U.S. Insular Areas: Economic, Fiscal, and Financial Accountability Challenges
Published: 2006-12-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. insular areas of American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, and the U.S. Virgin Islands (USVI), face long-standing economic, fiscal, and financial accountability challenges. GAO was requested to identify and report on the (1) economic challenges facing each government, including the effect of changing tax and trade laws on their economies; (2) fiscal condition of each government; and (3) financial accountability of each government, including compliance with the Single Audit Act, which applies to nonfederal entities that receive $500,000 or more a year in federal funding.
section_title: What GAO Found
paragraphs: The governments of the U.S. insular areas of American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, and the U.S. Virgin Islands face serious economic, fiscal, and financial accountability challenges. The economic challenges stem from dependence on a few key industries, scarce natural resources, small domestic markets, limited infrastructure, shortages of skilled labor, and reliance on federal grants to fund basic services. To help diversify and strengthen their economies, OIA sponsors conferences and missions to the areas to attract U.S. businesses; however, there has been little formal evaluation of these efforts. After fiscal year 2001, government spending in the CNMI, Guam, and USVI exceeded revenues through fiscal year 2004 (the most recent year for which there is complete data on all four areas). As a result, their fiscal conditions weakened further during this period. CNMI and USVI ended fiscal year 2004 with negative net government assets. For American Samoa the picture was mixed, with more stability than the other areas in the period 2001 through 2003, but a downturn in the balance of governmental funds by the end of fiscal year 2004. Efforts to meet formidable fiscal challenges and build strong economies are hindered by delayed and incomplete financial reporting that does not provide timely and complete information to management and oversight officials for decision making. The insular area governments have had long-standing financial accountability problems, including the late submission of required single audits, the receipt of disclaimer or qualified audit opinions, and the reporting of many serious internal control weaknesses. These problems have resulted in numerous federal agencies designating these governments as "high-risk" grantees. The Department of the Interior and the federal agencies are working to help these governments improve their financial accountability, but greater coordination among the agencies would increase the effectiveness of their efforts.

section_title: Letter
paragraphs: The U.S. insular areas of American Samoa, Commonwealth of the  The U.S. insular areasthe Single Audit Act, as amended (Single Audit Act).
These four insular areas are the subject of this report. Not included in the scope of this  report are Puerto Rico and nine smaller insular areas of the United States, Navassa Island  in the Caribbean Sea, and Baker Island, Howland Island, Kingman Reef, Jarvis Island,  Johnston Atoll, Midway Atoll, Palmyra Atoll, and Wake Island in the Pacific Ocean.  31 U.S.C. Chp. 75.
subsections: section_title: Background
paragraphs: The U.S. insular areas of American Samoa, CNMI, and Guam are located in  the Pacific Ocean, between 4,100 and 6,000 miles from the U.S. mainland.  USVI is located about 1,000 miles southeast of Miami in the Caribbean Sea,  as shown in figure 1.
According to U.S. Census Bureau data for 2000, the population of the U.S.  insular areas ranges from about 57,000 in American Samoa, to about  155,000 in Guam. Residents born in CNMI, Guam, and USVI are citizens of  the United States. Residents born in American Samoa are nationals of the  United States, but may become naturalized U.S. citizens. The population of  both American Samoa and CNMI, which control their own immigration,  included significant percentages of people who were foreign nationals.
According to U.S. Census Bureau data for 2000, median household  incomes in the four insular areas ranged from less than half of the U.S.  median household income of almost $41,000 for American Samoa to nearly  equal for Guam, as shown in table 1. The percentage of individuals in  poverty ranged from a low in Guam of 23 to a high in American Samoa of  61. Guam’s 23 percent is nearly twice the rate of the continental U.S. rate  of 12 percent.
While the United States exercises sovereignty over the insular areas, each  administers its local government functions through popularly elected  governors. As shown in table 2, American Samoa and CNMI are self- governed under locally adopted constitutions. Guam and USVI have not  adopted local constitutions and remain under organic acts approved by  Congress. Because each of the insular areas is an unincorporated  territory, its residents—although they have many of the rights of citizens  of the 50 states—cannot vote in national elections and do not have voting  representation in the final approval of legislation by the full Congress.
The insular areas receive substantial amounts in federal grants from a  variety of federal agencies, as shown in table 3. Recipients that expend  $500,000 or more a year in federal awards under more than one federal  program are required by the Single Audit Act to undergo a single audit.  Single audits are audits of the recipient organization—the government in  the case of the insular areas—that focus on the recipient’s internal  controls and its compliance with laws and regulations governing federal  awards. As nonfederal entities expending more than $500,000 a year in  federal awards, the insular areas are required to submit single audit  reports each year to comply with the Single Audit Act. One of the  objectives of the act is to promote sound financial management, including  effective internal controls, with respect to federal awards administered  by nonfederal entities. Single audits also provide key information about  the federal grantee’s financial management and reporting.
