MILLENNIUM CHALLENGE CORPORATION

2005 ANNUAL REPORT

REDUCING POVERTY THROUGH GROWTH

ALBANIA • ARMENIA • BENIN • BOLIVIA • BURKINA FASO • CAPE VERDE • EAST TIMOR• GEORGIA

GHANA • GUYANA • HONDURAS • KENYA • LESOTHO • MADAGASCAR • MALAWI • MALI

M O N G O L I A • M O R O C C O • M O Z A M B I Q U E • N I CA R AG U A • PA R AG U AY • P H I L I P P I N E S

SAO TOME AND PRINCIPE • SENEGAL • SRI LANKA • TANZANIA • UGANDA • VANUATU • YEMEN • ZAMBIA
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MESSAGE FROM THE CHAIR OF THE BOARD

MCC BOARD OF DIRECTORS

MESSAGE FROM THE CHIEF EXECUTIVE OFFICER

MCC INVOLVEMENT AROUND THE WORLD

MISSION & ACTIONS

YEAR IN REVIEW

FIVE COMPACTS

CAPE VERDE: AN EXAMPLE OF HOW A SUCCESSFUL 

COMPACT DEVELOPMENT PROCESS WORKS

KEY MCC STAFF

FINANCIAL AUDIT AND MANAGEMENT’S COMMENTS

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TABLE OF CONTENTS

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MESSAGE FROM

THE CHAIR OF THE BOARD

A MESSAGE FROM SECRETARY OF STATE CONDOLEEZZA RICE

CHAIR OF THE BOARD, MILLENNIUM CHALLENGE CORPORATION

 In the two short years since Congress acted on President Bush’s vision to authorize the 

Millennium Challenge Account, I have watched the development of the Millennium Challenge Corporation 

(MCC) with great pride. The MCC is spurring economic and democratic reforms in some of the poorest 

areas in the world. Compact partners range from Africa (Benin, Cape Verde, Madagascar) and Latin 

America (Honduras, Nicaragua) to Eurasia (Armenia, Georgia) and the Pacific (Vanuatu). The MCC is 

changing how the world thinks about foreign aid by proving that development assistance is most effective 

when given to those countries that are already governing well.

 In the last year, the MCC has approved its first eight Compacts with partner countries and, under 

the effective leadership of CEO John Danilovich, is paving the way for many more. Compact projects are 

intended to be transformative—to help countries lift large numbers of their people out of poverty forever. 

In Benin, for example, the Compact aims to reduce delays and increase the volume of imports and 

exports through the main port, establish an arbitration center to resolve business disputes, expand 

access to financial services, and reduce the time and cost to obtain a land title. Benin and other Compact 

countries have said that the process of designing their own Compacts, which includes consultations with 

civic leaders and non-governmental organizations, changed how they approached their development.

The direct benefits from individual compacts are far from the only positive influence MCC is having. 

For example, according to the World Bank’s Doing Business team, which tracks business environment 

reform across the world, 80 percent of the business start-up reforms they track are directly linked to the 

incentive effect of MCC. Since the MCC uses clear, independent, objective criteria that focus on good 

governance and economic freedom to determine a country’s eligibility for a Compact, countries now 

regularly come to us ready to explain how they are committed to democracy and open markets; how they 

are fighting corruption; how they are investing in the health and education of their people; and why they 

therefore deserve the support of MCC and its financial resources. To date, 24 countries have specifically 

cited MCC as the primary motivation for their reform efforts. “The MCC Effect” is encouraging poor 

nations throughout the world to do a better job for their own citizens. 

 I want to thank the Congress and the Administration agencies for the support and guidance that 

they have provided to this important initiative. Every day, MCC showcases the true spirit of America’s 

compassion and commitment to partner with people around the world to give them hope for a better life. 

We look forward to continuing to improve the world for its poorest citizens in 2006.

Condoleezza Rice

Chair, MCC Board of Directors
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BOARD OF DIRECTORS

Chair

Condoleezza Rice

Secretary of State

Vice-Chair 

John W. Snow

Secretary of Treasury

Rob Portman

United States Trade 

Representative 

Fred Schieck Christine Todd Whitman

Acting USAID Administrator

John J. Danilovich

MCC Chief Executive Officer

Kenneth Hackett
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A MESSAGE FROM THE CEO, AMBASSADOR JOHN DANILOVICH

 Nearly six months ago, I assumed the role of Chief Executive Officer (CEO) of the 

Millennium Challenge Corporation (MCC). My primary focus during these first few months has been to 

streamline the process from Compact approval to implementation and guide MCC toward reaching its 

organizational capacity as efficiently and effectively as possible. MCC is well on the way to achieving both 

goals and I plan to build on that progress in the coming year. I have also made it a top priority to reach out 

and share ideas with members of Congress and the leadership of our fellow agencies, non-governmental 

organizations and other thought leaders in the foreign assistance field, all of whom we will need to work 

closely with to fulfill President Bush’s vision for MCC. 

 Since April of last year, MCC has signed Compacts totaling over $1.5 billion with eight partner 

countries: Madagascar, Cape Verde, Georgia, Nicaragua, Honduras, Armenia, Benin and Vanuatu. We have 

also approved Threshold Program agreements worth approximately $100 million for five countries: Burkina 

Faso, Malawi, Tanzania, Paraguay and Albania. By the end of 2006, MCC plans to finalize at least three 

more Compacts totaling an estimated $1.1 billion in additional grants. Importantly, over the past year 

we have utilized our early experiences to improve our guidance to Millennium Challenge Account (MCA)—

eligible countries and have improved the Compact development process so that we can finalize 

Compacts—and begin making MCA disbursements -- much earlier than we experienced with our first 

few Compacts. This will speed up the Compact implementation process and allow us to see 

transformative results sooner.

 We have in recent months reorganized several departments to allow us to perform due diligence 

and finalize Compacts more efficiently and perform our oversight role during the implementation phase 

more effectively. This reorganization will also allow us to fill critical needs with new staff, which will 

reach its authorized level of 300 in 2006. We have also further developed and strengthened our internal 

financial controls to ensure we are good stewards of taxpayer dollars.

 As an organization, MCC is still young, but we now have the foundation in place to achieve the kind 

of results President Bush envisioned when he announced the idea for the Millennium Challenge Account 

at the Monterrey Conference in 2002 and when MCC was established in 2004. We will make even more 

progress in the years ahead as MCA-eligible countries implement their Compacts, and even more 

countries become eligible for MCA assistance.

MESSAGE FROM

THE CHIEF EXECUTIVE OFFICER 

John J. Danilovich

Chief Executive Officer
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Zam

Senegal

Sao Tome & Principe

Paraguay

Nicaragua

Morocco

Mali

Honduras Guyana

Ghana

Cape Verde

Bolivia

B

MCC INVOLVEMENT 

AROUND THE WORLD

Threshold Countries

Compact or Compact 

Eligible Countries
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bia

Vanuatu

Uganda

Tanzania

Sri Lanka 

Philippines

East Timor

Mozambique

Mongolia

Malawi

Madagascar

Lesotho

Kenya

Georgia Albania

Benin

Burkina Faso 

Armenia

Yemen
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MISSION & ACTIONS

MISSION STATEMENT:

MCC’s mission is to reduce poverty by supporting sustainable, transformative economic 

growth in developing countries which create and maintain sound policy environments.

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Reward Good Policy

Using objective indicators, countries are selected to receive assistance 

based on their performance in governing justly, investing in their citizens, 

and encouraging economic freedom.

Operate in Partnership

Countries that receive MCA assistance are responsible for identifying the 

greatest barriers to their own development, ensuring civil society participation, and developing a multi-year MCC compact.

Focus on Results

MCA assistance goes to those countries that have developed well-designed 

programs with clear objectives, benchmarks to measure expected results, 

procedures to ensure fiscal accountability for the use of MCA assistance, 

and a plan for effective monitoring and objective evaluation of results. Programs are designed so that recipient countries can sustain progress after 

the funding under the Compact has ended.

The Three Essential Elements of MCC Activity
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MCC’s HISTORY

President Bush proposes the creation of the Millennium Challenge

Account, calling for a “new compact for global development,” to link 

greater contributions from developed nations to greater responsibility 

from developing nations.

Congress formally creates the MCA and establishes MCC. With bipartisan support, Congress provides $1 billion in initial funding for FY 

2004.

MCC’s Board of Directors holds first meeting. The Board adopts 

Corporation’s by-laws, announces the initial 63 Candidate Countries, 

and names an interim CEO, Under Secretary of State Alan Larson.

At the earliest possible date, MCC submits criteria and methodology 

for selecting eligible countries for FY 2004.

Paul V. Applegarth confirmed as MCC’s first CEO.

After the 90 day notification period expires, MCC’s Board of Directors 

selects 16 countries from among the 63 candidate countries to be 

eligible to submit proposals for FY 2004 MCA assistance.

MCC staff travel to all 16 newly eligible countries to explain what MCA 

eligibility means, to articulate the process of compact development, 

and invite them to submit a proposal.

MCC receives the first compact proposal from Cape Verde, one of 16 

countries chosen to be eligible in 2004.

MCC submits criteria and methodology for selecting eligible countries 

for FY 2005.

MCC’s Board of Directors selects 17 countries to be eligible to submit 

proposals for FY 2005 MCA funds. These included 16 of the countries 

who were eligible to apply for FY 2004 funds, as well as one new addition.

Congress passes the Foreign Operations Appropriations bill including 

$1.488 billion for MCA funding for FY 2005.

2002

2004

03.14.02

01.23.04

02.02.04

02.27.04

05.05.04

05.06.04

06.04

08.10.04

08.26.04

11.08.04

12.08.04
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Mission & Actions

The President submits his budget for FY 2006 funding including a 

request of $3 billion for MCA.

MCC announces plans to establish a working group to look into the 

possibility of establishing a Natural Resources Management Indicator. 

The group is chaired by MCC Board member and former EPA Administrator, former Governor Christine Todd Whitman.

MCC Board of Directors approves a four-year $110 million Compact 

with Madagascar as the first Millennium Challenge Compact country. 

MCC signs four-year Compact with Madagascar.

MCC Board of Directors approves a five-year $215 million Compact 

with Honduras. 

MCC signs five-year Compact with Honduras.

MCC Board of Directors approves two Millennium Challenge Compacts—a five-year $110 million with Cape Verde and a five-year $175 

million with Nicaragua. 

MCC signs five-year Compact with Cape Verde.

MCC Board of Directors approves the first Threshold Country Program 

with Burkina Faso to improve girls’ primary education completion rates. 

MCC signs five-year Compact with Nicaragua.

MCC makes its first disbursement of MCA funds to Madagascar, totaling $2.5 million.

Charles O. Sethness named interim CEO, pending nomination and 

confirmation of new CEO.

MCC Board of Directors approves a five-year $295.3 million Compact 

with Georgia.

MCC announces the criteria and methodology for selecting eligible 

countries for MCA assistance in fiscal year 2006. 

MCC signs five-year Compact with Georgia.

MCC signs the second Threshold Country Program with Malawi for 

$20.9 million to reduce corruption and to improve fiscal management.

200502.07.05

02.28.05

03.14.05

04.18.05

05.20.05

06.13.05

07.04.05

07.08.05

07.14.05

08.01.05

08.08.05

08.16.05

09.08.05

09.12.05

09.23.05
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YEAR IN REVIEW

At the beginning of Fiscal Year 2005, the Millennium Challenge Corporation (MCC) had 

been in existence for less than one year. MCC had 49 permanent employees, most of 

whom were responsible for multiple jobs. MCC had not yet entered into any Compacts or 

Threshold Programs. MCC was a “start-up” in every sense of the word. 

MCC moved quickly to hire and train staff to negotiate with partner countries, ensure 

fiscal responsibility, and to improve our ability to efficiently monitor program results. 

As FY 2005 concluded, MCC began a major reorganization and today, is moving to fully 

staff the agency by the end of the current year, increasing to the authorized level of 

300 from the current staffing level of 175.

Each of the seven operating units of MCC made significant strides in the past year. 

The Department of Operations staff that is responsible for leading the Compact 

development and overseeing the implementation more than doubled staffing levels, and 

improved coordination with government agencies and private stakeholders. The Office of 

Administration and Finance and the Accountability Department built stronger and more 

extensive internal and external controls and updated guidelines for economic analysis 

monitoring and evaluation of Compacts, while the Office of General Counsel played a 

critical role in the preparation, negotiation, and signing of the five Compacts in FY 2005. 

The Department of Policy and International Relations and the Department of Congressional

and Public Affairs supported Compact development, worked closely with donors who 

already work in partner countries, and developed critical legislative and media relationships.

