GAO

United States General Accounting Office

A

Testimony

Before the Subcommittee on Government Efficiency and 

Financial Management, Committee on Government 

Reform, House of Representatives

For Release on Delivery

Expected at 2:00 p.m.

Wednesday, September 24, 2003

FINANCIAL 

MANAGEMENT 

Sustained Effort Needed to 

Resolve Long-Standing 

Problems at U.S. Agency 

for International 

Development 

Statement of Gregory D. Kutz, Director

Financial Management and Assurance

GAO-03-1170T
USAID has made some progress to improve financial management, primarily 

in achieving audit opinions on its financial statements. Through the rigors of 

the financial statement audit process and the requirements of the Federal 

Financial Management Improvement Act of 1996 (FFMIA), USAID has 

gained a better understanding of its financial management weaknesses. 

However, pervasive internal control weaknesses continue to prevent USAID 

management from achieving the objective of the CFO Act, which is to have 

timely, accurate financial information for day-to-day decision making. 

USAID’s inadequate accounting systems make it difficult for the agency to 

accurately account for activity costs and measure its program results. 

Compounding USAID’s systems difficulties has been the lack of adequate 

financial management personnel. Since the early 1990s, we have reported 

that USAID has made limited progress in addressing its human capital 

management issues. 

While some improvements have been made over the past several years, 

significant challenges remain. Transforming USAID’s financial and business 

environment into an efficient and effective operation that is capable of 

providing timely and accurate information will require a sustained effort. 

USAID has acknowledged the challenges it faces to reform its financial 

management problems and has initiatives underway to improve its systems, 

processes, and internal controls. USAID has also recognized the need for a 

specific human capital action plan that addresses financial management 

personnel shortfalls. 

GAO has long reported that the 

U.S. Agency for International 

Development (USAID) faces a 

number of performance and 

accountability challenges that 

affect its ability to implement its 

foreign economic and humanitarian 

assistance programs. These major 

challenges include human capital, 

performance measurement, 

information technology, and 

financial management. Effective 

financial management as 

envisioned by the Chief Financial 

Officers Act of 1990 (CFO Act) and 

other financial management reform 

laws is an important factor to the 

achievement of USAID’s mission. 

USAID is one of the federal 

agencies subject to the CFO Act. 

In light of these circumstances, the 

Subcommittee asked GAO to testify 

on the financial management 

challenges facing USAID, as well as 

the keys to reforming USAID’s 

financial management and business 

practices and the status of ongoing 

improvement efforts. 

www.gao.gov/cgi-bin/getrpt?GAO-03-1170T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gregory D. 

Kutz at (202) 512-9505 or kutzg@gao.gov. 

Highlights of GAO-03-1170T, a testimony 

before the Subcommittee on Government 

Efficiency and Financial Management, 

Committee on Government Reform, 

House of Representatives 

September 24, 2003

FINANCIAL MANAGEMENT 

Sustained Effort Needed to Resolve 

Long-Standing Problems at U.S. Agency 

for International Development 
Page 1 GAO-03-1170T USAID Financial Management

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to appear before you today to testify on the 

U.S. Agency for International Development (USAID). USAID’s financial 

management challenges have been the subject of prior oversight hearings 

by this Subcommittee’s predecessor. GAO has long reported1

 that USAID 

faces a number of performance and accountability challenges that affect its 

ability to implement its foreign economic and humanitarian assistance 

programs. These major challenges include human capital, performance 

measurement, information technology, and financial management. Today 

our testimony will focus on the financial management challenges at USAID.

USAID serves a critical role by providing nonmilitary international aid to 

further U.S. interests abroad. For fiscal year 2003, USAID received about 

$12 billion in total program funding that is spent in six principle areas: 

economic growth and development, population health and nutrition, 

environment, democracy and governance, education and training, and 

humanitarian assistance. USAID carries out its assistance role primarily 

through grants, contracts, and loan guarantees to foreign governments and 

to humanitarian organizations. With current rebuilding efforts in Iraq and 

Afghanistan and increased efforts towards HIV/AIDS relief, the amounts of 

funds flowing through USAID have increased significantly. USAID’s role is 

critical to the success of these rebuilding efforts. 

My statement today will provide an overview of USAID’s progress in 

addressing its financial management challenges. Effective financial 

management as envisioned by the Chief Financial Officers Act of 19902

(CFO Act) is an important factor to the achievement of USAID’s mission. 

