does Not Fully Comply with The Federal Information Security Management Act 

(FISMA) 

In a report issued June 2005, an OIG audit identified significant non-compliance with FISMA 

requirements. Subsequently, MCC completed its FISMA report to OMB as of September 30, 

2005, where it acknowledged that it had not met the majority of the FISMA requirements and 

proposed a timetable for compliance. 

We are reporting this deficiency, as required by the guidance issued by the Office of 

Management and Budget. However, because this deficiency was addressed in a prior OIG audit 

report, we are not making any recommendation in this report. 

The OIG continues the report significant noncompliances with FISMA requirements in fiscal 

year 2006. 

Page 25 of 48 
Appendix B 

Management 

Comments and 

Our Evaluation 

We received and evaluated MCC’s management comments to the 

recommendations made in this report. We considered their comments 

to be generally responsive except for specific exceptions detailed 

below. Management comments have been included in their entirety in 

Appendix C. 

In its response MCC’s management stated that it recognizes the 

importance of accountability, effective stewardship, and public 

disclosure related to the resources entrusted to it, and that their goal is 

to achieve and maintain excellence in financial management, financial 

reporting and internal control systems. Further, MCC’s management 

commented that it will implement the recommendations as soon as 

possible to strengthen their systems of internal controls and lend further 

credibility to their financial statements and overall financial operations. 

MCC’s management went on to address each recommendation. 

MCC’s management also recognized and thanked both the OIG and 

Williams, Adley & Company, LLP for working closely with them 

during the audit process and providing counseling and support 

throughout the year. 

Based on MCC’s comments, we consider that a management decision 

has been reached on recommendations 1, 4, and 6 provided in this 

report but not on recommendations 2, 3, 5, and 7. These 

recommendations do not provide defined timelines for the corrective 

action implementation. Also, the corrective actions for 

recommendation 2.4 and 7.1 require additional details to ensure that the 

recommendations are appropriately addressed. On recommendation 

2.1, management agreed to “the spirit” of the recommendation but has 

not agreed to the usage of the US Treasury requirements. MCC should 

report to the OIG when management decision has been reached on the 

four recommendations and when final action has been taken on the 

recommendations. The following is a brief summary of MCC’s 

management comments on the seven recommendations included in this 

report and our evaluation on those comments. 

Recommendation No. 1 

MCC accepts the recommendation and is currently implementing 

relevant corrective action. Specifically, the Division of Finance 

(within the Department of Administration and Finance) initiated an 

effort during the summer 2006 to develop and implement a 

comprehensive corporate Financial Management Policies and 

Procedures (FMPP) manual. The Division is utilizing contractor 

support in this endeavor. The initial version of the FMPP manual is 

Page 26 of 48 
Appendix B 

slated to be completed and formally institutionalized by December 31, 

2006. 

Auditor Evaluation: We conclude that management has adequately 

addressed this issue. 

Recommendation No. 2 

MCC Management accepts recommendations 2.2, 2.3, and 2.4. 

Regarding recommendation 2.1, MCC intends to follow sound cash 

management practices, will disburse funds consistent with the GAO 

policy based upon what is needed to meet grant purposes in any given 

quarter, though the funds will be released in tranches following a 

monthly schedule. 

MCC has begun implementing needed corrective actions. The MCC 

FMPP manual (currently being developed – see above management 

response to recommendation 1) will contain definitive documentation 

and disbursement requirements for transferring funds to compact 

countries. Furthermore, the Division of Finance, in coordination with 

the National Business Center (MCC’s financial services provider) has 

already implemented procedures to disburse funds to compact countries 

monthly in accordance with identified funding needs per pertinent 

quarterly disbursement requests. 

Auditor Evaluation: We conclude that management has not adequately 

addressed this issue because the response does not address 

recommendation 2.4; and does not discuss the implementation of 

recommendation 2.2. Also, the management response does not specify 

an implementation date for any of the subparts of recommendation 2. 

Recommendation No. 3 

MCC management accepts the recommendation. The Department of 

Administration and Finance has begun planning and defining 

requirements for implementing a viable property management system 

and associated controls and processes, including periodic physical 

counts to verify the Corporation’s property holdings and ensure the 

propriety of perpetual property records and related financial balances. 

Auditor Evaluation: We conclude that management has not adequately 

addressed this issue because no defined timetable has been stated for 

the corrective action. 

Page 27 of 48 
Appendix B 

Recommendation No. 4 

MCC management accepts the recommendations. The Division of 

Finance has already implemented quality assurance and review 

procedures to help ensure that compact disbursement requests/reports, 

which are to include compact expense information, are received timely, 

are complete, and that relevant financial information from such 

requests are properly included in quarterly financial statements and 

reports prepared by NBC. In the event of missing or late 

reports/requests, Division of Finance personnel will contact the 

pertinent accountable officials to obtain the reports/requests, and 

document such. Relevant policies and procedures will be included in 

the FMPP manual. 

Auditor Evaluation: We conclude that management has adequately 

addressed this issue. 

Recommendation No. 5 

MCC management accepts the recommendation and will take 

necessary steps to establish and implement required policies, 

procedures, and organizational protocol to ensure that the 

Corporation’s CFO is appropriately involved with the financial 

management operations entity-wide. 

Auditor Evaluation: We conclude that management has not adequately 

addressed this issue because no defined timetable has been stated for 

the corrective action. 

