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 such as earned but unused annual leave.
Appropriations expended for property and equipment is recognized as a financing source
when the property is purchased.

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 $5 thousand to the CSRS Plan and $117
thousand and $20 thousand to the FERS and TSP Plans in fiscal year 2004,

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.

18


Salary and Benefits

Travel

Rent/Lease

Utilities

Information Technology Services.
Accounting Services

Other Services

Supplies and Equipment
Miscellaneous

Total Program Administrative Audit
$2,185,333 $ - $ 2,013,058 $ 172,275
460,463 443,508 16,955
322,833 322,833
170,241 170,241
502,286 502,286
316,496 316,496
893,483 726,529 166,954
102,368 102,368
209,729 209,729
$5,163,232 $ -_$ 4,807,048 $ 356,184

The footnotes are an integral part of these financial statements

12


Our consideration of internal control over financial reporting would not necessarily
disclose all matters in the internal control over financial reporting 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 controls over financial
reporting that, in our judgment, could adversely affect the Corporation’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 any internal control, misstatements
due to error or fraud may occur and not be detected.

We noted one matter involving internal control over financial reporting and its operation
that we consider to be a reportable condition. We do not consider this reportable
condition to be a material weakness.

Review of Oracle Federal Financials 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
Financials 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.

The Federal Financial Management Improvement Act financial system requirements state
that a system should comply with OMB Circular A-127, Federal Financial System
Requirements. The Circular requires an agency to conduct an internal control review of
all federal financial systems in accordance with FMFIA. By not completing an internal
control review of the financial system, management does not have a comprehensive
understanding of the system’s internal controls and the risk involved in conducting
system transactions. Per the Corporation, they are the first organization to use the
system. It is a new system for NBC.

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 Financials System.

28


Unaudited

(2) General Counsel: Responsible for and directs all attorneys, agents and employees
in the performance of all legal duties and services for and on behalf of MCC.
This office is responsible for all legislative matters and maintains MCC’s records.

(3) Administration and Finance: Responsible for all matters pertaining to the
Corporation’s financial, administrative, information technology, procurement, and
human resource management policies and procedures.

(4) Country Relations: Responsible for managing assistance and the development of .
compacts. Manages the communications with eligible countries leading to the
country’s submission of a proposal. It provides advice to the countries about their
proposals, plays a coordination role after the proposals are submitted and will
coordinate the negotiation of compacts with individual countries.

(5) Markets and Sectoral Assessments: Responsible for evaluating country proposals
to ensure that the projects that the countries propose are feasible and will lead to
poverty reduction through economic growth. This office is also responsible for
reviewing the financial and procurement systems in each country.

(6) Domestic Relations: Responsible for all domestic and international
communications concerning MCC. This office collects and disseminates
information to all key stakeholders.

(7) Monitoring and Evaluation: Responsible for developing and administering the
corporation’s monitoring and evaluation program.

(8) Development Policy: Responsible for defining MCC’s policies and procedures,
gathering data on the countries, and developing briefing materials.

(9) International Relations: Responsible for developing and maintaining mutually
beneficial relationships with international organizations.

PERFORMANCE GOALS, OBJECTIVES AND RESULTS FOR FY 2004

During the start up phase or the first nine months of its operations, or the period ending
September 30, 2004, MCC’s key goals were to:

Objective 1: Establish an enabling administrative and operational environment.
Performance Measures:

i. Office space rented, contracts executed for fundamental operational
services such as accounting, information technology, contracting, and,
travel services.

ii, Organizational structure and staffing plan developed, and 60 positions
filled.

Results: The MCC has successfully met all the performance measures identified
above. MCC’s temporary headquarters was established in Rosslyn, Virginia, with
space rented from the Department of State. It is anticipated that MCC will relocate to
Washington, DC in the summer of 2005. During its start up phase, MCC outsourced


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 utilized donated services from other Federal agencies during the period of

establishment for the Corporation. The dollar amount of these donated services is immaterial
to these statements.

