United States General Accounting Office

GAO Report to the Ranking Minority Member,

Subcommittee on Foreign Operations,

Committee on Appropriations, 

U.S. Senate

June 1995 FOREIGN

ASSISTANCE

African Development

Foundation’s Overhead

Costs Can Be Reduced

GAO/NSIAD-95-79

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-256714 

June 2, 1995

The Honorable Patrick J. Leahy

Ranking Minority Member

Subcommittee on Foreign Operations

Committee on Appropriations

United States Senate

Dear Senator Leahy:

This report, prepared at your request, discusses the African Development

Foundation’s (ADF) administrative and financial management practices.

You were concerned about whether ADF used its resources efficiently and

asked that we assess the levels that ADF budgeted and spent on

administrative overhead, specifically whether ADF (1) used program funds

for administrative expenses, (2) presented reliable data in its budget

submissions to Congress, and (3) complied with financial reporting

requirements.

Results in Brief During fiscal year 1994, as in prior years, ADF spent more of its budget for

headquarters administrative expenses (about 28 percent), than the

Inter-American Foundation (IAF), an organization that is comparable to

ADF, and other similar agencies spent for such costs. ADF’s overhead rate

was higher mainly because of higher salaries and greater use of

consultants and contractors than were budgeted to carry out headquarters

functions. This may have occurred, in part, because ADF’s board of

directors provided insufficient oversight of ADF activities between 1991

and 1994.

Because ADF’s funds are appropriated as a lump sum and not earmarked

for program or administrative use, ADF is not bound by statute as to the

amount it can spend for administrative overhead. During fiscal years

1991-94, ADF generally spent more for administration and in-country

program support and less for development grants than it proposed in its

congressional budget submissions. It also exceeded amounts it included in

its own budgets for administrative costs and may have exceeded the

amount that the Office of Management and Budget (OMB) apportioned to

ADF for administrative costs during 1 or more years of this period.

ADF budgetary and cost data presented to Congress and OMB for program

management and support (administrative overhead) was not reliable. The

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B-256714 

data was based on unaudited financial statements and an accounting

system that was not viable for audit. Further, the data did not always agree

with the amounts shown in ADF records or reports to ADF’s board of

directors, and explanations were not provided as to why actual costs

sometimes varied significantly from the budget estimates. Program

categories used to present data to Congress and OMB were not consistent

in format from year to year, making comparisons difficult; some costs

were not properly coded; and narrative justifications did not adequately

describe what the costs covered. ADF and OMB have recently acknowledged

the problem and taken steps to improve the quality of budget reporting.

ADF did not meet the financial reporting, internal controls assessment, and

budget report reconciliation requirements of the Government Corporation

Control Act; however, it began steps in 1994 to do so.

In commenting on a draft of this report, ADF’s new Chairman of the Board

indicated that ADF has already addressed or is in the process of addressing

most, if not all, of the problems noted in this report.

Background ADF was created by Congress in 1980 as an independent public corporation

to support local self-help initiatives of the poor in Africa. It was patterned

after IAF, which provides small social and economic development grants to

grassroots organizations in Latin America and the Caribbean. ADF is

authorized to prescribe its own rules and regulations for carrying out its

functions. It also has authority to execute contracts and agreements, and

to employ and fix the compensation of staff. ADF is subject to the

Government Corporation Control Act provisions applicable to

wholly-owned corporations and has stated that its programs and

operations are generally administered in accordance with existing federal

regulations.

ADF’s charter calls for a seven-member bipartisan board of directors,

comprised of five private sector and two public sector members,

appointed to 6-year staggered terms by the President with Senate

approval. The board is responsible for the Foundation’s overall

management. This includes establishing policy and monitoring program

activities to ensure they are carried out within the framework of legislative

authority. The board also appoints a president who manages the

day-to-day operations.

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B-256714 

ADF began operations in 1984, and as of September 30, 1994, had funded

415 development grants and 123 research grants in 31 African countries. It

had obligated about $45.4 million for development projects and

$3.7 million for research through fiscal year 1994. Its budgets for fiscal

years 1993 through 1995 have remained constant at $16.9 million. During

fiscal year 1994, ADF had a staff of 54 at its Washington, D.C., headquarters

and used the services of local country liaison officers, resident evaluators,

technical assistance providers, and auditors under cooperative agreements

and contract arrangements in 22 African countries.

Administrative

Overhead Is Higher

Than Other Similar

Agencies

ADF’s administrative overhead was significantly higher than other

grassroots development organizations. The overhead rate, which generally

declined between fiscal years 1984-90 as the size of ADF’s budget increased,

has remained fairly constant at about 28 percent between fiscal years

1991-94 even though ADF’s budget increased from about $13 million to

$17 million during this period. In comparison, IAF, which administered a

budget that was more than twice as large as ADF’s ($38 million versus

$17 million), spent 21 percent or less of its budget for administrative

overhead during the period. ADF also spent proportionately more of its

budget for in-country support and less for development grants. (See fig. 1.)

