Millennium Challenge Corporation 

Reducing Poverty Through Growth 

[Tel] (202) 521-3600 | (202) 521-3700 [Fax] 

1000 Wilson Boulevard – Suite 1400 

P.O. Box 12825 

Arlington, VA 22219-2825

MILLENNIUM CHALLENGE CORPORATION 

Annual Report 

2004 

Table of Contents: 

I. Message from the Chair of the Board .......................................... 3 

II. Message from the Chief Executive Officer .................................... 4 

III. MCC Board of Directors ........................................................... 6 

IV. MCC’s Mission ...................................................................... 7 

 

V. Summary of 

Accomplishments ............................................................... 7 

VI. FY2004 Operations .................................................................. 8 

A. Setting Up the Organization 

B. Country Selection 

C. Eligible Countries 

i. Inviting Proposals 

ii. Initial Proposals 

iii. Example of Due Diligence -- Fiscal Accountability 

D. Threshold Program 

VII. Annual Reporting Requirements ................................................ 15 

www.mcc.gov
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Inspector General’s September 30, 2004 Financial Audit and Management’s 

Comments: 

 Management’s Discussion and Analysis ...................................... 16 

 Mission, Key Principles and Organizational Structure ................... 16 

 Performance Goals, Objectives and Results for FY 2004 ................. 18 

 Financial Statements ............................................................... 20 

 Systems, Controls and Legal Compliance ................................... 20 

 Management Challenges Facing MCC ....................................... 21 

Independent Auditor’s Report ................................................... 22 

Statement of Financial Position .................................................. 24 

Statement of Operations and Changes in Net Position .................... 25 

Statement of Functional Expenses ......................................... .... 26 

Statement of Cash Flows ......................................................... 27 

Statement of Budgetary Resources ............................................ 28 

Notes to the Financial Statements .............................................. 29 

Independent Auditors’ Report on Internal Control 

Over Financial Reporting ....................................................... 34 

Independent Auditors’ Report on Compliance 

 With Laws and Regulations ......................................... 37 

Management Comments and Evaluation .................................... 39 

VIII. Management Assessment of Internal Controls and Annual 

 Integrity Act Report ...................................................... 40 

Appendix I – Management Comments ................................................ 41 

Appendix II - Key MCC Staff and Contact Information ...................... ... 42 
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Millennium Challenge Corporation 

Reducing Poverty Through Growth 

Paul V. Applegarth 

Chief Executive Officer 

II. A MESSAGE FROM CEO PAUL APPLEGARTH October 2004

Looking back at all MCC has accomplished, it is hard to believe that we are still a “startup” – as of this writing, we have not yet celebrated our first birthday. In February of 

2004, a group of seven detailed employees turned on the lights for the first time at 

MCC’s temporary headquarters. 

As a startup, we faced the usual problems: getting phones and computers and then getting 

them to work. We recruited staff with three criteria: they had to be among the most 

talented in their field, they had to be team players, and they had to believe in our mission 

to reduce global poverty. While doing this we also had to implement a new way of 

delivering development assistance and do so in the glare of the international spotlight. 

Our Board completed selection rounds for MCA eligible countries on May 6— the 

earliest date permitted under our legislation—and for Threshold Program eligible 

countries in September. MCC received the first eligible country proposals in late August, 

and we have maintained a constant dialogue with each country as they refine their 

programs for poverty reduction and growth. Our eligible countries are taking the time to 

get their proposals right. By September 30, we had 10 of 16 potential concept papers or 

proposals in hand. 

Starting in May, MCC staff visited all sixteen 2004 eligible countries to explain our 

mission and our expectations. As many aspects of the MCA are radically different from 

traditional assistance programs, I have to confess that initially our message was met with 

enthusiasm, but also with some uncertainty. Some of this uncertainty centered around the 

“consultative process,” which we emphasized was important to ensuring compact 

proposals reflected national priorities. Accordingly, while we had successful meetings 

with leaders and with government ministers in all of our eligible countries, we didn’t stop 

there. We met with non-governmental organizations, local businesses, members of 

parliament, other donors, and the press. Our message to each was that they stay vigilant 

and stay involved. We told them that their participation was critical to identifying 

opportunities for meaningful poverty reduction and sustainable growth and to ensuring 

that proposals reflect the development priorities of all people, not just a minority of wellconnected people. 

