OFFICE OF INSPECTOR GENERAL 

for the Millennium Challenge Corporation 

AUDIT OF THE MILLENNIUM 

CHALLENGE CORPORATION’S 

FINANCIAL STATEMENTS, INTERNAL 

CONTROLS, AND COMPLIANCE FOR 

THE PERIOD ENDING SEPTEMBER 

30, 2005 AND THE NINE MONTH 

PERIOD ENDING SEPTEMBER 30, 

2004 

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

December 6, 2005 

WASHINGTON, DC 
Office of Inspector General 

 for the 

Millennium Challenge Corporation 

December 6, 2005 

MEMORANDUM 

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

FROM: John M. Phee, AIG/MCC /s/ 

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

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

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

Enclosed is the final report on the subject audit. The Office of Inspector General (OIG) contracted 

with the independent certified public accounting firm of Williams, Adley and Company, LLP to 

audit the financial statements of the Millennium Challenge Corporation (MCC) for the period 

ending September 30, 2005 and the nine month period ended September 30, 2004. The contract 

required that the audit be performed in accordance with generally accepted auditing standards and 

Office of Management and Budget (OMB) Bulletin 01-02, Audit Requirements for Federal 

Financial Statements. 

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

ending September 30, 2005 and the nine month period ended September 30, 2004, the WA & Co. 

auditors found that: 

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

accepted accounting principles, 

• four reportable conditions regarding the controls over financial reporting and its 

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

• three instances of noncompliance with laws and regulations. Two of the three instances of 

noncompliance were related to its financial and accounting system. 

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

Millennium Challenge Corporation’s need to develop written policies and procedures to 

U.S. Agency for International Development 

1300 Pennsylvania Avenue, NW 

Washington, DC 20523 

www.usaid.gov 
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streamline its financial operations. Because of this material weakness and the reportable 

conditions, there is an increased risk of improper recording, unauthorized transactions, 

omissions, potential funds control violations and noncompliance with laws and regulations. 

Williams, Adley and Company, LLP reported the following internal control weaknesses: 

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

weakness) 

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

Efficient Management of Travel (reportable condition) 

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

Cash Management Nor the Appropriate Recording of Custodial Interest Receivable and 

Payable (reportable condition and noncompliance) 

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

Inadequate (reportable condition) 

Williams, Adley and Company, LLP also reported the following instances of noncompliance 

with laws, regulations, contracts, and grant agreements, inclusive of those referred to in the 

Federal Financial Management Improvement Act of 1996 (FFMIA), disclosed instances of 

noncompliance or other matters that are required to be reported herein under Government 

Auditing Standards, issued by the Comptroller General of the United States, and Office of 

Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial 

Statements: 

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

(FFMIA) and Government Performance Results Act (GPRA) (material noncompliance). 

2. MCC did not fully comply with Federal Information Security Management Act FISMA 

(material noncompliance). 

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

Cash Management Nor the Appropriate Recording of Custodial Interest Receivable and 

Payable (reportable condition and noncompliance) 

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

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

accordance with U.S. generally accepted government auditing standards, was not intended to 

enable the OIG to express, and we do not express, opinions on MCC’s financial statements or 

internal control; on whether MCC’s financial management systems substantially complied with 

FFMIA; or on MCC’s compliance with other laws and regulations. Williams, Adley and 

Company, LLP is responsible for the attached auditors’ report, dated November 7, 2005, and the 

conclusions expressed in the report. However, our review disclosed no instances where 
 

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Williams, Adley and Company, LLP did not comply, in all material respects, with applicable 

standards. 

Because of the internal control weaknesses and the noncompliance finding reported by Williams, 

Adley and Company, LLP we are making the following recommendations to MCC’s management: 

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

Administration revise and reissue written policies and procedures that provide 

additional specificity including the Fund Balance with Treasury, financial reporting, 

payroll processing, accrual generation and reporting, interagency reporting, fixed 

assets, travel, monitoring and internal grant processes. 

Recommendation No. 2: We recommend that MCC management: 

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

employees are aware of and follow the Federal Travel Regulations. The 

policies should require that any exceptions to the policies be documented 

and approved by a manager/supervisor in writing. 

2.2 Institute policies and procedures to ensure proper authorizations and 

approvals are obtained and coordination with the Office of Finance and 

Administration has occurred for each planned trip prior to travel to 

ensure that the information is properly captured in the financial 

management system. 

2.3 Develop and institute controls to reject those expenses claimed that exceed 

the allowable country per diem unless explicit written authorization is 

provided prior to travel. 

Recommendation No. 3: We recommend that MCC management: 

3.1 Develop policies and procedures to ensure that the payment schedules 

and other agreements entered into with grantees are reflective of the 

Treasury requirements concerning advances and immediate cash needs. 

3.2 Establish policies and procedures to ensure that any custodial liabilities, 

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

advances, are properly recorded. 

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

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

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

the roles and responsibilities of the current Controller position and the new 

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

and communicated to its staff. 
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Recommendation No. 5: We recommend that MCC management: 

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

years that meets OMB requirements, b) Involve MCC staff in the 

determination of corporate performance goals, and c) Establish and 

communicate operational performance goals for FY 2006 that align 

with the defined strategic goals and submit the operational goals to the 

Board and OMB. 

5.2 Assess the automated options available to handle MCC operations and 

develop short range and long range plans for the implementation of the 

most appropriate information technology structure to address 

electronic integration of at least the payroll, procurement and travel 

functions and systems to increase the efficiencies and effectiveness of 

the processing of financial transactions; and decrease the risk of errors. 

In finalizing the report, we have received and considered your response to the draft report and 

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

consider that management decision has been reached on Recommendations No. 1, 2, 4, and 5. 

However, management decision has not been reached on Recommendation No. 3. According to 

your response you will study the action recommended by recommendation No. 3 and will provide 

us the results of that study within 30 days. Please forward to us all information related to your 

management decision on recommendation No. 3 and the final actions you have taken to implement 

the other recommendations. See the Exhibit for the full text of MCC’s Management Comments. 

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

Williams, Adley and Company, LLP during the audit. Please contact Alvin A. Brown at (202) 

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

Page 

Management Discussion and Analysis 1 

Independent Auditors’ Report 13 

Opinion on Financial Statements 14 

Internal Control Over Financial Reporting 15 

Compliance with Laws and Regulations 24 

Status of Prior Year Finding 29 

Management Comments and Our Evaluation 30 

Management Comments - Exhibit 32 

Statement of Financial Position 36 

Statement of Operations and Changes in Net Position 37 

Statement of Functional Expenses 38 

Statement of Cash Flows 39 

Statement of Budgetary Resources 40 

Notes to Financial Statements 41 
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 MANAGEMENT’S DISCUSSION AND ANALYSIS

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

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

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

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

greater resources for developing countries taking greater responsibility for their own 

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

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

of funding to implement this new initiative. 

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

transformative economic growth in developing countries which create and 

maintain sound policy environments. 

In the 21 months since its creation, MCC has laid the underpinnings of programs to address 

and implement the purposes of The Millennium Challenge Act of 2003, “To provide 

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

poverty and strengthens good governance, economic freedom, and investments in people.” 

Accordingly, MCC is focused on this long-term, targeted foreign policy mission, and 

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

assistance program. 

MCC’s Organization 

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

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

Agency for International Development (USAID), the CEO of MCC, and four public 

members1

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

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

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

MCC is designed to make maximum use of flexible authorities to optimize efficiency in 

contracting, program implementation, and personnel. MCC is committed to hiring and 

retaining a small but highly talented workforce from diverse backgrounds. 

MCC organizes its work into the following areas: 

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

in a manner that reflects policies of the Board of Directors and also achieves MCC’s 

objectives in accordance with applicable laws and regulations and Congressional directives. 

1

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

Todd Whitman, who previously served as Administrator of the Environment Protection Agency, were 

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

Page 1 of 48 
 

Country Programs manage MCC's relationship with eligible countries through all phases of 

the MCA. 

Markets and Sector Assessments provide technical expertise on specific development 

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

assessments related to environmental compliance and fiscal accountability. 

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

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

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

Administration and Finance 

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

and budgeting; human resources management; information technology infrastructure, 

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

administrative services; and corporate records management. 

Development Policy (DP)2

 is responsible for identifying policy issues, analyzing alternative 

approaches and recommending strategies for the most effective execution of MCC's mission. 

DP also manages the selection process and the policy indicators used to evaluate countries' 

policy performance. 

Domestic Relations (DR): DR is responsible for managing MCC's relationship with 

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

other constituencies key to MCC's mission. 

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

organizations. It coordinates MCC positions on international development initiatives, 

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

at meetings regarding multilateral and donor issues. 

Office of General Counsel (OGC): OGC is responsible for providing advice to MCC's 

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

PERFORMANCE GOALS, OBJECTIVES AND RESULTS FOR FY 2005 

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

creation, a formal strategy has not yet been published at the end of fiscal year 20053

. As 

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

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

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

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

3

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

Page 2 of 48 
for information. MCC has developed a detailed strategic plan and is developing measurable 

performance goals linked to that plan that will be issued in early fiscal year 2006. 

OBJECTIVE: Improve Program Operations 

Performance Targets 

(for calendar 2005): 

Accomplishments 

(for fiscal 2005): 

 Finalize board approval for 7 – 9 

quality compacts and conclude 

steps necessary to initiate 3 Section 

609(g) grants to countries with 

whom compacts will not have been 

signed in 2005, with an aggregate 

of 10 – 12 grants to countries; 

 Set up implementation systems, 

resident mission plans, and begin 

implementation in 4 – 6 Compact 

countries; 

 Finalize Board approval for 7 – 9 

Threshold Programs and begin 

implementation on 6 – 8 Threshold 

Programs;

 -------------------------------------------- 

 Complete 2006 MCA-eligible & 

Threshold country selection, 

including improvements in 

selection criteria. 

---------------------------------------------- 

------------------------------------------- 

 5 Compacts approved by Board; 

 4 Section 609(g) actions approved by 

Board with countries with which 

compacts were not signed. 