USAID has made some progress, primarily in achieving audit opinions on 

its financial statements. However, pervasive internal control weaknesses 

continue to prevent USAID management from achieving the primary 

objective of the CFO Act—which is to have relevant, timely, and accurate 

financial information for day-to-day decision making. As a result, much of 

the progress USAID achieved in getting improved opinions has been based 

on heroic efforts rather than systems that routinely generate timely and 

reliable financial information. USAID has a number of initiatives underway 

1

U.S. General Accounting Office, Major Management Challenges and Program Risks: U.S. 

Agency for International Development, GAO-03-111 (Washington, D.C.: January 2003).

2

Pub. L. No. 101-576, 104 Stat. 2838 (1990).
Page 2 GAO-03-1170T USAID Financial Management

intended to improve its financial management, including the 

implementation of a new financial management system. Our analysis is 

based on USAID Inspector General (IG) reports and limited meetings with 

USAID management and the IG. 

USAID is one of the federal agencies subject to the CFO Act as expanded 

by the Government Management Reform Act of 19943 and the Federal 

Financial Management Improvement Act of 19964 (FFMIA). The CFO Act 

envisions that agencies have financial management leadership, systems, 

and practices in place to provide complete, consistent, reliable, and timely 

information to agency management and other decision makers. Through 

the rigors of the financial statement audit process and the requirements of 

FFMIA, agencies such as USAID have gained a better understanding of 

their financial management weaknesses and the impetus to resolve 

problems caused by those weaknesses. At the same time, agencies are 

slowly making progress in addressing their problems. However, while most 

agencies are receiving “clean” audit opinions on their financial statements, 

remaining weaknesses in internal controls and the continued widespread 

noncompliance with FFMIA show that there is still a long way to go to 

reach the end game—that is, having systems, processes, and controls that 

routinely generate reliable, useful, and timely information for managers 

and other decision makers. In addition, reaching this “end game” should 

provide management, the Congress, and taxpayers with reasonable 

assurance that fraud, waste, and abuse are minimized. 

In the federal government, many of the clean opinions in fiscal year 2002 

were achieved as a result of time-consuming, ad hoc programming and 

analysis of data produced by inadequate systems that are not integrated 

and often require significant audit adjustments. Such time-consuming 

procedures, which often represent “heroic efforts,” prevent financial 

management staff from doing other financial-related work such as financial 

analyses, which could directly support strategic decision making and 

ultimately improve overall business performance. In contrast, for most 

private sector corporations, the clean opinion confirms the fact that 

management has timely, reliable information to manage daily operations in

3

Pub. L. No. 103-356, title IV, 108 Stat. 3412 (1994).

4

Pub. L. No. 104-208, div. A, sec. 101(f), title VIII, 110 Stat. 3009-389 (1996).
Page 3 GAO-03-1170T USAID Financial Management

a competitive environment. In our Executive Guide: Creating Value 

Through World-class Financial Management,5

 we identified the success 

factors, practices, and outcomes associated with world-class financial 

management efforts. We found that many leading finance organizations 

have a goal to reduce the time spent on routine accounting activities, such 

as financial statement preparation, so that financial management staff can 

spend more time on activities such as business performance analysis or 

cost analysis. These organizations also had clear, strong executive 

leadership, that when combined with factors such as effective 

organizational alignment, strategic human capital management, and end-toend business process improvement, were critical for ensuring their 

financial management staff delivered the kind of analysis and forwardlooking information needed to effectively manage their programs. As 

discussed in the executive guide, to reap the full benefit of a modern, 

integrated financial management system, USAID must go beyond obtaining 

an unqualified audit opinion toward (1) routinely generating reliable cost 

and performance information and analysis, (2) undertaking other valueadded activities that support strategic decision making and mission 

performance, and (3) building a finance team that supports the agency’s 

mission and goals. 

Progress Towards 

Financial Management 

Reform

In May 2001, the Subcommittee’s predecessor held a hearing6 on USAID 

financial management. Using that hearing as a baseline, we evaluated, 

using primarily USAID IG reports, the progress made to improve USAID’s 

financial management systems, processes, and human capital (people) in 

the past 2 years. At the time of the May 2001 hearing, USAID was one of 

three federal agencies subject to the CFO Act that had such significant 

problems that they were unable to produce financial statements that 

auditors could express an opinion on. The hearing focused on actions 

needed to resolve USAID’s financial management issues. At that time, the 

Acting Assistant Administrator for the Bureau of Management told the 

Subcommittee that actions to correct reported material weaknesses in 

5

U.S. General Accounting Office, Executive Guide: Creating Value Through World-class 

Financial Management, GAO/AIMD-00-134 (Washington, D.C.: April 2000).