The eligible countries have reacted with pride at being selected to apply for MCA 

funding. Just being selected ranks them favorably in comparison to their peers. Being an 

MCA country is an honor, as well as an opportunity and a responsibility. 
5

For people who are unfamiliar with the MCC process, it is understandable that they 

expect immediate disbursement of aid dollars in light of the great need and the suffering 

of the more than one billion people worldwide living in extreme poverty. But MCC is 

not about to commit resources without confidence that these funds will help to bring a 

poverty reduction and growth return on this investment of US taxpayer funds. Our 

partner countries share the view that MCC funding must be used effectively. Both they 

and we are working quickly and carefully toward that end. 

It is noteworthy that we also received a clean bill of health in our audited financial 

statements for 2004. This is important because we see ourselves as a fiduciary of the 

American taxpayer and set high standards for ourselves in terms of our financial 

operations and the way we conduct our overall business. We see ourselves as accountable 

to taxpayers as well as to the countries of MCC and their citizens. 

As eligible countries move toward MCC compact negotiations, the act of refining and 

finalizing their proposals has had a dramatic impact. One government official commented 

that the intangibles his country gained—learning to incorporate diverse viewpoints, to 

prioritize a long list of development needs, and to focus on results, rather than inputs—

were worth as much as any potential financial assistance from MCC. One country passed 

four pieces of anti-corruption legislation and began enforcement. The stated reason: a 

hope to qualify for MCA funding. 

While we emphasize country ownership and the responsibility of the country to drive the 

timeline of the compact proposals, we don’t leave them on their own. We let the 

countries take the lead but we do not passively sit by. We spend extensive time on the 

ground with the countries helping them to develop their proposals. 

Our Board has scheduled the second round of MCA and Threshold eligible countries for 

November. We now have potential relationships with 23 of the poorest countries in the 

world, and look forward to expanding our reach in fiscal year 2005. 

Finally, we could not have gotten where we are without the wholehearted assistance of 

many people. Our Board of Directors has been enthusiastic and invaluable. Our 

Chairman, Secretary of State Colin Powell, has gone above and beyond any call to 

promote and support MCC. Our friends on Capitol Hill have given us bipartisan support. 

Many organizations and individuals also have offered assistance of every kind to get us 

up and running and on our way to reducing poverty. And those seven detailees have 

grown to more than sixty full time employees. Their collective efforts are what moved us 

to where we are today. 

Paul V. Applegarth 

Chief Executive Officer 
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III. BOARD OF DIRECTORS 

as of September 30, 2004 

Colin L. Powell 

Secretary of State 

Chairman 

John W. Snow 

Secretary of the Treasury 

Vice-Chairman 

Paul V. Applegarth 

Chief Executive Officer 

Kenneth Hackett 

Andrew S. Natsios 

Administrator 

U.S. Agency for International Development 

Christine Todd Whitman 

Robert B. Zoellick 

U.S. Trade Representative 
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IV. MCC’s MISSION 

To provide United States assistance for global development through the Millennium 

Challenge Corporation in a manner that promotes economic growth and the 

elimination of extreme poverty and strengthens good governance, economic freedom, 

and investments in people. 

On March 14, 2002 in Monterrey, Mexico, President Bush called for a “new Compact for 

global development,” to link greater contributions from developed nations to greater 

responsibility from developing nations. Pledging the United States would lead by 

example, the President proposed the creation of the Millennium Challenge Account 

(MCA). 