 Implementation systems initiated and 

resident missions established in 2 

Compact countries. 

 2 Threshold Programs approved by 

Board; 

 1 Threshold Program began 

implementation. 

 Pending Board approval in November 

2005. 

-------------------------------------------------- 

-------------------------------------------------- 

-------------------------------------------------- 

 OBJECTIVE: Organizational Capacity and Maturity 

Performance Targets: Accomplishments: 

 Complete staffing plan matched to 

desired organizational capacity, 

with retention rate at 90 – 95%. 

 Complete essential policy papers 

and improved guidance to 

countries. 

-------------------------------------------------- 

-------------------------------------------------- 

 Staff built to 147, slightly behind 

plans, with retention rate exceeding 

90%. 

 Critical policy papers and guidance to 

countries published. 

------------------------------------------------ 

-------------------------------------------------- 

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-------------------------------------------------- -------------------------------------------------- 

 Develop effective internal control  Initial set of internal controls put in 

environment, documentation and place. 

implementation of internal controls 

and systems. 

 Implement strategic performance  First stage performance assessment 

assessment and compensation plan. and compensation plans in place. 

 Effective Communications and Constituency Relations 

Performance Targets: Accomplishments: 

 Implement communications plan. 

 Implement Congressional outreach 

plan. 

 Provide input into reauthorization 

bill. 

 Submit Congressional Budget 

Justification for FY 2006. 

-------------------------------------------------- 

-------------------------------------------------- 

-------------------------------------------------- 

 Not yet accomplished. 

 Congressional outreach begun. 

 Completed; final action pending 

Congressional action. 

 Submitted and pending Congressional 

action. 

-------------------------------------------------- 

------------------------------------------------ 

-------------------------------------------------- 

ALIGNMENT WITH THE PRESIDENT’S MANAGEMENT AGENDA 

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

follows: 

• Strategic Management of Human Capital: MCC has made extensive and continuing use 

of the flexibilities in place to acquire and retain talent and leadership, and has maximized 

the number of staff in front-line program positions. 

• Competitive Sourcing: MCC has consistently competed services eligible for such 

competition with both private and federal government suppliers, outsourcing a 

considerable part of both its program and support activities. 

• Improved Financial Performance: MCC has meet expectations for timely and accurate 

reporting, with timely, unqualified audit opinions for both years of its existence. 

Page 4 of 48 
• Expanded Electronic Government: MCC has used web-based technologies to enhance 

transparency of its operations, both with domestic constituencies and globally with 

partner countries. 

• Budget and Performance Integration: MCC is building its assistance programs around 

explicit measurable results, resulting in clearly visible critical integration of program 

spending and performance. (Following a set of output objectives for calendar 2005, 

MCC has, since the end of the fiscal year, initiated a more rigorous process of developing 

performance goals integrated with its operating budget.) 

MCC’s FINANCIAL STATEMENTS 

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

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

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

attests to the reliability and veracity of management information. 

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

corporation that manages a substantial development assistance fund with focused human 

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

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

such as financial, information technology and human resource management, have been 

outsourced, while MCC maintains overall responsibility for these functions. 

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

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

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

administrative costs. 

MCC’S SYSTEMS, CONTROLS AND LEGAL COMPLIANCE: FEDERAL 

MANAGER’S FINANCIAL INTEGRITY ACT AND MANAGEMENT’S 

RESPONSIBILITY FOR INTERNAL CONTROLS (OMB A-123 (Revised)) 

The Federal Manager’s Financial Integrity Act (FMFIA) 

FMFIA requires management of federal agencies to establish controls in accordance with 

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

assurance that: 

• Obligations and costs are in compliance with applicable law; 

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

use, or misappropriation; and 

Page 5 of 48 
• Revenues and expenditures applicable to corporate operations are properly recorded 

and accounted for to permit the preparation of accounts and reliable financial and 

statistical reports. 

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

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

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

responsibility and accountability for internal control in Federal agencies, beginning fiscal 

year 2006. 

The revised circular reflects policy recommendations intended to strengthen the requirements 

for conducting management’s assessment of internal control over financial reporting and 

emphasize the need for agencies to integrate and coordinate internal control assessments with 

other internal control-related activities. 

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

management responsibility for establishing and maintaining internal control to achieve the 

following objectives: 

• Effective and efficient operations; 

• Reliable financial reporting; and 

• Compliance with applicable laws and regulations. 

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

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

internal control effectiveness. In addition, the circular requires management to provide 

annual assurances on internal control in its Performance and Accountability Report (PAR), 

including a separate assurance on internal control over financial reporting, along with a 

report on identified material weaknesses and corrective actions. 

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

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

requirements of both the FMFIA and OMB A-123 (revised). While the material weaknesses 

identified in this report addresses both requirements, the CEO’s certification, his annual 

statement in response to these findings, is limited to the scope of what is required by the 

FMFIA. The CEO has qualified the FMFIA assurance for FY 2005. His certification is 

provided below: 

Federal Managers’ Financial Integrity Act Certification 

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

management of the Millennium Challenge Corporation (MCC) and 

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

management accountability and internal control systems that were in effect on 

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September 30, 2005 provide reasonable assurance that the objectives of the 

Federal Managers’ Financial Integrity Act were achieved, with the exception of 

the four material weaknesses identified in the Management’s Discussion & 

Analysis portion of this report. In addition, the report includes a detailed 

discussion of the material weaknesses and actions that MCC will be taking in 

future months to resolve them. 

Charles O. Sethness 

November 7, 2005 

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

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

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

effect in fiscal year 2006. 

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

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

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

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

mission; 

• Violates statutory or regulatory requirements; 

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

misappropriation of funds, property, or other assets; 

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

for decision-making; 

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

• Results in a material misstatement in the financial reports. 

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

action plan to remedy these weaknesses. 

Weakness # 1: MCC’s strategic plan does not fully comply with the Government 

Performance and Results Act (GPRA). 

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

significant progress in drafting a strategic plan that is in alignment 

with GPRA. This act requires that federally funded organizations 

develop and implement an accountability system, based on 

performance measurement, including setting goals and objectives and 

measuring progress toward achieving them. While MCC has 

developed a set of strategic goals and means to achieve them, it has not 

articulated measurable performance goals which align with the 2006 – 

2011 plans. 

Page 7 of 48 
Remediation Plan: The following actions are to be completed by March, 2006 

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

fiscal years that meets OMB requirements. 

• Involve MCC staff in the determination of corporate 

performance goals. 

• Articulate operational performance goals which align with the 

defined strategic goals. 

Weakness # 2: MCC does not fully comply with the Federal Information Security 

Management Act (FISMA). 

Discussion: The Federal Information Security Management Act (FISMA) provides 

the framework for securing the federal government’s information 

systems. Agencies covered by FISMA are required to report annually 

to OMB and Congress on the effectiveness of their information 

security programs. Specifically, FISMA requires agencies to have 1) 

periodic risk assessments; 2) information security policies, procedures, 

standards, and guidelines; 3) delegations of authority to the CIO to 

ensure compliance with policy; (4) security awareness training 

programs; (5) procedures for detecting, reporting, and responding to 

security incidents; and (6) plans to ensure continuity of operations. 

FISMA also requires an annual independent evaluation of the agency’s 

information security program, which is separate from the Performance 

Assessment Report. Only significant deficiencies identified under 

FISMA are to be reported as a material weakness under the FMFIA. 

In a report issued June 2005 an OIG audit identified significant noncompliance with FISMA requirements. Subsequently, MCC 

completed its FISMA report to OMB as of September 30, 2005, where 

it acknowledged that it had not met the majority of the FISMA 

requirements and proposed a timetable for compliance. 

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

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

September 30, 2005 to implement material compliance with the 

requirements of FISMA by September 30, 2006. 

Weakness # 3: MCC does not fully comply with the provisions of the Federal 

Financial Management Information Systems Act (FFMIA) 

Discussion: The Federal Financial Management Improvement Act (FFMIA) of 

1996 is designed to improve federal financial management by 

requiring that financial management systems provide reliable, 

consistent disclosure of financial data in accordance with generally 

accepted accounting principles (GAAP) and standards. The FFMIA 

Page 8 of 48 
requires MCC to implement and maintain a financial management 

system that complies substantially with federal requirements for an 

integrated financial management system, applicable federal accounting 

standards and U.S. Standard General Ledger at the transaction level. 

The OIG is required to report on compliance with these requirements 

as part of the annual audit of MCC’s financial statements. 

MCC has outsourced all its back office business functions to the 

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

auspices of the OMB Center of Excellence initiative. NBC uses the 

following systems to record MCC’s transactions: 

• Financial Management: Oracle Federal Financials. 

• Human Resource and Payroll management: Federal Personnel 

and Payroll System (FPPS) and Excel spread sheets. 

• Procurement: Microsoft Office Template to generate contract 

documents, Excel spread sheets to manage contract actions, and 

Oracle Federal Financials to manually record procurement 

transactions. 

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

Federal Financials to manually record travel transactions. 

Oracle Federal Financials and Statement on Auditing Standard (SAS) 

70: 

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

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

recognized auditing standard developed by the American Institute of 

Certified Public Accountants (AICPA). A SAS 70 review is widely 

recognized, because it represents that a service organization has been 

through an in-depth review of its control activities, which generally 

include controls over information technology and related processes. 

Service organizations must demonstrate that they have adequate 

controls and safeguards when they host or process data belonging to 

their customers. 

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

financial transactions. While this system has been approved by the 

Joint Federal Management Improvement Program, the sub-systems 

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

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

integration as a challenge. MCC discussed these requirements at 

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

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

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

process MCC’s financial transactions. Through this review, which 

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Remediation Plan: 

Weakness # 4: 

was completed in September 2005 for the period March 1 through July 

2005, NBC has certified its applicability with regard to the period 

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

fiscal year, the balances have been verified through alternative audit 

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

closed. 

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

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

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

and an electronic interface has been created to record disbursements. 