Country Selection 

During this reporting period, MCC carried out its second cycle of selecting countries 

eligible to apply for Compact and Threshold Program assistance for Fiscal Year 2005 from 

November 2004 through September 2005. The Millennium Challenge Act of 2003, 22 

U.S.C.A. 7701, 7707(b) (the “Act”) requires MCC to take a number of steps in determining the countries that, based on their demonstrated commitment to just and democratic 

governance, economic freedom and investing in their people, will be eligible for MCA 

assistance during the fiscal year. Reports submitted to Congress at each of these stages 

were made publicly available on MCC’s website. 
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Selection of Candidate Countries: 

In accordance with the Act, MCC submitted its Report to Congress on July 20, 2004, 

indicating the countries that were “candidate countries” for MCA assistance during FY05 

based on their per capita income levels and their eligibility to receive assistance under 

U.S. law. This Report identified 70 low income candidates that had a per capita income 

equal to or less than $1,465, the International Development Association’s historical 

ceiling for FY05.

Criteria and Methodology for Selection:

In accordance with the Act, MCC submitted its Report to Congress on August 26, 2004 

indicating the criteria and methodology that MCC’s Board of Directors would later use 

to measure and evaluate the relative policy performance of the candidate countries 

consistent with the requirements of Section 607 of the Act in order to select “eligible 

countries” from among the “candidate countries” (Section 608(b) of the Act). The report 

also highlighted its interest in identifying potential refinements to measures of inflation, 

management of natural resources, trade policy, entrepreneurial environment, and other 

measures of investments of people, particularly with respect to women and girls. 

As a general matter, MCC continually reviews the indicators it uses to ensure they are 

the best possible measures of country performance on the MCA criteria, consulting with 

experts across the U.S. Government, the development community, donors, academia, and 

elsewhere. For FY05, MCC made one change to the indicators, substituting “Girls’ Primary 

Education Completion Rates” for “Primary Completion Rates.” Using completion rates 

disaggregated by gender both continues MCC’s focus on the importance of countries 

investing in the education of their people and highlights the importance of the well-being 

of women and girls as contributors to a country’s economic growth and poverty reduction. 
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The indicators used for FY05 were:

 Ruling Justly: Encouraging Economic Freedom: Investing in People:

1. Civil Liberties 

Source: Freedom House

2. Political Rights 

Source: Freedom House

3. Voice and Accountability 

Source: World Bank Institute

4. Government 

Effectiveness 

Source: World Bank Institute

5. Rule of Law 

Source: World Bank Institute

6. Control of Corruption 

Source: World Bank Institute

1. Country Credit Rating

Source: Institutional Investor 

Magazine

2. 1-year Consumer Price 

Inflation 

Source: Multiple

3. Fiscal Policy 

Source: National Governments 

and IMF WEO

4. Trade Policy 

Source: The Heritage 

Foundation’s Index of 

Economic Freedom

5. Regulatory Quality 

Source: World Bank Institute

6. Days to Start a 

Business 

Source: World Bank Group

1. Public Expenditures 

on Health as Percent 

of GDP 

Source: National Governments

2. Immunization Rates: 

DPT3 and Measles 

Source: World Health 

Organizations

3. Public Primary 

Education Spending as 

Percent of GDP 

Source: National Governments

4. Girls Primary Education 

Completion Rate 

Source: World Bank and 

UNESCO

Following submission of the Report to Congress and its publication on MCC’s website 

and in the Federal Register, MCC held a 30 day public comment period, hosted a public 

meeting to discuss the selection criteria and hosted a session for Ambassadors and 

Finance Ministers from candidate countries to discuss the selection criteria and process. 

MCC published all candidate country performance rankings sheets on the web. 

MCC staff met with many countries to discuss individual country performance against 

the indicators and highlight areas where reforms could increase future chances of 

qualifying for MCA funds. 
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Natural Resources Management Indicator

In its authorizing legislation, MCC is directed to use objective and quantifiable indicators 

to evaluate a country’s demonstrated commitment to, among other things, economic 

policies that promote the sustainable management of natural resources. MCC was unable 

to identify a single existing indicator or index that met both the Congressional mandate 

and our general criteria for an indicator. In lieu of a single indicator or index, for FY04 and 

FY05, MCC provided the Board with supplemental quantitative and qualitative information 

about countries’ performances for consideration during the annual selection process. 

To seek broad input on such an indicator from experts and key stakeholders in the 

development community, MCC launched a public process in 2005. MCC staff spent the 

following months conducting broad consultations with experts and interested groups and 

catalogued and reviewed over 135 potential natural resource indicators available. 

In June 2005, MCC provided support to The Brookings Institution to host a conference 

bringing together the country’s top experts and policy makers in natural resource 

management and environmental economic indicators to review available indicators 

and announce MCC’s formal “call for ideas” to seek suggestions for an indicator. MCC 

assembled a group of economists and experts in natural resources management to help 

us individually rate the ideas. Seven ideas for indicators were submitted to the experts 

in August 2005, and the rest were under review through the end of FY05.

Eligible Country Selection

The final stage in the selection cycle was the Board’s selection of “eligible countries” 

for FY05, and MCC submitted this list in its Report to Congress on November 12, 2004 

(Section 608(d) of the Act). The Fiscal Year 2004 (FY04) selection was conducted in May 

2004, the earliest possible date for that fiscal year; therefore, the FY05 selection was 

conducted just seven months later. In light of this, for FY05, the 16 countries selected as 

eligible for FY04 were re-endorsed by the Board as eligible and one new country, Morocco, 

a new candidate, was selected as eligible for FY05. Additionally, for the first time, 

in FY05, the Board selected countries in FY05 as eligible for the Threshold Program at the 

same time as selecting countries as eligible for Compact assistance. The Board selected 

countries that they determined did not satisfy the selection criteria but were close and 

demonstrated a commitment to reforming policies on which they failed the indicator tests.
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Program Operations

In fiscal year 2005, MCC completed and signed Compacts with five partner countries: 

Madagascar, Honduras, Cape Verde, Nicaragua, and Georgia, committing over $900 

million to help these nations reduce poverty through sustainable economic growth. 

MCC successfully worked with 12 additional countries as they developed their Compacts. 

The word “Compact” means agreement or commitment, and an MCC Compact is just that, 

mutual promises between the U.S. Government and a partner country. The U.S. 

Government promises to fully fund the Compact and to provide assistance necessary to 

develop, implement, and monitor the Compact. A partner country promises to implement 

the program according to certain performance benchmarks and policy reforms throughout 

the life of the Compact. In order to demonstrate that the United States is committed 

to funding the entire four-or five-year Compact, and to providing the needed certainty for 

complex, multi-year programs, we obligate all of the Compact money up front.

Compact Development Process Implementation

FY04 and FY05 Eligible Countries

Madagascar

Honduras

Cape Verde

Nicaragua

Georgia

Vanuatu

Armenia

Benin

Mali

Sri Lanka

Mongolia

Ghana

Lesotho

Mozambique

Senegal

Morocco

Bolivia

Proposal

Receipt

Opportunity

Memo Due Diligence Notify

Congress

Investment

Memo

Board

Approval

Compact

Signing

Entry into

Force

Disburse, Invest, 

Monitor/Evaluate

FY05 Progress

Program Dev 

Funding Agreed 
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Staff from the Departments of Operations and Accountability and the Office of General 

Counsel work together on country-specific transaction teams to assist the countries in 

the Compact development and implementation processes, to provide technical leadership, 

to conduct due diligence, to negotiate Compacts and to maintain effective communication 

with partner countries. During FY 2005, these teams significantly increased their staffing 

levels, principally in the professional ranks. In FY 2006, the Operations and Accountability Departments and the Office of General Counsel will build their respective teams with 

professionals who are dedicated solely or primarily to Compact development and oversight 

activities. At the end of calendar year 2005, MCC Resident Country Directors were in 

place in Honduras, Nicaragua, Cape Verde and Madagascar.

MCC has achieved significant progress working with other U.S. government agencies and 

private sector consultants and firms, including the Agency for International Development, 

the U.S Trade Representative, the Census Bureau the Army Corps of Engineers and the 

Departments of the Treasury, State, Transportation, Interior, and Agriculture both in 

Washington and at U.S. missions overseas. Also in FY 2005, MCC developed and refined 

policies and procedures to provide better guidance for newly eligible countries.

Many important lessons learned in FY 2005 have been incorporated into the operating 

model to improve the process. For example, MCC is investing more time and resources up 

front to help eligible countries develop successful Compact proposals and put in place the 

necessary project management, financial management, and procurement capacity.

Threshold Program

Through its Threshold Program, MCC is helping countries meet the governance, 

economic management, and social investment criteria for Millennium Challenge Account 

(MCA) eligibility. The Threshold Program is designed to assist countries that are close to 

qualifying, but do not qualify for MCA Compact funding. At the time of their designation 

as a Threshold country, these countries demonstrated a significant commitment to 

improve their performance on the eligibility criteria. The Board of Directors selects 

countries as qualified for Threshold Program assistance based on their performance 

on the policy indicators tracked by MCC and their ability and political will to undertake 

reform. Threshold Program assistance is then used to help selected countries address 

the specific policy weaknesses indicated by their scores on the policy indicators. 

In November 2004, the Board invited six new countries to participate in the FY05 Threshold

Program: Burkina Faso, Guyana, Malawi, Paraguay, the Philippines, and Zambia. Each 

country submitted a Concept Paper by the March 15, 2005 deadline. These new countries 

joined East Timor, Kenya, Sao Tome and Principe, Tanzania, Uganda, and Yemen, which 

were initially selected in FY04 and were reselected to participate in the Threshold Program

in FY05. Of these 12 countries, all were actively involved in the Program and worked 

diligently to revise concept papers as needed or to complete a Threshold Country Plan.
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MCC’s Board of Directors approved Burkina Faso and Malawi’s Threshold Country Plans 

in FY05. Burkina Faso’s Threshold program is focused on increasing girls’ primary school 

enrollment and attendance rates in the 10 lowest performing provinces in the country. 

The $12.9 million program provides for the construction of 132 schools as well as 

other interventions designed to improve the access and quality of education for girls 

within these 10 provinces. Malawi’s $20.9 million Threshold program is focused on 

its performance on the Control of Corruption indicator with crosscutting impact on the 

Fiscal Policy indicator. The program is designed to strengthen the legislative and judicial 

branches, provide support for lead anti-corruption agencies, strengthen independent 

media coverage, and expand and intensify the work of civil society organizations.

Performance Metrics

During the course of FY05, MCC made major strides in developing the capacities, 

methodologies, approaches, and organization necessary for the establishment of 

the baselines, benchmarks, and targets, design of impact evaluations and reporting 

requirements that are all involved in the development of Compacts in our eligible 

countries. MCC also focused on the significant responsibilities involved in the execution 

and monitoring of Compact implementation. 

For the five Compacts signed during FY05 as well as the pipeline of pending Compacts, 

the MCC transaction teams and MCC’s country counterparts worked to assess the 

capacity of government systems to handle procurement and financial management 

responsibilities and to evaluate alternatives when third party actors were deemed necessary to reduce risk to acceptable levels. MCC also assessed the environmental and 

social impacts of the proposed programs, developed approaches to and participated 

in contracting for necessary environmental and social impact studies and mitigation and 

management plans, including public consultation. MCC developed economic analysis 

approaches to ensure that the program logic was explicit and that the quantifiable costs 

and benefits were likely to produce a meaningful reduction in poverty and an attractive 

economic return on the proposed investments. 

MCC also worked with our country counterparts to produce agreed-upon indicators of 

project and program results, derived from the economic and distribution analysis justifying 

the programs, against which to measure success. This work included developing baseline 

levels for success indicators to seek and design opportunities for rigorous impact evaluations working with MCC and eligible country teams to reach agreed targets as triggers 

for disbursements, and documenting all of this in strong Monitoring and Evaluation Plans. 

MCC developed and promulgated formal guidelines for monitoring & evaluation, economic 

analysis, fiscal accountability, procurement and environmental and social impact assessment, and developed templates for periodic reporting for financial activity, implementation 

progress and performance results. In addition to policy and country work in these areas, 

MCC engaged in extensive dialogue and briefings with nongovernmental organizations 

(NGOs), Congressional and oversight entities. 
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MCC’s “Guidance on the Consultative Process” for eligible countries and the related 

integration of “timely, participatory, and meaningful” public consultations in the context 

of MCC’s Compact process ensures that citizens are effectively engaged in the Compact 

development and implementation process. 

MCC invested significant efforts in implementation oversight, including drafting and 

reviewing monitoring and evaluation (M&E) plans, designing and finding baseline surveys, 

evaluating statistical and analytical capacities of local entities, and developing and 

reviewing disbursement agreements to ensure that policy reforms and performance 

targets are met as conditions of funds disbursement. 

The hard and challenging tasks of program implementation for the first Compacts are in 

the early stages, and MCC, recognizing the significance of implementation and results 

against the agreed metrics in the Monitoring and Evaluation Plans, has been actively 

working on being ahead of the emerging needs for planning for procurements and 

disbursements, design of reporting formats and assurance of transparency, data 

quality review standards, assistance to implementing entities on monitoring, financial 

and procurement systems and controls, audits, impact evaluation, and oversight of 

environmental and social impact mitigation measures.

Coordination of U.S. assistance with other donor countries.