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B-256714 

Figure 1: Comparison of ADF and IAF

Budget Expenditures, Fiscal Year 1994

(Dollars in Millions)

$24.6 (65%)

ADF budget expenditures – $16.9 

IAF budget expenditures – $38.1 

Development grants (64)

$8.3 (49%)

Personnel compensation

$4.7 (28%)


Administrative


overhead

$3.0

Other

$1.7

Research

$.9

In-country support

$3.0

$8.0 (21%)


Administrative


overhead

Development grants (168)

In-country support

Other

Personnel compensation

$1.2 Research

$3.4 $4.6

$4.3

We also found that two other regional development assistance

organizations with similar grant making activities but different program

delivery systems and accounting policies, the Asia and Eurasia

Foundations, which are privately operated under contract funding

arrangements with federal entities, had lower overhead rates than ADF.

Page 4 GAO/NSIAD-95-79 African Development Foundation
B-256714 

During fiscal year 1994, they reported combined program services and

administrative overhead of 17.9 percent and 18.3 percent, respectively.

While ADF had less than one-half the overall funding level and spent

proportionately less of its budget for development grants than IAF (as

shown in fig. 1), it maintained program activity in as many countries as IAF

but at a much lower volume per country. Both organizations were active in

22 countries (though ADF had suspended operations in several countries

due to turmoil at the end of fiscal year 1994). Whereas the grants awarded

by the organizations were of comparable size, the number and total value

of grants awarded by ADF per country were less than one-half of those

awarded by IAF. During fiscal years 1993-94, ADF averaged about three new

development grants and less than $400,000 per country whereas IAF

averaged about seven new grants and more than $1.1 million per country.

In addition, ADF managed a much smaller portfolio of active grants than

IAF, including issuing far fewer grant amendments and supplements.

Both ADF and IAF spent a comparatively modest share of their budgets

(5 percent versus 3 percent) for a congressionally mandated research

program of providing grants to local nationals and funding activities that

seek to disseminate “lessons learned” through them, as well as for

in-country technical assistance and evaluation. We do not believe that

these research and support activities had a material effect on either of

their administrative overhead rates since they do not appear to require as

much staff supervision as development grants, in part, because they are

not audited and they require less reporting and formal review.

The difference between ADF’s and IAF’s administrative overhead costs can

be attributed mainly to higher ADF personnel compensation costs.

Headquarters personnel compensation is ADF’s fastest growing expense

and accounts for about two-thirds of the overhead cost. ADF had higher

graded positions than IAF—more than half of its headquarters staff was

GS-12 or above—and a higher graded management structure. In their

respective program offices, ADF had two regional directors (GS-15) that

each supervised three regional managers (GS-13/14) and staff whereas IAF

had one vice president (GS-15) that supervised four regional directors

(GS-14) and staff. Also, IAF had no counterpart to ADF’s newly established

Director of Central Operations (GS-15) and Public Affairs Officer (GS-14).

ADF’s administrative support services costs were also higher than planned

or relative to IAF because ADF made significant and frequently unbudgeted

use of consultants and contract support staff to supplement the work

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performed by its direct-hire employees. ADF spent over $400,000 annually

for consulting and temporary services during fiscal years 1991-94, or more

than double the amount that was budgeted for them. The large majority of

this cost was for long-term personal services contractors providing

support services ranging from 1 to 4 years. In most cases, these

contractors were retained by ADF on a continuous basis through award of

successive annual contracts, including some for individuals who were

later hired as regular employees. While ADF’s legislation1

 authorizes it to

make contracts with individuals as necessary to carry out its functions,

some contractors were providing services more properly reserved to

employees. Several of the contractors who were ultimately hired

continued to perform the same jobs they had done before. In addition, OMB

confirmed an agreement with ADF in April 1992 that by September 30, 1992,

“no contractors will be permitted to perform inherently governmental

functions at ADF.” While ADF phased down the use of personal services

contractors, it continued to use them to perform governmental functions,

such as reviewing project proposals and monitoring grants and

agreements during all of fiscal year 1993 and into 1994. ADF had released all

but two contractors by January 1994 and ADF officials told us in

March 1995 that they planned to release those two within several months.

ADF also spent a higher proportion of its administrative budget on travel

and transportation than IAF (about 12 versus 8 percent). Much of the

difference can be accounted for by the longer distances ADF personnel

have to travel and the difficulties in getting to and around African

countries. However, ADF travel policies and practices contributed to higher

operating costs. For example, ADF records showed that the board of

directors, president, and vice president traveled business class by virtue of

their position and that staff members who accompanied them also did so

without having to make any further justification. Moreover, adequate

efforts were not made to defray travel costs by combining tasks to

eliminate short trips. ADF has since tightened its travel policies, including

improving trip planning and eliminating all business class travel except in

cases of medical emergency.