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

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

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

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

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

Excellence for HR and Payroll services, and NBC is expected to 

implement a new system that will be interfaced with the OFF system 

that will address these shortfalls in the next two to three years. 

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

been approved by the federal government, requires manual entry of 

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

and timing errors. 

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

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

data entry and timing errors. 

The following actions are to be completed as indicated below 

Address the following integration issues: 

 Continue to address the integration issues outside MCC’s 

control with NBC, such as complete integration with FPPS and 

E-travel. 

 Implement a procurement system solution by March 31, 2006. 

 Ensure that all commercial off-the-shelf programs implemented 

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

NBC performs a SAS 70 review of these functions. 

MCC has not developed or documented internal control 

procedures detailing the responsibilities of employees at each 

control level, i.e. from the data entry functions to the various 

administrative approvals. 

Page 10 of 48 
Discussion: The independent auditors have reported that MCC’s operating 

procedures in the many functional areas such as payroll processing, 

budget preparation, reconciliations, accruals, travel, fixed assets, 

monitoring, and internal grant processes are too general or incomplete. 

These procedures do not identify the responsible persons at the various 

control levels, including the administrative approval of transactions, 

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

detail and accountability in internal control procedures may result in 

ineffective and inefficient processing of transactions and noncompliance with laws and regulations. 

Remediation Plan: The following actions are to be completed as indicated below 

• Develop formal procedures to address the key material weaknesses 

identified by no later than June 30, 2006 and ensure that these 

policies and procedures provide internal and external timelines, 

and adequate internal documentation. 

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Page 12 of 48 
Independent Auditors’ Report 

Inspector General 

United States Agency for International Development 

Board of Directors 

Millennium Challenge Corporation 

We have audited the accompanying Statements of Financial Position of the Millennium 

Challenge Corporation (MCC or Corporation) as of September 30, 2005 and 2004, and the 

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

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

2004. These financial statements are the responsibility of Corporation management. Our 

responsibility is to express an opinion on these financial statements based on our audit. 

In connection with our audit, we also considered the MCC’s internal control over financial 

reporting and tested the MCC’s compliance with certain provisions of applicable laws, 

regulations, contracts and grant agreements that could have a direct and material effect on the 

financial statements. 

SUMMARY 

As stated in our opinion, we concluded that the MCC’s financial statements of and for the 

year ended September 30, 2005 and as of and for the nine months ended September 30, 2004 

are presented fairly, in all material respects, in conformity with accounting principles 

generally accepted in the United States of America. 

Our consideration of internal control over financial reporting and its operation resulted in 

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

reportable conditions is a material weakness. 

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

weakness) 

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

and Efficient Management of Travel (reportable condition) 
3. MCC Policies for Disbursing Advances to Grantees Do Not Accommodate Effective 

Cash Management Nor the Appropriate Recording of Custodial Interest Receivable 

and Payable (reportable condition and noncompliance) 

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

Inadequate (reportable condition) 

The results of our tests of compliance with certain provisions of laws, regulations, contracts, 

and grant agreements, inclusive of those referred to in the Federal Financial Management 

Improvement Act of 1996 (FFMIA), disclosed three instances of noncompliance or other 

matters that are required to be reported herein under Government Auditing Standards, issued 

by the Comptroller General of the United States, and Office of Management and Budget 

(OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial Statements: 

1. MCC did not fully comply with FFMIA and GPRA (material noncompliance) 

2. MCC did not fully comply with Federal Information Security Management Act 

(material noncompliance) 

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

Cash Management Nor the Appropriate Recording of Custodial Interest Receivable 

and Payable (reportable condition and noncompliance) 

The following sections discuss our opinion on the MCC’s financial statements, our 

consideration of the MCC’s internal control over financial reporting, our tests of the MCC’s 

compliance with certain provisions of applicable laws, regulations, contracts, and grant 

agreements, and the distribution of our report. 

OPINION ON THE FINANCIAL STATEMENTS 

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

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

Position, Cash Flows, and Budgetary Resources for the year ended September 30, 2005 and 

the nine months ended September 30, 2004. These financial statements are the responsibility 

of Corporation management. Our responsibility is to express an opinion on these financial 

statements based on our audit. 

We conducted our audit in accordance with auditing standards generally accepted in the 

United States of America and standards applicable to financial statement audits contained in 

Government Auditing Standards, issued by the Comptroller General of the United States, and 

the Office of Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for 

Federal Financial Statements. Those standards require that we plan and perform the audit to 

obtain reasonable assurance that the financial statements are free of material misstatement. 

An audit includes examining, on a test basis, evidence supporting the amounts and 

disclosures in the financial statements. An audit also includes assessing the accounting 

Page 14 of 48 
principles used and significant estimates made by management, as well as evaluating the 

overall financial statement presentation. We believe that our audit provides a reasonable 

basis for our opinion. 

In our opinion, the financial statements referred to above present fairly, in all material 

respects, the financial positions of the Corporation as of September 30, 2005 and 2004, and 

changes in net position, cash flows and budgetary resources for the year ended September 30, 

2005 and for the nine months ended September 30, 2004, in conformity with accounting 

principles generally accepted in the United States of America. 

Our audit was made for the purpose of forming an opinion on the basic financial statements 

of the Corporation taken as a whole. The information contained in the Management’s 

Discussion and Analysis is not a required part of the financial statements but is 

supplementary information required by the Federal Accounting Standards Advisory Board 

guidance. We have applied certain limited procedures, which consisted principally of 

inquiries of management regarding the methods of measurement and presentation of the 

information. However, we did not audit the information and do not express an opinion 

thereon. 

The accompanying Statement of Functional Expenses for the year ended September 30, 2005 

and as summarized for the nine months ended September 30, 2004, are presented for 

purposes of additional analysis and are not a required part of the basic financial statements. 

This statement is the responsibility of the management of the Corporation. The information 

in this statement has been subjected to the auditing procedures applied in our audit of the 

basic financial statements and, in our opinion, is fairly stated in all material respects when 

considered in relation to the basic financial statements taken as a whole. 

INTERNAL CONTROL OVER FINANCIAL REPORTING 

In planning and performing our fiscal year 2005 audit, we considered MCC’s internal control 

over financial reporting by obtaining an understanding of MCC’s internal control, determined 

whether internal controls had been placed into operation, assessed control risk, and 

performed tests of controls in order to determine our auditing procedures for the purpose of 

expressing an opinion on the financial statements. We limited our internal control testing to 

those controls necessary to achieve the objectives described in OMB Bulletin No. 01-02 and 

Government Auditing Standards. We did not test all internal controls relevant to operating 

objectives as broadly defined by the Federal Managers’ Financial Integrity Act of 1982 

(FMFIA), such as those controls relevant to ensuring efficient operations. The objective of 

our audit was not to provide assurance on internal control; accordingly, we do not provide an 

opinion on internal control. 

Our consideration of internal control over financial reporting would not necessarily disclose 

all matters that might be reportable conditions. Under standards issued by the American 

Institute of Certified Public Accountants, reportable conditions are matters coming to our 

attention relating to significant deficiencies in the design or operation of the internal control 

Page 15 of 48 
over financial reporting that, in our judgment, could adversely affect MCC’s ability to record, 

process, summarize, and report financial data consistent with the assertions by management 

in the financial statements. 

Material weaknesses are reportable conditions in which the design or operation of one or 

more of the internal control components does not reduce to a relatively low level the risk that 

misstatements, in amounts that would be material in relation to the financial statements being 

audited, may occur and not be detected within a timely period by employees in the normal 

course of performing their assigned functions. Because of inherent limitations in internal 

controls, misstatements, losses or noncompliance may occur and not be detected. 

We noted four matters involving the internal control over financial reporting and its 

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

condition is a material weakness. 

MATERIAL WEAKNESS 

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

Condition: 

During the fiscal year, the Millennium Challenge Corporation (MCC) has used various 

processes to address the financial aspects of their operations. These processes have evolved 

during the year as the organization has grown in personnel and operations. In this growth, 

however, the development of written policies and procedures to guide MCC’s streamlined 

operational structure has not been a high priority for MCC in several areas. However, 

written policies and procedures must be in place to ensure operational efficiencies, risk 

reduction, and consistent application. 

In the prior year, we noted that draft accounting policies and procedures had been prepared 

but not finalized. Also, we noted that written policies and procedures were incomplete. 

Based on our internal control review in the current year, we noted that MCC’s operating 

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

quarterly accruals, annual leave accruals, travel, fixed assets, monitoring, and internal grant 

processes are too general or incomplete. Several procedures do not address the responsible 

positions at the various control levels for the processing of data/data entry functions, or 

submission and approval levels. 

Examples of the inconsistent or incomplete policies and procedures include: 

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

simultaneously. The proper process had not been developed and documented to 

Page 16 of 48 
ensure the MCC’s Controller’s involvement in the internal aspects of funds control 

and grants management for proper sequencing and appropriate timing of this 

transaction. 

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

a General Services Administration (GSA) approved and maintained electronic travel 

system. In our testing, however, we noted that MCC’s current travel policy does not 

provide sufficient controls to ensure that appropriate coordination occurs with the 

Office of Finance and Administration to ensure that the information is captured in the 

financial management system, and adequate explanations from employees and 

approvals from supervisors are provided for expenses in excess of the per diem. 

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

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

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

3⁄4 3 out of 80 obligation/disbursement sample items amounting to $42,661 

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

obligating documents. 

3⁄4 Per the SAS 70 review performed at the National Business Center (NBC), an 

Independent Audit Firm found that the Oracle Federal Financial system will 

allow disbursements to be made without an obligation previously being 

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

payroll disbursements from another nonintegrated NBC system. Also, NBC 

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

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

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

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

Criteria: 

The Standards for Internal Control in the Federal Government states that internal controls 

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

documentation should be readily available for examination. The documentation should 

appear in management directives, administrative policies, or operating manuals. Also, 

information should be recorded and communicated to management and others within the 

entity who need it and in a form and within a timeframe that enables them to carry out their 

internal control and other responsibilities. 