Recommendation No. 6 

MCC management accepts the recommendation. The Deputy Chief 

Financial Officer has instructed the Division of Finance staff not to 

approve any claimed travel expenses that exceed established limitations 

as defined by the Federal Travel Regulation (FTR). Furthermore, the 

Division has instituted procedures to require that a traveler’s 

responsible manger/supervisor be apprised of claimed expenses that are 

not in compliance with the FTR and/or MCC requirements, and that the 

manager/supervisor explicitly approve such expenses, but only if 

allowable per the FTR. 

Auditor Evaluation: We conclude that management has adequately 

addressed this issue. 

Page 28 of 48 
Appendix B 

Recommendation No. 7 

MCC accepts the recommendations. Relative to GPRA, the 

Department of Administration and Finance management is working 

with various corporate organizations to help ensure that strategic and 

operational performance goals, including financial management 

performance, and inter-related and resulting performance data is 

reliable and consistent. 

In regards to system integration, the Department of Administration and 

Finance is currently considering various potential options and 

alternatives for increasing the electronic integration, responsiveness, 

and efficiency of the financial management systems used by the 

Corporation. The Division of Finance is working with NBC to identify 

potential opportunities for various financial management systems 

functions, including enhanced automated financial reporting and cost 

accumulation. Since MCC outsources its financial management and 

administrative functions, the Corporation is highly dependent upon its 

financial and administrative services provider (NBC) to help ensure 

operation of effective financial systems. 

Auditor Evaluation: We conclude that management has not adequately 

addressed this issue because no defined timetable has been stated for 

the corrective action. Also, the response to recommendation 7.1 does 

not provide enough detail information to conclude that the finalization 

of baseline data, review of performance indicators, the development of 

templates, or performance of follow-up training is part of the corrective 

action plan. 

Page 29 of 48 
Appendix C

Page 30 of 48 

November 6, 2006 

TO: John Phee 

Assistant Inspector General 

FROM: Michael Ryan /s/ 

Vice President, Administration & Finance 

SUBJECT: Management Response to Draft Independent Auditor’s 

Report on MCC’s Financial Statements for Fiscal Years 

Ended September 30, 2006 and 2005, Respectively 

We have received the subject draft report and are pleased to note that the independent auditors, 

Williams, Adley & Company, LLP, are issuing an unqualified opinion on our principal financial 

statements, namely the Statements of: 

• Financial Position; 

• Operations and Changes in Net Position; 

• Cash flows; 

• Functional Expenses; and 

• Budgetary Resources. 

The auditor’s unqualified opinion is being issued despite material internal control weaknesses 

and noncompliance with selected laws and regulations that have been identified. 

The Millennium Challenge Corporation’s (MCC) management recognizes the importance of 

accountability, effective stewardship and public disclosure related to the resources entrusted to it. 

Our goal is to achieve and maintain excellence in our financial management, financial reporting 

and internal control systems. Accordingly, we will implement the recommendations as soon as 

possible to strengthen our systems of internal control and lend further credibility to our financial 

statements and overall financial operations. 
We wish to recognize and thank you, your team and Williams, Adley & Company for working 

closely with us during the audit process. We look forward to working with you and your staff on 

the fiscal year (FY) 2007 financial audit. Any questions may be addressed to Mr. Gerald 

Thomas, Deputy Chief Financial Officer, or to me. 

Following are our management decisions and responses to Williams Adley’s audit 

recommendations. 

Material Weakness 1: MCC’s policies and procedures were not always complete and 

consistent. 

Recommendation 1: Williams, Adley & Company recommends that MCC’s Department of 

Administration and Finance complete the Financial Management Policies and Procedures 

(FMPP) manual and implement the written policies and procedures for all areas that result in a 

financial event. 

Management Decision: MCC management accepts the recommendation and is currently 

implementing relevant corrective actions. Specifically, the Division of Finance (within the 

Department of Administration and Finance) initiated an effort during the summer, 2006 to 

develop and implement a comprehensive corporate Financial Management Policies and 

Procedures (FMPP) manual. The Division is utilizing contractor support in this endeavor. The 

initial version of the FMPP manual is slated to be completed and formally institutionalized by 

December 31, 2006. 

* * * * * 

Material Weakness 2: MCC policies for disbursing advances to grantees do not accommodate 

effective cash management. 

Recommendations: Williams, Adley & Company recommends that MCC management: 

2.1: Develop and implement policies and procedures to ensure that payment schedules and 

other agreements entered into with grantees are reflective of U.S. Treasury 

requirements concerning advances and immediate cash needs. 

2.2: Develop and implement policies and procedures to ensure that all disbursement 

requests from the accountable entity of the recipient countries follow the official format 

that documents the cash requirements for each month of the quarterly period. 

2.3: Make and document all payments to the recipient countries on a monthly basis instead 

of a quarterly basis. 

2.4: Establish and implement 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. 

Page 31 of 48 
Management Decision: MCC management accepts recommendations 2.2, 2.3 and 2.4. 

Regarding recommendation 2.1, MCC intends to follow sound cash management practices, will 

disburse funds consistent with GAO policy based on an evaluation of what is needed to meet 

grant purposes in any given quarter, though the funds will be released in tranches following a 

monthly schedule. 

MCC has begun implementing needed corrective actions. The MCC FMPP manual (currently 

being developed – see above management response to recommendation 1) will contain definitive 

documentation and disbursement requirements for transferring funds to compact countries. 