Inadequate Board

Oversight and Cost

Controls Contributed

to Higher Overhead

Between 1991 and 1994, ADF’s board of directors, due to extended

vacancies in its membership, did not provide the oversight necessary to

control overhead costs. As shown in table 1, even though four board

members agreed to extend their service terms, there were still long

periods of vacancy in board membership. Four of the seven board member

1

Public Law 96-533, Sec. 506 (a)(5).

Page 6 GAO/NSIAD-95-79 African Development Foundation
B-256714 

positions were vacant for periods ranging from 14 months to 3 years and

only one position did not experience a vacancy or need to extend a

member’s term of service.

Table 1: Service Extensions and

Vacancies on ADF’s Board of Directors

Between 1991-94 Position

Extended service

period Vacancy period Length of vacancy

Chairman 10/89 to 3/91 8/92 to 7/94 23 months

Vice chairman None 6/92 to 5/94 23 months

Public member None None None

Public member None 1/93 to 3/94 14 months

Private member 10/93 to 5/94 5/94 to present Since 5/94

Private member 10/93 to 5/94 None None

Private member 11/89 to 12/91 12/91 to 10/94 34 months

Until a new board was formed in July 1994, the board had not met at least

quarterly, as stipulated in the ADF’s board manual. Three out of four

previously scheduled meetings (in June 1993 and in February and

June 1994) were canceled or delayed because the board could not

establish a quorum or lacked a chairman. Also, the last meeting held (in

October 1993) before the new board was established was attended by the

board’s only three members, two of whom were serving on extended

appointments. Vacancies in the board’s vice chairman and chairman

positions had existed since June and August 1992, although one board

member was chosen in October 1992 to be acting chairman.

Although we were told that the ADF president did have frequent contact

with the existing board members during the period (which appeared to be

the case), our review indicated that ADF management did not receive the

appropriate attention necessary to ensure that administrative and program

support costs were in line with budget estimates and were spent efficiently

and effectively.

In addition, while ADF has asserted that it had generally adhered to

government travel and procurement regulations, we found that ADF’s

president had engaged in some practices that appeared to be questionable.

For example, he:

• Established a travel pattern that appeared to combine personal and

business activity through indirect routing that included frequent stops at a

New York residence on official trips between March 1991 and

Page 7 GAO/NSIAD-95-79 African Development Foundation
B-256714 

January 1994 without using constructive travel cost (required by travel

regulations) as the basis for claiming reimbursement of travel expenses.

• Employed a policy, inconsistent with federal travel regulations, that

permitted himself and certain ADF staff to routinely use business-class

accommodations without appropriate justification.

• Acquired a portable cellular telephone that was used primarily for

personal business and obtained discounted rates from contract providers

of cellular communications and express mail services that created an

additional administrative burden on staff to identify and seek

reimbursement for personal charges.

• Retained a consultant on a continuous but largely unbudgeted basis, using

six successive personal service contracts and amendments commencing

June 1991 and ending January 1994, totaling about $189,000, for the

purpose of developing a new grant audit manual and bookkeeping system

for field operations and training for regional managers, country liaison

officers, and grantees. ADF officials familiar with implementation

procedures for the new manual and bookkeeping system told us they

considered the consultant’s work to be of marginal value.

Weak budgetary and cost controls also contributed to ADF’s high overhead

costs. It used an accounting system designed and operated by the National

Transportation Safety Board that was not well suited for grant making.

Written operating procedures were not current or complete, and certain

organizational functions were inappropriate for effective internal control

or not clearly defined. For example, ADF’s operating manual did not reflect

important changes in staff organization, and the delegation of authority to

officers of ADF had not been updated since 1985. Also, manual procedures

had not been drafted for office director responsibilities, budget

preparation, procurement and contracting, property management, and

most aspects of ADF personnel and grant program administration. The risk

of impropriety was increased by a concentration of certain key functions

(including personnel hiring and compensation, travel authorization, and

the cash imprest fund) in the Office of the President and management’s

failure to assess agency internal accounting controls.

An almost complete board has been in place since July 1994 when a new

chairman was appointed. In December 1994, the new Chairman told us

that the board intended to be more vigorous in its oversight of ADF

program and administrative support activities, including cost controls. As

of the end of March 1995, it had held five meetings and was actively

engaged in selecting a new president and formulating policies and

strategies designed to improve ADF’s operations.

Page 8 GAO/NSIAD-95-79 African Development Foundation
B-256714 

ADF Has Begun

Taking Steps to

Reduce

Administrative Costs

To reduce its administrative costs, ADF terminated several of its long-term

personal services contractors in 1994 and plans to terminate the remainder

during 1995. ADF officials identified other steps designed to reduce these

costs and promote efficiency, including improving and simplifying

financial management systems and controls, promoting better

communication and working relations between headquarters staff, and

providing better training to field staff and grantees.