6

House Committee on Government Reform, Subcommittee on Government Efficiency, 

Financial Management and Intergovernmental Relations, The U.S. Agency for International 

Development: What Must Be Done to Resolve USAID’s Longstanding Financial 

Management Problems? 107th Cong., 1st Sess., May 8, 2001.
Page 4 GAO-03-1170T USAID Financial Management

financial management were completed or in process and that all reported 

weaknesses would be resolved by 2002.

While USAID has made progress in its financial management since that 

hearing, it has not achieved the success that it had expected. Rather, its 

progress relates primarily to improved opinions on USAID’s financial 

statements. Table 1 below shows that USAID has been able to achieve 

improved opinions on its financial statements over the past 3 years. 

Table 1: Audit Opinions on USAID’s Financial Statements in Fiscal Years 2000 

Through 2002 

Source: USAID Inspector General reports.

a

A disclaimer of opinion means that the auditor does not express an opinion on the financial 

statements. A disclaimer is appropriate when the audit scope is not sufficient enough to enable the 

auditor to express an opinion or when there are material uncertainties involving scope limitations.

b

A qualified opinion means that, except for the effects of the matter to which the qualification relates, 

the auditor concludes that the financial statements are presented fairly, in all material respects, in 

accordance with generally accepted accounting principles. 

c

An unqualified, or clean, opinion means that the auditor concludes that the financial statements are 

presented fairly, in all material respects, in accordance with generally accepted accounting principles.

Fiscal year 2001 marked the first time that the USAID IG was able to 

express an opinion on three of USAID’s financial statements—the Balance 

Sheet, Statement of Changes in Net Position, and Statement of Budgetary 

Resources. However, as noted above, the opinions were qualified and 

achieved through extensive efforts to overcome material internal control 

weaknesses. Further, the IG remained unable to express an opinion on 

USAID’s Statement of Net Cost and Statement of Financing. 

Fiscal year 2002 marked additional improvements in the opinions on 

USAID’s financial statements. All but one of USAID’s financial statements 

received unqualified opinions. The Statement of Net Cost received a 

qualified opinion. The IG reported that “...on the Statement of Net Cost, the 

Type of opinion

Financial statements

Fiscal year 

2000

Fiscal year 

2001

Fiscal year 

2002

Balance sheet Disclaimera Qualifiedb Unqualifiedc

Statement of net costs Disclaimer Disclaimer Qualified

Statement of changes in net position Disclaimer Qualified Unqualified

Statement of budgetary resources Disclaimer Qualified Unqualified

Statement of financing Disclaimer Disclaimer Unqualified
Page 5 GAO-03-1170T USAID Financial Management

opinion was achieved only through extensive effort to overcome material 

weaknesses in internal control” and “[a]lthough these efforts resulted in 

auditable information, [they] did not provide timely information to USAID 

management to make cost and budgetary decisions throughout the year.”7

Compounding USAID’s systems difficulties has been the lack of adequate 

financial management personnel. Since the early 1990s, we have reported 

that USAID has made limited progress in addressing its human capital 

management issues. A major concern is that USAID has not established a 

comprehensive workforce plan that is integrated with the agency’s 

strategic objectives and ensures that the agency has skills and 

competencies necessary to meet its emerging foreign assistance 

challenges. While a viable financial management system is needed, and 

offers the capacity to achieve reliable data, it is not the entire answer for 

improving USAID’s financial management information. Qualified personnel 

must be in place to implement and operate these systems. 

In addition to the improved opinions for fiscal year 2002, the IG reported 

that while USAID had made improvements in its processes and procedures, 

a substantial number of material weaknesses,8

 reportable conditions,9 and 

noncompliance with laws and regulations10 remain. The report also noted 

that USAID’s financial management systems do not meet federal financial 

system requirements. Table 2 shows that while USAID’s opinions on its 

financial statements improved, reported material weaknesses, reportable 

conditions, and noncompliance increased. 