Recipient organizations are required by the act to submit their single  audits reports to the Federal Audit Clearinghouse (FAC). The single audit  reporting package sent to the FAC includes (1) the auditor’s reports;   (2) the entity’s audited financial statements and related notes; (3) the  schedule of expenditures of federal awards, related notes, and the  auditor’s report on the schedule; (4) a schedule of findings and questioned  costs; (5) reports on internal controls over financial reporting, and  compliance with laws and regulations; and (6) a summary schedule of  prior audit findings. The reporting package also includes corrective  actions for findings identified for the current year as well as unresolved  findings from prior fiscal years. Table 3 below shows the total amount of  federal funds provided to each insular area and the largest five federal  grant agencies for each insular area.
The Secretary of the Interior has administrative responsibility over the  insular areas for all matters that do not fall within the program  responsibility of another federal department or agency. DOI’s OIA and IG  carry out the Secretary’s responsibilities. OIA was established to foster the  efficiency and effectiveness of the insular area governments and to  provide technical and financial assistance. In this role, OIA coordinates  activities with other federal agencies in the development and  implementation of programs and policies pertaining to the insular areas.  DOI’s IG has the authority to audit all insular area accounts pertaining to  revenue and receipts and all expenditures; may report all findings of  government failures to collect amounts owed; and may report improper  and illegal expenses to the Secretary. DOI’s IG has issued many audit  reports covering issues on individual insular areas. See appendix III for a  list of reports on the insular areas issued by the DOI IG between calendar  years 2000 and 2005.
section_title: Scope and Methodology
paragraphs: To identify the economic challenges the insular areas face, we reviewed  relevant literature dealing with economic conditions in the insular areas,  including the potential impact of recent changes in tax and trade laws. We  also interviewed officials at OIA and specialists at the U.S. Census Bureau  and analyzed various documents and studies from these agencies,  including estimates of gross domestic product (GDP). We reviewed  analyses prepared by the U.S. Department of Labor (DOL) of the tuna  industry in American Samoa and gathered military personnel data from  DOD. In addition, we obtained economic data from insular area officials,  such as CNMI plant closings, employment statistics, and tourism  indicators.
We studied the fiscal condition of each of the insular area governments by  identifying and analyzing the revenues, expenditures, government fund  balances, and net assets data, as reported in their single audit reports  issued for fiscal years 2001 through 2004. We used benchmark estimates of  2002 GDP, prepared by the U.S. Census Bureau for each of the insular  areas, to calculate revenues and expenditures as a percentage of GDP.  After our work was completed, American Samoa, CNMI, and Guam issued  their single audit reports for fiscal year 2005. We did not update our  information on the insular areas’ fiscal conditions because the USVI single  audit report for fiscal year 2005 had not been issued.
We reviewed the financial accountability of the insular area governments  by (1) determining the timeliness of submission of the single audit reports,  (2) analyzing the contents of the single audit reports issued for fiscal years  2001-2004, (3) identifying those insular area governments designated as  high-risk grantees through U.S. federal agency contacts, (4) obtaining  information about OIA’s efforts to help the insular areas improve financial  management, and (5) identifying the relevant auditing organizations at the  federal and local levels. We determined the timeliness of submission of the  single audit reports using the FAC’s “Form Date,” which is the most recent  date that a required SF-SAC data collection form or a revised form was  received by the FAC. We did note that the “Form Date” is updated if  revised SF-FACs for that same fiscal year are subsequently filed. Our  review of the contents of the single audit reports identified the auditors’  opinions on the financial statements, matters cited by the auditors in their  qualified opinions, the numbers and nature of material weaknesses and  reportable conditions reported by the auditors, and the status of corrective  actions. We interviewed OIA officials to identify their role in assisting the  insular area governments in efforts to improve financial accountability,  including training and technical assistance funded by OIA and provided by  the USDA’s Graduate School. To identify the federal and local auditing  authorities with oversight over the four insular area governments, we  reviewed the information on the authorities’ Web sites and reports that  had been recently issued.
Because high-risk designations are made at the individual agency or  program level, and this information is not consolidated at the federal  government level, we contacted officials at the largest five federal grant  agencies for each insular area to determine whether they had designated  any of these four insular area governments or agencies of these  governments as high-risk grantees, and whether special conditions had  been placed on them. We used the schedules of expenditures of federal  awards included in the fiscal year 2004 single audit reports to identify the  largest five federal grant agencies for each insular area.