In January of 2004, Congress formally created the MCA and established the Millennium 

Challenge Corporation (MCC) — a U.S. government corporation — to oversee the 

Account. The program, envisioned by President Bush and established by Congress, 

would be substantial, providing significant new resources to the global fight against 

poverty. MCC country programs would be funded in multi-year Compacts of sufficient 

size to enable MCC to be among the largest donors in each country that receives funding. 

The mission of MCC is to provide United States assistance for global development 

through the Millennium Challenge Corporation in a manner that promotes economic 

growth and the elimination of extreme poverty and strengthens good governance, 

economic freedom, and investments in people. To carry out this mission, MCC draws 

lessons from the past 50 years of development assistance: 

• Aid is most effective when it reinforces sound political, economic, and social 

policies; therefore, reward countries that demonstrate performance in terms of putting 

in place policies to provide an environment for increased economic growth and 

poverty reduction. 

• Development plans that engender country ownership are the most likely to succeed; 

therefore, allow countries to set their own priorities. 

• Measure results from the beginning to boost effectiveness, accountability, and the 

transparency with which taxpayer resources are used; therefore, integrate monitoring 

and evaluation into the design and execution of activities. 

V. SUMMARY OF ACCOMPLISHMENTS

In the eight months since its founding, MCC is proud of its accomplishments and below 

is a summary of some of them. The largest accomplishment, however, is more difficult 

to quantify or enumerate -- the effect of the United States establishing an entirely unique 

development assistance program that incentivizes policy reforms, focuses programs 

exclusively on reducing poverty through economic growth, and emphasizes the 

importance of countries establishing their own priorities and ideas as opposed to a donor 

explaining what a country needs. At the same time, MCA is a program that requires a 

broad-based consultative process, highlights the importance of measuring results, and 
8

holds countries accountable for their ability to produce those results. Some specific 

accomplishments of MCC’s first eight months include: 

• Selectivity: Developed country selection criteria and methodology for FY2004; 

refined specific indicators based on public comment and announced processes to 

further refine for FY2005 and FY2006; selected 16 out of 63 candidate countries for 

FY2004; announced new set of 68 candidate countries for FY2005 

• Eligible Countries: Engaged 16 countries for FY2004, including collaboration with 

government officials, local civic leaders, USAID and other donors; received and 

began review of 10 country proposals or concept papers 

• Threshold Countries: Designed program from scratch; selected 7 eligible countries 

for FY2004; worked out the basis for an agreement with USAID to work with 

countries in program development and implementation 

• Congress: Met all legislative deadlines, including country selection on first day it 

was legally possible; conducted numerous briefings and meetings to keep interested 

parties informed; cooperated with GAO to help them make three different 

presentations about MCC during the fiscal year 

• Public: Held four public outreach sessions; conducted three Board meetings attended 

by the public 

• Staffing: Built up staff from 7 to over 60 individuals with wide variety of 

backgrounds and experience in government, private sector development, multilateral 

institutions, NGOs and higher education 

• Administrative: Held open, competitive process to select office space and began 

competitive process to develop an IT platform; competitively selected a public-sector 

financial manager; received clean bill of health in audited financial statements 

VI. FY2004 OPERATIONS 

A. SETTING UP THE ORGANIZATION 

The initial MCC core staff consisted of only seven employees working in offices located 

in Rosslyn, Virginia. On February 2, the MCC Board of Directors held its first meeting. 

The first Board consisted of the Secretary of State (Chairman), the Secretary of the 

Treasury (Vice Chairman), the U.S. Trade Representative and the Administrator of the 

U.S. Agency for International Development. Two public members, Kenneth Hackett, 

President of Catholic Relief Services, and Christine Todd Whitman, who served as 

Governor of New Jersey and Administrator of the Environmental Protection Agency, 

were named and confirmed later. At its first meeting, the Board adopted the 

Corporation’s by-laws, announced the initial 63 Candidate Countries, and named an 

interim CEO, Under Secretary of State Alan Larson. On February 20, the President 

announced his intention to nominate Paul V. Applegarth as CEO of MCC. A Senate 

hearing was held on March 31, 2004 and Mr. Applegarth was confirmed as MCC’s first 

CEO on May 5, 2004. 
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B. COUNTRY SELECTION 

In March, MCC submitted its criteria and methodology for selecting eligible countries for 

FY2004. The selection process involves a measurement of the candidate countries’ 

overall performance in three broad policy categories: Ruling Justly, Encouraging 

Economic Freedom, and Investing in People. To assess policy performance within these 

three major policy categories, 16 publicly available indicators were used. 

