Financial Management: Sustained Effort Needed to Resolve Long-Standing Problems at U.S. Agency for International Development
Published: 2003-09-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 on Government Efficiency and Financial Management, House Committee Government Reform 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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 reported 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 1990  (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  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 1994 and the Federal  Financial Management Improvement Act of 1996 (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 a competitive environment. In our Executive Guide: Creating Value  Through World-class Financial Management, 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-to- end business process improvement, were critical for ensuring their  financial management staff delivered the kind of analysis and forward- looking 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 value- added activities that support strategic decision making and mission  performance, and (3) building a finance team that supports the agency’s  mission and goals.
subsections: section_title: Progress Towards Financial Management Reform
paragraphs: In May 2001, the Subcommittee’s predecessor held a hearing 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  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.
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  opinion was achieved only through extensive effort to overcome material  weaknesses in internal control” and “lthough these efforts resulted in  auditable information,  did not provide timely information to USAID  management to make cost and budgetary decisions throughout the year.”
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, reportable conditions, and  noncompliance with laws and regulations 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.
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 reported 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.
section_title: Financial Management Reform Will Require a Long-term Commitment
paragraphs: 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.
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.
section_title: Conclusion
paragraphs: 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,  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.
section_title: Contacts and Acknowledgments
paragraphs: 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.
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