In response to the executive branch’s National Performance Review

initiative and OMB guidance, ADF’s president appointed a committee in

February 1994 to review ADF’s operations and structure to find ways to

reduce workload and streamline procedures. The review identified

opportunities for improving staff efficiency and controlling overhead

costs. The ADF president endorsed a number of the committee’s

recommendations and submitted them in November 1994 to the board of

directors for approval. They provided for

• increased delegation of approval authority to lower management levels to

permit decisions to be made at the operating level,

• transfer of certain functions to increase operational efficiency and reduce

overlap or duplication,

• flexible policies and procedures for grant audits and closeouts,

• improved planning and use of travel and communications services,

• staggered or reduced frequency of reporting by grantees, and

• establishment of criteria for selecting countries for program participation

and minimum funding level for efficient operation.

The president did not endorse some of the committee’s proposals and did

not immediately forward other recommendations for the board’s

consideration, stating that he intended to further review or seek additional

assistance before submitting them. The proposals that were not initially

forwarded included realigning, eliminating, or downgrading existing staff

positions; making more effective use of existing personnel resources,

including less dependence on outside contractors and consultants;

reducing priority for representational travel; and improving administration

of incentive awards programs.

In December 1994, ADF hired a private consultant (The Mitchell Group) to

analyze ADF’s organizational structure and staffing patterns. The Group’s

March 1995 report to ADF focuses mainly on ADF’s organization and

operating procedures. The report highlights an inefficient management

structure with poor communications and confused lines of authority, and

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B-256714 

confirmed the existence of weak budgetary discipline and cost controls.

ADF’s board chairman told us that the board had accepted the Group’s

recommendations to restructure and downsize ADF and referred them to

the staff for implementation.

Administrative

Overhead Excludes

In-Country Support

Costs

In-country support costs that include liaison and administrative activities,

technical assistance, and project evaluation, make up about 18 percent of

ADF’s budget (compared to 11 percent for IAF), but ADF does not consider

any of these costs to be administrative overhead. ADF officials believe the

costs for in-country support are an integral part of ADF’s unique program

concept of capacity-building and fully consistent with its legislative

mandate that projects are for grassroots development and that they be

designed, managed, and implemented for and by Africans. ADF officials

argue that other development organizations are able to achieve lower

program overhead ratios by channeling their project funds through various

intermediaries or requiring they be spent on foreign consultants and

equipment. ADF in-country support costs are principally made up of the

following:

• A country liaison officer network of local national development specialists

who (1) carry out the day-to-day monitoring of ADF-funded projects in each

country in which ADF operates, (2) disseminate information about ADF

funding procedures, (3) help screen applicants and evaluate project

proposals, and (4) provide technical assistance to applicants and grantees.

• A resident evaluator network through which ADF maintains a cadre of

African development professionals who, on a consultant basis, facilitate

implementation of ongoing, self-evaluations of ADF-funded projects.

• Recruitment and training of local technical assistance providers who train

grantees and field support staff in basic bookkeeping and financial

management.

ADF and OMB have debated for years whether the cost of country liaison

officers should be accounted for as ADF administrative or program

overhead. ADF regards country liaison officer costs, which include

ADF-provided office space and equipment and have ranged from 11 to

14 percent of its budget in recent years, to be program-related support and

has included them along with research grants and other cooperative

agreements as a single cost category in prior budget presentations under

“Development studies and technical assistance.” OMB clarified the matter

by revising the budget format in 1994 so that country liaison officer and

Page 10 GAO/NSIAD-95-79 African Development Foundation
B-256714 

other program support costs covered by cooperative agreements would be

shown as separate line items under an “In-country support” category.

ADF’s in-country support costs nearly doubled from $1.8 million in 1992 to

about $3 million during fiscal years 1993 and 1994 at a time when ADF’s

overall budget increased by 32 percent. The cost increases were primarily

for (1) country liaison officers, which ADF officials attributed mainly to

expanded country liaison officer staffing and installation of computer and

communications equipment in their offices and (2) expanded emphasis on

technical training programs for grantees and field support staff, including

standardizing the method of providing this assistance so that the cost was

accounted for as in-country support rather than charging it to individual

projects, for example, “Direct development assistance” (grants), as it was

presented in congressional budget presentations. According to ADF

officials, grantees needed more training and technical support to ensure

maximum project impact. During fiscal year 1994, such technical

assistance amounted to $604,000.

Administrative and

Program Support

Costs Exceeded

Budget Estimates

ADF is funded by annual lump-sum appropriations, which do not specify

how funds must be spent among cost categories. Although ADF’s

appropriations are based on an annual budget estimate and priority

agenda that ADF submits through OMB to Congress, the appropriation acts

do not earmark funds for specific purposes such as for program or

administrative support activities. Each year, the acts state that ADF may

use the funds as necessary to carry out its responsibilities. As a result, ADF

is not bound by statute as to the amount it can spend for administrative

overhead or other support and program purposes. However, while ADF

budget and cost controls have been weak and financial reporting generally

could not be relied on, we found that actual operating and support costs

were higher and development grants were lower than the budget estimates

approved by OMB and submitted to Congress for fiscal years 1991-94. (See

fig. 2.)