In assessing possible indicators, MCC explained that it favors those that: 1) are developed 

by an independent third party, 2) utilize objective and high-quality data, 3) are 

analytically rigorous and are publicly available, 4) have broad country coverage and are 

comparable across countries, 5) have a clear theoretical or empirical link to economic 

growth and poverty reduction, 6) are policy-linked, i.e. measure factors that governments 

can influence within a two to three year horizon, and 7) have broad consistency in results 

from year to year. 

In fiscal year 2004, MCC used the following 16 indicators: 

Ruling Justly 

• Civil Liberties (Freedom House) 

• Political Rights (Freedom House) 

• Voice and Vote (World Bank Institute) 

• Government Effectiveness (World Bank Institute) 

• Rule of Law (World Bank Institute) 

• Control of Corruption (World Bank Institute) 

Investing in People 

• Immunization rate (World Health Organization) 

• Public Expenditure on Health (National Government Data) 

• Primary Education Completion Rate (World Bank EdStats, Education For All 

(EFA)) 

• Public Expenditure on Primary Education (National Government Data) 

Economic Freedom 

• Country Credit Rating (Institutional Investor) 

• Inflation Rate [(International Monetary Fund’s (IMF) International Financial 

Statistics (IFS), World Economic Reports (WEO) and other sources)] 

• Days to Start a Business (World Bank) 

• Trade Policy (The Heritage Foundation) 

• Regulatory Quality Rating (World Bank Institute) 

• Fiscal Policy (WEO and other sources) 

In making its determination of eligibility for a particular candidate country, the MCC 

Board considered whether the country performs above the median in relation to its peers 

on at least half of the indicators in each of the three policy categories and above the 
10

median on the corruption indicator. One exception to this methodology was that the 

median was not used for the inflation indicator. Instead, to pass the indicator, a country’s 

inflation rate needed to be under a fixed ceiling of 20%. The indicators methodology was 

used as the predominant basis for determining which countries will be eligible for MCA 

assistance. In addition, the Board used discretion in evaluating and translating the 

indicators into a final list of eligible countries. In this respect, the Board considered 

whether any adjustments should be made for data gaps, lags, trends, or other weaknesses 

in particular indicators. Likewise, the Board could deem a country ineligible if it 

performs substantially below average on any indicator and has not taken appropriate 

measures to address this shortcoming. 

Through a variety of public outreach mechanisms, MCC made its selection criteria and 

methodology known and received constructive input on the indicators. In August, MCC 

submitted its selection criteria and methodology for FY2005 -- particularly highlighting 

two changes and a process to try to find a source of reliable, consistent data for assessing 

the quality of a country’s policies regarding the management of natural resources. 

MCC substituted the indicator “Girls’ Primary Completion Rates” for the previous 

indicator, “Primary Completion Rates.” Using primary school completion rate data 

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

in the education of their people, and highlights the strong empirical linkage between 

investments in the education of women and girls and a country’s economic growth and 

poverty reduction. Another indicator -- one-year consumer price inflation rate – was 

changed from a ceiling of 20% to 15% to be a more meaningful test of a government’s 

economic policies. 

MCC announced a process to try to identify an existing natural resources management 

indicator or to stimulate development of a new indicator. MCC explained that it would 

establish a working group, chaired by MCC Board Member Christine Todd Whitman, to 

work with outside groups and experts to establish criteria, and invite proposals, for such 

an indicator. 