In August 2005, MCC issued Policy and Procedures for Donor Coordination both to ensure 

compliance with the Millennium Challenge Act of 2003 and to ensure the most effective 

use of MCA grant funding. Donor coordination is primarily the responsibility of the 

governments of MCA-eligible or Threshold Program countries. MCC staff members consult 

directly with other donors as well to: 

■ provide MCC feedback on country proposals;

■ reduce the cost of programs by avoiding duplication, creating synergies, and 

avoiding approaches that have been unsuccessful in the past; 

■ facilitate co-financing, common or supportive programs, and use of joint 

structures; 

■ helps MCC assess the effectiveness of MCA country governments in 

coordinating donor assistance; 

■ enable the sharing of lessons learned; and 

■ advise other donors of MCC approaches and methods of operation and build 

a base for optimal joint efforts in bringing about development results.
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The Department of Policy and International Relations oversees donor coordination, with 

entities such as the United States Agency for International Development (USAID), other 

U.S.-based donor agencies, and international donor agencies. All MCC program offices, 

however, are responsible for encouraging, carrying out, and documenting the actual conduct of donor coordination. MCC assesses donor coordination at each stage of the MCC 

process from proposal, through due diligence, to the Investment Memorandum, and final 

Compact. 

As a result, the programs of MCA countries are well coordinated with those of other U.S. 

agencies and foreign donors. Many MCA programs build on previous work financed by 

other donors. In Madagascar, for example, the MCA Agricultural Business Investment 

Project scales up USAID’s agricultural and trade program. In Cape Verde, MCC funding will 

help the government implement International Finance Corporation recommendations to 

reduce barriers to small and medium enterprise competitiveness. In other cases, MCC is 

parallel financing a broader program supported by other donors. MCC will be funding the 

final segments of the major Honduran North-South highway, for example, that is otherwise 

funded by the World Bank, the Inter-American Development Bank and the Central American Bank for Economic Integration. MCC also uses existing donor structures to avoid 

duplication, such as in Georgia, where MCC grants for local infrastructure development 

will use the same administrative unit as an existing World Bank loan program. MCC 

investments also act to catalyze other donor investment around Compact programs as 

seen in Nicaragua, Madagascar, and Georgia. MCC resident directors provide oversight to 

ensure that coordination continues in the implementation stage.

Management Challenges Facing MCC

Like all start-ups, MCC’s first two years have been ones of great progress and great 

learning. MCC has learned from its successes and shortcomings during this time of 

tremendous growth to further its capabilities and sophistication as it moves forward, 

particularly under the new leadership of Ambassador Danilovich. MCC is now strengthening internal fiscal and policy controls, executing an aggressive staffing plan, and carrying 

out a much improved budgeting process. Despite this progress, key management 

challenges remain for 2006 and include:

Staffing: MCC will rapidly expand its staff to a maximum of 300 by the end of 2006, 

roughly doubling its size in less than a year. Management has laid out an aggressive 

hiring plan in order to catch up and keep pace with the substantive and organizational 

needs of the Corporation as it continues to bring more countries on line. We expect 

staffing numbers to stabilize by 2007, but expect workload issues—including what 

activities are kept as core competencies within MCC and what activities can be performed 

by outside entities—to be key challenges in out-years. 
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Preparing for Implementation: The focus and urgency of MCC’s work thus far has largely 

been on supporting our partner countries as they develop quality Compacts. To this end, 

MCC succeeded in obtaining Board approval for its first five Compacts by the end of FY 

2005 (a total of eight Compacts valued at more than $1.5 billion had been approved by 

January 2006). While support for Compact development will remain a core competency 

for MCC, the Corporation is preparing and organizing itself for Compact implementation, 

which is likely to be even more challenging. Monitoring, evaluation, quality control, 

fiscal and procurement oversight, and performance assessments are among the range 

of activities that MCC will apply to the numerous projects within the expanding number of 

Compacts coming on line. Even when fully staffed at 300 personnel, MCC will need 

to design methods for implementation of oversight that continue to rely on country ownership (as with Compact development) but maintain high standards of quality with limited 

staff resources. 

Budget shortfalls: Budget appropriations from Congress have so far been sufficient to 

enable MCC to move forward with all countries that have concluded Compacts for approval

and implementation. However, MCC’s accelerated Compact negotiation pace, improved 

operating procedures, and larger Compacts will combine to exhaust its appropriated levels 

sometime in fiscal year 2007, especially if the President’s request for $3 billion is not 

fully funded. Further, new countries eligible for 2007 funding will be selected in November 

2006, adding to the number of countries seeking transformational development through 

MCC. Funding shortfalls could require MCC to delay or deny approval of Compacts with 

MCA countries that have spent months preparing them. In addition, lack of funding would 

adversely impact the incentive, already observable as a trend, for countries to adopt and 

implement good policies to become eligible for MCC funding.
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FIVE

COMPACTS

Madagascar

Honduras

Cape Verde

Nicaragua

Georgia
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Madagascar

“If you take a look at our vision and 

country ownership you will realize 

why the MCA is so important for 

us. Here we have a new approach 

which helps us to implement our 

vision.”

-Marc Ravalomanana

President of Madagascar

Enable better land use.

Expand the financial sector.

Increase investment in farms and other rural businesses.

The key goal of the Compact with Madagascar is to help 

the island nation move from subsistence to a market-driven 

economy, particularly in agricultural production. The four-year, 

$110 million Compact will support a program designed to raise 

incomes in rural areas by providing the rural population with the 

means to increase investment in their land and raise agricultural productivity.

Key Objectives

Date Of Compact Signing

Size of Compact

Population

GNI (Per Capita)

April 18, 2005

$110 million/ 4-year

17,332,328

$300

Key Facts

$37,803

Madagascar $109,773

$15,024

$35,888

$3,375

$17,683

Land Tenure Project

Finance Project

Agricultural Businesss Investment Project

Monitoring and Evaluation

Program Administration and Control

COMPACT DEVELOPMENT PROCESS

Eligibility Notification

Proposal Receipt

Opportunity Memo

Notify Congress

Investment Memo

Board Approval

Compact Signing

Entry into Force

First Disbursement

DATE

May 6, 2004

October 4, 2004

October 7, 2004

October 12, 2004

December 16, 2004

March 14, 2005

April 18, 2005

July 27, 2005

July 27, 2005

a

a

a

a

a

a

a

a

a

Numbers in thousands.
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Honduras

 “[The Compact] will help spur economic growth and reduce poverty 

at a time when our citizens must 

see that democracy delivers more 

than just promises.”

-Ricardo Maduro

President of Honduras

Increase the productivity and business skills of farmers 

who operate small and medium-size farms and their 

employees.

Reduce transportation costs between targeted production 

centers and national, regional, and global markets.

The goal of the Compact with Honduras is to reduce poverty 

by alleviating two key impediments to economic growth: low 

agricultural productivity and high transportation costs. The 

five-year, $215 million Compact will extend growth to the rural 

population by enhancing agricultural development and linking 

the large rural population to markets. The Compact will increase annual income by an estimated $69 million.

Key Objectives

Date Of Compact Signing

Size of Compact

Population

GNI (Per Capita)

June 13, 2005

$215 million/ 5-year

7,141,464

$1,030

Key Facts

Honduras $215,000

$12,122

$125,700

$72,195

$4,983

Rural Development Project

Transportation Project

Monitoring and Evaluation

Program Administration and Control

COMPACT DEVELOPMENT PROCESS

Eligibility Notification

Proposal Receipt

Opportunity Memo

Notify Congress

Investment Memo

Board Approval

Compact Signing

Entry into Force

First Disbursement

DATE

May 6, 2004

August 20, 2004

August 31, 2004

October 12, 2004

April 21, 2005

May 20, 2005

June 13, 2005

September 29, 2005

a

a

a

a

a

a

a

a

Numbers in thousands.
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Cape Verde

“The MCA Program gives credibility 

to good governance, democracy, 

it protects the rights of citizens, 

their freedom, and also economic 

freedom.”

- Jose Maria Pereira Neves

Prime Minister of Cape Verde

Improve water management and soil conservation.

Strengthen agribusiness development services. 

Improve road and bridge infrastructure and upgrade the 

Port of Praia. 

Remove obstacles to private sector investment and enact 

vital reforms across the financial sector.

The MCC Compact with Cape Verde will help it achieve its national development goal of transforming its economy from aiddependency to sustainable, private sector-led growth. The fiveyear, $110 million Compact focuses on increasing incomes of 

the rural poor by increasing agricultural productivity, integrating 

internal markets, reducing transportation costs, and developing 

the private sector through greater private sector investment and 

financial sector reform. 

Key Objectives

Date Of Compact Signing

Size of Compact

Population

GNI (Per Capita)

July 4, 2005

$110 million/ 5-year

475,947

$1,770

Key Facts

$78,760

Cape Verde $110,078

$10,848

$7,200

$4,889

$8,381

Watershed and Agricultural Support

Infrastructure Improvement

Private Sector Development

Monitoring and Evaluation

Program Administration and Control

COMPACT DEVELOPMENT PROCESS

Eligibility Notification

Proposal Receipt

Opportunity Memo

Notify Congress

Investment Memo

Board Approval

Compact Signing

Entry into Force

First Disbursement

DATE

May 6, 2004

August 10, 2004

October 18, 2004

March 18, 2005

May 26, 2005

June 13, 2005

July 4, 2005

October 17, 2005

October 17, 2005

a

a

a

a

a

a

a

a

a

Numbers in thousands.
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Nicaragua

 “This visionary program will play 

a pivotal role within the context 

of democracy, freedom, national 

security and trade.”

-Enrique Bolanos

President of Nicaragua

Strengthen property rights.

Increase profits and wages of farms and related 

enterprises. 

Reduce transportation costs and improve access to markets and social services.

The MCC Compact with Nicaragua focuses on transforming the 

rural business sector in the northwest of the country into a 

high-value, sustainable engine of economic growth and linking 

it to regional and international markets. The five-year Compact 

will provide $175 million to reduce poverty, spur economic 

growth, and increase investment, particularly in the regions of 

León and Chinandega.

Key Objectives

Date Of Compact Signing

Size of Compact

Population

GNI (Per Capita)

July 14, 2005

$175 million/ 5-year

5,604,000

$790

Key Facts

COMPACT DEVELOPMENT PROCESS

Eligibility Notification

Proposal Receipt

Opportunity Memo

Notify Congress

Investment Memo

Board Approval

Compact Signing

Entry into Force

First Disbursement

DATE

May 6, 2004

October 25, 2004

October 28, 2004

November 3, 2004

May 26, 2005

June 13, 2005

July 14, 2005

a

a

a

a

a

a

a

$26,500

Nicaragua $175,000

$11,400

$92,800

$10,600

$33,700

Property Regularization Project

Transportation Project

Rural Business Development Project

Program Administration, Monitoring, and 

Evaluation

Fiscal/Procurement Agent Services

Numbers in thousands.
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Georgia

“[The Compact] is a partnership 

between our two peoples who share 

the same values, who have the 

same dreams for their children, and 

to support one another and to 

believe in the supreme value of 

liberty and freedom.”

-Mikheil Saakashvili

President of Georgia

Increase productivity in farms, agribusinesses, tourism, 

and other enterprises.

Ensure a reliable supply of energy.

Reduce transportation times and costs in targeted areas.

The MCC Compact with Georgia is focused on reducing two 

hurdles to development in regions outside the capital city of 

Tbilisi: a lack of reliable infrastructure and the slow development of enterprises, particularly in agribusiness. The five-year, 

$295 million Compact seeks to reduce poverty and stimulate 

economic growth in rural areas. The Compact will directly benefit approximately 500,000 Georgians.

Key Objectives

Date Of Compact Signing

Size of Compact

Population

GNI (Per Capita)

September 12, 2005

$295 million/ 5-year

4,521,000

$1,040

Key Facts

$211,700

Georgia $295,300

$36,100

$47,500

Regional Infrastructure Rehabilitation

Regional Enterprise Development

Administration, Fiscal Management, 

Monitoring, and Evaluation.

COMPACT DEVELOPMENT PROCESS

Eligibility Notification

Proposal Receipt

Opportunity Memo

Notify Congress

Investment Memo

Board Approval

Compact Signing

Entry into Force

First Disbursement

DATE

May 6, 2004

September 24, 2004

October 28, 2004

November 3, 2004

July 7, 2005

July 21, 2005

September 12, 2005

a

a

a

a

a

a

a

Numbers in thousands.
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Each step of the Compact development process is critical to making sure 

that resulting Compacts are based on a close, flexible, collaborative working relationship. MCC’s work with the Government of Cape Verde shows 

how the compact development process works to develop sound programs.

1. Proposal Development: Cape Verde was declared eligible for MCC funding 

in May 2004. Following consultation with its citizens to identify national priorities, Cape 

Verde submitted to MCC an initial concept paper on August 10, 2004. This Concept Paper Was Based On A Broad Consultative Process That Included Government Officials And 

Representatives From Civil Society And The Private Sector. Cape Verde succeeded at this 

stage by building a strong MCC team and involving high-level decision makers, building on 

activities undertaken with other donors, and by taking advantage of the country’s tradition 

of good governance. 