Additionally, management and employees should establish and maintain an environment 

throughout the organization that sets a positive and supportive attitude toward internal 

control and conscientious management. A positive control environment is the foundation for 

all other standards. It provides discipline and structure as well as the climate, which 

influences the quality of internal controls. 

Page 17 of 48 
Cause: 

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

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

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

have initiated a process in which the Controller approves miscellaneous obligation 

documents that are transmitted electronically to NBC. 

Effect: 

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

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

unauthorized transactions, omissions; potential funds control violations and noncompliance 

with laws and regulations. This also diminished the effectiveness and efficiency with which 

the financial transactions were being processed. 

Recommendation # 1: 

We recommend that MCC’s Office of Finance and Administration revise and reissue written 

policies and procedures that provide additional specificity in the areas noted above including 

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

and reporting, interagency reporting, fixed assets, travel, monitoring and internal grant 

processes. These policies and procedures should provide the following information at a 

minimum: 

• Position accountable for each step in the process, 

• Position responsible for approving/reviewing the information, 

• The acceptable internal and external timelines for each step in the process, and 

• The specific documentation required determining the authorization, timeliness and 

review of transaction. 

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

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

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

of funds availability should be provided to the NBC accountant. 

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

amount of the accrued annual leave balance from FPPS. The policy, however, does not 

address how, who, nor acknowledge that it will mean a coordination between various NBC 

offices. 

Page 18 of 48 
Management Response: 

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

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

formalized and procedures strengthened to align responsibilities with control objectives in 

order to manage and mitigate risks. 

REPORTABLE CONDITIONS 

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

Efficient Management of Travel 

Condition: 

According to MCC’s management, MCC has adopted the Federal Travel Regulations as its 

overall policy related to travel. MCC's internal travel policies and procedures do not permit 

the effective and efficient management of travel. These procedures do not ensure that travel 

is adequately planned and managed. Because a blanket travel authorization is used, there is 

no record of individual travel that has taken place and the accounting for each instance. 

Additionally, the policy does not require that appropriate coordination include the Office of 

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

have knowledge of planned trips, the timing, exceptions to the standard travel policy, and the 

estimated costs in order to ensure that sufficient obligations have been recorded to cover 

expenses incurred by MCC travelers. Currently, an initial estimate is prepared annually to 

fund the blanket travel authorization and the estimate is adjusted quarterly by the controller 

based upon expense patterns. There are, however, no automated processes in place to ensure 

that the estimate is sufficient to cover the travel expenses incurred. This problem is 

compounded by the untimely filing of travel vouchers thereby increasing the difficulty and 

reducing the accuracy of the estimation process performed by the controller. 

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

in managing the travel process and processing their voucher upon their return. Although ETravel is electronic, it does not interface with Oracle Federal Financials (OFF) and has 

limited functionality, such that it does not allow a traveler to submit a reclaim voucher. 

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

forwarded to NBC. At NBC an accounting technician manually enters each voucher into 

OFF. 

Page 19 of 48 
We identified the following internal control deficiencies related to travel voucher 

reimbursements: 

• Nine of 122 travel vouchers totaling $1,383 exceeded lodging per diem. No 

approvals of the lodging per diems were provided nor were the excess rejected by the 

system or the approving official. 

• Three of 122 travel vouchers totaling $507 had “Other” costs claimed that were not 

documented. We noted that there was no additional explanation provided as to what 

the expenses were for. 

Criteria: 

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

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

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

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

and other events are initiated or entered into. Authorizations should be clearly 

communicated to managers and employees. Additionally, internal control and all 

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

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

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

financial management system, including financial reporting and internal control standards 

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

Cause: 

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

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

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

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

from the maximum per diems and other authorized expenses. According to MCC 

management, employees were requested to obtain pre-approval when they know that the 

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

procedures in these instances. 

Effect: 

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

approximately $11,940 ($1,890 projected to the travel expense population of $3,980,087) are 

unsupported and potentially approved without adequate documentation. Also, there is an 

increased risk of travel inefficiency, and non-compliance with Federal Travel Regulations. 

Additionally, MCC’s processing of travel vouchers is inefficient because it currently requires 

the manual entry of information from E-Travel to OFF. The lack of individual travel 

authorizations increases the difficulty and reduces the accuracy of the estimation process 

performed by the controller. 

Page 20 of 48 
Recommendation #2: 

We recommend that MCC management: 

(1) Develop and disseminate explicit policies to ensure that employees are aware of and 

follow the Federal Travel Regulations. Any exception should be documented and 

approved by a manager/supervisor in writing. 

(2) Institute policies and procedures to ensure proper authorizations and approvals are 

obtained and coordination with its Office of Finance and Administration has occurred 

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

in the financial management system. 

(3) Develop and institute controls to reject those expenses claimed that exceed the 

allowable country per diem unless explicit written authorization is provided prior to 

travel. 

Management Response: 

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

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

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

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

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

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

determine if it would be feasible to migrate to a different General Services Administration 

approved software provider to accomplish travel management, as the developers of E-Travel 

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

MCC Policies for Disbursing Advances to Grantees Does Not Accommodate Effective 

Cash Management Nor the Appropriate Recording of Custodial Interest Receivable and 

Payable 

Condition: 

MCC entered into a compact with Madagascar in April 2005. The Compact became 

effective in July 2005 and an immediate advance was provided to MCA Madagascar 

amounting to $2,500,924. Based upon information obtained at year-end, MCA Madagascar 

has expended $650,000 of the initial advance. 

Through various OMB Circulars, OMB has attempted to address the need for advances to 

cover immediate cash needs or timely disbursements of an entity for direct program costs for 

carrying out the purpose of the approved program or project. Thus, funds paid to a grantee 

are not to be held but are to be promptly applied to the grant purpose. Although the 

timeframe for immediate cash needs has not been clearly defined by OMB, the general rules 

Page 21 of 48 
employed by various Federal agencies are 30 days for non-governmental entities. Based 

upon this definition, MCC has provided Federal funds in excess of immediate cash needs. 

Criteria: 

Per the Appropriations Law Volume II, advances under an assistance program are intended to 

accomplish the program purposes and not to profit the recipient other than in the manner and 

extent specified in the program. Also, when funds are drawn from Treasury before it is 

needed, or in excess of current needs, the government loses the use of the funds. 

Cause: 

The approved agreements entered into by MCC with MCA Madagascar and other compact 

grantees indicate that quarterly advances will be provided based upon their estimated costs. 

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

shorter than quarterly. 

Effect: 

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

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

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

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

Recommendation #3: 

We recommend that management: 

(1) Develop policies and procedures to ensure that the payment schedules and other 

agreements entered into with grantees are reflective of the Treasury requirements 

concerning advances and immediate cash needs. 

(2) Establish policies and procedures to ensure that any custodial liabilities, e.g. interest 

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

recorded. 

Management Response: 

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

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

Page 22 of 48 
conclusion on this recommendation. We expect to reach a management decision within 30 

days, as required by regulation. 

Page 23 of 48 
MCC’s Human Resources Responsible for Managing It Financial Operations are 

Inadequate 

Condition: 

During our internal control and substantive testing we noted that the MCC relies solely on 

the Controller, with contract assistance, to perform the substantial duties of the Office of 

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

not limited to, the approval of miscellaneous obligations; monthly, quarterly and yearly 

financial information review; development of financial policies and procedures; financial 

statement review; audit coordination; coordination with other agencies including OMB, 

USAID/OIG, and NBC; and approval of funds availability. 

Criteria: 

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

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

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

succession, and ensure continuity of needed skills and abilities. 

Cause: 

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

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

Effect: 

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

following: 

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

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

• Obligations of funds prior to review of funds availability. 

Additionally, it does not provide for backstops and continuity. 

Recommendation # 4: 

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

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

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

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

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

and communicated. 

Page 24 of 48 
Management Response: 

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

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

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

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

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

As required by OMB Bulletin No. 01-02, with respect to internal controls related to 

performance measures determined by management to be key and reported in the 

Management’s Discussion and Analysis, we obtained an understanding of the design of 

significant internal controls relating to the existence and completeness assertions. Our 

procedures were not designed to provide assurance on internal control over performance 

measures and, accordingly, we do not provide an opinion thereon. 

COMPLIANCE WITH LAWS AND REGULATIONS 

MCC’s management is responsible for complying with laws and regulations applicable to 

MCC. As part of obtaining reasonable assurance that MCC’s balance sheet is free of 

material misstatement, we performed tests of its compliance with certain provisions of laws 

and regulations, noncompliance with which could have a direct and material effect on the 

determination of financial statement amounts, and certain other laws and regulations 

specified in OMB Bulletin No. 01-02, including the requirements referred to in the FFMIA. 

We limited our tests of compliance to these provisions and we did not test compliance with 

all laws, regulations, contracts, and agreements applicable to MCC. Providing an opinion on 

compliance with laws, regulations, contracts, and grant agreements was not an objective of 

our audit and, accordingly, we do not express such an opinion. 

Under OMB Bulletin No. 01-02 and FFMIA, we are required to report whether MCC’s 

financial management systems substantially comply with: (1) Federal financial management 

systems requirements, (2) applicable Federal accounting standards, and (3) the United States 

Government Standard General Ledger at the transaction level. To meet this requirement, we 

relied on the results of a SAS 70 review of the Department of Interior’s Oracle Federal 

Financial System performed by an Independent Audit Firm. The results of that review have 

been presented to MCC in a separate report. Providing an opinion on compliance with those 

provisions was not, however, an objective of our audit and, accordingly, we do not express 

such an opinion. 

The results of our tests disclosed that the Corporation did not fully comply with the FFMIA, 

which is required to be reported under Government Auditing Standards or OMB Bulletin No. 

01-02. 

Under FFMIA, we are required to report whether the Corporation’s financial management 

systems substantially comply with the Federal financial management systems requirements, 

Page 25 of 48 
applicable Federal accounting standards, and the United States Government Standard 

General Ledger at the transaction level. To meet this requirement, we performed tests of 

compliance with FFMIA section 803(a) requirements. 

The results of our tests disclosed three instances of noncompliance with laws and regulations. 