7

USAID Office of Inspector General, Report on USAID’s Consolidated Financial 

Statements, Internal Controls, and Compliance for the Fiscal Year 2002, Audit Report No. 

0-000-03-001-C (Washington, D.C.: Jan. 24, 2003).

8

A material weakness is a condition that precludes the entity’s internal control from 

providing reasonable assurance that misstatements, losses, or noncompliance material in 

relation to the financial statements or to stewardship information would be prevented or 

detected on a timely basis.

9

Reportable conditions are matters coming to the auditor’s attention that, in the auditor’s 

judgment, should be communicated because they could adversely affect the entity’s ability 

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

management in the financial statements.

10 The auditor determined that the agency was not in compliance with selected provisions of 

applicable laws and regulations that could have a direct and material effect on amounts 

reported in the financial statements.
Page 6 GAO-03-1170T USAID Financial Management

Table 2: Weaknesses Reported by the USAID Inspector General in Fiscal Years 2000 

Through 2002 

Source: USAID Inspector General reports.

Fiscal year

2000 2001 2002

Reported material weaknesses

Reconciling fund balance with Treasury X

Recognizing, recording, and reporting accounts 

receivable

X X

Calculating and reporting accounts payable X X

Recording and classifying advances to grantees 

and related expenses

X X X

Computer security deficiencies X X Reported as a 

Compliance with 

Laws and 

Regulations 

Condition

Process for preparing the Management's 

Discussion and Analysis needs improvement 

X Now a Reportable 

Condition

Allocating program expenses on its Statement of 

Net Costs

X

Reviewing, analyzing, and deobligating 

unliquidated obligations

X X

Calculating credit program allowances X

Reportable conditions

Reconciling fund balance with Treasury X

Calculating and reporting accounts payable X

Recognizing, recording, and reporting accounts 

receivable

X

Establish monthly closing procedures X

Improve controls and management of property at 

overseas missions

X

Process for preparing the Management's 

Discussion and Analysis needs improvement 

X X

Compliance with laws and regulations

Chief Financial Officers Act of 1990 X

Federal Financial Management Improvement Act 

of 1996

X X X

Computer Security Act of 1987 X X X

Debt Collection and Improvement Act of 1996 X
Page 7 GAO-03-1170T USAID Financial Management

The increase in reported material weaknesses, reportable conditions, and 

noncompliance is, in part, due to the full scope audits that were not 

possible in prior years. As financial information improved over the years, it 

has assisted the USAID IG in identifying additional internal control and 

system weaknesses. Identifying these additional weaknesses is 

constructive in that they highlight areas that management needs to address 

in order to improve the overall operations of the agency and provide 

accurate, timely, and reliable information to management and the 

Congress.

Several of the weaknesses reported by the USAID IG are chronic in nature 

and resolution has been a challenge. For example, similar to the USAID 

fiscal year 2002 material weakness, in 1993 we reported11 that USAID did 

not promptly and accurately report disbursements. At that time, USAID 

could not ensure that disbursements were made only against valid, 

preestablished obligations and that its recorded unliquidated obligations 

balances were valid. Additionally, we reported USAID did not have 

effective control and accountability over its property.

The chronic nature of the reported weaknesses at USAID reflect challenges 

with people (human capital), processes, and financial management 

systems. USAID management represented to us that, over time, they have 

lost a significant number of staff in this area and face challenges recruiting 

and retaining financial management staff. Further, according to IG 

representatives, many of the individuals that financial managers must 

depend on to provide the data that are used for financial reports are not 

answerable to the financial managers and often do not have the 

background or training necessary to report the data accurately. Also 

contributing to the challenge are USAID’s nonintegrated systems that 

require data reentry, supplementary accounting records, and lengthy and 

burdensome reconciliation processes. 

11 U.S. General Accounting Office, Financial Management: Inadequate Accounting and 

System Project Controls at AID, GAO/AFMD-93-19 (Washington D.C.: May 24, 1993).
Page 8 GAO-03-1170T USAID Financial Management

Financial Management 

Reform Will Require a 

Long-term 

Commitment

Transforming USAID’s financial and business management environment 

into an efficient and effective operation that is capable of providing 

management and the Congress with relevant, timely, and accurate 

information on the results of operation will require a sustained effort. 

Improved financial systems and properly trained financial management 

personnel are key elements of this transformation. While these challenges 

are difficult, they are not insurmountable. Without sustained leadership 

and oversight by senior management, the likelihood of success is 

diminished.