Furthermore, the Division of Finance, in coordination with the National Business Center (MCC’s 

financial services provider) has already implemented procedures to disburse funds to compact 

countries monthly in accordance with identified funding needs per pertinent quarterly 

disbursement requests. 

* * * * * 

Material Weakness 3: MCC does not have a property management system. 

Recommendation 3: Williams, Adley & Company recommends that MCC develop and 

maintain appropriate fixed asset records to ensure accurate reporting and physical control. 

Management Decision: MCC management accepts the recommendation. The Department of 

Administration and Finance has begun planning and defining requirements for implementing a 

viable property management system and associated controls and processes, including periodic 

physical counts to verify the Corporation’s property holdings and ensure the propriety of 

perpetual property records and related financial balances. 

* * * * * 

Material Weakness 4: MCC did not properly record compact expenses during the fiscal year. 

Recommendations: Williams, Adley & Company recommends that MCC management: 

4.1: Require that the final quarterly disbursement requests received from the accountable 

entity of the recipient countries be made available to the Department of Administration 

and Finance and the Fiscal Accountability Office. 

4.2: Develop and implement policies and procedures that require compact expenses are 

properly and accurately recorded and reported on a quarterly basis. 

4.3: Implement written procedures requiring that appropriate and timely follow-up actions 

are performed and documented on late and/or outstanding fund disbursements and/or 

advance requests. 

Page 32 of 48 
4.4: Develop and implement policies and procedures that require the Department of 

Administration and Finance to perform a thorough review of the financial statements to 

ensure that costs are not omitted. 

Management Decision: MCC management accepts the recommendations. The Division of 

Finance has already implemented quality assurance and review procedures to help ensure that 

compact disbursement requests/reports, which are to include compact expense information, are 

received timely, are complete, and that relevant financial information from such requests are 

properly included in quarterly financial statements and reports prepared by NBC. In the event of 

missing or late reports/requests, Division of Finance personnel will contact the pertinent 

accountable officials to obtain the reports/requests, and document such. Relevant policies and 

procedures will be included in the FMPP manual. 

* * * * * 

Material Weakness 5: MCC’s Chief Financial Officer was not an integral part of the 

compact/grant processes. 

Recommendation 5: Williams, Adley & Company recommends that MCC management revise 

its policies and procedures to invest the Office of the Chief Financial Officer (CFO) with the 

level of responsibility, including role and all levels of authority established by the Chief 

Financial Officers Act. 

Management Decision: MCC management accepts the recommendation and will take the 

necessary steps to establish and implement required policies, procedures and organizational 

protocol to ensure that the Corporation’s CFO is appropriately involved with financial 

management operations entity-wide. 

* * * * * 

Reportable Condition 1: MCC’s travel disbursement controls and procedures do not permit the 

effective and efficient management of travel. 

Recommendation 6: Williams, Adley & Company recommends that MCC management 

develop and implement controls to reject travel expense reimbursement requests that exceed the 

allowable country per diem limits unless additional electronic authorization is provided. 

Management Decision: MCC management accepts the recommendation. The Deputy Chief 

Financial Officer has instructed the Division of Finance staff not to approve any claimed travel 

expenses that exceed established limitations as defined by the Federal Travel Regulation (FTR). 

Furthermore, the Division has instituted procedures to require that a traveler’s responsible 

manager/supervisor be apprised of claimed expenses that are not in compliance with FTR and/or 

MCC requirements, and that the manager/supervisor explicitly approve such expenses, but only 

if allowable per the FTR. 

* * * * * 

Page 33 of 48 
Page 34 of 48 

Material Noncompliance 1: MCC did not fully comply with the Federal Financial 

Management Improvement Act (FFMIA) and the Government Performance and Results Act 

(GPRA). 

Recommendations: Williams, Adley & Company recommends that MCC management: 

7.1: Develop performance goal templates and follow-up training to ensure that Government 

Performance and Results Act (GPRA) requirements are adequately addressed and 

consistent. Williams, Adley & Company and the OIG also recommend that baseline 

data be finalized or performance indicators reviewed and amended such that they can 

be measured against obtainable data. 

7.2: Assess the automated options available to handle MCC operations and develop shortrange and long-range plans for implementation of the most appropriate information 

technology structure to address electronic integration of at least the payroll, 

procurement and travel functions and systems to increase the efficiencies and 

effectiveness of the processing of financial transactions; and decrease the risk of errors. 

Management Decision: MCC accepts the recommendations. Relative to GPRA, Department of 

Administration and Finance management is working with the various corporate organizations to 

help ensure that strategic and operational performance goals, including financial management 

performance, and inter-related and resulting performance data is reliable and consistent. 

In regard to systems electronic integration, Department of Administration and Finance 

management is currently considering various potential options and alternatives for increasing the 

electronic integration, responsiveness and efficiency of the financial management systems used 

by the Corporation. The Division of Finance is working with NBC to identify potential 

automation opportunities for various financial management systems functions, including 

enhanced automated financial reporting and cost accumulation. Since MCC outsources its 

financial management and administrative functions, the Corporation is highly dependent upon its 

financial and administrative services provider (NBC) to help ensure operation of effective 

financial systems. 