MATERIAL NONCOMPLIANCE 

MCC Did Not Fully Comply with FFMIA and GPRA 

Condition: 

Millennium Challenge Corporation has not complied with the following laws and 

regulations: 

• Federal Financial Management Improvement Act (FFMIA) 

• Government Performance and Results Act (GPRA) 

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

substantially with Federal requirements for an integrated financial management system as 

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

decided to outsource its accounting operations, MCC selected NBC from the available 

Federal Centers of Excellence as the best choice to meet its needs. In order to address the 

needs of MCC, multiple systems, i.e. E-Travel, procurement, and FPPS, are used but these 

systems cannot exchange data electronically. The entry of the travel expenses and 

disbursements must be done manually. The entry of obligations and commitments requires a 

process of emails, scanning and manual entry into OFF. The payroll expenses and 

disbursements must be uploaded into OFF from FPPS. 

MCC has not developed performance goals and objectives that comply with the requirements 

of the GPRA. Although MCC has several guiding objectives, they do not meet the 

requirements of GPRA. The information in Management’s Discussion and Analysis are not 

sufficient to meet GPRA requirements and the goals presented are on a calendar year basis 

rather than a fiscal year. 

Criteria: 

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

complies substantially with Federal requirements for an integrated financial management 

system. 

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

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

Page 26 of 48 
(1) establish performance goals to define the level of performance to be achieved by a 

program activity; 

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

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

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

capital, information, or other resources required to meet the performance goals; 

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

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

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

goals; and 

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

Also, the performance report should evaluate the performance plan for the current fiscal year 

relative to the performance achieved toward the performance goals in the fiscal year covered 

by the report. 

Cause: 

The Millennium Challenge Corporation (Corporation) does not have its own financial 

system. The Corporation has contracted with NBC to provide accounting and IT services 

including usage of its OFF application. The MCC is required by government regulations to 

use Federal Centers of Excellence of which NBC is one. According to MCC officials the 

Corporation has been directed to use the systems available through NBC. MCC believes that 

in fiscal year 2005 it used the only options available. NBC is working with MCC to provide 

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

requirements for Centers of Excellence. 

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

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

Effect: 

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

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

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

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

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

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

accountability and achievements of the Corporation. 

Recommendation # 5: 

We recommend that MCC management: 

Page 27 of 48 
(1) Assess the automated options available to handle MCC operations and develop short 

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

information technology structure to address electronic integration of at least the 

payroll, procurement and travel functions and systems to increase the efficiencies and 

effectiveness of the processing of financial transactions; and decrease the risk of 

errors. 

(2) Implement their intended corrective actions for preparation of a GPRA based 

performance goals and objectives by March 2006 as specified in its FMFIA 

assessment, specifically: 

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

OMB requirements. 

• Involve MCC staff in the determination of corporate performance goals. 

• Articulate operational performance goals for FY 2006 that align with the defined 

strategic goals and submit to the Board and OMB. 

Management Response: 

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

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

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

accordingly, many facets of its back-office operations have been outsourced. MCC was 

required to outsource many of these functions such as financial management, human 

resource and payroll management, and travel management, to a USG entity, and MCC 

selected NBC to perform its back-office work. NBC operates on many legacy 

information systems that are not interfaced or integrated with MCC’s core financial 

management system. This leads to non-compliance with FFMIA and also makes MCC 

operations inefficient. MCC is cognizant of these issues and identified FFMIA noncompliance as a material weakness in its FMFIA report, which is included in this 

report. MCC will work diligently within the span of its control to comply not only with 

the FFMIA requirements, but more importantly to improve its operational efficiency, 

effectiveness and transparency. 

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

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

have been undertaken: 

3⁄4 A strategic plan for the next 6 fiscal years has been approved by MCC’s Board and 

submitted to OMB. 

3⁄4 A working group comprising a broad cross-section of MCC staff is actively 

engaged in developing corporate performance goals for FY 2006. 

3⁄4 MCC management expects to adopt operational performance goals for FY 2006 and 

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

Board and OMB. 

Page 28 of 48 
MCC does not fully comply with the Federal Information Security Management Act 

(FISMA) 

In a report issued June 2005 an OIG audit identified significant non-compliance with FISMA 

requirements. Subsequently, MCC completed its FISMA report to OMB as of September 30, 

2005, where it acknowledged that it had not met the majority of the FISMA requirements and 

proposed a timetable for compliance. 

We are reporting this deficiency as required by the guidance issued by the Office of 

Management and Budget. However, because this deficiency was addressed in a prior OIG 

audit report we are not making any recommendation in this report. 

MCC Policies for Disbursing Advances to Grantees Does Not Accommodate Effective 

Cash Management Nor the Appropriate Recording of Custodial Interest Receivable and 

Payables 

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

Accommodate Effective Cash Management Nor the Appropriate Recording of Custodial 

Interest Receivable and Payable” is also a noncompliance with laws and regulations. 

The complete finding and recommendation for this finding is presented in the internal control 

section of this report. We are not making any recommendation for this finding because we 

reported and made recommendations for corrective actions in the internal control section of 

this report. 

DISTRIBUTION 

This audit was performed pursuant to the Government Corporation Control Act, and is 

intended solely for the information and use of the United States Congress, the President, the 

Director of the Office of Management and Budget, Comptroller General of the United States, 

the Corporation and its Inspector General, and is not intended to be, and should not be, used 

by anyone other than these specific parties. 

November 7, 2005 

Washington, D.C. 

Page 29 of 48 
Appendix A 

Appendix A 

STATUS OF PRIOR YEAR FINDING 

Review of Oracle Federal Financial System 

The Millennium Challenge Corporation (Corporation) does not have its own financial 

system. The Corporation contracted with the Department of Interior, National Business 

Center (NBC) to provide accounting and IT services including usage of its Oracle Federal 

Financial System application. The NBC has not conducted an internal control review, such 

as a Statement of Auditing Standards (SAS) 70 review of the Oracle Federal Financials 

System nor has MCC directed NBC as its third-party servicer to have a review conducted in 

accordance with the federal system requirements. 

Recommendation 

We recommend that MCC direct the National Business Center to conduct an internal control 

review, such as a SAS 70 review to assess the control environment of the Oracle Federal 

Financial System. 

Status 

The NBC performed a SAS 70 review of the Oracle Federal Financial System for the period 

March 1, 2005 to July 31, 2005. The independent auditors reported that the relevant aspects 

of the NBC’s controls that had been placed in operation are suitably designed to provide 

reasonable assurance that the specified control objectives would be achieved, except for the 

following two items: 

• OFF requires transactions exceeding a dollar threshold to be approved by certifying 

officers. The electronic workflow in OFF currently does not require the approval by 

certifying officers of all such transactions. 

• NBC is responsible for monitoring budgetary accounts for MCC. However, OFF 

limit edits are not designed to prevent obligations from exceeding the allotment. 

They provided a self-certification asserting no change in the system controls from August 1 

to September 30, 2005. No system review was performed for the period October 1, 2004 to 

February 28, 2005. 

Page 30 of 48 
Management 

Comments and 

Evaluation 

We received and evaluated MCC’s management comments to the 

recommendations made in this report. We considered their 

comments to be responsive and have included them in their entirety 

in the Exhibit. 

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

importance of accountability, transparency and public disclosure, 

and that their goal is to achieve excellence in our financial 

management, reporting and internal control systems. Further, 

MCC’s management commented that it will implement all but one 

of the recommendations as soon as possible to strengthen our 

systems of internal controls and lend further credibility to our 

financial statements. MCC’s management went on to address each 

recommendation and provided specific dates by which it will 

implement these recommendations (theses dates are provided 

below). MCC’s management also recognized and thanked both the 

OIG and Williams, Adley & Company, for working closely with 

them during the audit process and providing counseling and 

support throughout the year. 

Based on MCC’s comments, we consider that a management 

decision has been reached on recommendation nos. 1, 3, 4, and 5 

provided in this report. MCC should report to the OIG when final 

action has been taken on the recommendations and when a 

management decision is reached on recommendation no. 2. The 

following is a brief summary of MCC’s management comments on 

the five recommendations included in this report and our evaluation 

on those comments. 

Recommendation No. 1 

MCC management agreed with recommendation No. 1 and to 

implement this recommendation no later than June 30, 2006. 

MCC’s management also commented that they recognize that the 

informal procedures that served them in the past need to be 

formalized and procedures strengthened to align responsibilities 

with control objectives in order to manage and mitigate risks. 

Recommendation No. 2 

MCC management agreed with recommendation No. 2 and will 

implement this recommendation no later than March 31, 2006. 

MCC also commented that it recently issued its travel policy 

incorporating the principles enumerated in the FTR and also 

included procedures to strengthen the internal control environment. 

Page 31 of 48 
MCC will also reevaluate its travel authorization practices and 

procedures to ensure that they meet the desired control objectives. 

MCC has also commenced discussions with the National Business 

Center, Department of Interior, to determine if there are other 

things that can be done to improve this condition. 

Recommendation No. 3 

MCC management did not reach a management decision with 

regard to this recommendation. MCC’s management commented 

that they believe that this recommendation needs further 

management study before we can come to a conclusion on this 

recommendation. MCC’s management expects to reach a 

management decision within 30 days. 

Recommendation No. 4 

MCC management agreed with recommendation No. 4 and agreed to 

implement this recommendation no later than March 31, 2006. As 

a matter of fact, MCC has advertised and is actively recruiting for 

an additional position – a Deputy Chief Financial Officer. The 

responsibilities of the positions will be clearly drawn after the staff 

is hired to ensure the most appropriate mix of skills. 

Recommendation No. 5 

MCC management agreed with recommendation No. 5 and agreed to 

implement the portion of this recommendation that pertains to the 

GPRA no later than March 31, 2006 and the portion that pertains 

to FFMIA no later than September 30, 2006. MCC’s management 

commented that as of the date of this management response 1) A 

strategic plan for the next 6 fiscal years has been approved by 

MCC’s Board and submitted to OMB, 2) A working group 

comprising a broad cross-section of MCC staff is actively engaged 

in developing corporate performance goals for FY 2006, and 3) 

MCC management expects to adopt operational performance goals 

for FY 2006 and 2007 that align with the defined strategic goals, 

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

management also commented that they will work diligently within 

the span of its control to comply not only with the FFMIA 

requirements, but more importantly to improve its operational 

efficiency, effectiveness and transparency. 