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)
2004
Appropriated Funds
Unobligated $ 986,171,577
Obligated 3,645,002
Total $ 989,816,579

Note 3 — Prepayments

The prepayment reflects a prepaid lease on office space rented from the U.S. Department of
State.

19


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 one instance, see the Auditors’ Report on Internal
Control over Financial Reporting, where the agency’s financial management systems did
not substantially comply with the Federal financial management systems requirements.
This instance of non-compliance is required to be reported under Government Auditing
Standards or OMB Bulletin No. 01-02

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.

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, the Comptroller General of the
United States, the Corporation and its Inspector General. This restriction is not intended
to limit the distribution of this report, which is a matter of public record.

Williams, «Gmpert: Lup

January 6, 2005
Washington, DC

31


WA

WILLIAMS, ADLEY & COMPANY, LLP

Management Consultants
Certified Public Accountants

INDEPENDENT AUDITORS’ REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING

Inspector General
United States Agency for International Development

Board of Directors
Millennium Challenge Corporation.

We have audited the Statement of Financial Position of the Millennium Challenge
Corporation (Corporation) as of September 30, 2004, and the related Statements of
Operations and Changes in Net Position, Cash Flows, and Budgetary Resources for the
nine months ended September 30, 2004, and have issued our report thereon dated January
6, 2005. We conducted our audit in accordance with auditing standards generally
accepted in the United States of America and standards applicable to financial 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.

In planning and performing the September 30, 2004 audit, we considered the
Corporation’s internal control over financial reporting by obtaining an understanding of
the Corporation’s internal control, determining if internal control had been placed in
operation, assessing control risk, and performing tests of internal controls to determine
our auditing procedures for the purpose of expressing an opinion on the financial
statements. We limited internal control testing to those controls necessary to achieve the
objectives described in Government Auditing Standards and OMB Bulletin 01-02. We
did not test all internal controls relevant to operating objectives as broadly defined by the
Federal Managers’ Financial Integrity Act of 1982, such as those controls relevant to
ensuring efficient operations. The objective of our audit was not to provide assurance on
the Corporation’s internal control over financial reporting. Consequently, we do not
provide an opinion thereon.

1250 H Street, N.W., Suite 1150 * Washington, DC 20005 © (202) 371-1397 * Fax: (202) 371-9161


D. Basis of Accounting

Transactions are recorded in the accounting system on an accrual basis and a 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.

The recognition of budgetary accounting transactions is essential for compliance with legal
constraints and controls over the use of Federal funds. Budgetary accounting principles are
designed to recognize the obligation of funds according to legal requirements, which in many
cases is prior to the occurrence of an accrual-based transaction. Thus, the financial
statements differ from other financial reports submitted pursuant to Office of Management
and Budget directives for the purpose of monitoring and controlling the use of the
Corporation’s budgetary resources.

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 drawdown requests, to
facilitate completion of any approved grant or contract.

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 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 ten year, using the half-year convention. Normal
maintenance and repair costs on capitalized property and equipment are expensed when
incurred.

H. Grants Payable
Grants are made to eligible countries with an approved Compact. Grants become budgetary
obligations, but not liabilities, when they are awarded. At the end of each fiscal year, the

Corporation reports the total amount of unreimbursed authorized grantee expenses, earned
under the terms of the Compact, as grants payable.

16


WILLIAMS, ADLEY & COMPANY, LLP

Management Consultants
Certified Public Accountants

INDEPENDENT AUDITORS’ REPORT

Inspector General
United States Agency for International Development

Board of Directors
Millennium Challenge Corporation

We have audited the accompanying Statement of Financial Position of the Millennium
Challenge Corporation (Corporation) as of September 30, 2004, and the related
Statements of Operations and Changes in Net Position, Cash Flows, and Budgetary
Resources for 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.