We conducted our work from September 2005 through August 2006 in  accordance with U.S. generally accepted government auditing standards.
section_title: Narrow Economic Base and Intrinsic and External Factors Limit Economic Progress in the U.S. Insular Areas
paragraphs: Several factors common to all four U.S. insular areas constrain their  economic potential. These factors include lack of diversification, scarce  natural resources, small domestic markets, limited infrastructure, and  shortages of skilled labor. The labor markets of all four insular areas face  competition with U.S. mainland wage levels because natives from the  insular areas are free to migrate to the United States. Therefore, the  insular areas’ private and public sectors face chronic difficulties retaining  well-trained and highly educated workers. Two of the insular areas,  American Samoa and CNMI, control their own immigration and have  developed industries that depend on foreign labor paid a minimum wage  below that of the United States. Although geographic isolation is  frequently mentioned as a factor restraining economic progress in the  insular areas, it does not appear to apply to CNMI, Guam, or USVI. CNMI  and Guam are well positioned to integrate with the regional economies of  East Asia; and USVI is surrounded by the Caribbean Basin countries and  the United States. On the other hand, American Samoa is more  geographically isolated, with Australia, more than 2,000 miles away, and  New Zealand, 1,600 miles away, as the closest large economies.
Although the type of industries and extent of dependence varies, the local  economies of the insular areas rely on one or two primary industries. The  result of this dependence is economies that are vulnerable to changes in  international trade agreements, tax laws, and other external events. For  example, American Samoa’s private sector is largely based on two tuna  canneries. Although these tuna canneries have been an integral part of  American Samoa’s private sector for decades, they are likely to face  increased foreign competition from existing and pending trade agreements  established to advance free trade, which could have a serious negative  effect on them. Similarly, CNMI’s economy is highly dependent on the  garment manufacturing industry, which is facing the challenge of  remaining internationally competitive against low-wage nations given  recent changes in trade agreements. Guam’s economy depends on two  main sectors—tourism and the provision of services to the U.S. military.  Guam’s tourism sector is currently stable, but has been affected by several  external events, such as the terrorist attacks on the United States on  September 11, 2001, and the Severe Acute Respiratory Syndrome (SARS)  epidemic. The stability of the sector that provides services to the U.S.  military is tied to Guam’s status as a strategic U.S. military base. USVI has  a more diverse economy than American Samoa, CNMI, or Guam, with  several sources of revenue—primarily tourism, petroleum refining, and  international business and financial services. However, USVI’s tourist  sector, like that of CNMI and Guam, has experienced volatility due to the  terrorist attacks on the United States on September 11, 2001, and the  impact of hurricanes. USVI is also facing challenges resulting from recent  tax law changes that could cause a reduction in U.S. businesses operating  in the insular area.
subsections: section_title: American Samoa
paragraphs: American Samoa’s economy depends primarily on the tuna canning  industry. The industry is the insular area’s largest source of income and,  with the government sector, one of its two largest sources of employment.  According to DOL, the two tuna canneries in the insular area employ about  one-third of the workforce, with another one-third employed by other  businesses, many of which support the tuna industry. The government  sector in American Samoa accounts for about 20 percent of the insular  area’s GDP and employs around one-third of its labor force. Noncitizens  make up a large portion of the canneries’ employees, about 80 percent in  2000. Several changes in federal trade and tax law may adversely affect  the American Samoa tuna industry, in turn affecting the insular area’s  economy and government.
subsections: section_title: Trade Law Changes
paragraphs: Since the 1950s, tuna canned in American Samoa has been permitted to  enter the United States duty free. However, changes scheduled to take  effect in existing free trade agreements, as well as several pending  agreements, are likely to increase competition for the tuna canneries in  American Samoa. For example, according to a DOL study, the elimination  of tuna tariffs in 2008 for Mexico under the North American Free Trade  Agreement (NAFTA) could, in concert with other factors, result in  Mexico’s becoming a major exporter of canned tuna to the United States.  Likewise, the Andean Trade Preference Act (ATPA), as amended in 2002,  allows the U.S. President to exempt Bolivia, Colombia, Ecuador, and Peru  from paying U.S. tariffs on shipments of pouched tuna, which is expected  to gain market share in the United States. According to DOL, Congress  may choose to gradually eliminate tariffs on canned tuna for these  countries in the future. In that case, Ecuador—ATPA’s major tuna  exporter—could become, like Mexico, a significant supplier of canned  tuna to the United States. In addition, the U.S.-Thailand Free Trade  Agreement now being negotiated could further challenge the American  Samoa tuna industry if it grants Thailand—the biggest exporter of tuna to  the United States—the right to ship canned tuna to the United States duty  free.