Page 32 of 48 
___________________________________________________________________________ 

_____________ 

Exhibit 

Millennium Challenge Corporation 

Reducing Poverty Through Growth 

November 18, 2005 

To: MCC/A, John Phee 

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

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

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

respectively. 

We have received the subject draft report and are pleased to note that the independent 

auditors, Williams, Adley & Company, LLP, are issuing an unqualified opinion on our 

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

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

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

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

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

implement all but one of the recommendations as soon as possible to strengthen our systems 

of internal controls and lend further credibility to our financial statements. We wish to 

recognize and thank you and your team, as well as Williams, Adley & Company, for working 

closely with us during the audit process and especially for the excellent counsel and support 

you have provided us throughout the year. We look forward to working with you and your 

staff on the FY 2006 audit. Any questions may be addressed to Nimalka Wijesooriya, 

Comptroller at MCC, or to me. 

Following are our management decisions regarding the proposed audit recommendations. 

Material Weakness 1: MCC needs to improve its Policies and Procedures 

Recommendation: We recommend that MCC’s Office of Finance and Administration revise 

and reissue written policies and procedures that provide additional specificity in the 

following areas noted above including the Fund Balance with Treasury, financial reporting, 

payroll processing, accrual generation and reporting, interagency reporting, fixed assets, 

travel, monitoring and internal grant processes. These policies and procedures should 

provide the following information at a minimum: 

• Position accountable for each step in the process; 

• Position responsible for approving/reviewing the information; 

• The acceptable internal and external timelines for each step in the process; and 

Page 33 of 48 
Exhibit 

• The specific documentation required determining the authorization, timeliness and 

review of transaction. 

Management Decision: The management decision is to accept and implement this 

recommendation no later than June 30, 2006. We recognize that the informal procedures that 

served us in the past need to be formalized and procedures strengthened to align 

responsibilities with control objectives in order to manage and mitigate risks. 

Reportable Condition 1: MCC Should Devise and Implement Improved Travel 

Disbursement Controls and Procedures 

Recommendation: We recommend that MCC management: 

(4) Develop and disseminate explicit policies to ensure that employees are aware of and 

follow the Federal Travel Regulations. Any exception should be documented as to 

why and approved by a manager/supervisor in writing. 

(5) Institute policies and procedures to ensure proper authorizations and approvals are 

obtained and coordination with the Office of Finance and Administration has 

occurred for each planned travel prior to the travel occurrence including ensuring 

funds availability. 

(6) Develop and institute controls to reject those expenses claimed that exceed the 

allowable country per diem unless explicit written authorization is provided prior to 

travel. 

Management Decision: The management decision is to accept and implement this 

recommendation no later than March 31, 2006. In this regard, MCC has recently issued its 

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

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

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

objectives. MCC has also commenced discussions with the National Business Center, 

Department of Interior, to determine if it would be feasible to migrate to a different General 

Services Administration approved software provider to accomplish travel management, as 

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

Reportable Condition 2: MCC Needs to Address its Policies on Immediate Cash Needs and 

the Accruing of Interest on Grant Funds 

Recommendation: We recommend that management: 

Page 34 of 48 
Exhibit 

(3) Develop policies and procedures to ensure that the payment schedules and other 

agreements entered into with grantees are reflective of the Treasury requirements 

concerning advances and immediate cash needs. 

(4) Establish policies and procedures to ensure that any custodial liabilities, e.g. interest 

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

recorded. 

Management Decision: MCC has not arrived at a management decision with regard to this 

recommendation. We believe that this recommendation needs further management study 

before we can come to a conclusion on this recommendation. We expect to reach a 

management decision within 30 days, as required by regulation. 

Reportable Condition 3: MCC Needs to Address Human Capital Needs in Office of 

Finance and Administration 

Recommendation: We recommend that MCC evaluate and document the need for additional 

employees in to ensure that proper internal controls are in place to meet the agency’s 

objectives, thus providing the Controller with delegation authority. Additionally, the roles 

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

Finance and Administration should be clearly delineated and communicated. 

Management Decision: The management decision is to accept and implement this 

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

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

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

most appropriate mix of skills. 

Material Noncompliance: MCC Did Not Fully Comply with FFMIA and GPRA 

Recommendation: We recommend that MCC management: 

(3) Implement their intended corrective actions for preparation of a GPRA based 

performance goals and objectives by March 2006 as specified in its FFMIA 

assessment, specifically: 

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

OMB requirements. 

• Involve MCC staff in the determination of corporate performance goals. 

• Articulate operational performance goals for FY 2006 that align with the defined 

strategic goals and submit to the Board and OMB; and 

(4) Assess the automated options available to handle MCC operations and develop short 

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

technology structure to address electronic integration of at least the payroll, 

procurement and travel functions and systems to increase the efficiencies and 

effectiveness of the processing of financial transactions; and decrease the risk of 

errors. 

Page 35 of 48 
Exhibit 

Management Decision: 

(1) GPRA: The management decision is to accept this recommendation and complete 

implementation by no later than March 31, 2006. As of the date of this management 

response, the following actions have been undertaken: 

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

and submitted to OMB. 

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

engaged in developing corporate performance goals for FY 2006. 

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

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

MCC’s Board and OMB. 

(2) FFMIA: The management decision is to accept this recommendation and complete 

implementation by no later than September 30, 2006. However, MCC recognizes that 

the outcomes are outside its direct management control. MCC was established to be a 

lean efficient operation and accordingly, many facets of its back-office operations 

have been outsourced. MCC was required to outsource many of these functions such 

as financial management, human resource and payroll management, and travel 

management, to a USG entity, and MCC selected NBC to perform its back-office 

work. NBC operates on many legacy information systems that are not interfaced or 

integrated with MCC’s core financial management system. This leads to noncompliance with FFMIA and also makes MCC operations inefficient. MCC is 

cognizant of these issues and identified FFMIA non-compliance as a material 

weakness in its FMFIA report, which is included in this report. MCC will work 

diligently within the span of its control to comply not only with the FFMIA 

requirements, but more importantly to improve its operational efficiency, 

effectiveness and transparency. 

Page 36 of 48 
Millennium Challenge Corporation 

Statement of Financial Position As of September 30, 2005 and 2004 

Assets

2005 Total Compacts 

Pre-Compact 

Funding Threshold 

Evaluation and 

Support Administrative 

C

Fund Balance with Treasury (Note 2) $ 2,358,547,000 $ 2,273,365,909 $ 21,843,188 $ 20,000,000 $ 19,546,020 $ 23,110,024 Receivables/Advances/Prepayments (Note 3) 4,338,698 1,805,924 - - 2,500,000 32,774 

F

urrent Assets 

ixed Assets 

tal Assets 

Leasehold Improvements (Note 4) 4,244,059 - - - - 4,244,059 

To $ 2,367,129,757 $ 2,275,171,833 $ 21,843,188 $ 20,000,000 $ 22,046,020 $ 27,386,857 Liabilities 

Accounts Payable 1,319,468 - - - 72,130 1,247,338 Other Liabilities (Note 5) 2,522,803 - 154,527 - 997,921 919,546 Accrued Funded Annual Leave 1,386,644 - - - - 1,386,644 

Total Liabilities $ 5,228,915 $ - $ 154,527 $ - $ 1,070,051 $ 3,553,528 

Net Position 

Unexpended Appropriations 

Obligated/Undelivered Orders $ 349,153,392 $ 324,078,000 $ 6,144,307 $ - $ 8,800,260 $ 9,899,775 

Unobligated - Encumbered 606,634,745 580,378,488 15,398,801 - 5,423,455 5,434,001 Unobligated - Unencumbered 1,401,835,873 1,370,715,345 145,553 20,000,000 6,752,254 4,222,721 

Cumulative Results of Operations 4,276,832 - - - - 4,276,832 

 Total Net Position (Note 6) 

tal Liabilities and Net Position 

$ 2,361,900,842 $ 2,275,171,833 $ 21,688,661 $ 20,000,000 $ 20,975,969 $ 23,833,329 

To $ 2,367,129,757 $ 2,275,171,833 $ 21,843,188 $ 20,000,000 $ 22,046,020 $ 27,386,857 

 The footnotes are an integral part of these financial statements 

Page 37 of 48 
Millennium Challenge Corporation 

Statement of Operations and Changes in Net Position For the year ended September 30, 2005 with summary totals for the nine months ended September 30, 2004 

Revenues 

2005 Total Compacts 

Pre-Compact 

Funding Threshold 

Evaluation and 

Support Administra

Appropriations Used $ 39,312,758 $ 695,000 $ 311,339 $ - $ 3,024,031 $ 33,208

Expenses 35,035,926 695,000 311,339 - 3,024,031 28,931Excess of Revenues over Expenses $ 4,276,832 $ - $ - $ - $ - $ 4,276Net Position 

Excess of Revenues over Expenses 4,276,832 - - - - 4,276

Increase in Unexpended Appropriations

 Appropriated

 Obligated/Undelivered Orders 346,388,202 324,078,000 6,144,307 8,800,260 7,134

 Unobligated - Encumbered 626,634,744 580,378,488 15,398,801 20,000,000 5,423,455 5,434

 Unobligated - Unencumbered 407,664,296 396,543,768 145,553 6,752,254 4,222

 Permanent Recission (12,000,000) (12,000,000) - - - 

Total Increase in Unexpended Appropriations $ 1,372,964,074 $ 1,289,000,256 $ 21,688,661 $ 20,000,000 $ 20,975,969 $ 21,068

Beginning Net Position $ 988,936,768 $ 986,171,577 $ - $ - $ - $ 2,765

Ending Net Position $ 2,361,900,842 $ 2,275,171,833 $ 21,688,661 $ 20,000,000 $ 20,975,969 $ 23,833