In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Corporation at September 30, 2004, and cash flow
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

1250 H Street, N.W., Suite 1150 ° Washington, DC 20005 « (202) 371-1397 * Fax: (202) 371-9161


Unaudited

MCC’s FINANCIAL STATEMENTS

The financial statements, presented herein, have been prepared to report the financial
position and results of operation of MCC, pursuant to the requirements of 31 U.S.C. 3515
(b). While these statements have been prepared from the books and records of MCC in
accordance with generally accepted accounting principles (GAAP) for Federal entities
and the formats prescribed by the Federal Accounting Standards Advisory Board
(FASAB), the statements are in addition to the financial reports used to monitor and
control budgetary resources which are prepared from the same books and records. As
such, these statements should be read with the realization that they are for a component of
the U.S. Government, a sovereign entity. MCC’s financial statements for the nine
months ended September 30, 2004 reflect a classic start up organization, where the
program or business purpose has not been implemented from a financial perspective.
MCC has three costs centers: Program, Administration and Audit.

The financial statements however provide a glimpse of MCC’s evolving character, a lean
corporation that manages a substantial development investment fund, with limited human.
resources. MCC’s objective is to maximize the use of its human resource capital to
further its business objectives and accordingly, the bulk of its back office operations,
such as financial, information technology and human resource management have been
outsourced. MCC’s key administrative costs are staff salaries and benefits, travel, rent
and operational services. It is anticipated that salaries and benefits will account for about
55 percent and travel, particularly those related to program due diligence and monitoring,
will account for about 20 percent of all administrative costs. Audit services, provided by
USAID’s Inspector General’s office, amounted to 7 percent of administrative costs in FY
2004 and is expected to consume a lower percentage of administrative costs in the future
as MCC operations expand and the full contingent of staff is hired. No direct program
funds were obligated or disbursed in FY 2004.

MCC’S SYSTEMS, CONTROLS AND LEGAL COMPLIANCE

MCC’s strategy, given that: (i) it did not have a full complement of staff; (ii) had
outsourced all its key administrative operational functions; and (iii) was developing its
compact process, was to use outside resources to assess and validate its key internal
control structures, instead of conducting an internal review of its internal control
structures. The USAID Inspector General has issued a report based on a review it
performed addressing the following:

¢ What progress has the Millennium Challenge Corporation made in achieving its
planned organizational structure?

« What is the status of the Millennium Challenge Corporation’s compact
development process?


Unaudited

its financial management, human resources, contract and travel management
functions to the Department of Interior’s National Business Center.

On September 30, 2004, MCC had a total staff, including contractors of 61 people. 2
MCC ambitious staffing plan calls for a total staff of 150 to 200 employees by the end
of FY 2005, and accordingly, MCC has hired a recruitment firm to assist it in meeting
this important goal.

Objective 2: Meet the legal requirements specified in the Millennium Challenge Act and
develop a process for providing program support.

Performance Measures:

i. Eligible candidate countries for FY 2004 and FY 2005 funding identified,
Congress notified, and, list published in the Federal Register.

ii. Criteria and methodology for selecting eligible countries in FY 2004 and
FY 2005 established, results published, and one or more public hearings
held.

iii. Eligible countries for FY 2004 funding identified, report provided
Congress and published in the Federal Register.

Results: MCC developed the candidate country list, which included 63 and 70
countries respectively, for FY 2004 and FY 2005, notified Congress and published
the report in the Federal Register, all within the specified time frames? in the Act.
Similarly, MCC developed the selection criteria and methodology and held four
public hearings to solicit comment and facilitate understanding. On May 6, 2004, the
Board selected 16 countries as eligible to apply for MCA financing in FY 2004; a
report was submitted to Congress and published in the Federal Register. MCC also
conducted public hearings to explain the results. Within weeks of this selection,
MCC delegations visited the selected countries to explain MCA and invited these
countries to submit proposals. MCC received 10 proposals and concept papers
before the end of the fiscal year. MCC has clearly met this objective.

Objective 3: Coordinate with the United States Agency for International Development
(USAID).

Performance Measures:

i. Threshold program developed.
ii, Memorandum of understanding signed with USAID.