C. ELIGIBLE COUNTRIES 

On May 6, 2004, MCC’s Board of Directors selected 16 countries from among the 63 

candidate countries to be eligible to submit proposals for MCC assistance. The selected 

countries, which have a combined population of more than 130 million people and an 

average per capita income of roughly $600 are: Armenia, Benin, Bolivia, Cape Verde, 

Georgia, Ghana, Honduras, Lesotho, Madagascar, Mali, Mongolia, Mozambique, 

Nicaragua, Senegal, Sri Lanka, and Vanuatu. 

i) Inviting Proposals 

In April 2004, MCC put proposal guidance on its website. Within 10 days of the May 6 

announcement of the FY 2004 program, five MCC delegations departed for consultations 

in the 16 selected countries. The purposes of these preliminary visits, which occurred in 

May and June, 2004, were: 
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1) To advise the countries formally of their eligibility for the program and to describe the 

program. MCC delegations made it clear that eligibility was not a guarantee of MCC 

funding and that funding would depend ultimately on the quality of the proposals; 

2) To invite the participation of both government and non-government entities in these 

countries in the development of the countries’ proposals; 

3) To discuss the issues that eligible countries would have to address in their proposals: 

How would the proposals lead to poverty reduction through growth? How would the 

proposal development process by an eligible country be made open to its public? What 

additional policy reforms would the countries adopt as a result of MCC funding? 

4) To invite into the proposal process representatives of the private sector, civil society, 

non-government organizations and opposition parties in each of the countries visited. 

The results of these initial forays into the eligible countries were highly positive. The 

major finding: getting workable proposals was going to take time. Although the MCC 

program was welcomed enthusiastically by potential partners, it became obvious that to 

move the process from an initial concept to a full proposal to a formal negotiation would 

take a considerable amount of resources and a significant investment of time by country 

officials. The concept of the country developing its own priorities seemed new to many 

of the countries. Some looked for MCC direction in establishing program priorities; 

other countries seemed inclined to take earlier planned projects “off the shelf” for 

funding without particular reference to the strategic growth and poverty reduction 

policies which are required for MCC funding. In short, the process is likely to be 

iterative, extended in both time and scope, as proposals are developed and reviewed. 

ii) Initial Proposals 

Responding to the MCC delegation visits in May and June, country proposals and 

concept papers began reaching MCC in August and September. The proposal writing 

process itself spurred innovation by some of the eligible countries in expanding the 

participation of their populations. 

MCC started conducting a preliminary type of due diligence on a few of the more 

detailed proposals shortly after their submission. The aim was to assess the economic 

plausibility and the logic of the proposals, ask questions about the consultative process, 

establish the groundwork on fiscal accountability mechanisms, procurement practices, 

and implementation capabilities, and a country’s capability to set reasonable and useful 

benchmarks, and monitor program progress. 

Early indications are that many of the initial proposals are quite responsive and in line 

with MCC’s objectives. For instance, one proposal was prepared by the central 

government working with development councils which represent 144 local 

nongovernmental organizations, private sector entities and other groups within the 

country’s regions. This process marks the first time in that country’s history that the 
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central government has employed these councils to develop the components of a foreign 

assistance program, giving these groups unprecedented ”ownership” of the process. The 

proposal itself is for a four year program that focuses on an area with both the most 

extreme rural poverty in the region and a high potential for economic growth. It includes 

measures to modernize land registration and to promote agribusiness through irrigation, 

extension services, financing, export promotion, and market development. 

Some proposals, however, have not been prepared in a manner that involved broad input 

from civil society and other stakeholders in the countries’ development process. Some 

proposals consisted more of a “laundry list” of projects rather than an attempt to identify 

a measurable result to accomplish. Further iterations of these types of proposals will be 

necessary. 