These successful initial efforts enabled Cape Verde and MCC to move from its initial concept paper to a more focused, final proposal on October 4, 2004. 

2. Opportunity Memo: Based on Cape Verde’s final proposal, MCC staff prepared an Opportunity Memorandum for the MCC investment committee describing the 

proposed program and requesting resources for a full review of the activities proposed. 

3. Due Diligence: From October 2004 until June 2005, MCC and its experts engaged in the Due Diligence Process, in close cooperation with their Cape Verdean technical counterparts. This involved technical and economic analyses of the feasibility and 

design of all elements of the proposed program, as well as the identification of policy 

reforms necessary for the success of the program. Meanwhile, Cape Verde continued its 

ongoing consultation process with its stakeholders. 

4. Congressional Notification: On March 18, 2005, MCC notified Congress of 

its intent to begin formal compact negotiations with Cape Verde. MCC’s staff briefed appropriate Congressional committees on details of the planned negotiations.

Cape Verde: An Example of How a Successful 

Compact Development Process Works

CAPE VERDE: 

AN EXAMPLE
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5. Investment Memo: After months of due diligence and the required consultation with Congress, the MCC team negotiated the compact terms with Cape Verde. After 

the Compact negotiations, MCC staff documented its recommendations in an Investment 

Memorandum that was considered by MCC’s Investment Committee on May 26, 2005. 

6. MCC Board Approval: In early June 2005 MCC’s CEO sent the final Compact 

proposal to the MCC Board with a recommendation to approve. On June 13, 2005, the 

Board approved the five-year, $110 million Compact. Upon Board approval, MCC notified 

Congress of its intent to obligate funds for the purpose of financing the Cape Verde 

Compact.

7. Compact Signing: MCC signed the Compact on July 4, 2005, in Cape Verde, 

as the country celebrated 30 years of independence. Cape Verde’s final Compact program involves capital investments in road networks, port facilities, water resources, and 

private sector development. The program also supports reforms to improve port operations, maintain roads, manage water use, improve farmers’ access to expertise and 

financial services, and to enhance private sector investments. These activities will help 

Cape Verde reduce its dependence on outside aid by reducing poverty through economic 

growth.

8. Entry into Force: On October 17, 2005, after completing final legal documentation and financial accountability standards, the Compact entered into force. Simultaneously, MCC made its first disbursement and program implementation began.

Conclusions:

The Cape Verde process took far less time than most economic development 

program cycles and easily meets or exceeds the project preparation time frame 

for private sector investments -- from concept to implementation.

MCC is already hard at work with other eligible countries to make use of this 

practical illustration that commitment, intensive and directed teamwork, and 

shared perspectives can deliver real, timely development results. 

A partnership approach between the Cape Verde team and MCC staff helped 

to facilitate the development of a Compact that leveraged the work of other 

donors, facilitated broad-based community participation, focused on measurable results, and built upon Cape Verde’s existing culture of transparency and 

accountability. 
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KEY MCC 

STAFF

Ambassador John J. Danilovich

Chief Executive Officer

Rodney G. Bent

Vice President 

Department of Policy and International Relations

Jon Dyck 

Vice President and General Counsel 

and Corporate Secretary

John Hewko 

Vice President

Department of Operations

Frances C. McNaught

Vice President 

Department of Congressional and Public Affairs

Charles Sethness 

Vice President

Department of Accountability

Matthew K. McLean 

Chief of Staff
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FINANCIAL AUDIT AND MANAGEMENT’S 

COMMENTS

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, 2005 AND THE NINE MONTH PERIOD 

ENDING SEPTEMBER 30, 2004 

AUDIT REPORT NO. M-000-06-001-C

December 6, 2005

WASHINGTON, DC
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December 6, 2005

MEMORANDUM

TO: John J. Danilovich, Chief Executive Officer, Millennium Challenge Corporation 

FROM: John M. Phee, AIG/MCC 

SUBJECT: Audit of the Millennium Challenge Corporation’s Financial Statements, 

Internal Controls, and Compliance for the Period Ending September 30, 2005 and 

the Nine Month Period Ending September 30, 2004 (Report No. M-000-06-001-C) 

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 and 

Company, LLP to audit the financial statements of the Millennium Challenge Corporation

(MCC) for the period ending September 30, 2005 and the nine month period ended 

September 30, 2004. The contract required that the audit be performed in accordance 

with generally accepted auditing standards and Office of Management and Budget (OMB) 

Bulletin 01-02, Audit Requirements for Federal Financial Statements. 

In its audit of the Millennium Challenge Corporation’s (MCC) financial statements for 

the period ending September 30, 2005 and the nine month period ended 

September 30, 2004, the WA & Co. auditors found that:

■ the financial statements were fairly presented in conformity with U.S. 

generally accepted accounting principles,

■ four reportable conditions regarding the controls over financial reporting and 

its operations. One of the four reportable condition is a material weakness, and

■ three instances of noncompliance with laws and regulations. Two of 

the three instances of noncompliance were related to its financial and 

accounting system.

The material weakness and the reportable conditions identified in MCC’s internal 

controls relate to Millennium Challenge Corporation’s need to develop written policies 

and procedures to streamline its financial operations. Because of this material weakness 

and the reportable conditions, there is an increased risk of improper recording, 

unauthorized transactions, omissions, potential funds control violations and noncompliance

with laws and regulations. Williams, Adley and Company, LLP reported the following 

internal control weaknesses: 
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1. MCC’s Policies and Procedures Were Not Always Complete and Consistent 

(material weakness)

2. MCC’s Travel Disbursement Controls and Procedures Do Not Permit the 

Effective and Efficient Management of Travel (reportable condition)

3. MCC’s Policies for Disbursing Advances to Grantees Do Not Accommodate 

Effective Cash Management Nor the Appropriate Recording of Custodial 

Interest Receivable and Payable (reportable condition and noncompliance)

4. MCC’s Human Resources Responsible for Managing Its Financial Operations 

are Inadequate (reportable condition)

Williams, Adley and Company, LLP also reported the following 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), disclosed 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. 01-02, Audit Requirements for 

Federal Financial Statements:

1. MCC did not fully comply with Federal Financial Management Improvement Act 

(FFMIA) and 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 Does Not Accommodate 

Effective Cash Management Nor the Appropriate Recording of Custodial Interest 

Receivable and Payable (reportable condition and noncompliance)

In carrying out its oversight responsibilities, the OIG reviewed Williams, Adley and 

Company, LLP report and related audit documentation. This review, as differentiated from 

an audit in accordance with U.S. generally accepted government auditing standards, 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 and Company, LLP is responsible for the attached auditors’ 

report, dated November 7, 2005, and the conclusions expressed in the report. However, 

our review disclosed no instances where Williams, Adley and Company, LLP did not comply, 

in all material respects, with applicable standards.

Because of the internal control weaknesses and the noncompliance finding reported 

by Williams, Adley and Company, LLP we are making the following recommendations to 

MCC’s management:
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Recommendation No. 1: We recommend that MCC’s Office of Finance and Administration 

revise and reissue written policies and procedures that provide additional specificity 

including the Fund Balance with Treasury, financial reporting, payroll processing, accrual 

generation and reporting, interagency reporting, fixed assets, travel, monitoring and 

internal grant processes. 

Recommendation No. 2: We recommend that MCC management:

 2.1 Develop and disseminate to its staff explicit policies to ensure that its employees are 

aware of and follow the Federal Travel Regulations. The policies should require that any 

exceptions to the policies be documented and approved by a manager/supervisor in writing.

2.2 Institute policies and procedures to ensure proper authorizations and approvals are 

obtained and coordination with the Office of Finance and Administration has occurred for 

each planned trip prior to travel to ensure that the information is properly captured in the 

financial management system. 

2.3 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. 

Recommendation No. 3: We recommend that MCC management: 

3.1 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. 

3.2 Establish policies and procedures to ensure that any custodial liabilities, e.g. interest 

owed to the U.S. government resulting from the grantee advances, are properly recorded.

Recommendation No. 4: We recommend that MCC evaluate and document the need for 

additional employees in its Office of Finance and Administration to ensure that proper 

internal controls are in place to meet the agency’s objectives. Additionally, the roles and 

responsibilities of the current Controller position and the new positions in the Office of 

Finance and Administration should be clearly delineated and communicated to its staff.

Recommendation No. 5: We recommend that MCC management: 

5.1 a) Complete the development of a strategic plan for the next 6 fiscal years that 

meets OMB requirements, b) Involve MCC staff in the determination of corporate 

performance goals, and c) Establish and communicate operational performance goals 

for FY 2006 that align with the defined strategic goals and submit the operational goals 

to the Board and OMB.
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5.2 Assess the automated options available to handle MCC operations and develop short 

range and long range plans for the implementation of the most appropriate information 

technology structure to address electronic integration of at 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 your response to the draft report 

and the recommendations included therein. Based on your response to our recommendations,

we consider that management decision has been reached on Recommendations No. 1, 2, 

4, and 5. However, management decision has not been reached on Recommendation No. 

3. According to your response you will study the action recommended by recommendation 

No. 3 and will provide us the results of that study within 30 days. Please forward to us all 

information related to your management decision on recommendation No. 3 and the final 

actions you have taken to implement the other recommendations. See the Exhibit for the full 

text of MCC’s Management Comments.

The OIG appreciates the cooperation and courtesies extended to our staff and to the 

staff of Williams, Adley and Company, LLP during the audit. Please contact Alvin A. Brown 

at (202) 712-1003, if you have any questions concerning this report.
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TABLE OF CONTENTS

1 Management Discussion and Analysis

12 Independent Auditors’ Report

13 Opinion on Financial Statements 

14 Internal Control Over Financial Reporting

23 Compliance with Laws and Regulations

28 Status of Prior Year Finding 

30 Management Comments and Our Evaluation

31 Management Comments - Exhibit

35 Statement of Financial Position

36 Statement of Operations and Changes in Net Position

37 Statement of Functional Expenses

38 Statement of Cash Flows

40 Statement of Budgetary Resources

41 Notes to Financial Statements
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MANAGEMENT’S DISCUSSION AND ANALYSIS 

On January 23, 2004, the United States established the Millennium Challenge Account 

(MCA), an innovative new foreign assistance program designed to reduce extreme poverty 

by promoting sustainable economic growth. The MCA grew out of the U.S. commitment at 

the Monterrey Summit on Financing for Development, as President Bush said, “to provide 

greater resources for developing countries taking greater responsibility for their own 

development.” The Millennium Challenge Corporation (MCC) is a government corporation that 

was established to administer the MCA. Congress has provided MCC significant levels of 

funding to implement this new initiative. 

Mission: MCC’s mission is to reduce poverty by supporting 

sustainable, transformative economic growth in developing 

countries which create and maintain sound policy environments.

In the 21 months since its creation, MCC has laid the underpinnings of programs to address and implement the purposes of The Millennium Challenge Act of 2003, “To provide 

assistance “in a manner that promotes economic growth and the alleviation of extreme 

poverty and strengthens good governance, economic freedom, and investments in people.” Accordingly, MCC is focused on this long-term, targeted foreign policy mission, and 

occupies a very vital and innovative niche in the U.S. government’s overall foreign assistance program.

MCC’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 CEO of MCC, and four public members1

appointed by the President and confirmed by the Senate. The Secretary of State is the 

Chair of the Board and the Secretary of Treasury is the Vice Chair. MCC is managed by 

a Chief Executive Officer appointed by the President and confirmed by the Senate. 

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 organizes its work into the following areas: 

Office of the Chief Executive Officer (CEO): responsible for managing MCC operations in 

a manner that reflects policies of the Board of Directors and also achieves MCC’s objectives in accordance with applicable laws and regulations and Congressional directives.

1 Two public members, Kenneth Hackett, President of Catholic Relief Services, and former Governor Christine Todd Whitman, 

who previously served as Administrator of the Environment Protection Agency, were confirmed by the Senate in July 2004. The 

other two public Board member positions remain open.
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Country Programs manage MCC’s relationship with eligible countries through all phases 

of the MCA.

Markets and Sector Assessments provide technical expertise on specific development 

function areas, such as infrastructure, agriculture, and financial sectors, as well as 

conducting assessments related to environmental compliance and fiscal accountability.

Monitoring and Evaluation oversees the assessment of economic logic, growth and poverty

reduction impact of country proposals and programs, the establishment of monitoring and 

evaluation plans, and the collection and analysis of performance measurement data.

Administration and Finance

A&F is responsible for planning and directing all activities related to financial management 

and budgeting; human resources management; information technology infrastructure, 

resources and management; procurement and acquisition; security; facilities management;

administrative services; and corporate records management.

Development Policy (DP)2 is responsible for identifying policy issues, analyzing alternative 

approaches and recommending strategies for the most effective execution of MCC’s 

mission. DP also manages the selection process and the policy indicators used to 

evaluate countries’ policy performance.

Domestic Relations (DR): DR is responsible for managing MCC’s relationship with Congress,

key Executive departments and the press, working on issues relevant to MCC and other 

constituencies key to MCC’s mission.