Results: The MCC, in close coordination with USAID, developed a Threshold
program and executed a memorandum of Understanding in September 2004, thereby
meeting this objective.

? Includes 51 direct hire staff and 10 contractors.
3 One report was submitted two days late.


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.

Because 2004 is the first year of limited operation for the MCC, there are no FECA liabilities
incurred or reflected on the statements.

K. Other Liabilities

Other liabilities included amounts owed but not paid at the end of the fiscal year for payroll
and benefits.

L. Accrued Annual Leaye

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 when used. 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.

17


Unaudited

implementation, where the foreign governments will generally manage the resources, is
new and has not been tested, increasing potential risk. The developmental benefits of this
approach, however, by far outweigh the risks, and MCC believes that this risk can be
greatly reduced or mitigated with adequate due diligence and management controls.


We also noted other matters involving internal control and its operation that we will
report to Corporation management in our management letter.

| 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, the Comptroller General of the
United States, the Corporation and its Inspector General. This restriction is not intended
to limit the distribution of this report, which is a matter of public record.

Wi tliaes, Adley« Comper Lit

January 6, 2005
Washington, DC

28


MILLENNIUM CHALLENGE CORPORATION

Financial Statements
September 30, 2004

(With Independent Auditors’ Report Thereon)

WILLIAMS, ADLEY & COMPANY, LLP
Management Consultants
and
Certified Public Accountants


Assets
Fund Balance with Treasury (Note 2)
Prepayments (Note 3)

Total Assets

Liabilities
Accounts Payable
Other Liabilities (Note 4)
Accrued Unfunded Annual Leave
Total Liabilities

Net Position
Unexpended Appropriations
Obligated
Unobligated
Cumulative Results of Operations
Total Net Position (Nofe 5)

Total Liabilities and Net Position

Total Program Administrative _Audit

$ 989,816,579 986,171,577 $ 3,288,818 $ 356,184
168,599 - 168,599 :

$ 989,985,178 986,171,577 _$ 3,457,417 $ 356,184
$ 23,884 - $ 23,884 $ -
854,625 - 498,441 356,184
169,901 : 169,901 -

$ 1,048,410 ~ $ 692,226 $ 356,184
$ 2,765,191 - $ 2,765,191 $ -
986,171,577 986,171,577 - -

$ 988,936,768 986,171,577 § 2,766,191 $ =
$ 989,985,178 986,171,577 $ 3,457,417 _$ 356,184

The footnotes are an integral part of these financial statements

10


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 nine months ended
September 30, 2004 is presented for purposes of additional analysis and is not a required
part of the basic financial statements. This statement is the responsibility of the
management of 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.

In accordance with Government Auditing Standards, we have also issued our reports
dated January 6, 2005, on our consideration of the Corporation’s internal control over
financial reporting and on our tests of its compliance with provisions of laws and
regulations. Our reports on internal control and compliance are an integral part of an
audit conducted in accordance with Government Auditing Standards and should be read
in conjunction with this report in considering the results of our audit.

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, the Comptroller General of the
United States, the Corporation and its Inspector General. This restriction is not intended
to limit the distribution of this report, which is a matter of public record.

Williays Adley «Companys uur

January 6, 2005
Washington, DC


Unaudited

What progress has the Millennium Challenge Corporation made in complying
with the Millennium Challenge Act of 2003 and other applicable federal laws and
regulations?

and, conducted reviews of:

MCC’s compliance with the Federal Information Security Management Act, and

‘The external auditors, as a part and parcel of the present financial statement audit,
have reviewed the Department of Interior’s National Business Center and MCC
internal control structures related solely to the MCC’s financial statements.

These reviews and audits provide MCC with reasonable assurance as to the validity of the
internal control systems and its ability to rely on them. MCC will be implementing the
recommendations emanating from the above: (i) MCC recently developed its own
information technology network and accordingly, will develop a security program as
called for by the report; and, (ii) MCC has obtained assurance from the Department of
Interior’s National Business Center that they will be conducting a FISMA audit of the
Oracle system in FY 2005.