In its fiscal year 2002 Performance and Accountability Report, USAID 

noted that it was in the process of implementing an agencywide financial 

management system. USAID reported that the system has been 

successfully implemented in Washington. In June 2003, USAID awarded a 

contract for the implementation of the system overseas. According to 

USAID officials, they anticipate this effort to be completed by fiscal year 

2006. While we are encouraged by USAID’s progress toward implementing 

an integrated system, it should be noted that this is the second attempt in 

the past 10 years to implement an agencywide integrated financial 

management system. To provide reasonable assurance that the current 

effort is successful, top management must be actively involved in the 

oversight of the current project. Management must have performance 

metrics in place to ensure the modernization effort is accomplished on 

time, within budget, and provides the planned and needed capabilities. 

In this regard, in fiscal year 2002, USAID redesigned its overall governance 

structure for the acquisition and management of information technology. 

Specifically, USAID created the Business Transformation Executive 

Committee, chaired by the Deputy Administrator and with membership 

including key senior management. The committee’s purpose is to provide 

USAID-wide leadership for initiatives and investments to transform USAID 

business systems and organizational performance. The committee’s roles 

and responsibilities include:

• Guiding business transformation efforts and ensuring broad-based 

cooperation, ownership, and accountability for results.

• Initiating, reviewing, approving, monitoring, coordinating, and 

evaluating projects and investments.
Page 9 GAO-03-1170T USAID Financial Management

• Ensuring that investments are focused on highest pay-off performance 

improvement opportunities aligned with USAID’s programmatic and 

budget priorities.

Active, substantive oversight by this committee over USAID’s information 

technology investments, including its agencywide integrated financial 

management system initiative, will be needed for business reform efforts to 

succeed.

In addition to improved business systems, it is critical that USAID have 

sustained financial management leadership and the requisite personnel and 

skill set to operate the system in an efficient and effective manner once it is 

in place. We have reported for years and USAID acknowledges that human 

capital is one of the management challenges that must be overcome. As 

previously noted, since the early 1990s we have reported that USAID has 

made limited progress in addressing its human capital management issues. 

Within the area of financial management, progress in this area has also 

been slow, with no specific plan of action on how to address shortages of 

trained financial managers. USAID represented to us that as part of its 

agencywide human capital strategy, it plans to specifically address its 

financial management personnel challenges. 

In addition to addressing systems and human capital challenges, USAID is 

working to improve its processes and internal controls. Effective 

processes and internal controls are necessary to ensure that whatever 

systems are in place are fully utilized and that its operations are as efficient 

and effective as possible. USAID is working to eliminate the material 

weaknesses, reportable conditions, and noncompliance reported by the 

USAID IG in fiscal year 2002. For fiscal year 2003, the Administrator of 

USAID and the IG agreed to work together to provide for the issuance of 

audited financial statements by November 15, 2003, in line with the Office 

of Management and Budget’s accelerated timetable for reporting. To meet 

this tight timeframe, the CFO must provide timely and reliable information 

that can withstand the test of audit with little to no needed adjustment. 

However, given the continued financial management system, process, and 

human capital challenges, meeting this goal will be difficult. 

Conclusion USAID appears to be making a serious attempt to reform its financial 

management, as evidenced by initiatives to improve its human capital, 

internal controls, and business systems. However, progress to date is most 

evident in the improvement in the opinions on its financial statements, 
Page 10 GAO-03-1170T USAID Financial Management

which reflect USAID’s ability to generate reliable information one time a 

year, rather than routinely for purposes of management decision making. 

Through fiscal year 2002 these improved opinions reflect a significant 

“heroic” effort to overcome human capital, internal control, and systems 

problems. Although these improved opinions represent progress, the 

measures of fundamental reform will be the ability of USAID to provide 

relevant, timely, reliable financial information and sound internal controls 

to enable it to operate in an efficient and effective manner. 

Mr. Chairman, this concludes my statement. I would be pleased to answer 

any questions you or other members of the Subcommittee may have at this 

time.

Contacts and 

Acknowledgments

For further information about this testimony, please contact Gregory D. 

Kutz at (202) 512-9095 or kutzg@gao.gov or John Kelly at (202) 512-6926 or 

kellyj@gao.gov. Other key contributors to this testimony include Stephen 

Donahue, Dianne Guensberg, and Darby Smith.

(192107)
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