 The footnotes are an integral part of these financial statements 

Page 38 of 48 
Millennium Challenge Corporation 

Statement of Functional Expenses For the year ended September 30, 2005 with summary totals for the nine months ended September 30, 2004 

Salary and Benefits Travel Rent/Lease Utilities Information Technology Services Accounting Services Interagency Agreements Other Services Supplies and Equipment Grants Miscellaneous 

Total Expenses 

2005 Total Compacts 

Pre-Compact 

Funding Threshold 

Evaluation and 

Support Administrative 

$13,343,440 

3,980,087 

718,546 207,704 

2,065,657 3,186,484 

564,654 

6,082,697 

2,671,882 

1,024,133 

1,190,642 

$ -

---

---

--

695,000 

-

$ -

--------

311,339 

-

$ -

--------

-

-

$ 1,603 

-----

564,654 

2,363,004 

--

94,770 

13,341,837 

3,980,087 

718,546 207,704 

2,065,657 1,112,790 

-

3,719,693 

2,671,882 

17,794 

1,095,872 

$ 

$ 35,035,926 $ 695,000 $ 311,339 $ - $ 3,024,031 $ 28,931,862 $ 

 The footnotes are an integral part of these financial statements 

Page 39 of 48 
Millennium Challenge Corporation 

Statement of Cash Flows For the year ended September 30, 2005 with summary totals for the nine months ended September 30, 2004 

Cash Flows from Operating Activities 

2005 Total Compacts 

Pre-Compact 

Funding Threshold 

Evaluation and 

Support Admi

Excess of Revenues over Expenses $ 4,276,832 $ - $ - $ - $ - $ 4

Adjustments Affecting Cash Flow: Appropriated Capital Used (39,312,758) (695,000) (311,339) - (3,024,031) (33

 Decrease (Increase) in Advances/Receivables/Prepayments (4,170,099) (1,805,924) - - (2,500,000) 

 Increase in Accounts Payable 1,295,584 - - - 72,130 

 Decrease in Other Liabilities 1,668,178 - 154,527 - 997,921 

 Increase in Annual Funded Leave Liabilities 1,216,743 - - - - 

Total Adjustments $ (39,302,352) $ (2,500,924) $ (156,812) $ - $ (4,453,980) $ (30

 Net Cash Used in Operating Activities $ (35,025,520) $ (2,500,924) $ (156,812) $ - $ (4,453,980) $ (25

Cash Flows from Investing Activities

 Purchase of Property $ (4,244,059) $ - $ - $ - $ - $ (4

 Net Cash Used in Investing Activities $ (4,244,059) $ - $ - $ - $ - $ (4

Cash Flows from Financing Activities

 Appropriations received net of recissions $ 1,488,000,000 $1,289,695,256 $ 22,000,000 $ 100,000,000 $ 24,000,000 $ 50

 Transfers Out (80,000,000) (80,000,000)

 Net Cash Provided by Financing Activities $ 1,408,000,000 $1,289,695,256 $ 22,000,000 $ 20,000,000 $ 24,000,000 $ 50

 Net Increase in Cash $ 1,368,730,421 $1,287,194,332 $ 21,843,188 $ 20,000,000 $ 19,546,020 $ 19

 Fund Balance with Treasury, Beginning $ 989,816,579 $ 986,171,577 $ - $ - $ - $ 3

 Fund Balance with Treasury, Ending $ 2,358,547,000 $2,273,365,909 $ 21,843,188 $ 20,000,000 $ 19,546,020 $ 23

 The footnotes are an integral part of these financial statements 

Page 40 of 48 
Millennium Challenge Corporation 

Statement of Budgetary Resources For the year ended September 30, 2005 with summary totals for the nine months ended September 30, 2004 

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 7) 

2005 Total Compacts 

Pre-Compact 

Funding Threshold 

Evaluation and 

Support Adminis

$ 1,500,000,000 

986,171,577 

-

-

-

(12,000,000) 

$ 1,301,695,256 

986,171,577 

(12,000,000) 

$ 22,000,000 

-

$100,000,000 

-

$ 24,000,000 

-

$ 50,00

Total Budgetary Resources $ 2,474,171,577 $22,000,000 2,275,866,833 $ $100,000,000 $ 24,000,000 $ 50,00

Status of Budgetary Resources: 

Obligations Incurred Unobligated Balance Available: 

Apportioned 

Unobligated Balance Not Available: 

$ 420,449,393 

683,006,839 

1,370,715,345 

$ 324,773,000 

580,378,488 

1,370,715,345 

$ 6,455,646 

15,544,354 

-

$ 34,748,434 

65,251,566 

-

$ 11,824,290 

12,175,710 

-

$ 40,34

9,65

Total Status of Budgetary Resources $ 2,474,171,577 $22,000,000 2,275,866,833 $ $100,000,000 $ 24,000,000 $ 50,00

Relationship of Obligations to Outlays: 

Obligated Balance, Net - as of October 1, 2004 

Obligations Incurred 

Recoveries of Prior Years Obligations Adjustments Obligated Balance, Net - End of Period

 Accounts Payable  Undelivered Orders 

$ 3,645,002 

420,244,138 

-

(5,335,899) 

(379,526,106) 

$ -

324,773,000 

-

(322,272,076) 

$ -

6,298,834 

(154,527) 

(6,144,307) 

$ -

34,699,991 

(21,353) 

(34,678,638) 

$ -

11,824,290 

(1,070,051) 

(6,300,260) 

$ 3,64

40,34

(3,63

(9,89

Total Outlays $ 39,027,135 $ 2,500,924 $ - $ - $ 4,453,979 $ 30,44

Outlays:

 Disbursements 39,232,391 2,500,924 156,813 48,443 4,453,980 30,44

 Collections / Refunds -

Net Outlays $ 39,232,391 $ 2,500,924 $ 156,813 $ 48,443 $ 4,453,980 $ 30,44

 The footnotes are an integral part of these financial statements 

Page 41 of 48 
Millennium Challenge Corporation 

Notes to the Financial Statements 

As of September 30, 2005 

Note 1 – Summary of Significant Accounting Policies 

A. Basis of Presentation 

These financial statements have been prepared to report the financial position, results of 

operations, cash flows, and budgetary resources for the Millennium Challenge 

Corporation (the Corporation), as required by Section 613 of the Millennium Challenge 

Act of 2003 and the Government Corporation Control Act (31 USC 9106). The 

Corporation was formed on January 23, 2004. These financial statements have been 

prepared from the books and records of the Corporation and are presented in accordance 

with the applicable form and content requirements of the Office of Management and 

Budget, the Secretary of the Treasury, and the Government Management and Reform Act 

of 1994. 

The corporations accounting policies follow generally accepted accounting principles for 

the federal government, as recommended by the Federal Accounting Standards Advisory 

Board (FASAB). The Corporation is not subject to income tax. 

The principal financial statements of the Corporation are the: 

• Statement of Financial Position; 

• Statement of Operations and Changes in Net Position; 

• Statement of Functional Expenses; 

• Statement of Cash Flows; and 

• Statement of Budgetary Resources. 

These statements are comparative between fiscal years 2004 and 2005. Since the 

Corporation was only formed in January 2004, fiscal year 2004 only represents nine 

months of data, while fiscal year 2005 represents twelve months of data. The notes to the 

financial statements are considered an integral part of the financial statements. 

B. Reporting Entity 

The Corporation was created by the Millennium Challenge Act of 2003 (Public Law 108-

199). The Corporation provides United States assistance for global development. This 

assistance is provided in such a manner as to provide economic growth and the 

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

investments in people. 

Page 41 of 48 
Millennium Challenge Corporation 

Notes to the Financial Statements 

As of September 30, 2005 

The Millennium Challenge Act provides specific authorities to MCC that result in the 

following definitions that are used in these statements: 

Compact: An agreement entered in to between the Corporation and an eligible country 

that establishes and funds a multi-year plan for achieving development objectives. 

Pre-Compact Funding: Contracts or Grants made by the Corporation to an eligible 

country for the purpose of facilitating the development and implementation of a compact. 

Threshold: Assistance provided by the Corporation to a candidate country for the purpose 

of assisting that country to become eligible for Compact funding from the Corporation. 

Evaluation and Support: Program budgetary resources to assess and work with countries 

on key elements of program development and implementation, including program results 

and impact measurement and management. 

Administrative: Budgetary resources to meet the administrative and overhead expenses. 

Audit: Budgetary resources provided to the Inspector General of the Corporation to 

conduct reviews, investigations and inspections of all aspects of the operations and 

activities of the Corporation. 

C. Budgets and Budgetary Accounting 

The activities of the Corporation are funded through No-Year Appropriations, wherein 

the funds are available for obligation without fiscal year limitation and remain available 

until expended. MCC was provided a total appropriation of $1.5 billion for Fiscal Year 

2005. MCC’s Administrative, Evaluation and Support, and Audit funds are limited as to 

amount and it is MCC’s policy to transfer all unobligated funds at the end of the year in 

these categories to the Compacts fund at the beginning of the next fiscal year. 

The Threshold Program is implemented by the United States Agency for International 

Development (USAID) under an “Appropriation Allocation” wherein the obligation 

authority for the funds provided the Corporation is transferred to USAID; the funds 

remain in MCC’s account but MCC allocates them to USAID for obligation. USAID is 

responsible for obligating these funds and meeting the financial reporting requirements 

stipulated by MCC. Accordingly, USAID will be presenting the net cost and proprietary 

balances on its financial statements. 

D. Basis of Accounting 

Transactions are recorded on both an accrual and budgetary basis. Under the accrual 

method of accounting, revenues are recognized when earned and expenses are recognized 

when a liability is incurred, without regard to receipt or payment of cash. 

Page 42 of 48 
Millennium Challenge Corporation 

Notes to the Financial Statements 

As of September 30, 2005 

Budgetary accounting facilitates compliance with legal constraints and controls over the 

use of federal funds. 