* * * * * 

Material Noncompliance 2: MCC does not comply with the Federal Information Security 

Management Act (FISMA). Williams, Adley & Company makes no recommendation(s) relative 

to this material noncompliance since the deficiency was identified by the Office of Inspector 

General in a prior audit and MCC management has: 

• acknowledged that it has not fully met FISMA requirements; 

• hired an outside expert to perform an independent security audit; and 

• proposed a timetable for compliance. 
Statements of Financial Position

As of September 30, 2006 With Summary Totals for 2005

2006 Total Compacts

Pre-Compact 

Funding Threshold

Evaluation and 

Support Administrative 

Assets Current Assets

Fund Balance with Treasury (Note 2) $ 3,931,404,752 $ 3,610,671,774 $ 55,951,660 $ 193,230,000 $ 32,200,504 $ 37,567,478 $ Receivables/Advances/Prepayments (Note 3) 18,893,478 16,587,951 511,426 1,731,899 - 62,202 

Fixed Assets

Leasehold Improvements and Capital Equipment (Note 4) 4,632,785 - - - 4,632,785 - 

Total Assets $ 3,954,931,015 $ 3,627,259,725 $ 56,463,086 $ 193,230,000 $ 33,932,403 $ 42,262,465 $ Liabilities 

Accounts Payable 2,552,277 774,246 - 731,258 - 1,046,773 

Other Liabilities (Note 5) 2,516,786 - - (461,774) - 2,978,560 

Accrued Funded Annual Leave 2,698,070 - - - 2,698,070 - 

Total Liabilities $ 7,767,133 $ 774,246 - $ $ 269,484 - $ $ 6,723,403 $ 

Net Position

Unexpended Appropriations Obligated 1,283,003,458 1,187,867,694 43,098,943 0 23,298,780 26,954,705  Commitments 856,804,162 842,399,600 5,052,595 0 8,495,391 856,576 

 Allotments - Realized Resources 1,802,661,275 1,596,992,431 7,537,302 193,230,000 1,868,748 3,032,794 Cumulative Results of Operations 4,694,987 - - - 4,694,987 - 

 Total Net Position (Note 6) $ 3,947,163,882 $ 3,627,259,725 $ 55,688,840 $ 193,230,000 $ 33,662,919 $ 35,539,062 $ 

Total Liabilities and Net Position $ 3,954,931,015 $ 3,627,259,725 $ 56,463,086 $ 193,230,000 $ 33,932,403 $ 42,262,465 $ 

 The notes are an integral part of these financial statements

Millennium Challenge Corporation

Page 35 of 48 
Statements of Operations and Changes in Net Position

For the Year Ended September 30, 2006 With Summary Totals for 2005

2006 Total Compacts

Pre-Compact 

Funding Threshold

Evaluation and

Support Administrative 

Financing Sources

Appropriations Used $ 92,455,115 $ 16,747,194 $ 5,895,167 $ 15,137,340 - $ $ 54,055,700 

Expenses 92,036,960 16,747,194 5,895,167 15,137,340 - 53,637,545 Excess of Financing Sources over Expenses $ 418,155 $ - $ (0) $ - $ 0 $ 418,155 Net Position

Excess of Financing Sources over Expenses 418,155 - (0) - 0 418,155 

Increase in Unexpended Appropriations

 Appropriated - 

 Obligated 933,850,067 863,789,695 36,954,637 14,498,520 17,054,929 

-

 Commitments 856,804,162 842,399,600 5,052,595 0 8,495,391 856,576 

 Allotments - Realized Resources (168,109,344) (358,233,833) (8,007,053) 193,230,000 1,868,748 3,032,794  Transfers In/(Out) (20,000,000) - (20,000,000) - - - 

 Permanent Recission (17,700,000) (17,700,000) - - - - 

Total Increase in Unexpended Appropriations 1,585,263,040 1,330,255,462 34,000,179 173,230,000 24,862,659 21,362,454 

Beginning Net Position 2,361,900,842 2,297,004,263 21,688,661 20,000,000 8,800,260 14,176,608 

Ending Net Position $ 3,947,163,882 $ 3,627,259,725 $ 55,688,840 $ 193,230,000 $ 33,662,919 $ 35,539,062 

Millennium Challenge Corporation

 The footnotes are an integral part of these financial statements

Page 36 of 48 
Statements of Functional Expenses

For the Year Ended September 30, 2006 With Summary Totals for 2005

2006 Total Compacts

Pre-Compact 

Funding Threshold

Evaluation and 

Support Administrat

Salary and Benefits $27,587,426 $ - $ - $ - $ 27,587,4

- $ 

Travel 6,362,880 - - 317,509 - 6,045,3

Rent/Lease 4,404,013 - - - 4,404,0

- 

Utilities 766,206 - - - 766,2

- 

Information Technology Services 2,562,575 - - - 2,562,5

- 

Accounting Services 4,244,677 - - - 3,624,9

- 

Interagency Agreements 4,636,977 - - 4,636,977 - 

Other Services 13,563,769 - - 9,755,703 - 3,808,0

Supplies and Equipment 2,211,918 - - - 2,211,9

- 

Grants 22,642,361 16,747,194 5,895,167 - - 

Miscellaneous 3,054,158 - - 427,151 - 2,627,0

Total Expenses $ 92,036,960 $ 16,747,194 $ 5,895,167 $ 15,137,340 - $ $ 53,637,5

 The footnotes are an integral part of these financial statements

Millennium Challenge Corporation

Page 37 of 48 
Statements of Cash Flows

For the Year Ended September 30, 2006 With Summary Totals for 2005

2006 Total Compacts

Pre-Compact 

Funding Threshold

Evaluation and 

Support Administrat

Cash Flows from Operating Activities

Excess of Financing Sources over Expenses $ 418,155 $ - $ - $ - $ 418,1

- $ 

Adjustments Affecting Cash Flow:Depreciation Expense 483,000 483,0

Changes in Assets and Liabilities: Appropriated Capital Used (92,455,115) (16,747,194) (5,895,167) (15,137,340) - (54,055,7