International Relations (IR): IR oversees MCC relations with other donors and multilateral 

organizations. It coordinates MCC positions on international development initiatives, 

recommends activities and policies to advance USG and MCC interests, and represents 

MCC at meetings regarding multilateral and donor issues.

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. 

2 The offices of Development Policy and International Relations were consolidated in October 2005.

2
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PERFORMANCE GOALS, OBJECTIVES AND RESULTS 

FOR FY 2005

Although MCC has been driven by a very clearly articulated Mission statement since its 

creation, a formal strategy has not yet been published at the end of fiscal year 2005 .3

As more fully described in Material Weakness #1 below, MCC did not have detailed 

performance goals for fiscal year 2005. Clear operational objectives were set for 

calendar 2005 as detailed below. Actual accomplishments for fiscal year 2005 are 

presented below for information. MCC has developed a detailed strategic plan and is 

developing measurable performance goals linked to that plan that will be issued in 

early fiscal year 2006.

3 A draft strategic plan was submitted to MCC’s Board in October 2005. 

OBJECTIVE: Improve Program Operations

3

Performance Targets 

(for calendar 2005):

• Finalize board approval for 7—9 

quality compacts and conclude 

steps necessary to initiate 3 Section

609(g) grants to countries with 

whom compacts will not have been 

signed in 2005, with an aggregate 

of 10—12 grants to countries;

• Set up implementation systems, 

resident mission plans, and 

begin implementation in 

4—6 Compact countries;

• Finalize Board approval for 

7—9 Threshold Programs 

and begin implementation on 

6—8 Threshold Programs;

• Complete 2006 MCA-eligible & 

Threshold country selection, including

improvements in selection criteria.

Accomplishments

(for fiscal 2005):

• 5 Compacts approved by Board;

• 4 Section 609(g) actions approved 

by Board with countries with which 

compacts were not signed.

• Implementation systems initiated 

and resident missions established 

in 2 Compact countries.

• 2 Threshold Programs approved 

by Board;

• 1 Threshold Program began 

implementation.

• Pending Board approval in 

November 2005.
MILLENNIUM CHALLENGE CORPORATION

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ALIGNMENT WITH THE PRESIDENT’S MANAGEMENT AGENDA

MCC significantly advanced its alignment with The President’s Management Agenda, 

as follows:

• Strategic Management of Human Capital: MCC has made extensive and continuing use of the flexibilities in place to acquire and retain talent and leadership,

and has maximized the number of staff in front-line program positions. 

• Competitive Sourcing: MCC has consistently competed services eligible for 

such competition with both private and federal government suppliers, 

outsourcing a considerable part of both its program and support activities. 

OBJECTIVE: Organizational Capacity and Maturity

Performance Targets:

• Complete staffing plan matched to 

desired organizational capacity, with 

retention rate at 90—95%. 

• Complete essential policy papers 

and improved guidance to countries.

• Develop effective internal control 

environment, documentation and 

implementation of internal controls 

and systems.

• Implement strategic 

performance assessment and 

compensation plan.

Accomplishments:

• Staff built to 147, slightly 

behind plans, with retention rate 

exceeding 90%. 

• Critical policy papers and guidance 

to countries published.

• Initial set of internal controls put 

in place.

• First stage performance 

assessment and compensation 

plans in place.

• Effective Communications and Constituency Relations

Performance Targets:

• Implement communications plan.

• Implement Congressional 

outreach plan.

• Provide input into 

reauthorization bill.

• Submit Congressional Budget 

Justification for FY 2006. 

Accomplishments:

• Not yet accomplished.

• Congressional outreach begun. 

• Completed; final action pending 

Congressional action.

• Submitted and pending Congressional action.

4
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• Improved Financial Performance: MCC has meet expectations for timely 

and accurate reporting, with timely, unqualified audit opinions for both years 

of its existence. 

• Expanded Electronic Government: MCC has used web-based technologies to 

enhance transparency of its operations, both with domestic constituencies 

and globally with partner countries. 

• Budget and Performance Integration: MCC is building its assistance 

programs around explicit measurable results, resulting in clearly visible 

critical integration of program spending and performance. (Following a set 

of output objectives for calendar 2005, MCC has, since the end of the fiscal 

year, initiated a more rigorous process of developing performance goals 

integrated with its operating budget.)

MCC’s FINANCIAL STATEMENTS

MCC financial statements, which appear on pages 36-40 of this report, received an 

unqualified opinion issued by the Independent Auditors. MCC management is responsible 

for the integrity and objectivity of the financial information presented and the audit report 

attests to the reliability and veracity of management information.

The financial statements provide an overview of MCC’s evolving character, a lean 

corporation that manages a substantial development assistance fund with focused 

human resources. MCC’s operational strategy is to maximize the use of its human capital 

to further its primary business objectives. Accordingly, the bulk of MCC’s back office 

operations, such as financial, information technology and human resource management, 

have been outsourced, while MCC maintains overall responsibility for these functions. 

MCC’s key administrative costs are staff salaries and benefits, travel, rent and operational

services. Salaries and benefits accounted for about 46% of all administrative costs and 

travel costs closely linked to due diligence and monitoring account for about 14% of all 

administrative costs.

MCC’S SYSTEMS, CONTROLS AND LEGAL COMPLIANCE: FEDERAL MANAGER’S FINANCIAL 

INTEGRITY ACT AND MANAGEMENT’S RESPONSIBILITY FOR INTERNAL CONTROLS 

(OMB A-123 (Revised))

The Federal Manager’s Financial Integrity Act (FMFIA)

FMFIA requires management of federal agencies to establish controls in accordance 

with standards prescribed by the Comptroller General and these controls must provide 

reasonable assurance that:

• Obligations and costs are in compliance with applicable law;

• Funds, property, and other assets are safeguarded against waste, loss, 

unauthorized use, or misappropriation; and 

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• Revenues and expenditures applicable to corporate operations are properly 

recorded and accounted for to permit the preparation of accounts and 

reliable financial and statistical reports.

OMB Circular A-123, Management’s Responsibility for Internal Control

On December 21, 2004 the Office of Management and Budget (OMB) revised OMB 

Circular A-123 Management’s Responsibility for Internal Control, which defines 

management’s responsibility and accountability for internal control in Federal agencies, 

beginning fiscal year 2006.

The revised circular reflects policy recommendations intended to strengthen the 

requirements for conducting management’s assessment of internal control over financial 

reporting and emphasize the need for agencies to integrate and coordinate internal 

control assessments with other internal control-related activities.

In order to strengthen the internal control over financial reporting, Circular A-123 reaffirms 

management responsibility for establishing and maintaining internal control to achieve the 

following objectives:

• Effective and efficient operations;

• Reliable financial reporting; and

• Compliance with applicable laws and regulations.

Moreover, the circular requires management to consistently apply the five internal control

components outlined by the GAO to meet each of the internal control objectives and to 

assess internal control effectiveness. In addition, the circular requires management 

to provide annual assurances on internal control in its Performance and Accountability 

Report (PAR), including a separate assurance on internal control over financial reporting, 

along with a report on identified material weaknesses and corrective actions.

In anticipation of the new OMB requirements applicable in FY 2006, MCC performed its 

first internal control assessment based on these more stringent standards by including 

the requirements of both the FMFIA and OMB A-123 (revised). While the material weaknesses identified in this report addresses both requirements, the CEO’s certification, 

his annual statement in response to these findings, is limited to the scope of what 

is required by the FMFIA. The CEO has qualified the FMFIA assurance for FY 2005. 

His certification is provided below:

6
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The CEO’s certification is based on information gathered from various sources, including 

MCC managers’ knowledge of existing controls, day-to-day operations, a managementinitiated study of risks and internal controls, and reviews and audits by the OIG and GAO. 

MCC’s evaluation of risk also included the revised OMB A-123 guidelines that come into 

effect in fiscal year 2006. 

In determining whether a weakness in MCC’s internal controls is “material”, MCC considers

whether such identified weakness meets one or more of the following criteria:

• Significantly impairs the Corporation’s ability to achieve its objectives;

• Results in the use of resources in a way that is inconsistent with the 

Corporation’s mission;

• Violates statutory or regulatory requirements;

• Results in a significant lack of safeguards against waste, loss, unauthorized 

use, or misappropriation of funds, property, or other assets;

• Impairs the ability to obtain, maintain, report, and use reliable and timely 

information for decision-making;

• Permits improper or unethical conduct or a conflict of interest; 

• Results in a material misstatement in the financial reports.

MCC has identified the following material internal control weaknesses and has developed 

an action plan to remedy these weaknesses.

Federal Managers’ Financial Integrity Act Certification

Based on the results of a comprehensive internal control assessment directed by 

management of the Millennium Challenge Corporation (MCC) and recommendations

from senior officials and staff, I certify that the Corporation’s management 

accountability and internal control systems that were in effect on September 30, 

2005 provide reasonable assurance that the objectives of the Federal Managers’

Financial Integrity Act were achieved, with the exception of the four material 

weaknesses identified in the Management’s Discussion & Analysis portion of 

this report. In addition, the report includes a detailed discussion of the material 

weaknesses and actions that MCC will be taking in future months to resolve them.

Charles O. Sethness

November 7, 2005

MCC’s strategic plan does not fully comply with the Government 

Performance and Results Act (GPRA).

Weakness # 1:

7 
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MCC did not have a strategic plan in FY 2005. MCC has made 

significant progress in drafting a strategic plan that is in alignment with 

GPRA. This act requires that federally funded organizations develop 

and implement an accountability system, based on performance 

measurement, including setting goals and objectives and measuring 

progress toward achieving them. While MCC has developed a set of 

strategic goals and means to achieve them, it has not articulated measurable performance goals which align with the 2006—2011 plans. 

The following actions are to be completed by March, 2006

• Complete the development of a strategic plan for the next 6 fiscal 

years that meets OMB requirements.

• Involve MCC staff in the determination of corporate 

performance goals.

• Articulate operational performance goals which align with 

the defined strategic goals.

MCC does not fully comply with the Federal Information Security 

Management Act (FISMA).

The Federal Information Security Management Act (FISMA) provides the 

framework for securing the federal government’s information systems. 

Agencies covered by FISMA are required to report annually to OMB and 

Congress on the effectiveness of their information security programs. 

Specifically, FISMA requires agencies to have 1) periodic risk assessments; 2) information security policies, procedures, standards, and 

guidelines; 3) delegations of authority to the CIO to ensure compliance 

with policy; (4) security awareness training programs; (5) procedures 

for detecting, reporting, and responding to security incidents; and 

(6) plans to ensure continuity of operations. FISMA also requires an 

annual independent evaluation of the agency’s information security 

program, which is separate from the Performance Assessment Report. 

Only significant deficiencies identified under FISMA are to be reported 

as a material weakness under the FMFIA. 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. 

Discussion: 

Remediation Plan: 

 

Weakness # 2: 

Discussion:

 

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The following actions are to be completed by September 30, 2006

• Implement the action plan set forth in MCC’s report of 

September 30, 2005 to implement material compliance with the 

requirements of FISMA by September 30, 2006.

MCC does not fully comply with the provisions of the Federal Financial 

Management Information Systems Act (FFMIA)

The Federal Financial Management Improvement Act (FFMIA) of 1996 

is designed to improve federal financial management by requiring that 

financial management systems provide reliable, consistent disclosure 

of financial data in accordance with generally accepted accounting 

principles (GAAP) and standards. The FFMIA requires MCC to implement 

and maintain a financial management system that complies substantially 

with federal requirements for an integrated financial management system, 

applicable federal accounting standards and U.S. Standard General 

Ledger at the transaction level. The OIG is required to report on 

compliance with these requirements as part of the annual audit of MCC’s 

financial statements.

MCC has outsourced all its back office business functions to the Department

of Interior’s National Business Center (NBC) under the auspices of the 

OMB Center of Excellence initiative. NBC uses the following systems to 

record MCC’s transactions:

• Financial Management: Oracle Federal Financials.

• Human Resource and Payroll management: Federal Personnel and 

Payroll System (FPPS) and Excel spread sheets.

• Procurement: Microsoft Office Template to generate contract documents, Excel spread sheets to manage contract actions, and Oracle 

Federal Financials to manually record procurement transactions.

• Travel: E-Travel to perform travel authorizations and Oracle Federal 

Financials to manually record travel transactions.

Oracle Federal Financials and Statement on Auditing Standard (SAS) 70: 

Because NBC is MCC’s service provider, it has been essential to ensure 

that it performs an SAS-70 review; SAS-70 is an internationally recognized 

auditing standard developed by the American Institute of Certified Public 

Accountants (AICPA). A SAS 70 review is widely recognized, because it 

represents that a service organization has been through an in-depth 

Remediation Plan: 

Weakness # 3:

Discussion: 

9 
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review of its control activities, which generally include controls over 

information technology and related processes. Service organizations 

must demonstrate that they have adequate controls and safeguards 

when they host or process data belonging to their customers. 