The coordination of other international donor activities has been a major consideration by 

both MCC and eligible countries in the consultative process. There is widespread 

agreement that the proposals need to insure that MCC programs complement (rather than 

replace) other bilateral and international donor activities. MCC has indicated that there is 

no need to “reinvent the wheel” with regard to other donor documentation requirements -

- such as the Poverty Reduction Strategy Papers prepared by the country in coordination 

with the World Bank and International Monetary Fund. The focus, rather, is on leverage 

-- on getting MCC proposals that tie into other donor programs and build on their efforts 

to reduce poverty through growth. 

To date, programs identified in proposals that have been submitted to MCC vary greatly 

according to the needs of each eligible country. Some examples include: 

• Integrated rural and regional development programs with a focus on improved 

infrastructure, targeted investment, and energy rehabilitation. 

• A program to improve land titling procedures, expand access to credit, and 

identify domestic and international market opportunities. 

• A program to develop agribusiness and increase agricultural productivity through 

irrigation system upgrades, improved access to financing, and strengthening 

regional technology research capabilities. 

iii) Example of Due Diligence -- Fiscal Accountability 

To provide an example on how MCC is conducting its due diligence, it is worth looking 

at a particular subject area. A key element of all Compact development and execution 

will be fiscal accountability—the mechanisms and processes that assure that funds are 

managed properly and procurements are undertaken in a fair, open, and transparent 

manner. The following is a summary of general guidance that MCC is providing to 

countries eligible to receive MCA assistance, though MCC notes that fiscal 

accountability -- like any aspect of due diligence -- will be reviewed on a country by 

country basis. 
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Principles

MCC is utilizing U.S. taxpayer funds and is accountable for those funds. The 

requirement to meet these accountability standards will guide the design, and be a key 

element, of MCC program implementation. In determining the appropriate financial 

accountability mechanism for each country, MCC will be guided by the following 

principles: 

 The mechanisms should result in maximum transparency of financial transactions 

and activity. 

 The mechanisms should have clear lines of authority and responsibility to assure 

accountability. 

 The mechanisms should produce maximum integrity of financial information and 

assurance that the funds are used for the purpose intended. 

 MCC will seek, wherever possible, to build upon existing systems, mechanisms, 

and previous assessment work. 

 The mechanisms should, wherever possible, build capacity that will remain in 

place at the end of the MCC Program. 

In developing a specific mechanism for a particular country, MCC and the country will 

seek an optimal balance among speed of program and project execution, efficiency of 

operation, minimization of overhead costs, sustainability of outcomes, and effectiveness 

of accountability. 

Examples of mechanisms could be financial and accounting institutions, existing 

government financial systems, a project management firm, the establishment of separate 

financial management units and accounts within government, an overall project 

management firm, or the establishment of a trust managed by an independent party to 

oversee and account for MCC program funds. While the mechanisms will differ, some 

common elements will be part of fiscal accountability in every MCC program. The 

common elements include: 

 Financial information will be provided on a periodic basis (e.g., monthly) and in a 

standard accounting framework that will allow information to be compared over 

time and across countries. 

 Significant procurement actions must be available on a website (or some other 

method that would make the procurement process transparent) including 

notifications of procurements, solicitation documents, final contract awards, and 

change orders. 

 Actual cash disbursements from MCC will be made periodically (e.g., quarterly) 

based on certified cash requirement needs and financial management and 

procurement standards. 

 Ongoing disbursements will be subject to satisfactory performance on Compact 

goals and objectives. 
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 At a minimum, an independent auditor approved by the MCC Inspector General 

will conduct an annual audit. The financial accountability mechanism must 

address any audit recommendations promptly and transparently. 

D. THRESHOLD PROGRAM 

In May, the Board announced that MCC would launch a Threshold Program. Underlying 

all of MCC’s efforts is the importance of incentivizing policy reform. The Threshold 

Program was set up to enhance this objective -- to provide assistance to countries that are 

close to qualifying for MCC and have demonstrated a commitment to meeting the 

eligibility requirements in the future. The program is directed toward improving the 

specific performance indicators on which a Threshold Program country has failed to 

score higher than the median. 