 Increase in Advances/Receivables/Prepayments (14,554,780) (14,782,027) (511,426) 768,101 (29,4

 Increase in Accounts Payable 1,232,809 - 774,246 - 659,128 (200,5

 Decrease in Other Liabilities (6,017) - (154,526) (1,459,696) - 2,059,0

 Increase in Annual funded Leave Liabilities 1,311,427 - - - 1,311,4

- 

Total Adjustments (103,988,676) (31,529,221) (5,786,873) (15,169,807) - (50,432,2

 Net Cash Used in Operating Activities $ (103,570,521) $ (31,529,221) $ (5,786,873) $ (15,169,807) - $ $ (50,014,0

Cash Flows from Investing Activities

 Purchase of Property $ (871,727) $ - $ - $ - $ (871,7

- $ 

 Net Cash Used in Investing Activities $ (871,727) $ - $ - $ - $ - $ (871,7

Cash Flows from Financing Activities

 Appropriations received net of recissions $ 1,752,300,000 $ 1,347,002,655 $ 39,895,345 $ 248,230,000 $ 40,000,000 $ 75,000,0

 Transfers Out (75,000,000) (75,000,000)  Net Cash Provided by Financing Activities 1,677,300,000 1,347,002,655 39,895,345 173,230,000 40,000,000 75,000,0 Net Increase in Cash 1,572,857,752 1,315,473,434 34,108,472 173,230,000 24,830,193 24,114,1 Fund Balance with Treasury, Beginning 2,358,547,000 2,295,198,340 21,843,188 20,000,000 7,370,311 13,453,3 Fund Balance with Treasury, Ending $ 3,931,404,752 $ 3,610,671,774 $ 55,951,660 $ 193,230,000 $ 32,200,504 $ 37,567,4

 The footnotes are an integral part of these financial statements

Millennium Challenge Corporation

Page 38 of 48 
Statements of Budgetary Resources

For the Year Ended September 30, 2006 With Summary Totals for 2005

2006 Total Compacts

Pre-Compact 

Funding Threshold

Evaluation and 

Support Administrative 

Budgetary Resources:

 Budget Authority: Appropriations 1,770,000,000 1,364,702,655 39,895,345 248,230,000 40,000,000 75,000,000 

 Net Transfer, Current Year Authority Unobligated Balance - Beginning of Period 2,053,722,184 1,972,926,264 15,544,354 65,251,566 

 Unobligated Balance - Transferred Spending Authority from Offsetting Collections - Advances Received - Adjustments: Recoveries of Prior Years Obligations - Permanently Not Available (Note 7) (17,700,000) (17,700,000) - - - 

 Total Budgetary Resources $ 3,319,928,919 3,806,022,184 $ 55,439,699 $ $ 313,481,566 $ 40,000,000 $ 75,000,000 

Status of Budgetary Resources:

 Obligations Incurred $ 1,109,535,594 $ 880,536,888 $ 42,849,803 $ 83,230,412 $ 29,635,861 $ 71,110,630 

 Unobligated Balance Available: Apportioned 877,383,424 842,399,600 10,644,896 10,085,419 10,364,139 3,889,370 

 Unobligated Balance Not Available: 1,819,103,166 1,596,992,431 1,945,000 220,165,735 - 

 Total Status of Budgetary Resources $ 3,319,928,919 3,806,022,184 $ 55,439,699 $ $ 313,481,566 $ 40,000,000 $ 75,000,000 

Relationship of Obligations to Outlays:

 Obligated Balance, Net - as of October 1, 2005 $ 384,862,005 $ 322,272,076 $ 6,298,834 $ 34,699,991 $ 7,370,311 $ 13,538,935 

 Obligations Incurred 1,109,535,594 880,536,888 $ $ 42,849,803 $ 83,230,412 $ 29,635,861 $ 71,110,630 

 Recoveries of Prior Years Obligations - Adjustments Obligated Balance, Net - End of Period Accounts Payable (8,881,212) 0 (774,246) 0 (1,670,526) (6,436,440

 Obligations (1,376,397,315) (1,171,279,742) (42,587,517) (112,225,132) (21,566,882) (26,954,705

 Total Outlays $ 109,119,072 $ 31,529,222 $ 5,786,873 $ 5,705,271 $ 13,768,764 $ 51,258,420 

 Outlays: Disbursements 109,119,072 31,529,222 5,786,873 5,705,271 13,768,764 51,258,420 

 Collections / Refunds - 

 Net Outlays $ 109,119,072 $ 31,529,222 $ 5,786,873 $ 5,705,271 $ 13,768,764 $ 51,258,420 

 The footnotes are an integral part of these financial statements

Millennium Challenge Corporation

Page 39 of 48 
NOTES TO FINANCIAL STATEMENTS 

(AS OF SEPTEMBER 30, 2006) 

Note 1—Summary of Significant Accounting Policies 

A. Basis of Presentation 

The accompanying financial statements have been prepared to report the financial position, 

results of operations, cash flows, and budgetary resources for MCC (the Corporation), as required 

by Section 613 of the Millennium Challenge Act of 2003 and the Government Corporation 

Control Act (31 U.S.C. §9106). These financial statements have been prepared from the books 

and records of the Corporation and are presented in accordance with the applicable requirements 

of OMB, the Secretary of the Treasury, and the Government Management and Reform Act of 

1994. 