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Figure 2: Budget Shortfalls and

Overruns by Major Category, 

Fiscal Years 1991-94

Dollars in thousands

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

400

500

600

700

1991 1992 1993 1994

Fiscal year

-539

-54

508

220

-168

118

-123

156

-673

192

270

160

-742

140

457

138

Development grants

Development research and dissemination

In-country support

Administrative overhead

Baseline

Furthermore, we found that ADF does not provide Congress with advance

notification for anticipated or actual changes that it makes in allocating

the resources it uses for operating expenses and program support costs.

However, it does provide Congress with prior notification for proposed

individual development grants that exceed $50,000 and for cooperative

agreements and research grants, including major amendments or funding

supplements.

OMB apportions appropriated ADF funds quarterly for administrative

expenses and annually for all other expenses. This procedure made about

80 percent of ADF’s appropriation available to be spent from the start of

fiscal year 1994. The apportionment process is expected to reduce the risk

that the funds will be overobligated but does not give OMB control over

whether ADF funds are used for program or overhead purposes. ADF budget

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and accounting reports showed that actual administrative expenses were

higher than the amount that was originally apportioned by OMB or that was

given final budget approval by ADF’s president, with overruns that ranged

from $220,000 in fiscal year 1991 to $138,000 in fiscal year 1994. Federal

entities are supposed to seek advance approval from OMB before exceeding

their spending authority in any apportionment category. While ADF

requested and received higher spending authority for administrative

expenses for fiscal years 1993 and 1994, we found no evidence it sought

such approval in fiscal year 1991 or for exceeding the higher amount that

OMB authorized for this category in fiscal year 1993.2 In addition, program

support costs were significantly higher than the budget estimates during

these years, reflecting increased in-country staffing and equipment as well

as increased emphasis on research and technical assistance. However,

development grant funding was below the targeted levels during each of

these years.

Budget Reporting Was

Unreliable

ADF budget and cost data reported to OMB and Congress in recent years for

program management and support were unreliable or not useful for

several reasons. First, the cost categories used in the budget presentations

were not consistent in format from year to year. ADF’s congressional

budget presentations summarized program and financing activity by major

cost category and object class, but the categories and descriptions used

and data supplied did not provide enough detailed information to make

year-to-year comparisons of headquarters program management and

overseas support costs. For example, the costs were combined in fiscal

year 1991, separated into three parts (with a portion of headquarters cost

shown separately) during fiscal years 1992-94, divided into two parts in

fiscal year 1995, and changed again in the executive branch’s proposed

budget for fiscal year 1996. Also, research grants and cooperative

agreements for in-country support, evaluation, and education and

dissemination were merged into a single budget category in prior years

and all of the related costs continue to be reported as grants in the

breakdown by object classification.

Second, the narrative explanations did not accurately describe what ADF

costs were covered in the major program categories. Program narratives

did not agree with the funding categories and tended to be misleading. For

example, the narrative justification in ADF’s recent congressional

presentations (1) described in-country support costs under separate

programs, (2) discussed the costs of doing business in Africa as

2

No apportionment was made during fiscal year 1992 because of a continuing resolution.

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administrative overhead, and (3) understated the proportion of ADF’s

budget spent on administrative overhead—25 percent versus the actual

rate of 28 percent—and did not make it clear that this level of program

support excluded in-country costs.

Third, actual costs presented in the budgets did not always agree with

amounts shown in ADF’s records or reported to ADF’s board of directors.

For example, the fiscal year 1995 budget presentation showed that actual

fiscal year 1993 operating expenses totaled $4,529,000, whereas ADF’s

records and its report to the board of directors showed that these

expenses totaled $4,665,000. Budget presentations also understated ADF’s

use of consulting and other services because personal services contractor

costs were improperly shown as “Other personnel compensation” and

because ADF records showed that more was spent on consulting services

than was shown in the budget presentations. In addition, explanations

were not given in the budget presentations as to why actual fund

allocation varied significantly from earlier estimates. ADF budget

documents did not explain the reasons for the $673,000 shortfall in

development grant funding in fiscal year 1993 and the generally higher

than estimated levels of spending for headquarters and in-country program

support; nor did they disclose the use of personal services contractors to

supplement a direct-hire workforce that resulted in costs that far exceeded

the budget estimates between fiscal years 1991 and 1994. Finally, historical

funding data presented to ADF’s new board of directors in June 1994 for

briefing purposes was not consistent; we found that it intermingled budget

and actual results data for fiscal years 1991-93.

OMB, in cooperation with ADF and IAF and with our assistance, has partially

addressed these problems by developing a standard budget format for ADF

and IAF in 1994 that makes it easier to distinguish between program and

support elements and make year-to-year cost comparisons between

estimates and expenditures. However, ADF and IAF continue to use

different object classification codes to account for essentially the same

in-country support costs, apparently because of the means used and

purposes served in acquiring the assistance services. IAF classifies

contracting costs with local organizations for grantee technical assistance

and training as “advisory and assistance services” because it considers the

services accruing to IAF’s benefit; ADF uses cooperative agreements with

individuals and classifies them as grants because even though the

recipients perform required services, it considers them beneficiaries of ADF

program assistance the same as grantees.