MANAGEMENT CHALLENGES FACING MCC

There are many management challenges that face MCC. They include:

@

Gi)

(iii)

Staffing: MCC’s ability to effectively perform its business function, which
includes due diligence, compact negotiation, management and program
monitoring, is dependent on the ability to rapidly hire staff. MCC has
outsourced recruitment support and anticipates that this requirement will be met.

Integrated financial and management information system: As a lean
organization, MCC needs to make sure that its management information
systems are responsive to the needs of its managers and that this information is
readily accessible by its staff and partners. The financial management, human
resources, and procurement systems used by MCC are not integrated, resulting
in duplicative data entry, duplication of effort and loss of management
information. MCC plans to standardize its operations on one integrated
platform that would also provide a framework for managing its program
resources. MCC has already begun discussions with NBC to determine if they
are willing and able to support these key functions on the platform chosen by
MCC. If not, MCC will have to look for other means of meeting this
requirement.

Overseas risk: MCC’s business takes place in countries where risks are
perceived to be higher. MCC’s assistance modality and method of


Note 4 — Other Liabilities

Other Liabilities as of September 30
(in Dollars)

2004

Type Amount

Accrual

Office of the Inspector General $ 356,184

Payroll $ 330,216
Travel $ 81,001
Miscellaneous $87,224
Total $ 854,625

Note 5 — Net Position
The reported net position consists of unexpended appropriations and cumulative results of
operations (cumulative results of operations represents the differences between revenues and

expenses since the Corporation’s inception).

Net Position as of September 30

(in Dollars)
2004
Appropriated Fund
Unexpended Appropriations $ 988,936,768
Cumulative Results of Operations $ -
Total Net Position $ 988,936,768

Note 6 — Permanent Rescission

In fiscal year 2004, $5.9 million of amounts previously appropriated under the 2004 Foreign
Operations, Export Financing, and Related Programs Appropriations Act (Public Law 108-199)
were rescinded. This rescission was part of the Across-the-Board Rescission of 2004.

20


Unaudited

¢ Reward Good Policy: Using objective indicators, countries will be selected to
receive assistance based on their performance in governing justly, investing in
their citizens, and encouraging economic freedom.

¢ Operate in Partnership: Working closely with the MCC, countries that receive
MCA assistance will be responsible for identifying the greatest barriers to their
own development, ensuring civil society participation, and developing an MCA
program. MCA participation will require a high-level commitment from the host
government. Each MCA country will enter into a public Compact with the MCC
that includes a multi-year plan for achieving shared development objectives and
identifies the responsibilities of each partner in achieving those objectives.

« Focus on Results: MCA assistance will go to those countries that have
developed well-designed programs with clear objectives, benchmarks to measure
progress, procedures to ensure fiscal accountability for the use of MCA
assistance, and a plan for effective monitoring and objective evaluation of results.
Programs will be designed to enable progress to be sustained after the funding
under the MCA Compact has ended.

Organization: The MCC is managed by a Chief Executive Officer appointed by the
President and confirmed by the Senate and overseen by a Board of Directors composed of
the Secretary of State, the Secretary of Treasury, the U.S. Trade Representative, the
Administrator of USAID, the CEO of the MCC and four public members,! appointed by
the President with the advice and consent of the Senate. The Secretary of State is the
Chairman of the Board. The MCC, which administers the MCA, is designed to support
innovative strategies and to ensure accountability for measurable results. Accordingly,
the Corporation was designed to make maximum use of flexible authorities to optimize
efficiency in contracting, program implementation, and personnel.