The Corporation’s accounting policies conform to and are consistent with generally accepted 

accounting principles for the Federal government, as promulgated by OMB and prescribed by the 

Federal Accounting Standards Advisory Board (FASAB). 

The Corporation’s principal financial statements are: 

` Statement of Financial Position; 

` Statement of Operations and Changes in Net Position; 

` Statement of Functional Expenses; 

` Statement of Cash Flows; and 

` Statement of Budgetary Resources. 

MCC has presented comprehensive statements for fiscal year 2006, with summary totals for 2005 

for comparative purposes. These notes are considered an integral part of the financial statements. 

B. Reporting Entity 

The Corporation was formed in January 2004 pursuant to the Millennium Challenge Act of 2003 

(Public Law 108-199). The Corporation’s mission is to provide United States assistance to 

eligible countries for global development. The assistance is intended to provide economic growth 

and the elimination of extreme poverty, strengthen good governance, encourage economic 

freedom, and promote investments in people. 

Page 40 of 48 
C. Budgets and Budgetary Accounting 

The Corporation’s programs and activities are funded through no-year appropriations. Such 

funds are available for obligation without fiscal year limitation and remain available until 

expended. MCC was provided total appropriations of almost $1.8 billion and $1.5 billion in FY 

2006 and FY 2005, respectively. OMB apportions MCC administrative funds on an annual basis 

pursuant to statutory limitations in the appropriations bill. In addition, MCC receives from OMB 

a separate apportionment for due diligence funds, which MCC uses for compact evaluations and 

support, compact programs, 609(g) funds, the Threshold Program, and audit funds. Because of 

the no-year status of MCC appropriations, unobligated administrative, audit and due diligence 

funds (apportioned on annual bases) are not returned to Treasury. MCC’s policy is to transfer 

any unobligated balances as of September 30, for these three categories of funds to compact funds 

at the beginning of the subsequent fiscal year. 

D. Basis of Accounting 

Financial transactions are recorded on accrual and budgetary bases in accordance with pertinent 

Federal accounting and financial reporting requirements. Under the accrual method of 

accounting, financing sources are recognized when used and expenses are recognized when 

incurred, without regard to receipt or payment of cash. Budgetary accounting facilitates the 

Corporation’s compliance with legal constraints and controls over the use of Federal funds. 

The accompanying Statements of Financial Position, Operations and Changes in Net Position, 

Cash Flows, and Functional Expenses have been prepared on the accrual basis. The Statement of 

Budgetary Resources has been prepared in accordance with budgetary accounting rules. The 

Statement of Cash Flows has been prepared to reconcile budgetary to financial (proprietary) 

accounting information. 

E. Fund Balance with Treasury 

The Corporation does not maintain cash in commercial bank accounts. Rather, the Corporation’s 

funds are maintained in Treasury accounts. The Department of the Treasury processes all cash 

receipts and disbursements for the Corporation. The Fund Balances with Treasury represent noyear funds, which are maintained in appropriated funds that are available to pay current and 

future commitments. 

F. Advances to Others 

The Corporation advances funds in response to compact countries and Federal agency drawdown 

requests in order to implement compact projects in an MCA country or inter-agency agreements. 

Funds advanced to compact countries are used to pay legitimate costs and expenses incurred per 

the formal compacts entered into by MCC and the countries. 

Page 41 of 48 
G. Property and Equipment 

The Corporation’s accounting policies require that property and equipment with original cost of 

$25,000 or more and an estimated useful life of two or more years to be capitalized. Such assets 

include leasehold improvements, telephone equipment, computer systems equipment, copiers, 

computer software, furniture, and assets under capital leases. The assets are to be depreciated (or 

amortized) over their estimated useful lives. 

H. Compacts and Pre-Compact (609(g))Funding Payable 

Compact funding, including 609(g) funds, are made to eligible countries with approved Compact 

or pre-Compact funding agreements. Upon formally entering into a compact with a country, the 

Corporation records a commitment of funds (i.e., administrative reservation) in its financial 

records for the total value of the compact. Once a compact enters into force, the value of the 

compact is obligated on MCC’s financial books (and the related commitment reduced/liquidated). 

At the end of the fiscal year, the Corporation records the total estimated amount of compact 

expenses incurred for work performed but not paid as liquidations of the advances. The estimated 

amount of such expenses at September 30, 2006 and September 30, 2005, were $1.956 million 

and $0, respectively. 

I. Accounts Payable 

The Corporation records as liabilities all amounts to others as a direct result of transactions or 

events that have occurred. Accounts payable represent amounts due to both Federal and nonfederal entities for goods and services received by the Corporation, but not paid at the end of the 

fiscal year. 

J. Actuarial FECA Liability 

The Federal Employees’ Compensation Act (FECA) provides income and medical cost protection 

to covered Federal civilian employees injured on the job, employees who have incurred a workrelated occupational disease, and beneficiaries of employees whose deaths are attributable to a 

job-related injury or occupational disease. 

Claims incurred for benefits for Corporation employees under FECA are administered by the 

Department of Labor (DOL) and later billed to the Corporation. The Corporation’s actuarial 

liability for workers’ compensation includes any costs incurred but unbilled as of year-end, as 

calculated by DOL, and is not funded by current appropriations. 

The Corporation incurred no FECA liabilities during fiscal years 2006 and 2005. 