At the end of the fiscal year, the Board selected Albania, East Timor, Kenya, Sao Tome 

and Principe, Tanzania, Uganda, and Yemen to be invited to submit their proposals for 

improving their MCA indicators. A deadline of January 31, 2005 was set for these 

countries to submit concept papers. MCC reached an agreement with the U.S. Agency 

for International Development to work in partnership on helping countries design and 

ultimately implement programs. 
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VII. ANNUAL REPORTING REQUIREMENTS 

Pursuant to Section 613 of the Millennium Challenge Act of 2003 

In accordance with the reporting requirements set forth in Section 613 of its authorizing 

legislation, MCC reports the following as of September 30, 2004: 

Section 613(b)(1). Amount of obligations and expenditures for assistance 

provided to each eligible country during the prior fiscal year: 

None

MCC has no information to report with respect to the remaining items in Section 613 

because it had not obligated or expended any funds for assistance to any eligible country 

as of September 30, 2004. These items address the following reporting elements: 

• Section 613(b)(2). Assessments of progress towards objectives and effectiveness 

of assistance in eligible countries with which MCC has established a Compact. 

• Section 613(b)(3). Coordination of Compact assistance with other U.S. foreign 

assistance and related trade policies. 

• Section 613(b)(4). Coordination of Compact assistance with other donor 

countries. 

• Section 613(b)(5). Other relevant information related to Compact assistance. 

In evaluating country proposals, MCC has consulted with other U.S. agencies and 

international donors regarding how the proposed uses of MCC assistance would 

complement current and planned development assistance projects. 
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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 

MISSION STATEMENT 

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 23rd of January 2004, authorized 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 provide United States assistance for global development 

through the Millennium Challenge Corporation in a manner that promotes economic 

growth and the elimination of extreme poverty and strengthens good governance, 

economic freedom, and investments in people. 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. 
17

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

• 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 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 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: MCC is managed by a Chief Executive Officer appointed by the President 

and confirmed by the Senate. MCC is 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 MCC and four public members,

1

 appointed by the 

President with the advice and consent of the Senate. The Secretary of State is the 

Chairman of the Board. 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 vicePresidencies: 

 

(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. 

(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. 

1

 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. 
18

(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. 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 Congressional and media 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: 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 

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

 

2

 Includes 51 direct hire staff and 10 contractors. 
19

MCC’s 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 to 

Congress and published in the Federal Register. 

 

Results: MCC developed the candidate country list, which included 63 and 71 

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: MCC, in close coordination with USAID, developed a Threshold program 

and executed a Memorandum of Understanding in September 2004, thereby meeting 

this objective. 
20

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? 

 

• What progress has the Millennium Challenge Corporation made in complying with 

the Millennium Challenge Act of 2003 and other applicable federal laws and 

regulations? 
21

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 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: 

 

(i) 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. 

 

(ii) 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. 

 

(iii) Overseas risk: MCC’s business takes place in countries where risks are perceived 

to be higher. MCC’s assistance modality and method of 

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.
22

INDEPENDENT AUDITOR'S REPORT

Financial Statements from the Inspector General’s Audit Report September 30, 2004

 

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 
23

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 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. 

 

 January 6, 2005 

Washington, DC 
24
25

 
26
27
28
29

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. 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, through September 30, 2004. 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 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, 

compacts or contracts with eligible entities. 

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. 

 
30

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 years, 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. 

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 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 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. 

N. Revenues 

 

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 are recognized as a financing source when the property is purchased. 

 
31

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. 

 

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. 

 
32

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 with the U.S. Department of State. 

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 

 
33

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 $ 0 

 

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, 2004. 
34

 

 

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. 

Our consideration of internal control over financial reporting would not necessarily 

disclose all matters in the internal control over financial reporting that might be
35

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. 

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 
36

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. 