section_title: Tax Law Changes
paragraphs: The canneries in American Samoa have benefited from possession tax  credits under section 936 of the Internal Revenue Code, which is  designed to encourage U.S. corporations to invest in the U.S. insular areas  and create jobs by reducing the federal taxes on income earned by  qualifying U.S. corporations. However, the credit expired for taxable  years beginning after December 31, 2005. Although the House passed  legislation to extend the credit for American Samoa for 1 year, the  provision was removed in conference and was not included in the final  version of the bill, which was signed by the President on May 17, 2006.  According to the DOL study, the loss of the federal income tax credit will  reduce the canneries’ after-tax profitability and could prompt them to  move to countries with a lower minimum wage. The economic and social  impact associated with a significant downturn in its major industry may be  severe in American Samoa because the large foreign workforce has  relatively strong roots in the insular area and, as a result, may remain in  the insular area even if unemployed.
The CNMI economy depends on two industries, garment manufacturing  and tourism, for its employment, production, and exports. These two  industries rely heavily on a noncitizen workforce that represents more  than three quarters of the labor pool. The garment industry, for example,  uses textiles and labor imported mostly from China. Garment  manufacturing and tourism account for about 85 percent of CNMI’s total  economic activity and 96 percent of its exports. Recent estimates of  CNMI’s GDP suggest that, in 2002, the garment industry contributed to  roughly 40 percent of CNMI’s GDP and 47 percent of payroll. The rapid  growth of tourism between 1988 and 1996, with visitor arrivals rising from  over 245,000 to over 735,000, an average annual increase of 14.7 percent,  fueled economic expansion. However, recent alterations in trade law have  increased foreign competition for CNMI’s garment industry and caused its  exports to fall, while other external events have negatively impacted its  tourism sector.
section_title: Trade Law Changes
paragraphs: Several recent developments in international trade law have affected  CNMI’s garment industry. Historically, while other garment exports faced  quotas and duties in shipping to the U.S. market, CNMI’s garment industry  benefited from quota-free and duty-free access to U.S. markets for  shipments of goods in which 50 percent of the value was added in CNMI.  Recently, however, U.S. agreements with other textile-producing countries  have liberalized the textile and apparel trade. For example, in January  2005, in accordance with one of the 1994 World Trade Organization (WTO)  Uruguay Round agreements, the United States eliminated quotas on textile  and apparel imports from other textile-producing countries, leaving  CNMI’s apparel industry to operate under stiffer competition, especially  from low-wage countries such as China. With its trade advantage  lessened, CNMI’s garment industry has shrunk. According to a DOI  official, more than 3,800 garment jobs were lost between April 2004 and  the end of July 2006, with 10 out of 27 garment factories closing. U.S.  Department of Commerce data show that the value of CNMI shipments of  garments to the United States dropped by more than 16 percent between  2004 and 2005, from about $807 million to $677 million, and down from a  peak of $1 billion in 1999-2000. In the first 7 months of 2006, garment  exports to the United States dropped by more than 27 percent compared  to the same period in 2005, with sales declining from $419 million to   $305 million. Given that the taxes and fees from the garment industry  account for about 35 to 40 percent of the insular area’s revenues, these  developments will likely have significant financial and economic impacts,  according to OIA officials.
section_title: Other Events
paragraphs: Various external events have affected CNMI’s tourism industry in recent  years. Due to CNMI’s proximity to Asia, Asian economic trends have a  direct impact on CNMI’s economy. For example, tourism in CNMI  experienced a sharp decline in the late 1990s with the Asian financial  crisis. According to the Marianas Visitors Authority, total visitor arrivals  dropped from a peak of 736,117 in 1996 to 501,788 in 1999. After a modest  recovery in 2000, tourism faltered again with the September 11, 2001,  terrorist attacks on the United States, bringing the number of visitors to  444,284 in 2001. In 2003, according to CNMI officials, tourism slowed— with a double-digit decline in arrivals for several months—in reaction to  the SARS epidemic, which originated in Asia, and the war in Iraq. At the  same time, CNMI has experienced an influx of Chinese tourists in recent  years, with the potential to reenergize the industry. The Chinese share of  visitors increased significantly from 0.4 percent in 1997 to 6.5 percent in  2005. CNMI officials are optimistic that the trend will continue in the  future, especially on the island of Tinian, which already has gambling and  hotel facilities owned and operated by Chinese interests from Hong Kong.