Page 42 of 48 
K. Other Liabilities 

Other liabilities include amounts owed, but not paid, at the end of the fiscal year for employee 

payroll and benefits and Federal Employees’ Compensation Act charges (see Exhibit 13). 

L. Accrued Annual Leave 

The value of employees’ unused annual leave at the end of the fiscal year is accrued as a liability. 

At the end of each fiscal year, the balance in the accrued annual leave account is adjusted to 

reflect current year pay rates and leave balances. Annual leave is funded from current 

appropriations. Sick leave and other types of non-vested leave are expensed when used and, in 

accordance with Federal requirements, no accruals are recorded for unused leave. 

M. Net Position 

Net position is composed of unexpended appropriations and cumulative results of operations. 

Unexpended appropriations are funds appropriated by the Congress to the Corporation that are 

still available for expenditure at the end of the fiscal year. Cumulative results of operations 

represent the net differences between financing sources and expenses from the Corporation 

inception. 

N. Financing Sources 

Per note 1.C, the Corporation funds its program and operating expenses through no-year 

appropriations. Appropriations are recognized as an accrual-based financing source at the time 

they are used to pay program or administrative expenses, except for expenses to be funded by 

future appropriations. 

O. Retirement Benefits 

The Corporation’s employees participate in either the Civil Service Retirement System (CSRS) or 

the Federal Employees Retirement System (FERS). FERS was established by Public Law 99-

335. Pursuant to this law, most employees hired after December 31, 1983 are covered by FERS 

and Social Security. Employees hired prior to January 1, 1984, were allowed to elect whether 

they desired to participate in FERS (with Social Security coverage) or remain in CSRS. 

For employees covered by CSRS, the Corporation contributes seven percent of their gross pay 

towards their retirement benefits. For those employees covered by FERS, the Corporation 

contributes 11 percent of their gross pay towards retirement. Employees are also allowed to 

participate in the Federal Thrift Savings Plan (TSP). For employees under FERS, the Corporation 

contributes an automatic one percent of basic pay to TSP and matches employee contributions up 

to an additional four percent of pay, for a maximum Corporation contribution amounting to five 

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percent of pay. Employees under CSRS may participate in the TSP, but will not receive either 

the Corporation’s automatic or matching contributions. 

During FY 2006, the Corporation made retirement contributions of $761,000 to CSRS; $1.977 

million to FERS; and $620,700 to TSP. In FY 2005 the Corporation made contributions of 

$30,000 to CSRS, $876,000 to FERS and $226,000 to TSP. 

P. Use of Estimates 

The preparation of financial statements requires management to make estimates and assumptions 

that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and 

liabilities at the date of the financial statements, and the reported amounts of financing sources 

and expenses during the reporting period. Actual results could differ from such estimates. 

Q. Contingencies 

The Corporation can be a party to various routine administrative proceedings, legal actions, and 

claims brought by or against it, including threatened or pending litigation involving labor 

relations claims, some of which may ultimately result in settlements or decisions against the 

Corporation. In the opinion of the Corporation’s management and legal counsel, there are no 

proceedings, actions or claims outstanding or threatened, which would materially impact the 

Corporation’s financial statements. 

R. Judgment Fund 

Certain legal matters to which the Corporation can be named as a party may be administered and, 

in some instances, litigated and paid by other Federal agencies. In general, amounts paid in 

excess of $2,500 for Federal Tort Claims Act settlements or awards pertaining to these litigations 

are funded from a special appropriation administered by the Department of Treasury, called the 

Judgment Fund. Although the ultimate disposition of any potential Judgment Fund proceedings 

cannot be determined, management does not expect any liability or expense that might ensue 

would be material to the Corporation’s financial statements. 

S. Custodial Receivables and Liabilities 

Under current policy and procedures, the Corporation funds all Compacts with other countries by 

advancing funds to cover projected needs, generally for a forthcoming three-month period. Such 

funds provided to the countries are required to be deposited in interest-bearing accounts, if legally 

feasible, until disbursed. The interest earned on these accounts is remitted to the Corporation and 

deposited into an account at the U.S. Treasury. Such interest may not be retained or used by the 

Corporation, but periodically is returned to the Treasury’s general funds. As of September 30, 

2006, receivables for amounts of interest to be remitted by the countries and the related liabilities 

are not reflected in these financial statements. As of September 30, 2006, the Corporation had 

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outstanding advances related to compact financing of approximately $16.6 million. During FY 

2006 the Corporation received and deposited $304,000 in interest remittances. At the end of FY 

2006, approximately $174,000 of interest earned on compact advances to the MCAs was due to 

be remitted to MCC. At the end of FY 2005, the Corporation had advances of $1.8 million and 

received interest remittances of approximately $17,000 during the year. 

Note 2—Fund Balance with Treasury 

The U.S. Treasury accounts for all U.S. Government funds on an overall consolidated basis. The 

Fund Balance with Treasury line items on the Statements of Financial Position for FY 2006 and 

FY 2005 consisted of amounts presented in the following table. 

Fund Balances with Treasury 

(in thousands) 

Appropriated 

Funds 2006 2005 

Unobligated $ 2,546,127 $ 1,973,685 

Obligated 1,385,278 384,862 

Total $ 3,931,405 $ 2,358,547 

Note 3—Advances/Accounts Receivable 

Advances reflect amounts provided to MCA compact countries and other Federal agencies, in 

accordance with formal compacts or inter-agency agreements, respectively. Accounts receivable 

reflect overpayments of payroll and travel expenses to current employees of the Corporation. As 

such, no allowance for doubtful accounts is necessary. As of September 30, 2006, the 

Corporation reported $18.9 million in advances and receivables, of which $18.8 million related to 

advances for compact implementation and approximately $62,000 for receivables. 