MCC’s internal organization is comprised of the Chief Executive Officer and eight vice-
Presidencies:

(1) Office of the Chief Executive Officer: responsible for managing the 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,

' Two public members, Kenneth Hackett, president of Catholic Relief Services, and Governor Christine
Todd Whitman, who served as Administrator of the Environment Protection Agency, were named and
confirmed in July 2004,


Cash Flows from Operating Activities
Excess of Revenues over Expenses
Adjustments Affecting Cash Flow:

Appropriated Capital Used

Increase in Prepayments

Increase in Accounts Payable

Increase in Other Liabilities

Increase in Unfunded Annual Leave Liabilities

Total Adjustments
Net Cash Generated by Operating Activities

Cash Flows from Financing Activities
Appropriations Received Net of Recissions

Fund Balance with Treasury, Beginning

Fund Balance with Treasury, Ending

The footnotes are an integral part of these financial statements

Total Program Administrative Audit
$ ~ §$ - $ - $ -
$ (5,163,232) $ - $ (4,807,048) $(356,184)
(168,599) - (168,599) -
23,884 - 23,884 -
854,625 - 498,441 356,184
169,901 - 169,901 :

$ (4,283,421) $ -_$ (4,283,421) $ -
$ (4,283,421) $ - $ (4,283,421) $ -
$ 994,100,000 _$986,171.577_$ 7,572,239 _$ 356,184
$ - $ - $ ~_$ :
$_ 989,816,579 _$986,171,577_§ 3,288,818 _$ 356,184



Millennium Challenge Corporation
Footnotes
(As of September 30, 2004)

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 in accordance with generally accepted-accounting principles (according to
the Federal Accounting Standards Advisory Board, or FASAB) for the period January 23
though September 30, 2004. The Corporation is not subject to income tax.

The principal financial statements of the Corporation are the:
e Statement of Financial Position;
¢ Statement of Operations and Changes in Net Position;
« Statement of Cash Flows; and
* Statement of Budgetary Resources.

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.

C. Budgets and Budgetary Accounting
The activities of the Corporation are funded through an appropriation with indefinite
expiration (no-year funds). For FY 2004, $1 billion was initially appropriated. This

appropriation funds both the cost of administrative operations, and any grants, cooperative
agreements or contracts with eligible entities.

15


Unaudited

MANAGEMENT?’S DISCUSSION AND ANALYSIS

“We must tie greater aid to political and legal and economic reforms. And by
insisting on reform, we do the work of compassion. The United States will lead by
example.”

President George W. Bush, Monterrey, Mexico. March 22, 2002

With his announcement in Monterrey, President Bush launched a major new commitment
by the United States to bring hope and opportunity to the world’s poorest people. In
proposing the Millennium Challenge Account (MCA) and the Millennium Challenge
Corporation (MCC), the organization that would oversee and manage the account,
President Bush made clear that this program would be unlike any other in America’s long
history of foreign assistance. Along with significant new resources to fight world poverty,
the President promised we would insist on the reforms necessary to make this a fight we
could win.

With strong bipartisan support, Congress established the Millennium Challenge
Corporation on the 23 of January 2004, authorized the MCC to administer the MCA and
provided $1 billion in initial funding for FY 2004. President Bush has pledged to
increase funding for the MCA to $5 billion a year, roughly a 50 percent increase over
then current U.S. core development assistance.

The MCA draws on lessons learned about development over the past 50 years:

1. Aid is most effective when it reinforces sound political, economic and social
policies - which are key to encouraging the inflows of private capital and
increased trade - the real engines of economic growth;

2. Development plans supported by a broad range of stakeholders, and for which
countries have primary responsibility, engender country ownership and are more
likely to succeed;

3. Integrating monitoring and evaluation into the design of activities boosts
effectiveness, accountability, and the transparency with which taxpayer resources
are used,

Mission, Key Principles and Organizational Structure

Mission: MCC’s mission is to “Reduce Poverty through Economic Growth.” The MCC
will focus specifically on promoting sustainable economic growth that reduces poverty
through investments in areas such as agriculture, education, private sector development,
and capacity building.

Key Principles: The MCA is governed by the following key principles:


WA

WILLIAMS, ADLEY & COMPANY, LLP.