Tourism in CNMI is also subject to changes in airline practices. For  example, Japan Airlines (JAL) withdrew its direct flights between Tokyo  and Saipan in October 2005, raising concerns because roughly 30 percent  of all tourists and 40 percent of Japanese tourists arrive in CNMI on JAL  flights, according to CNMI and DOI officials. The Marianas Visitors  Authority’s June 2006 data show that the downward trend in Japanese  arrivals is not being offset by the growth in other tourism markets such as  China and South Korea, with the total number of foreign visitors dropping  from 43,115 in June 2005 to 38,510 a year later. A mitigating factor is  Northwest Airlines’ new daily nonstop flights between Osaka and Saipan,  which are expected to replace about 40 percent of the seats lost from  JAL’s action.
section_title: Guam
paragraphs: Guam’s economy is dominated by two sectors—tourism and government.  Tourism provided about 65 percent of business activity in 2004, according  to the Guam Economic Development and Commerce Authority  Administrator. A 2002 U.S. Census Bureau study indicates that the  government sector of Guam represented more than 36 percent of the  island’s GDP. The U.S. military accounted for more than 40 percent of  total government expenditures and about 90 percent of U.S. federal  expenditures in Guam.
Although Guam’s tourism sector is currently stable, it has been affected by  several external events since the late 1990s. The government sector, which  is projected to grow in the near future, has historically been sensitive to  significant changes in the U.S. military presence.
subsections: section_title: Factors Affecting Tourism
paragraphs: Guam’s tourism sector is vulnerable to external events. In 1997-1998, the  Asian financial crisis and a severe typhoon slowed tourist arrivals.  According to the Guam Visitors Bureau data, tourist arrivals dropped by  almost 18 percent from 1.38 million in 1997 to 1.14 million the following  year. After a modest recovery in 1999-2000, the terrorist attacks on the  United States in September 2001, two more typhoons in 2002, and the  SARS epidemic in 2003 caused further setbacks in the tourism sector.  However, in 2004, with the economic recovery in Japan and a resulting  increase in Japanese tourists—which make up the bulk of foreign  visitors—tourism on the island increased to about 100,000 arrivals per  month, according to Guam’s Visitors Bureau.
section_title: Military Decisions
paragraphs: Although the number of active-duty military personnel in Guam is  currently increasing, the island’s economy is vulnerable to policy changes  regarding the U.S. military presence. Even though military personnel in  Guam remained relatively stable from 1978 to 1992, averaging around  8,400, it declined by about 60 percent between 1992 and 2002, according to  DOD. A 2003 economic report states that this decline in the numbers of  military personnel may have contributed to Guam’s GDP shrinking by as  much as 25 to 35 percent over the same period. Military spending, aimed  primarily at repairing aging facilities and those damaged by typhoons, rose  in 2004. In addition, DOD, in October 2005, announced its plans to transfer  7,000 Marines from Okinawa, Japan, to Guam over the next 6 years, a  move that would more than triple the number of military personnel and  raise the amount of DOD’s spending in the insular area.
With several sources of revenue, primarily tourism, petroleum refining,  and international business and financial services, USVI has a more  diversified economy than American Samoa, CNMI, or Guam. Tourism  accounts for more than one half of USVI’s income and, according to 2002  data from the USVI Bureau of Economic Research, over 20 percent of  USVI employment. Exports of refined petroleum, reaching $4.8 billion in  2003, made up almost 90 percent of USVI’s total exports. Companies  selling international services benefit from a special tax incentive program  established by the USVI government in 2001. They accounted for about   29 percent of all USVI corporate and individual income receipts in 2003,  but less than 2 percent of USVI employment.
While it is diversified, USVI’s economy faces several challenges. First,  recent U.S. tax law changes may negatively affect businesses operating in  the insular area. Second, the tourism sector, which experienced several  setbacks in 2001 through 2004, may be experiencing increased volatility as  a result of local tourism trends and other factors.