NBC uses the Oracle Federal Financial System to record MCC’s 

financial transactions. While this system has been approved by the 

Joint Federal Management Improvement Program, the sub-systems 

used such as FPPS, Procurement and E-Travel are not fully integrated 

or interfaced. In its FY 2004 annual report, MCC identified integration 

as a challenge. MCC discussed these requirements at length with 

NBC and OMB and will continue to do so in the future.

In FY 2004, the OIG recommended that MCC request NBC to perform an 

SAS 70 audit of the Oracle Federal Financial System used to process 

MCC’s financial transactions. Through this review, which was completed

in September 2005 for the period March 1 through July 2005, 

NBC has certified its applicability with regard to the period ending 

September 30, 2005. As the audit did not address the entire fiscal year,

the balances have been verified through alternative audit procedures. 

As a result, the FY 2004 OIG audit recommendation was closed. 

FPPS: The FPPS system does not permit the management of staff in 

its entirety: organization plans; recruitment, evaluation, etc. The FPPS 

system is separate from the Oracle Federal Financial System (OFF) 

and an electronic interface has been created to record disbursements. 

However, this interface does not simultaneously create or link to an 

existing obligation of funds. In order to enable the FPPS interface, the 

OFF has been set up to permit the recording of a disbursement without 

being preceded by an obligation. This results in a less than desired 

level of funds control. OMB approved NBC as a “Center of Excellence 

for HR and Payroll services, and NBC is expected to implement a new 

system that will be interfaced with the OFF system that will address 

these shortfalls in the next two to three years.

Procurement: The procurement system used by MCC, which has not 

been approved by the federal government, requires manual entry of 

financial data into the OFF system, increasing the risk of data entry 

and timing errors.

 

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E-Travel: The E-Travel system is also not integrated with the OFF system 

and requires manual entry of financial data, increasing the risk data 

entry and timing errors.

The following actions are to be completed as indicated below

Address the following integration issues:

• Continue to address the integration issues outside MCC’s control 

with NBC, such as complete integration with FPPS and E-travel.

• Implement a procurement system solution by March 31, 2006.

• Ensure that all commercial off-the-shelf programs implemented 

by MCC and NBC are integrated and/or interfaced and that NBC 

performs a SAS 70 review of these functions.

MCC has not developed or documented internal control procedures 

detailing the responsibilities of employees at each control level, i.e. 

from the data entry functions to the various administrative approvals.

The independent auditors have reported that MCC’s operating procedures

in the many functional areas such as payroll processing, budget 

preparation, reconciliations, accruals, travel, fixed assets, monitoring, 

and internal grant processes are too general or incomplete. These procedures do not identify the responsible persons at the various control 

levels, including the administrative approval of transactions, processing 

of data and data entry functions. This lack of sufficient detail and 

accountability in internal control procedures may result in ineffective 

and inefficient processing of transactions and non-compliance with 

laws and regulations. 

The following actions are to be completed as indicated below

• Develop formal procedures to address the key material 

weaknesses identified by no later than June 30, 2006 and ensure 

that these policies and procedures provide internal and external 

timelines, and adequate internal documentation.

Remediation Plan:

Weakness # 4: 

Discussion: 

Remediation Plan: 

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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, 2005 and 2004, and 

the related Statements of Operations and Changes in Net Position, Cash Flows, and 

Budgetary Resources for the year ended September 30, 2005 and the nine months ended 

September 30, 2004. 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 of and for 

the year ended September 30, 2005 and as of and for the nine months ended 

September 30, 2004 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 

four matters that we consider to be reportable conditions. We believe that one of the four 

reportable conditions is a material weakness.

1. MCC’s Policies and Procedures Were Not Always Complete and Consistent 

(material weakness)

2. MCC’s Travel Disbursement Controls and Procedures Do Not Permit the 

Effective and Efficient Management of Travel (reportable condition)

3. MCC Policies for Disbursing Advances to Grantees Do Not Accommodate 

Effective Cash Management Nor the Appropriate Recording of Custodial 

Interest Receivable and Payable (reportable condition and noncompliance)

4. MCC’s Human Resources Responsible for Managing It Financial Operations 

are Inadequate (reportable condition)

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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. 01-02, Audit Requirements for 

Federal Financial Statements:

1. MCC did not fully comply with FFMIA and 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 Do Not Accommodate 

Effective Cash Management Nor the Appropriate Recording of Custodial 

Interest Receivable and Payable (reportable condition 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.

OPINION ON THE FINANCIAL STATEMENTS

We have audited the accompanying Statements of Financial Position of the Corporation as 

of September 30, 2005 and 2004, and the related Statements of Operations and Changes

in Net Position, Cash Flows, and Budgetary Resources for the year ended September 30, 

2005 and the nine months ended September 30, 2004. 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 Government Auditing Standards, issued by the Comptroller General of 

the United States, and the Office of Management and Budget (OMB) Bulletin No. 01-02, 

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.

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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, 2005 and 2004, 

and changes in net position, cash flows and budgetary resources for the year ended 

September 30, 2005 and for the nine months ended September 30, 2004, 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 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 Statement of Functional Expenses for the year ended September 30, 

2005 and as summarized for the nine months ended September 30, 2004, 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 2005 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. 01-02 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.

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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 four matters involving the internal control over financial reporting and its 

operation that we consider to be reportable conditions. We believe that one reportable 

condition is a material weakness.

MATERIAL WEAKNESS

MCC’s Policies and Procedures Were Not Always Complete and Consistent

Condition:

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.

In the prior year, we noted that draft accounting policies and procedures had been prepared but not finalized. Also, we noted that written policies and procedures were incomplete. Based on our internal control review in the current year, we noted that MCC’s 

operating procedures in the areas of payroll processing, Fund Balance with Treasury 

reconciliation, quarterly accruals, annual leave accruals, travel, fixed assets, monitoring, 

and internal grant processes are too general or incomplete. 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. 
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Examples of the inconsistent or incomplete policies and procedures include:

• An advance given by MCC to Madagascar MCA was obligated and disbursed 

simultaneously. The proper process had not been developed and documented 

to ensure the MCC’s Controller’s involvement in the internal aspects of funds 

control and grants management for proper sequencing and appropriate timing 

of this transaction.

• MCC follows the Federal Travel Regulations for employee travel and uses 

E-Travel; a General Services Administration (GSA) approved and maintained 

electronic travel system. In our testing, however, we noted that MCC’s current 

travel policy does not provide sufficient controls to ensure that appropriate 

coordination occurs with the Office of Finance and Administration to ensure 

that the information is captured in the financial management system, and 

adequate explanations from employees and approvals from supervisors are 

provided for expenses in excess of the per diem.

• MCC’s standard funds control policy requires the recording of a commitment, 

followed by an obligation and then a payment. However, during our internal 

control testing of obligations and related disbursements, we noted the following:

- 3 out of 80 obligation/disbursement sample items amounting to $42,661 

($513,154 projected to the obligation population) were not supported by 

obligating documents. 

- Per the SAS 70 review performed at the National Business Center (NBC), 

an Independent Audit Firm found that the Oracle Federal Financial system 

will allow disbursements to be made without an obligation previously being 

entered. This condition was primarily established to allow for the posting of 

payroll disbursements from another nonintegrated NBC system. Also, NBC 

established it to permit the recording of any disbursement or accrual without

a preceding obligation. In order to mitigate this system limitation, MCC 

records an estimated bi-weekly payroll obligation to ensure funds availability.

This manual process, however, is inefficient and increases MCC’s risk.

Criteria:

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.

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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: 

MCC management stated that because they are a new entity, the Corporation is still 

developing its final procedures. Therefore, MCC management developed many informal 

procedures in order to meet obligation/disbursement deadlines. Recently, MCC and NBC 

have initiated a process in which the Controller approves miscellaneous obligation 

documents that are transmitted electronically to NBC.

Effect:

The lack of sufficient detail and accountability in the procedures produced inconsistent 

application of the travel policies and increased the risk of errors, improper recording, 

unauthorized transactions, omissions; potential funds control violations and noncompliance with laws and regulations. This also diminished the effectiveness and efficiency with 

which the financial transactions were being processed. 

Recommendation # 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. 

For example, prior to signing final grant agreements, the authorized signer should ensure 

that the fund citation is indicated and that the Controller has indicated funds availability. 

To record a grant obligation, a copy of the approved agreement with fund citation and 

indication of funds availability should be provided to the NBC accountant.

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Also, the recently issued accrued annual leave policy indicates that NBC will obtain 

the amount of the accrued annual leave balance from FPPS. The policy, however, does 

not address how, who, nor acknowledge that it will mean a coordination between various 

NBC offices.

Management Response:

The management decision is to accept and implement this recommendation as soon as 

possible. We recognize that the informal procedures that served us in the past need to be 

formalized and procedures strengthened to align responsibilities with control objectives in 

order to manage and mitigate risks.

REPORTABLE CONDITIONS

MCC’s Travel Disbursement Controls and Procedures Do Not Permit the Effective and 

Efficient Management of Travel 

Condition: 

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 of individual travel that has taken place and the accounting 

for each instance. Additionally, the policy does not require that appropriate coordination 

include the Office of Finance and Administration. For example, the Office of Finance and 

Administration 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 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. 

E-Travel is a GSA managed and mandated system that is used by MCC to assist the 

traveler in managing the travel process and processing their voucher upon their return. 

Although E-Travel is electronic, it does not interface with Oracle Federal Financials (OFF) 

and has limited functionality, such that it does not allow a traveler to submit a reclaim 

voucher. Currently, after the traveler prepares a voucher and the voucher is approved, 

the voucher is forwarded to NBC. At NBC an accounting technician manually enters 

each voucher into OFF. 

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We identified the following internal control deficiencies related to travel 

voucher reimbursements: 

• Nine of 122 travel vouchers totaling $1,383 exceeded lodging per diem. 

No approvals of the lodging per diems were provided nor were the excess 

rejected by the system or the approving official. 

• Three of 122 travel vouchers totaling $507 had “Other” costs claimed that 

were not documented. We noted that there was no additional explanation 

provided as to what the expenses were for. 

Criteria:

As stated in the Government Accountability Office (GAO)’s Standards for Internal Control 

in the Federal Government, transactions and other significant events should be authorized 

and executed only by persons acting within the scope of their authority. This is the 

principal means of assuring that only valid transactions to exchange, transfer, use or 

|commit resources, and other events are initiated or entered into. Authorizations should 

be clearly communicated to managers and employees. Additionally, internal control and 

all transactions and other significant events need to be clearly documented, and the 

documentation should be readily available for examination. Also, the Chief Financial 

Officer’s Act of 1990 requires each agency’s CFO to develop and maintain an integrated 

financial management system, including financial reporting and internal control standards 

that comply with applicable accounting principles, standards, and requirements.

Cause: 

Currently, MCC records a blanket authorization that covers all employees at the beginning 

of each year. The blanket authorization addresses the basic policies but does not address 

deviation from the standard policy. Employees are not required to submit a separate travel 

authorization form, for each trip, that would address any special conditions or deviations 

from the maximum per diems and other authorized expenses. According to MCC management, employees were requested to obtain pre-approval when they know that the rates 

are higher than the maximum rate allowed. However, employees did not follow procedures 

in these instances. 

Effect:

As a result of non-enforcement of the travel policies, employee travel expenses of 

approximately $11,940 ($1,890 projected to the travel expense population of 

$3,980,087) are unsupported and potentially approved without adequate documentation. 

Also, there is an increased risk of travel inefficiency, and non-compliance with Federal 

Travel Regulations. Additionally, MCC’s processing of travel vouchers is inefficient 

because it currently requires the manual entry of information from E-Travel to OFF. 

The lack of individual travel authorizations increases the difficulty and reduces the 

accuracy of the estimation process performed by the controller.

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Recommendation #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 its Office of Finance and 

Administration 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. 

Management Response:

The management decision is to accept and implement this recommendation as soon 

as possible. In this regard, MCC has recently issued its travel policy incorporating the 

principles enumerated in the FTR and also included procedures to strengthen the internal 

control environment. MCC will also reevaluate its travel authorization practices and 

procedures to ensure that they meet the desired control objectives. MCC has also 

commenced discussions with the National Business Center, Department of Interior, 

to determine if it would be feasible to migrate to a different General Services Administration approved software provider to accomplish travel management, as the developers of 

E-Travel have not met many of the requirements in a timely fashion.

MCC Policies for Disbursing Advances to Grantees Does Not Accommodate Effective Cash 

Management Nor the Appropriate Recording of Custodial Interest Receivable and Payable

Condition: 

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.

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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. 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. 

Furthermore, MCC’s management does not agree that immediate cash needs represent 

a term shorter than quarterly.

Effect:

As a result of holding funds in excess of current needs, the MCA Madagascar has incurred a 

liability of approximately $16 thousand for the interest on the average outstanding advance. 

MCC has not adhered to Treasury’s requirement for immediate cash needs and the 

US Treasury has incurred interest expenses on these funds disbursed to MCA Madagascar. 

Recommendation #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.

Management Response:

MCC has not arrived at a management decision with regard to this recommendation. 