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Financial Reporting

Requirements Were

Not Met

Under a 1990 amendment to the Government Corporation Control Act (the

Chief Financial Officers Act), ADF and other government corporations are

required to prepare an annual report to Congress that includes financial

statements and an auditor’s report on the statements, an assessment of

internal controls, and a budget report reconciliation that links the actual

amounts that are submitted in the President’s budget with program and

operating expenses in agency accounting records and financial reports.

We recently reported that ADF was the only 1 of 34 government

corporations that did not meet the act’s financial statement reporting and

audit requirements.3

ADF officials told us that they had been unaware that ADF was subject to the

act’s reporting requirements but since learning of it they had hired an audit

firm (Coopers & Lybrand) to assist them in complying with the act’s

financial statement and audit requirements. Coopers & Lybrand

commenced audit work in April 1994 but suspended it in August 1994

when it concluded after performing intermittent work that the existing ADF

accounting system was not viable or cost-effective for audit. The firm

agreed to delay the audit and preparation of financial statements until a

new system was completed. ADF had sought approval to install a new

budget and accounting system since 1992. The revised audit, expected to

include an examination of ADF’s financial management reporting system

and controls, was scheduled to resume in May 1995.

Recommendations We recommend that the president of ADF, with the board of directors’

approval, (1) obtain an independent review of ADF’s position classifications

and grade structure;(2) provide improved disclosure in budget and

expenditure reporting, including explaining the reason(s) for any

significant differences in actual results; and (3) annually conduct the

management assessment of internal controls and reconciliation of budget

reporting required by the Government Corporation Control Act.

Matter for

Congressional

Consideration

If Congress wishes to ensure that ADF funds intended for program

purposes are not used for administrative overhead or program support

costs, it may wish to impose a limitation on the amount that ADF spends for

these costs through the annual appropriation process.

3

Government Corporations: CFO Act Management Reporting Could Be Enhanced (GAO/AIMD-94-73,

Sept. 19, 1994).

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Agency Comments

and Our Evaluation

In commenting on a draft of this report in March 1995, ADF’s Chairman of

the Board said that our report focused too heavily on issues that he says

have been resolved and did not give sufficient attention to corrective

actions that ADF has initiated to reduce its administrative costs and

improve its financial accountability. He indicated that efforts to address

most, if not all, of the concerns in this report were in various stages of

implementation. He pointed out that (1) an entirely new board of directors

had been appointed; (2) a new president was being sought; (3) pursuant to

a National Performance Review initiative, the ADF’s administrative

operations were being reappraised; (4) long-term personal services

contracting had virtually been eliminated; (5) efforts to update ADF’s

written policies and procedures were on-going; and (6) a new accounting

system was expected to be completed in April 1995.

ADF said that comparisons with IAF and other foundations are

inappropriate. While the comparisons may be imperfect, we believe there

are sufficient similarities among the foundations to make such

comparisons worthwhile and instructive. We also noted that OMB routinely

compares ADF with IAF in terms of their program performance and

administrative cost.

ADF was also concerned that this report creates the impression that ADF

had concealed or misrepresented fiscal data concerning ADF operations.

Our analysis shows that between fiscal years 1991 and 1994, ADF’s actual

administrative support costs were appreciably higher than what ADF had

previously budgeted, but we cannot comment on whether ADF’s inaccurate

reporting was intentional. ADF’s comments are presented in their entirety

in appendix I.

Scope and

Methodology

Our review focused on ADF financial administration. To accomplish our

objectives, we interviewed ADF officials and examined relevant program,

administrative, financial, and legislative documents at ADF headquarters in

Washington, D.C. We also interviewed officials of the Asia, Eurasia, and

Inter-American Foundations and other knowledgeable development

specialists in the Washington, D.C., area and obtained comparative

program and administrative information from them. We reviewed budget

reporting requirements and financial reporting and internal control

requirements. We also discussed these requirements with OMB officials and

a private contractor hired by ADF in 1994 to assess its accounting system

and assist in the preparation of its financial statements. We did not assess

project funding and implementation because, at the time of our review,

Page 16 GAO/NSIAD-95-79 African Development Foundation
B-256714 

ADF was conducting an assessment to find out what aspects of its program

worked well, what did not, and why; however, this assessment had not

been released as of March 1995.

We conducted our review between February 1994 and March 1995 in

accordance with generally accepted government auditing standards.

We are sending copies of this report to the Chairmen and Ranking

Minority Members, House and Senate Committees on Appropriations, and

other appropriate congressional committees; the president of ADF and its

board of directors; the Director, Office of Management and Budget; and

other interested parties.

Please call me on (202) 512-4128 if you or your staff have any questions

concerning this report. Major contributors to the report are listed in

appendix II.