Management Consultants
Certified Public Accountants

INDEPENDENT AUDITORS’ REPORT ON
COMPLIANCE WITH LAWS AND REGULATIONS

Inspector General
United States Agency for International Development

Board of Directors
Millennium Challenge Corporation

We have audited the Statement of Financial Position of the Millennium Challenge
Corporation (Corporation) as of September 30, 2004, and the related Statements of
Operations and Changes in Net Position, Cash Flows, and Budgetary Resources for the
nine months ended September 30, 2004, and have issued our report thereon dated January
6, 2005. We conducted our audit in accordance with auditing standards generally
accepted in the United States of America and standards applicable to financial 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.

The Corporation’s management is responsible for complying with laws and regulations
applicable to the Corporation. As part of obtaining reasonable assurance that the
Corporation’s financial statements are 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 01-02,
including the requirements referred to in the Federal Financial Management Improvement
Act (FFMIA) of 1996. We limited our tests of compliance to these provisions and we did
not test compliance with all laws and regulations applicable to the Corporation.

1250 H Street, N.W., Suite 1150 * Washington, DC 20005 * (202) 371-1397 * Fax: (202) 371-9161


Millennium Challenge Corporation

September 30, 2004

TABLE OF CONTENTS

Management Discussion and Analysis

Independent Auditors’ Report

Statement of Financial Position

Statement of Operations and Changes in Net Position

Statement of Functional Expenses

Statement of Cash Flows

Statement of Budgetary Resources

Notes to Financial Statements

Independent Auditors’ Report on Internal Control Over Financial Reporting

Independent Auditors’ Report on Compliance with Laws and Regulations

Page

10
il
12
13
14
15
21

4


Revenues
Appropriations Used

Expenses

Excess of Revenues over Expenses

Net Position
Excess of Revenues over Expenses
Increase in Unexpended Appropriations
Obligated

Appropriated
Permanent Recission
Unobligated
Total Increase in Unexpended Appropriations
Beginning Net Position - January 23, 2004

Ending Net Position - September 30, 2004

Total Program Administrative Audit
$ 5,163,232 $ - $ 4,807,048 $356,184
$ 5,163,232 $ -_ $ 4,807,048 $356,184
$ ~ $ - $ ~ $ >
$ - $ - $ - $ -

2,765,191 > 2,765,191 -

992,071,577 992,071,577 - -
(5,900,000) (5,900,000) - -
986,171,577 986,171,577 - :
988,936,768 986,171,577 2,765,191 >

$ - $ - $ -_ $ =
$ 988,936,768 $986,171,577_ $ 2,765,191 $ =

The footnotes are an integral part of these financial statements

1


ae

Budgetary Resources:
Budget Authority:
Appropriations
Net Transfer, Current Year Authority
Unobligated Balance - Beginning of Period
Unobligated Balance - Transferred
Spending Authority from Offsetting Collections
Advances Received
Adjustments:
Recoveries of Prior Years Obligations
Permanently Not Available (Note 6)
Total Budgetary Resources
Status of Budgetary Resources:
Obligations Incurred
Unobligated Balance Available:
Apportioned
Unobligated Balance Not Available:
Total Status of Budgetary Resources

Relationship of Obligations to Outlays:
Obligated Balance, Net - Beginning of Period
Obligations Incurred
Recoveries of Prior Years Obligations
Adjustments
Obligated Balance, Net - End of Period

Accounts Payable
Undelivered Orders
Total Outlays
Outlays:
Disbursements
Collections / Refunds
Net Outlays

Total Program Administrative — Audit

$ 1,000,000,000 $992,071,577 $ 7,572,239 $356,184
(8,900,000) (8,900,000)

$ 994,100,000 $ 986,171,577 _$ 7,572,239 $356,184

$ 7,928,423 $ - $ 7,572,239 $356,184

986,171,577 986,171,577

$ 994,100,000 $986,171,577 $ 7,572,239 $356,184

$ - § - $ - $ -
7,928,423 - 7,572,239 356,184
(1,048,410) (692,226) (356,184)
(2,596,592) (2,596,592)

$ 4,283,421 $ - $ 4,283,421 $ =
4,283,421 - 4,283,421 -

$ 4,283,421 $ - $ 4,283,421 $ -