The accompanying statements of: Financial Position, Operations and Changes in Net 

Position, Cash Flows, and Functional Expenses have been prepared on an accrual basis. 

The Statement of Budgetary Resources has been prepared in accordance with budgetary 

accounting rules. The statement of Cash Flows has been prepared to reconcile budgetary 

to financial (proprietary) accounting information. 

E. Fund Balance with Treasury 

The Corporation does not maintain cash in commercial bank accounts. The U.S. 

Treasury processes all cash receipts and disbursements for the corporation. The Fund 

Balance with Treasury represents no-year funds, which are maintained in appropriated 

funds that are available to pay current and future commitments. 

F. Advances to Others 

The Corporation advances funds, primarily in response to grantee and Federal agency 

drawdown requests, to facilitate completion of any approved grant or inter-agency 

agreement. 

G. Property and Equipment 

The Corporation capitalizes property and equipment at historical cost for acquisitions of 

$25 thousand or more, with an estimated useful life of two or more years. These assets 

can include leasehold improvements, telephone equipment, computer systems equipment, 

copiers, computer software, furniture, and assets under capital leases. These assets are 

depreciated (or amortized) over estimated useful lives ranging from two to 10 year, using 

the half-year convention. The Corporation records a full year’s depreciation when assets 

are placed in to service during the first half of the fiscal year and no depreciation when 

assets are placed in the second half of the fiscal year. Accordingly, no depreciation was 

taken in fiscal year 2005. Normal maintenance and repair costs on capitalized property 

and equipment are expensed when incurred. 

H. Grants (Compacts and Pre-Compact Funding) Payable 

Grants are made to eligible countries with an approved Compact or Pre-Compact funding 

agreement. Grants become budgetary obligations, but not liabilities, when they are 

awarded and enter in to legal force. At the end of each fiscal year, the Corporation 

reports the total amount of unreimbursed authorized grantee expenses, incurred under the 

terms of the grants, as a payable. The balance at the end of FY 2005 was $0. 

Page 43 of 48 
Millennium Challenge Corporation 

Notes to the Financial Statements 

As of September 30, 2005 

I. Accounts Payable 

The Corporation records as liabilities all amounts that are likely to be paid as a direct 

result of transactions or events that have already occurred. Accounts payable represents 

amounts due to both Federal and non-Federal entities for goods and services received by 

the Corporation, but not paid for at the end of the fiscal year. 

J. Actuarial FECA Liability 

The Federal Employees’ Compensation Act (FECA) provides income and medical cost 

protection to covered Federal civilian employees injured on the job, employees who have 

incurred a work-related occupational disease, and beneficiaries of employees whose 

death is attributable to a job-related injury or occupational disease. 

Claims incurred for benefits for Corporation employees under FECA are administered by 

the Department of Labor (DOL) and later billed to the Corporation. The Corporation’s 

actuarial liability for worker’s compensation includes any costs incurred but unbilled as 

of year-end, as calculated by DOL, and is not funded by current appropriations. 

The Corporation has no FECA liabilities incurred during fiscal year 2005. Therefore, 

none are reflected on the statements for this fiscal year. 

K. Other Liabilities 

Other liabilities included amounts owed but not paid at the end of the fiscal year for 

payroll and benefits; and the portion of the liability for the Federal Employees’ 

Compensation Act charges incurred and billed but unpaid. 

L. Accrued Annual Leave 

Annual leave is accrued as a liability based on amounts earned but not used as of the 

fiscal year-end. Each year, the balance in the accrued annual leave account is adjusted to 

reflect current year pay rates and leave balances. Annual leave is funded from current 

appropriations. As unused annual leave is used in the future, financing will be obtained 

from appropriations current at that time. Sick leave and other types of non-vested leave 

are expensed when used. 

M. Net Position 

Net position is composed of unexpended appropriations and cumulative results of 

operations. Unexpended appropriations are funds appropriated and warranted to the 

Corporation that are still available for expenditure at the end of the fiscal year. 

Cumulative results of operations represent the net differences between revenues and 

expenses from the inception of the Corporation. 

Page 44 of 48 
Millennium Challenge Corporation 

Notes to the Financial Statements 

As of September 30, 2005 

N. Revenues 

Appropriations used: The Corporation obtains funding for its program and operating 

expenses through no-year appropriations. Appropriations are recognized as an accrualbased financing source at the time they are used to pay program or administrative 

expenses, except for expenses to be funded by future appropriations. 

O. Retirement Benefits 

The Corporation’s employees participate in either the Civil Service Retirement System 

(CSRS) or the Federal Employees Retirement System (FERS). FERS was established by 

the enactment of Public Law 99-335. Pursuant to this law, FERS and Social Security 

automatically cover most employees hired after December 31, 1983. Employees hired 

prior to January 1, 1984, elected to join FERS and Social Security or remained in CSRS. 

For employees covered by CSRS, the Corporation contributes 8.51 percent of their gross 

pay towards retirement. For those employees covered by FERS, the Corporation 

contributes 11.50 percent of their gross pay towards retirement. Employees are allowed 

to participate in the Federal Thrift Savings Plan (TSP). For employees under FERS, the 

Corporation contributes an automatic one percent of basic pay to TSP and matches 

employee contributions up to an additional four percent of pay, for a maximum 

Corporation contribution amounting to five percent of pay. Employees under CSRS may 

participate in the TSP, but will not receive either the Corporation’s automatic or matching 

contributions. 

The Corporation made retirement contributions of $30 thousand to the CSRS Plan and 

$876 thousand and $226 thousand to the FERS and TSP Plans in fiscal year 2005. 

P. Use of Estimates 

The preparation of financial statements requires management to make estimates and 

assumptions that affect the reported amounts of assets and liabilities, the disclosure of 

contingent assets and liabilities at the date of the financial statements, and the reported 

amounts of revenue and expenses during the reporting period. Actual results could differ 

from these estimates. 

Q. Contingencies 

The Corporation can be a party to various routine administrative proceedings, legal 

actions, and claims brought by or against it, including threatened or pending litigation 

involving labor relations claims, some of which may ultimately result in settlements or 

decisions against the Corporation. In the opinion of the Corporation’s management and 

legal counsel, there are no proceedings, actions or claims outstanding or threatened, 

which would materially impact the financial statements of the Corporation. 

Page 45 of 48 
 

Millennium Challenge Corporation 

Notes to the Financial Statements 

As of September 30, 2005 

R. Judgment Fund 

Certain legal matters to which the Corporation can be named as a party may be 

administered and, in some instances, litigated and paid by other Federal agencies. 

Generally, amounts paid in excess of $2.5 thousand for Federal Tort Claims Act 

settlements or awards pertaining to these litigations are funded from a special 

appropriation called the Judgment Fund. Although the ultimate disposition of any 

potential Judgment Fund proceedings cannot be determined, management does not expect 

any liability or expense that might ensue would be material to the Corporation’s financial 

statements. 

S. Donated Services 

The Corporation utilizes donated services from other Federal agencies and private firms 

in the course of business operations. The approximate fair market value of these donated 

services during the fiscal year is $515,000. This amount is not material and therefore, is 

not reflected in the financial statements. 

T. Custodial Receivable and Liability 

It is expected that the Corporation will fund all its Compacts with advances that are 

required to be placed in an interest-bearing account, if legally feasible, until disbursed. 

The interest earned on these accounts are refunded to the Corporation and deposited in to 

an account at the U.S. Treasury. The receivable and related liabilities are not reflected in 

these financial statements. As at September 30, 2005, the Corporation had outstanding 

advances related to compact financing of approximately $1.8 million and the interest 

earned is estimated at about $ 17,000. 

Note 2 – Fund Balance with Treasury 

The U.S. Treasury accounts for all US Government cash on an overall consolidated basis. 

The Fund Balance with Treasury line on the Statement of Financial Position consists of the 

following: 

Fund Balance with Treasury as of September 30 

(In Dollars) 

2005 2004 

Appropriated Funds

 Unobligated 1,973,684,995 986,171,577 

Obligated 384,862,005 3,645,002 

Total $ 2,358,547,000 $ 989,816,579 

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Millennium Challenge Corporation 

Notes to the Financial Statements 

As of September 30, 2005 

Note 3 – Advances/Accounts Receivable 

Advances reflect amounts provided grantee countries and other Federal agencies, in 

accordance with their Compacts or inter-agency agreements, respectively. Accounts 

receivable reflect overpayments of payroll and travel expenses to current employees of the 

Corporation. As such, no allowance for doubtful accounts is necessary. 

Note 4 – Leasehold Improvements 

The only capitalized asset is the leasehold improvements on MCC headquarter offices 

located at 875 15th Street, NW, Washington, DC, 2005. Occupancy of this building by the 

Corporation began in July 2005. MCC’s policy is to use the straight line method for 

computing depreciation. 

Note 5 – Other Liabilities 

Other Liabilities as of September 30 

(In Dollars) 

Type 2005 2004 

Evaluation and Support $ 997,921 $ 0 

Travel $ 747,143 $ 81,001 

Office of the Inspector General $ 450,809 $ 356,184 

Miscellaneous $ 326,930 $ 87,224 

Payroll $ 0 $ 330,216 

Total $ 2,522,803 $ 854,625 

Page 47 of 48 
Millennium Challenge Corporation 

Notes to the Financial Statements 

As of September 30, 2005 

Note 6 – Net Position 

The reported net position consists of unexpended appropriations and cumulative results of 

operations, which reflects the difference between revenues and expenses since the 

Corporation’s inception. 

Breakdown of Obligated/Undelivered Orders and Unobligated–Encumbered grant funds: 

Note 7 – Permanent Rescission 

In fiscal years 2005 and 2004, respectively, $12 million and $ 5.9 million of amounts 

previously appropriated under the FY 2005 and FY 2004 Foreign Operations, Export 

Financing, and Related Programs Appropriations Acts (Public Law 108-447 and Public Law 

108-199, respectively), were rescinded. The rescissions were part of the Across-the-Board 

Rescissions enacted for fiscal years 2005 and 2004. 

Page 48 of 48