Sincerely yours,

Harold J. Johnson, Director

International Affairs Issues

Page 17 GAO/NSIAD-95-79 African Development Foundation
Contents

Letter 1

Appendix I 

Comments From the

African Development

Foundation

20

Appendix II 

Major Contributors to

This Report

35

Table Table 1: Service Extensions and Vacancies on ADF’s Board of

Directors Between 1991-94

7

Figures Figure 1: Comparison of ADF and IAF Budget Expenditures,

Fiscal Year 1994

4

Figure 2: Budget Shortfalls and Overruns by Major Category, 

Fiscal Years 1991-94

12

Abbreviations

ADF African Development Foundation

IAF Inter-American Foundation

OMB Office of Managementand Budget

Page 18 GAO/NSIAD-95-79 African Development Foundation
Page 19 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 20 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

See comment 2.

See comment 3.

See comment 4.

Page 21 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

See comment 1.

See comment 5.

See comment 6.

Page 22 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

See comment 7.

See comment 8.

Page 23 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

See comment 4.

See comment 3.

Page 24 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

See comment 9.

See comment 10.

Page 25 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

See comment 11.

See comment 12.

See comment 13.

See comment 14.

See pp. 10-11.

Page 26 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

See comment 15.

Page 27 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

See comment 16.

See comment 17.

Page 28 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

Page 29 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

The following are GAO’s comments on the African Development

Foundation’s (ADF) letter dated March 30, 1995.

GAO Comments 1. We have included information on actions taken by ADF’s new board of

directors throughout the report. The board had not specifically addressed

matters such as the ADF president’s combining of personal and business

travel activity and use of cellular telephone and express mail services that

contributed to increased administrative overhead, but it was moving

quickly to select a new president and review ADF’s operating policies.

2. We had previously discussed the preliminary results of our work

during the course of our review. Because many of the actions cited by ADF

are in various stages of implementation and it is too early to tell how they

will be carried out, we have retained three of the four recommendations

contained in our draft report.

3. We do not agree with ADF’s contention that the draft report contained a

number of factual inaccuracies. In some instances, we were able to resolve

differences involving presentation and interpretation of ADF budgetary and

cost data through discussions with ADF staff and we have modified the

report as appropriate to improve clarity. However, in other instances, ADF’s

claims of inaccuracy did not withstand careful tracing back to source

documentation and we stand by our analysis as described below in our

detailed annotation of ADF’s comments.

4. Our report makes the point that the lack of consistent budget

presentations from year to year has been a source of confusion as

Congress and the Office of Management and Budget (OMB) have sought to

reduce ADF’s administrative costs. We also point out discrepancies in the

reporting, but we cannot comment on whether ADF’s inaccurate and

inconsistent reporting was intentional.

5. While the Office of Personnel Management and OMB may have

concurred in ADF’s use of such contractors starting in 1985, OMB officials

subsequently instructed ADF to reduce its use of long-term personal

services contractors during the period covered by the report.

6. We have reflected ADF’s recent change in policy regarding use of

business class for travel in the report. We also modified the report to

clarify our point that prior to the policy change, ADF board members, the

president, vice president, and travelers accompanying the above were

Page 30 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

authorized business class travel by virtue of their position or

accompanying status without any further justification.

7. We have modified the report to note that ADF has attempted since 1992

to acquire a new computerized accounting system to replace its existing

system, which it found to be unsuitable. We also modified our report to

clarify our main point that it was management ineffectiveness, not just the

accounting system, that caused weak budgetary and cost controls.

8. We have added information on The Mitchell Group’s March 1995

report.

9. In making this comparison, ADF understates the cost of its contracting

and consulting services. The amount that ADF said it spent for contracting

and consulting services in fiscal year 1994 ($185,780) and the basis for its

average cost during fiscal years 1991-94 ($318,500) were solely attributable

to its use of personal services contractors. ADF did not include the

additional cost of services of temporary contract support staff. Our

average annual figure of $400,000 for fiscal years 1991-94 includes both

personal service contractors and the cost of services of temporary

contract support staff, but does not include the cost of other professional

and technical contractual services (such as carpet cleaning and computer

repair and maintenance) that ADF reported as “consulting and other

services.”

10. The report notes that the shortfall in development grant funding for

fiscal year 1994 was caused primarily by a change in the method by which

ADF accounted for technical training and support that it provided to

grantees. The effect of this accounting change was to reduce development

grant funding and to increase in-country support cost by the amount that

ADF spent for such technical assistance. In fiscal year 1994, this assistance

($604,000) accounted for nearly all of the shortfall ($742,000) reported in

development grant funding. We have modified the report to clarify this

point.

11. We agree in principle that the difference in ADF and the

Inter-American Foundation (IAF) administrative overhead rates can partly

be explained by economy of scale that is often achievable through larger

budgets. As we point out in the report, ADF’s overhead rate generally

declined as the size of its budget increased between 1984-90; however, we

also note that the rate has not declined in the past 4 years even though ADF

funding is up by 30 percent since 1991. Further, the report compares not

Page 31 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

only the total size but the composition of ADF’s and IAF’s fiscal year 1994

budget expenditures.