 

 January 6, 2005 

Washington, DC 
37

 

 

 

 

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. 

 

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. 
38

 

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. 

 

January 6, 2005 

Washington, DC 
39

MANAGEMENT COMMENTS AND OUR EVALUATION 

We consider the management comments to be responsive to the recommendations made 

in this report. We have included these comments in their entirety in Appendix I. 

MCC’s management noted the non-compliance and internal control weakness identified 

the auditors’ reports and concurred with the report finding and recommendation that 

MCC require the National Business Center (NBC) to conduct an internal control review 

to assess the control environment of the Oracle Federal Financials System used to process 

MCC’s transactions. MCC stated that it has discussed the issue with the NBC and NBC 

has scheduled a SAS 70 audit of the Oracle Federal Financials System which is expected 

to be completed in fiscal year 2005. 

 

Based on MCC’s comments, we consider that a management decision has been reached 

on the report’s recommendation. MCC should report to the OIG when final action has 

been taken. 
40

VIII. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS AND 

ANNUAL INTEGRITY ACT REPORT 

MCC began to fully implement internal accounting and administrative control systems 

for the corporation during this, its first year of operations. MCC was able to meet the 

intent of the Federal Managers’ Financial Integrity Act of 1982 (FMFIA) for FY 2004 by 

using the work of the Office of the Inspector General / USAID, external audits and 

reviews, observations and analyses of its daily operations and audits performed by its 

service partners. Because not all of these controls were formalized and documented and 

MCC did not perform a formal assessment of these controls, MCC’s internal control 

procedures did not fully comply with the requirements of the FMFIA. MCC did not 

identify any material reportable internal control weaknesses; items identified are reflected 

in the Management Discussion and Analysis section of the audit report attached hereto. 

MCC’s service provider, the Department of Interior’s National Business Center (NBC), 

did not conduct a formal review of the Oracle Financial System used to record MCC’s 

financial transactions. The Office of Inspector General / USAID auditors identified this 

as a weakness during the audit of MCC’s financial statements. As a result, MCC did not 

technically comply with the requirements of the Federal Financial Management 

Improvement Act and the related Office of Management and Budget (OMB) Circular 

A-127, which requires that agencies conduct a review of all Federal financial systems as 

part of FMFIA compliance. NBC has accordingly contracted for a Statement of Auditing 

Standards (SAS) 70 review of the Oracle Financial System used by MCC; the auditor’s 

report is expected to be issued by April 30, 2005. 

A report from the Office of Inspector General / USAID issued in FY 2004 determined 

that MCC had not developed an information security program or implemented such a 

program under the Federal Information Security Management Act of 2002 (FISMA) 

while using a State Department hosted network. MCC accepted the Inspector General’s 

recommendation and agreed to begin to address it in the course of migrating to a 

proprietary network in December 2004. The Inspector General is currently auditing the 

work performed to date and to delineate what further steps are needed. 

Certification: 

MCC did not perform a formal internal control assessment for the year ended 

September 30, 2004. Based on reports from the Office of Inspector General / USAID and 

the Government Accountability Office, including audits, inspections, reviews and audits 

of financial systems, as well as knowledge gained from daily operations of MCC 

programs and systems, I conclude that the systems of internal controls used by MCC 

provide reasonable assurance that the intent of the Federal Managers’ Financial Integrity 

Act was achieved. 

 

 

 Paul V. Applegarth 

 Chief Executive Officer
41

 
42

Appendix II. 

Key Staff 

as of September 30, 2004 

Paul V. Applegarth 

Chief Executive Officer 

Jon Dyck 

Vice President and General Counsel 

John Hewko 

Vice President 

Country Relations 

Gary Keel 

Vice President 

Administration and Finance 

Clay Lowery 

Vice President 

Markets and Sectoral Assessments 

Frances McNaught 

Vice President 

Domestic Relations 

Charles Sethness 

Vice President 

Monitoring and Evaluation