section_title: U.S. Tax Law Changes
paragraphs: As a result of tax changes that ensued from the American Jobs Creation  Act of 2004 (AJCA), a growing number of U.S. businesses are projected to  suspend operations in USVI, thus reducing local government revenues and  jobs. U.S. businesses operating in USVI calculate their income under a  coordinated U.S. and USVI income tax policy, but pay their taxes  exclusively to the USVI government, if certain requirements are met. These  coordinated rules allow the USVI government to reduce the amount of  taxes payable to the USVI government provided the businesses are bona  fide USVI residents whose income is derived from sources within USVI or  is effectively connected with the conduct of a trade or business in USVI.  For example, qualifying businesses receive a 90 percent exemption from  USVI income taxes and a 100 percent exemption from property and gross  receipts taxes under this program operated by USVI’s Economic  Development Commission (EDC). Such provisions are designed to  encourage economic development in the insular area. Effective January  2005, however, AJCA imposed stricter requirements on U.S. businesses for  establishing residency and limited the types of income eligible for the  program’s tax exemptions, which will likely reduce the tax incentives for  U.S. businesses operating in USVI.
section_title: Tourism Trends and Other Factors
paragraphs: Security concerns and natural disasters have affected USVI’s tourism  industry in the past 5 years. The total number of visitors to USVI declined  after the terrorist attacks of September 11, 2001, on the United States,  although in 2004 a record number of tourists—2.6 million—visited the  islands, according to the USVI Bureau of Economic Research. Three- quarters of these visitors in 2004 were cruise passengers and one-quarter  were overnight visitors. According to an OIA official, cruise ship visitors  are increasingly affected by problems associated with crime, especially in  St. Croix. Finally, the danger of hurricanes threatens USVI’s tourist  industry each year, imposing significant costs.
section_title: Programs to Promote Economic Development in the Insular Areas
paragraphs: In the last few years, DOI has organized a number of initiatives, such as  conferences in the United States and business opportunity missions to the  four insular areas, to attract American businesses to these insular areas.  The main goal of these efforts is to facilitate interaction and the exchange  of information between U.S. firms and top government and business  officials from the insular areas, and to spur new investment in a variety of  industries. OIA recognizes that the natural economic partners of the  Pacific insular areas are neighboring Asian and Pacific countries.  However, OIA does not have a foreign affairs component that could  actively promote economic relations between the insular areas and foreign  countries in the region. Further, OIA believes it needs to promote  partnership with U.S.-based firms before foreign ones.
In 2003, a 1-day Secretary’s Investment Development Conference in  Washington, D.C. attracted approximately 500 participants, while the  second 2-day Secretary’s Conference on Business Opportunities in the  Islands in 2004 drew over 1,200 participants to Los Angeles. The 2004  conference had 248 attendees from the four insular areas. About half of  the participants from USVI, Guam, and American Samoa came from  government. More than 80 percent of CNMI’s participants were from  government. The largest number of participants from the U.S. mainland  came from California and Hawaii with a large majority from the private  sector, but 26 other states and the District of Columbia were also  represented. Individuals from the People’s Republic of China, the  Philippines, and Australia took part as well. In addition to the  conferences, OIA organized three trade missions in the past year.  Between 11 and 14 U.S. companies, both small and large, participated in  each of these missions.
OIA notes that many mission participants from the mainland did return to  the insular areas for follow-up visits. According to OIA, several projects  and business deals resulted from contacts made at conferences and  missions. For example, OIA indicates that a California-based company is  developing a nurse-training facility in CNMI and an entrepreneur from  southern California started a software company in American Samoa.  Innovative projects such as setting up a production/mass mailing facility in  CNMI aimed at the Japanese market are reported to be underway.  Although the list does not include new large business enterprises with  significant employment impact, it appears that OIA’s initiatives have  brought new firms and jobs to the insular areas, albeit on a modest scale.  While some of these business activities may have taken place anyway, the  OIA conferences and missions seem to have helped create linkages and  joint projects between the business communities in the mainland and in  the insular areas. Some of the new firms may just be displacing local ones  or are interested in selling products and services rather than investing;  however, others are likely to benefit the insular areas’ economies by  building local capacity and increasing competition and productivity if  investments are realized. Many business deals are apparently still in the  planning stages, with companies expressing interest, holding talks, and  doing preliminary work.
Whether and to what extent OIA’s conferences and missions have  contributed to stronger economies in the insular areas is difficult to  discern because OIA does not carry out formal impact evaluations of its  conferences and missions. It does obtain some feedback through informal  surveys conducted with participants. But OIA would benefit from an in- depth analysis of how effective its initiatives are in attracting investment  to the islands. Further, OIA could, by learning the extent to which U.S.  firms are partnering with foreign investors already operating in the insular  areas, discover further opportunities for partnership. For example, many  Asian-owned businesses are currently contributing entrepreneurial skills  and capital: many garment factories in CNMI and one of the two canneries  in American Samoa are Asian-owned. Much of the insular areas’ economic  development may be dependent on relationships with Asian companies,  yet OIA does not actively seek to reach firms outside of the U.S. mainland.