12. Although it is true that IAF is not required to operate within the

funding limit of $250,000 per project that applies to ADF, both its grant

awards and the life-of-project costs have been smaller in size than ADF’s.

During fiscal year 1994, IAF awarded 168 new grants, of which 138 were

less than $100,000 and 7 were $200,000 or more, with the average value of

its active grants being $131,000; ADF awarded 64 new development grants,

of which 29 were under $100,000 and 13 were $200,000 or more, with an

average active grant value of $137,000.

13. Our report notes that travel costs are a significant component of ADF’s

administrative budget and that geographical factors contribute to making

ADF’s costs higher as a share of its budget than IAF’s. Nonetheless, ADF

travel policies and practices, which were changed during the course of our

review, also contributed to its higher operating costs.

14. Our report points out that the Eurasia Foundation’s program delivery

systems and accounting policies, as well as those of the Asia Foundation,

differ from those of ADF. However, although they are privately run and

operate somewhat differently than ADF and IAF, we believe that a cost

comparison of their administrative and program services overhead rates

merits attention and is instructive because, as U.S.-based regional

development assistance organizations, both maintain overseas field offices

and their program servicing costs include personnel salaries and benefits,

travel, rent, utilities, and communications in their overhead rates.

15. We reported that ADF budget reporting was unreliable. We do not

know or imply whether ADF was intentionally misleading in its reporting in

order to conceal true program costs. Our comparisons of what ADF

budgeted and actually spent on administrative support costs are based on

funds that it received, not on what it requested. While events between the

time that funds are budgeted and spent can alter any proposed spending

pattern, we believe that ADF did not adequately explain why actual costs in

some instances varied significantly from its budget estimates.

16. ADF’s fiscal year 1994 administrative support costs were not lower

than the amount it had previously budgeted. Based on the fiscal year 1994

approved funding level of $16.9 million, ADF initially estimated that

administrative support costs would be $4.265 million in its fiscal year 1994

congressional presentation submitted in April 1993. ADF revised its

Page 32 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

administrative support cost estimate for fiscal year 1994 to $4.6 million in

its fiscal year 1995 budget presentation that was submitted to OMB in

October 1993 and to Congress in March 1994. ADF estimated that the

10-year assessment would cost $130,000 in the October 1993 presentation

but did not make clear whether it included this amount in its revised fiscal

year 1994 estimate for administrative support. In any case, ADF established

a fiscal 1994 operating budget of $4.6 million that did not include any

amount for the 10-year assessment. Ultimately, however, ADF actually

spent $4,738,000, including the cost of the assessment, on administrative

support costs in fiscal year 1994, an increase that is more than 10 percent

higher than what ADF had budgeted 2 years earlier.

17. ADF accounting records show that operating expenses were higher

than the amounts that OMB originally apportioned to ADF in fiscal year 1994

and OMB provided through an increased apportionment in fiscal year 1993.

We could not verify whether there had been an understanding between ADF

and OMB from the beginning of fiscal year 1994 that OMB would reapportion

funds to cover the 10-year assessment costs once they became known, but

OMB did subsequently (in September 1994) permit ADF to transfer $150,000

from its program funds to administrative support to cover the cost of

increased actual operating expenses, including the 10-year assessment.

As for fiscal year 1993, OMB originally apportioned $4,505,000 for ADF

operating expenses and raised the amount by $50,000 to $4,555,000 at the

end of the fiscal year. ADF’s final obligation report for fiscal 1993,

submitted to ADF’s board of directors in June 1994, shows that it spent

$4,665,000 on administrative support costs. A February 6, 1994, budget and

accounting report shows administrative support expenditures of

$4,679,000 for fiscal year 1993. The actual reported operating expense

figure of $4,529,000 that was used in the executive branch’s budget for

fiscal year 1995 (published in January 1994) and ADF’s March 1994

congressional presentation appears to be have been based on an

interoffice memo submitted to ADF’s president on January 5, 1994.

However, we found no evidence that any reconciliation or adjustment was

made that supports ADF’s contention that the costs reflected in the cited

reports overstated salary costs by more than $150,000.

ADF’s conflicting records and reports and the lack of back-up data to

document its financial performance, as described above, considerably

complicated our review. ADF acknowledges that numerous problems exist

in its accounting system and, as we noted in our report, Coopers and

Lybrand suspended its financial statement preparation work in

Page 33 GAO/NSIAD-95-79 African Development Foundation
Appendix I 

Comments From the African Development

Foundation

August 1994 because it found that the system was not viable or cost

effective for audit. Until these matters are corrected, neither Congress nor

OMB will be able to rely on the information in ADF’s budget presentations.

Page 34 GAO/NSIAD-95-79 African Development Foundation
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Lawrence L. Suda

Rolf A. Nilsson

James M. Strus

Office of Special

Investigations,

Washington, D.C.

Barbara J. Cart

Harvey D. Gold

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