Note 4—Fixed Assets 

The Corporation’s fixed (capital) assets are predominantly comprised of leasehold improvements 

related to the MCC headquarters offices located in Washington, DC. As of September 30, 2006, 

the Corporation reported $5.1 million of which $4.8 million represented leasehold improvements 

and $280,000 represented capitalized equipment. At the end of the fiscal year, $483,000 of 

amortization and depreciation had been recorded for the two categories of assets. 

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Note 5—Other Liabilities 

The Corporation is liable for amounts owed to other parties, including employees and other 

Federal groups. The following table presents the amounts of such liabilities as of September 30, 

2006 and 2005. 

Other Liabilities 

(in dollars) 

Type 2006 2005 

Evaluation and Support $ (461,744)* $ 997,921 

Travel 300,000 747,143 

Office of the Inspector General 0 450,809 

Miscellaneous 1,566,695 326,935 

Payroll 1,111,865 0 

Total $ 2,516,786 $ 2,522,808 

* This amount represents the difference in funds drawn from MCC’s accounts by other Federal parties per 

inter-agency agreements (through the Department of the Treasury’s Intra-governmental Payment and 

Collection System (IPAC)) and the liability amounts recorded by MCC. In short, as of September 30, 2006, 

other Federal entities had drawn approximately $1.401 million from MCC’s accounts with Treasury. MCC 

had recorded liabilities of $.939 million for the pertinent charges—$.462 million less than the amounts 

“drawn” by the entities. At the end of the fiscal year, MCC and its financial services provider (the 

Department of Interior’s National Business Center) were researching the differences and reconciling 

supporting records. 

Note 6—Net Position 

The reported net position consists of unexpended appropriations and cumulative results of 

operations, which reflects the difference between financing sources and expenses since the 

Corporation’s inception. 

The following table presents total obligated and unobligated compact and 609(g) funds as of 

September 30, 2006 and 2005. 

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Total Obligated and Unobligated Compact and 609(g) Funds (in dollars) 

2006 Compacts 609(g) Funding 2005 

Obligations 

Armenia $ 235,646,174 $ 235,150,000 $ 496,174 

Benin 1,062,985 1,062,985 

Cape Verde 106,077,520 106,014,782 62,738 $ 84,617 

Georgia 296,178,084 292,802,057 3,376,027 4,111,000 

Ghana 13,584,891 13,584,891 48,688 

Honduras 213,166,147 213,166,147 215,000,000 

Lesotho 902,934 902,934 600,000 

Madagascar 103,290,130 101,990,130 1,300,000 110,378,000 

Mali 4,421,534 4,421,534 

Mozambique 12,956,078 12,956,078 

Nicaragua 173,583,320 173,529,975 53,345 

Senegal 4,882,237 4,882,237 

Vanuatu 65,214,603 65,214,603 

Total Obligations $1,230,966,637 $ 1,187,867,694 $ 43,098,943 $330,222,305 

Commitments 

Benin $ 305,781,626 $ 305,761,550 $ 20,076 

Cape Verde – $110,078,488 

Georgia – 295,300,000 

Ghana 536,638,050 536,638,050 2,870,502 

Mali 4,606,861 4,606,861 

Mozambique – 6,000,000 

Nicaragua – 175,000,000 

Senegal 425,658 425,658 6,528,299 

Total Commitments $ 847,452,195 $ 842,399,600 $ 5,052,595 $595,777,289 

Note 7—Permanent Rescission 

In FY 2006 and FY 2005, respectively, $17.7 million and $ 12 million of amounts previously 

appropriated under the FY 2006 and FY 2005 Foreign Operations, Export Financing, and Related 

Programs Appropriations Acts (Public Law 109-148 and Public Law 108-447, respectively), were 

rescinded. The rescissions were part of the Across-the-Board Rescissions enacted for FY 2006 

and FY 2005, respectively. 

Note 8—Inter-Agency Agreements 

MCC is party to various inter-agency agreements (IAA) with other Federal agencies for services 

to be provided by those entities. Such services include financial, travel management and other 

administrative functions; technical and engineering services, personnel background records 

checks; and information technology services. During FY 2006, MCC executed 20 IAAs with 

other Federal agencies totaling almost $9.1 million. At the end of the year, approximately $6.8 

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million remained available for paying future services to be provided under the subject IAAs. The 

following table provides a summary of the IAAs by Federal entity. 

Fiscal Year 2006 Inter-agency Agreements 

Agency 

Number of 

IAAs Dollar Value 

Remaining Funds – 

End of FY 

NBC, Dept. of Interior 6 $ 1,216,313 $ 0 

State Dept. 4 437,668 242,160 

U.S. Agency for International 

Development 

1 140,000 140,000 

Dept. of Agriculture 1 228,478 44,820 

U.S. Army Corps of Engineers 3 5,441,379 5,004,390 

Dept. of Transportation 1 109,083 83,794 

Dept. of Health and Human Services 1 1,500,000 1,241,422 

Dept. of Labor 1 2,912 0 

Government Printing Office 1 3,000 3,000 

Office of Personnel Management 1 5,000 220 

Total 20 $ 9,083,833 $6,759,806 

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