We believe that this recommendation needs further management study before we can come 

to a conclusion on this recommendation. We expect to reach a management decision within 

30 days, as required by regulation.

MCC’s Human Resources Responsible for Managing It Financial Operations are Inadequate

Condition: 

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 

Finance and Administration. The current range of Controller responsibilities include, but is 

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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.

Criteria:

The Standards for Internal Control in the Federal Government states that a control activity 

includes management of human capital. Specifically, as part of its human capital planning, 

management should consider how best to retain valuable employees, plan for their eventual 

succession, and ensure continuity of needed skills and abilities.

Cause: 

MCC’s has not revamped its organizational structure to reflect the impact of its current 

staffing and operational levels on its Office of Finance and Administration.

Effect:

Significant reliance on a single individual to perform key financial duties can result in 

the following:

• Lack of a review of quarterly/annual financial statements,

• Lack of a secondary review of MCC’s financial activities processed by NBC, 

and

• Obligations of funds prior to review of funds availability.

Additionally, it does not provide for backstops and continuity.

Recommendation # 4:

We recommend that MCC evaluate and document the need for additional employees in 

Office of Finance and Administration to ensure that proper internal controls are in place to 

meet the agency’s objectives. Thus, providing the Controller with adequate delegation of 

authority. Additionally, the roles and responsibilities of the current Controller position and 

the new positions in its Office of Finance and Administration should be clearly delineated 

and communicated.

Management Response:

The management decision is to accept and implement this recommendation as soon as 

possible. As a matter of fact, MCC has advertised and is actively recruiting for an additional 

position—a Deputy Chief Financial Officer. The responsibilities of the positions will 

be clearly drawn after the staff is hired to ensure the most appropriate mix of skills.

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The status of the prior year finding is provided in Appendix A.

As required by OMB Bulletin No. 01-02, 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 misstatement, 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. 01-02, 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. 01-02 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 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. 01-02.

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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 complied with the following laws and regulations:

• Federal Financial Management Improvement Act (FFMIA) 

• Government Performance and Results Act (GPRA)

MCC has not implemented and maintained a financial management system that complies 

substantially with Federal requirements for an integrated financial management system 

as required by the Federal Financial Management Improvement Act (FFMIA). 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. 

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.

Criteria:

The FFMIA requires MCC to implement and maintain a financial management system 

that complies substantially with Federal requirements for an integrated financial 

management system. 

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GPRA requires each agency to prepare an annual performance plan covering each 

program activity set forth in the budget of such agency. Such plan shall

(1) establish performance goals to define the level of performance to be 

achieved by a program activity;

(2) express such goals in an objective, quantifiable, and measurable form 

unless authorized to be in an alternative form under subsection (b);

(3) briefly describe the operational processes, skills and technology, and 

the human, capital, information, or other resources required to meet the 

performance goals;

(4) establish performance indicators to be used in measuring or assessing the 

relevant outputs, service levels, and outcomes of each program activity;

(5) provide a basis for comparing actual program results with the established 

performance goals; and

(6) describe the means to be used to verify and validate measured values.

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.

Cause: 

The Millennium Challenge Corporation (Corporation) 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 2005 it used the only options available. NBC is working with MCC to 

provide enhancement to the system to accommodate MCC needs within the context of 

the OMB requirements for Centers of Excellence.

MCC has developed strategic goals but it has not articulated performance goals. Also, the 

strategic objectives were originally developed for the calendar year and not the fiscal year. 

Effect:

Furthermore, because MCC does not have an integrated financial management system 

and the inefficiencies caused by the manual processes, the users may not receive 

financial information that is complete, accurate, and timely for decision-making purposes.

Because the MCC has not established and communicated its performance goals and 

its strategic objectives were originally developed for the calendar year and not the fiscal 

year. The reader of the financial statements is not provided with a clear picture of the 

accountability and achievements of the Corporation.

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Recommendation # 5:

We recommend that MCC management: 

(1) 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.

(2) 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 6 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.

Management Response:

(1) FFMIA: The management decision is to accept this recommendation and pursue its 

implementation. However, MCC recognizes that the outcomes are outside its direct 

management control. MCC was established to be a lean efficient operation and accordingly, 

many facets of its back-office operations have been outsourced. MCC was required to 

outsource many of these functions such as financial management, human resource and 

payroll management, and travel management, to a USG entity, and MCC selected NBC to 

perform its back-office work. NBC operates on many legacy information systems that are 

not interfaced or integrated with MCC’s core financial management system. This leads to 

non-compliance with FFMIA and also makes MCC operations inefficient. MCC is cognizant 

of these issues and identified FFMIA non-compliance as a material weakness in its FMFIA 

report, which is included in this report. MCC will work diligently within the span of its control 

to comply not only with the FFMIA requirements, but more importantly to improve its 

operational efficiency, effectiveness and transparency.

(2) GPRA: The management decision is to accept this recommendation and pursue its 

implementation. As of the date of this management response, the following actions have 

been undertaken: 

• A strategic plan for the next 6 fiscal years has been approved by MCC’s Board 

and submitted to OMB.

• A working group comprising a broad cross-section of MCC staff is actively 

engaged in developing corporate performance goals for FY 2006.

• MCC management expects to adopt operational performance goals for FY 2006 

and 2007 that align with the defined strategic goals, and submit these goals to 

MCC’s Board and OMB. 

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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. 

MCC Policies for Disbursing Advances to Grantees Does Not Accommodate Effective Cash 

Management Nor the Appropriate Recording of Custodial Interest Receivable and Payables

The internal control finding “MCC Policies for Disbursing Advances to Grantees Does Not 

Accommodate Effective Cash Management Nor the Appropriate Recording of Custodial 

Interest Receivable and Payable” 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 recommendation for this finding 

because we reported and made recommendations for corrective actions in the internal 

control section of this report.

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.

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November 7, 2005

Washington, D.C.

STATUS OF PRIOR YEAR FINDING

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 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.

They 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 February 28, 2005.

Management Comments and Evaluation

We received and evaluated MCC’s management comments to the recommendations made 

in this report. We considered their comments to be responsive and have included them in 

their entirety in the Exhibit.

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In its response MCC’s management stated that it recognizes the importance of 

accountability, transparency and public disclosure, and that their goal is to achieve 

excellence in our financial management, reporting and internal control systems. Further, 

MCC’s management commented that it will implement all but one of the recommendations as soon as possible to strengthen our systems of internal controls and lend 

further credibility to our financial statements. MCC’s management went on to address 

each recommendation and provided specific dates by which it will implement these recommendations (theses dates are provided below). MCC’s management also recognized 

and thanked both the OIG and Williams, Adley & Company, 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 recommendation nos. 1, 3, 4, and 5 provided in this report. MCC should 

report to the OIG when final action has been taken on the recommendations and when 

a management decision is reached on recommendation no. 2. The following is a brief 

summary of MCC’s management comments on the five recommendations included in 

this report and our evaluation on those comments.

Recommendation No. 1

MCC management agreed with recommendation No. 1 and to implement this recommendation no later than June 30, 2006. MCC’s management also commented that they 

recognize that the informal procedures that served them in the past need to be formalized

and procedures strengthened to align responsibilities with control objectives in order to 

manage and mitigate risks.

Recommendation No. 2

MCC management agreed with recommendation No. 2 and will implement this recommendation no later than March 31, 2006. MCC also commented that it recently issued 

its travel policy incorporating the principles enumerated in the FTR and also included 

procedures to strengthen the internal control environment. MCC will also reevaluate 

its travel authorization practices and procedures to ensure that they meet the desired 

control objectives. MCC has also commenced discussions with the National Business 

Center, Department of Interior, to determine if there are other things that can be done 

to improve this condition. 

Recommendation No. 3

MCC management did not reach a management decision with regard to this 

recommendation. MCC’s management commented that they believe that this recommendation needs further management study before we can come to a conclusion on 

this recommendation. MCC’s management expects to reach a management decision 

within 30 days.

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Recommendation No. 4

MCC management agreed with recommendation No. 4 and agreed to implement this 

recommendation no later than March 31, 2006. As a matter of fact, MCC has advertised 

and is actively recruiting for an additional position – a Deputy Chief Financial Officer. The 

responsibilities of the positions will be clearly drawn after the staff is hired to ensure the 

most appropriate mix of skills.

Recommendation No. 5

MCC management agreed with recommendation No. 5 and agreed to implement the 

portion of this recommendation that pertains to the GPRA no later than March 31, 2006 

and the portion that pertains to FFMIA no later than September 30, 2006. MCC’s management commented that as of the date of this management response 1) A strategic plan 

for the next 6 fiscal years has been approved by MCC’s Board and submitted to OMB, 

2) A working group comprising a broad cross-section of MCC staff is actively engaged in 

developing corporate performance goals for FY 2006, and 3) MCC management expects 

to adopt operational performance goals for FY 2006 and 2007 that align with the defined 

strategic goals, and submit these goals to MCC’s Board and OMB, MCC’s management 

also commented that they will work diligently within the span of its control to comply 

not only with the FFMIA requirements, but more importantly to improve its operational 

efficiency, effectiveness and transparency.

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MANAGEMENT COMMENTS—EXHIBIT

November 18, 2005

TO: MCC/A, John Phee

FROM: Vice President for Finance and Administration, Gary Keel/s/

SUBJECT: Management response to draft Independent Auditor’s Report on MCC’ s 

Financial Statements for Fiscal Years ended September 30, 2005 and 2004, 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 

principle financial statements: the Statements of Financial Position, Operations and Changes

in Net Position, Cash Flows, Functional Expenses and Budgetary Resources, despite the 

internal control weakness that have been identified. MCC recognizes the importance of 

accountability, transparency and public disclosure, and our goal is to achieve excellence 

in our financial management, reporting and internal control systems. Accordingly, we will 

implement all but one of the recommendations as soon as possible to strengthen our 

systems of internal controls and lend further credibility to our financial statements. We 

wish to recognize and thank you and your team, as well as Williams, Adley & Company, 

for working closely with us during the audit process and especially for the excellent counsel 

and support you have provided us throughout the year. We look forward to working with 

you and your staff on the FY 2006 audit. Any questions may be addressed to Nimalka 

Wijesooriya, Comptroller at MCC, or to me.

Following are our management decisions regarding the proposed audit recommendations.

Material Weakness 1: MCC needs to improve its Policies and Procedures 

Recommendation: We recommend that MCC’s Office of Finance and Administration revise 

and reissue written policies and procedures that provide additional specificity in the following

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 

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Management Decision: The management decision is to accept and implement this 

recommendation no later than June 30, 2006. We recognize that the informal procedures 

that served us in the past need to be formalized and procedures strengthened to align 

responsibilities with control objectives in order to manage and mitigate risks.

Reportable Condition 1: MCC Should Devise and Implement Improved Travel 

Disbursement Controls and Procedures 

Recommendation: We recommend that MCC management:

(4) Develop and disseminate explicit policies to ensure that employees are 

aware of and follow the Federal Travel Regulations. Any exception should 

be documented as to why and approved by a manager/supervisor in writing. 

(5) Institute policies and procedures to ensure proper authorizations and 

approvals are obtained and coordination with the Office of Finance and 

Administration has occurred for each planned travel prior to the travel 

occurrence including ensuring funds availability. 

(6) 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. 

Management Decision: The management decision is to accept and implement this 

recommendation no later than March 31, 2006. In this regard, MCC has recently issued 

its travel policy incorporating the principles enumerated in the FTR and also included 

procedures to strengthen the internal control environment. MCC will also reevaluate its 

travel authorization practices and procedures to ensure that they meet the desired control 

objectives. MCC has also commenced discussions with the National Business Center, 

Department of Interior, to determine if it would be feasible to migrate to a different 

General Services Administration approved software provider to accomplish travel 

management, as the developers of E-Travel have not met many of the requirements in 

a timely fashion. 

Reportable Condition 2: MCC Needs to Address its Policies on Immediate Cash Needs 

and the Accruing of Interest on Grant Funds

Recommendation: We recommend that management: 

(3) 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.

(4) 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.
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Management Decision: MCC has not arrived at a management decision with regard to 

this recommendation. We believe that this recommendation needs further management 

study before we can come to a conclusion on this recommendation. We expect to reach 

a management decision within 30 days, as required by regulation.

Reportable Condition 3: MCC Needs to Address Human Capital Needs in Office of Finance 

and Administration

Recommendation: We recommend that MCC evaluate and document the need for additional 

employees in to ensure that proper internal controls are in place to meet the agency’s 

objectives, thus providing the Controller with delegation authority. Additionally, the roles and

responsibilities of the current Controller position and the new positions in Office of Finance 

and Administration should be clearly delineated and communicated.

Management Decision: The management decision is to accept and implement this 

recommendation no later than March 31, 2006. As a matter of fact, MCC has advertised 

and is actively recruiting for an additional position – a Deputy Chief Financial Officer. 

The responsibilities of the positions will be clearly drawn after the staff is hired to ensure 

the most appropriate mix of skills.