section_title: Weakened Fiscal Condition in Three Insular Areas
paragraphs: With the exception of American Samoa, the fiscal condition of the insular  area governments steadily weakened from fiscal year 2001 through fiscal  year 2004, the most recent year for which audited financial statements  were available for all four insular areas. In CNMI and Guam, the fund  balance of total governmental funds declined as government spending rose  faster than revenues. CNMI’s net assets at fiscal year-end declined for  fiscal years 2001-2004. The USVI government maintained positive balances  of total government funds and reduced its negative balance of net assets  by increased borrowing during the period. American Samoa showed an  increase in government funds until fiscal year 2004, due to 2 years of  strong surpluses of revenues over expenditures, stemming from an  insurance settlement of claims from Hurricane Val, which hit the insular  area in 1991. In fiscal year 2004, the increases in government funds  reversed, although it is not yet known if this is a new trend. American  Samoa’s net assets increased during the entire 4 fiscal years.
subsections: section_title: American Samoa
paragraphs: For fiscal years 2001 through 2003, American Samoa’s fund balance of  total governmental funds increased steadily from a deficit of $23.1 million  at the beginning of fiscal year 2001 to a positive $43.2 million at the end of  fiscal year 2003 before dropping to $37.8 million in fiscal year 2004. From  2001 to 2003, total annual revenues rose by over $15 million, while annual  spending fell by almost $12 million, contributing to significant surpluses  for fiscal years 2002 and 2003. However, included in the revenues for 2002  and 2003 were proceeds attributable to an insurance settlement of claims  from Hurricane Val. Without the receipt of these insurance proceeds,  American Samoa’s spending would have exceeded its revenues for those  years. In fiscal year 2004, the increases in government funds apparently  reversed, although it is not yet known if this is a new trend. For fiscal year  2004, revenue fell $9 million while spending increased $22 million.
As shown in table 4, net assets almost tripled to $211 million during fiscal  years 2001 through 2004. In fiscal year 2002, American Samoa’s  government revenues, including the U.S. federal government’s  contributions, were higher as a share of GDP, 38 percent, than the  revenues of any of the other three insular areas. The U.S. federal  government also contributed a higher proportion of these revenues—  60 percent in fiscal year 2004.
The financial data in table 4 were extracted from American Samoa’s  audited financial statements, which received qualified opinions from the  outside auditors. Therefore, these figures are subject to the limitations  cited by the auditors in their opinions and to the material internal control  weaknesses identified. These limitations and other accountability issues  are discussed in a separate section of this report. Also, restatements of the  financial statements may occur, so the numbers shown in table 4 may be  different in subsequently issued single audit reports.
CNMI’s total government funds balance declined from a positive   $3.5 million at the beginning of 2001 to a deficit of $49.2 million by the end  of 2004 as total government spending rose more rapidly than revenues,  which, as shown in table 5, caused a decline in the government’s total net  assets over the period. CNMI is distinct among the four insular areas in  that it has been stable in terms of revenue per capita, although spending  per capita has fluctuated. Like USVI, it receives a significantly lower  proportion of its revenues from the federal government than do American  Samoa or Guam.
The financial data in table 5 were taken from the audited financial  statements, which received qualified opinions from the outside auditors.  Therefore, these figures are subject to the limitations cited by the auditors  in their opinions and to the material internal control weaknesses  identified. These limitations and other accountability issues are discussed  in a separate section of this report. Also, restatements of the financial  statements may occur, so the numbers shown in table 5 may be different in  subsequently issued single audit reports.
section_title: Guam
paragraphs: Guam’s total government funds balance declined from a positive of   $74.4 million at the beginning of 2001 to a deficit of $198.7 million by the  end of 2004 as total government spending rose more rapidly than  revenues. Guam’s reported net assets at fiscal year-end also fell from the  amount shown in fiscal year 2001, as shown in table 6. (The substantial  drop in net assets for fiscal year 2002 reflected a correction of previously  misstated amounts.) During fiscal year 2004, net assets increased, after  decreases in fiscal years 2002 and 2003. The federal government has  contributed a smaller proportion of Guam’s total revenues than it has for  American Samoa, but larger proportions than for CNMI and USVI.
The financial data in table 6 were taken from the audited financial  statements, which received qualified opinions from the outside auditors.  Therefore, these figures are subject to the limitations cited by the auditors  in their opinions and to the material internal control weaknesses  identified. These limitations and other accountability issues are discussed  in a separate section of this report. Also, restatements of the financial  statements may occur, so the numbers shown in table 6 may be different in  subsequently issued single audit reports. For example, the figures shown  for net assets as of the end of fiscal year 2004 and the change in net assets  were restated in comparative information provided for fiscal year 2004 in  Guam’s fiscal year 2005 single audit report.