Material Noncompliance: MCC Did Not Fully Comply with FFMIA and GPRA

Recommendation: We recommend that MCC management: 

(3) Implement their intended corrective actions for preparation of a GPRA based 

performance goals and objectives by March 2006 as specified in its FFMIA 

assessment, specifically:

• Complete the development of a strategic plan for the next 6 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; and

(4) Assess the automated options available to handle MCC operations and 

develop short range and long range plans for the implementation 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.

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Management Decision:

(1) GPRA: The management decision is to accept this recommendation and 

complete implementation by no later than March 31, 2006. As of the date 

of this management response, the following actions have been undertaken: 

• A strategic plan for the next 6 fiscal years has been approved by MCC’s 

Board and submitted to OMB.

• A working group comprising a broad cross-section of MCC staff is actively 

engaged in developing corporate performance goals for FY 2006.

• MCC management expects to adopt operational performance goals for 

FY 2006 and 2007 that align with the defined strategic goals, and submit 

these goals to MCC’s Board and OMB. 

(2) FFMIA: The management decision is to accept this recommendation and 

complete implementation by no later than September 30, 2006. However, 

MCC recognizes that the outcomes are outside its direct management control. 

MCC was established to be a lean efficient operation and accordingly, many 

facets of its back-office operations have been outsourced. MCC was required 

to outsource many of these functions such as financial management, human 

resource and payroll management, and travel management, to a USG entity, 

and MCC selected NBC to perform its back-office work. NBC operates on many 

legacy information systems that are not interfaced or integrated with MCC’s 

core financial management system. This leads to non-compliance with FFMIA 

and also makes MCC operations inefficient. MCC is cognizant of these issues 

and identified FFMIA non-compliance as a material weakness in its FMFIA 

report, which is included in this report. MCC will work diligently within the span 

of its control to comply not only with the FFMIA requirements, but more importantly to improve its operational efficiency, effectiveness and transparency.

34
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

74

35 

STATEMENT OF FINANCIAL POSITION
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

75

STATEMENT OF OPERATIONS AND CHANGES IN NET POSITION

36
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

76

37 

STATEMENT OF FUNCTIONAL EXPENSES
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

77

STATEMENT OF CASH FLOW

38
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

78

39 

STATEMENT OF BUDGETARY RESOURCES
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

79

40
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

80

41 

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

A. Basis of Presentation

These financial statements have been prepared to report the financial position, results of 

operations, cash flows, and budgetary resources for the Millennium Challenge Corporation 

(the Corporation), as required by Section 613 of the Millennium Challenge Act of 2003 

and the Government Corporation Control Act (31 USC 9106). The Corporation was formed 

on January 23, 2004. These financial statements have been prepared from the books 

and records of the Corporation and are presented in accordance with the applicable form 

and content requirements of the Office of Management and Budget, the Secretary of the 

Treasury, and the Government Management and Reform Act of 1994.

The corporations accounting policies follow generally accepted accounting principles for 

the federal government, as recommended by the Federal Accounting Standards Advisory 

Board (FASAB). The Corporation is not subject to income tax.

The principal financial statements of the Corporation are the:

•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.

These statements are comparative between fiscal years 2004 and 2005. Since the 

Corporation was only formed in January 2004, fiscal year 2004 only represents nine 

months of data, while fiscal year 2005 represents twelve months of data. The notes to 

the financial statements are considered an integral part of the financial statements.

B.Reporting Entity 

The Corporation was created by the Millennium Challenge Act of 2003 (Public Law 108-199).

The Corporation provides United States assistance for global development. 

This assistance is provided in such a manner as to provide economic growth and the 

elimination of extreme poverty and strengthens good governance, economic freedom, 

and investments in people.

The Millennium Challenge Act provides specific authorities to MCC that result in the following

definitions that are used in these statements:
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

81

Compact: An agreement entered in to between the Corporation and an eligible country 

that establishes and funds a multi-year plan for achieving development objectives.

Pre-Compact Funding: Contracts or Grants made by the Corporation to an eligible country 

for the purpose of facilitating the development and implementation of a compact.

Threshold: Assistance provided by the Corporation to a candidate country for the purpose 

of assisting that country to become eligible for Compact funding from the Corporation. 

Evaluation and Support: Program budgetary resources to assess and work with countries 

on key elements of program development and implementation, including program results 

and impact measurement and management.

Administrative: Budgetary resources to meet the administrative and overhead expenses.

Audit: Budgetary resources provided to the Inspector General of the Corporation to 

conduct reviews, investigations and inspections of all aspects of the operations and 

activities of the Corporation.

C. Budgets and Budgetary Accounting

The activities of the Corporation are funded through No-Year Appropriations, wherein the 

funds are available for obligation without fiscal year limitation and remain available until 

expended. MCC was provided a total appropriation of $1.5 billion for Fiscal Year 2005. 

MCC’s Administrative, Evaluation and Support, and Audit funds are limited as to amount 

and it is MCC’s policy to transfer all unobligated funds at the end of the year in these 

categories to the Compacts fund at the beginning of the next fiscal year.

The Threshold Program is implemented by the United States Agency for International 

Development (USAID) under an “Appropriation Allocation” wherein the obligation authority 

for the funds provided the Corporation is transferred to USAID; the funds remain in 

MCC’s account but MCC allocates them to USAID for obligation. USAID is responsible for 

obligating these funds and meeting the financial reporting requirements stipulated 

by MCC. Accordingly, USAID will be presenting the net cost and proprietary balances on 

its financial statements. 

D. Basis of Accounting 

Transactions are recorded on both an accrual and budgetary basis. Under the accrual 

method of accounting, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to receipt or payment of cash. 

42
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

82

Budgetary accounting facilitates 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 an 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. The U.S. Treasury 

processes all cash receipts and disbursements for the corporation. The Fund Balance with 

Treasury represents no-year funds, which are maintained in appropriated funds that are 

available to pay current and future commitments.

F. Advances to Others

The Corporation advances funds, primarily in response to grantee and Federal agency drawdown

requests, to facilitate completion of any approved grant or inter-agency agreement.

G. Property and Equipment

The Corporation capitalizes property and equipment at historical cost for acquisitions of 

$25 thousand or more, with an estimated useful life of two or more years. These assets 

can include leasehold improvements, telephone equipment, computer systems equipment, 

copiers, computer software, furniture, and assets under capital leases. These assets are 

depreciated (or amortized) over estimated useful lives ranging from two to 10 year, using 

the half-year convention. The Corporation records a full year’s depreciation when assets 

are placed in to service during the first half of the fiscal year and no depreciation when assets are placed in the second half of the fiscal year. Accordingly, no depreciation was taken 

in fiscal year 2005. Normal maintenance and repair costs on capitalized property 

and equipment are expensed when incurred.

H. Grants (Compacts and Pre-Compact Funding) Payable 

Grants are made to eligible countries with an approved Compact or Pre-Compact funding 

agreement. Grants become budgetary obligations, but not liabilities, when they are awarded

and enter in to legal force. At the end of each fiscal year, the Corporation reports the total 

amount of unreimbursed authorized grantee expenses, incurred under the terms of the 

grants, as a payable. The balance at the end of FY 2005 was $0.

43 
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

83

I. Accounts Payable 

The Corporation records as liabilities all amounts that are likely to be paid as a direct 

result of transactions or events that have already occurred. Accounts payable represents 

amounts due to both Federal and non-Federal entities for goods and services received by 

the Corporation, but not paid for 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 work-related occupational disease, and beneficiaries of employees whose 

death is 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 worker’s compensation includes any costs incurred but unbilled as of 

year-end, as calculated by DOL, and is not funded by current appropriations.

The Corporation has no FECA liabilities incurred during fiscal year 2005. Therefore, none 

are reflected on the statements for this fiscal year.

K. Other Liabilities 

Other liabilities included amounts owed but not paid at the end of the fiscal year for payroll and benefits; and the portion of the liability for the Federal Employees’ Compensation 

Act charges incurred and billed but unpaid.

L. Accrued Annual Leave 

Annual leave is accrued as a liability based on amounts earned but not used as of the 

fiscal year-end. Each 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. As unused annual leave is used in the future, financing will be obtained 

from appropriations current at that time. Sick leave and other types of non-vested leave 

are expensed when used.

M. Net Position

Net position is composed of unexpended appropriations and cumulative results of 

operations. Unexpended appropriations are funds appropriated and warranted 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 revenues and expenses from 

the inception of the Corporation.

42
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

84

45 

N. Revenues 

Appropriations used: The Corporation obtains funding for 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 

the enactment of Public Law 99-335. Pursuant to this law, FERS and Social Security 

automatically cover most employees hired after December 31, 1983. Employees hired prior 

to January 1, 1984, elected to join FERS and Social Security or remained in CSRS.

For employees covered by CSRS, the Corporation contributes 8.51 percent of their 

gross pay towards retirement. For those employees covered by FERS, the Corporation 

contributes 11.50 percent of their gross pay towards retirement. Employees are 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 percent of pay. Employees under CSRS may participate in 

the TSP, but will not receive either the Corporation’s automatic or matching contributions.

The Corporation made retirement contributions of $30 thousand to the CSRS Plan and 

$876 thousand and $226 thousand to the FERS and TSP Plans in fiscal year 2005.

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 revenue and expenses during the reporting period. Actual results could differ 

from these 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 financial statements of the Corporation.
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

85

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. Generally, 

amounts paid in excess of $2.5 thousand for Federal Tort Claims Act settlements or 

awards pertaining to these litigations are funded from a special appropriation 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. Donated Services

The Corporation utilizes donated services from other Federal agencies and private firms 

in the course of business operations. The approximate fair market value of these donated 

services during the fiscal year is $515,000. This amount is not material and therefore, 

is not reflected in the financial statements.

T. Custodial Receivable and Liability 

It is expected that the Corporation will fund all its Compacts with advances that are 

required to be placed in an interest-bearing account, if legally feasible, until disbursed. 

The interest earned on these accounts are refunded to the Corporation and deposited in 

to an account at the U.S. Treasury. The receivable and related liabilities are not reflected 

in these financial statements. As at September 30, 2005, the Corporation had 

outstanding advances related to compact financing of approximately $1.8 million and 

the interest earned is estimated at about $ 17,000.

Note 2 – Fund Balance with Treasury

The U.S. Treasury accounts for all US Government cash on an overall consolidated basis. 

The Fund Balance with Treasury line on the Statement of Financial Position consists of 

the following:

Fund Balance with Treasury as of September 30 (In Dollars)

Appropriated Funds

 Unobligated

 Obligated

Total

2004

 1,973,684,995

 384,862,005

 $2,358,547,000

2005

 986,171,577

 3,645,002

 $989,816,579

46
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

86

Note 3 – Advances/Accounts Receivable

Advances reflect amounts provided grantee countries and other Federal agencies, 

in accordance with their 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.

Note 4 – Leasehold Improvements

The only capitalized asset is the leasehold improvements on MCC headquarter offices 

located at 875 15th Street, NW, Washington, DC, 2005. Occupancy of this building by 

the Corporation began in July 2005. MCC’s policy is to use the straight line method for 

computing depreciation. 

Note 5 – Other Liabilities

Other Liabilities as of September 30

(In Dollars)

47 

2005

$997,921

$747,143

$450,809

$326,930

$ 0

$ 2,522,803

2004

$0

$81,001

$356,184

$87,224

$330,216

$ 854,625

Type

Evaluation and Support

Travel

 Office of the Inspector General

Miscellaneous

Payroll

Total
MILLENNIUM CHALLENGE CORPORATION

ANNUAL REPORT

87

Note 6 – Net Position

The reported net position consists of unexpended appropriations and cumulative results 

of operations, which reflects the difference between revenues and expenses since the 

Corporation’s inception.

Breakdown of Obligated/Undelivered Orders and Unobligated–Encumbered grant funds:

Note 7 – Permanent Rescission

In fiscal years 2005 and 2004, respectively, $12 million and $ 5.9 million of amounts 

previously appropriated under the FY 2005 and FY 2004 Foreign Operations, 

Export Financing, and Related Programs Appropriations Acts (Public Law 108-447 and 

Public Law 108-199, respectively), were rescinded. The rescissions were part of the 

Across-the-Board Rescissions enacted for fiscal years 2005 and 2004.

48

Obligated/Undelivered Orders:

Madagascar

Honduras

Georgia

Ghana

Lesotho

Cape Verde

Total—Obligated/Undelivered Order

Unobligated–Encumbered

Cape Verde

Nicaragua

Georgia

Ghana

Senegal

Mazambique

Total—Unobligated–Encumbered

$110,378,000

$215,000,000

$4,111,000

$48,688

$600,000

$84,619

$330,222,307

$110,078,488

$175,000,000

$295,300,000

$2,870,502

$6,528,299

$6,000,000

$595,777,289

$109,078,000

$215,000,000

$324,078,000

$110,078,488

$175,000,000

$295,300,000

$580,378,488

$1,300,000

$4,111,000

$48,688

$600,000

$84,619

$6,144,307

$ -

$2,870,502

$6,528,299

$6,000,000

$15,398,801

$-

$-

 $-

$-

2005 Compacts Pre-Compact

Fundidng

2004