USVI’s balance of total government funds remained positive throughout  the period and grew from $215.5 million at the beginning of 2001 to   $463.7 million at the end of 2004. However, this growth was made possible  only through increased government borrowing. Spending grew more  rapidly than revenues during this period and exceeded revenues by   $99.1 million in 2004. Although USVI’s negative net assets figures appear to  have improved over the period, the trend is due to the recording of assets  not previously recorded. At the end of fiscal year 2004, USVI still had a  significant negative value for net government assets, as shown in table 7.
The financial data in table 7 were taken from the audited financial  statements, which received qualified opinions from the outside auditors.  Therefore, these figures are subject to the limitations cited by the auditors  in their opinions and to the material internal control weaknesses  identified. These limitations and other accountability issues are discussed  in a separate section of this report. Also, restatements of the financial  statements may occur, so the numbers shown in table 7 may be different in  subsequently issued single audit reports.
section_title: Financial Accountability Remains Weak in the U.S. Insular Areas
paragraphs: The governments of the four U.S. insular areas have had long-standing  financial accountability problems, including the late issuance of the  reports required by the Single Audit Act, inability to achieve unqualified  (“clean”) audit opinions on their financial statements, and numerous  material weaknesses in internal controls over financial operations and  compliance with laws and regulations governing federal grant awards. The  findings in the single audit reports clearly point out that the insular area  governments have lacked effective internal controls to provide reasonable  assurance that transactions are properly recorded; assets are safeguarded  from fraud, waste, abuse, and mismanagement; and federal funds are being  expended in accordance with grant requirements. As a result, there has  been limited accountability over the use of federal funds. Multiple  agencies oversee the insular areas’ efforts to improve their financial  accountability and several federal agencies have designated the insular  areas as high-risk under the Grants Management Common Rule. Under  the rule, federal grant awarding agencies may designate a grantee as high- risk if the grantee has a history of unsatisfactory performance, is not  financially stable, has an inadequate management system, has not  conformed to the terms and conditions of previous awards, or is otherwise  not properly managing federal funds. OIA and DOI’s IG, other federal  inspectors general, and local auditing authorities provide oversight and  assistance to the insular area governments.
subsections: section_title: Single Audit Reports for Fiscal Years 2001-2004 Were Not Issued on Time
paragraphs: For fiscal years 1997 through 2004, the insular areas did not submit their  single audit reports to the FAC by the due date, which is generally no later  than 9 months after the fiscal year end. As shown in table 8, American  Samoa and Guam have improved on the timeliness of their audit reports  since 1997. Although they were still unable to submit their single audit  reports on time for fiscal year 2004, the last year of the review period for  all four areas, American Samoa and Guam both submitted their fiscal year  2005 single audit reports to the FAC by the June 30, 2006, due date. The  timeliness of CNMI and USVI governments’ single audit submissions did  not improve for fiscal years 1997 through 2004. However, CNMI submitted  its fiscal year 2005 single audit report to the FAC less than 1 month late. As  of September 27, 2006, the USVI government had not submitted its fiscal  year 2005 single audit report to the FAC.
Single audits are a key control for the oversight and monitoring of the  insular area governments’ use of federal awards. The late submission of  single audit reports means that federal government agencies have  information on the insular area governments’ accountability over federal  funds that is not up to date and whose usefulness is therefore limited.
section_title: Audit Opinions on Financial Statements and Compliance Were Disclaimed or Qualified
paragraphs: Auditors are required by OMB Circular No. A-133 to provide opinions (or  disclaimers of opinion, as appropriate) as to whether the (1) financial  statements are presented fairly in all material respects in conformity with  generally accepted accounting principles (GAAP) and (2) auditee  complied with laws, regulations, and the provisions of contracts or grant  agreements which could have a direct and material effect on each major  federal program.
When reporting on the fairness of the presentation of financial statements,  auditors can issue an unqualified opinion, a qualified opinion, an adverse  opinion, or a disclaimer of opinion. Auditors express an unqualified  (“clean”) opinion on financial statements when they have determined,  based on sufficient review work, that the financial statements are  presented fairly in all material respects, in accordance with GAAP.  Auditors render a qualified opinion when they identify one or more  specific matters that impact the fair presentation of the financial  statements. The effect of a specific matter on the auditors’ qualified  opinion can be significant enough to reduce the usefulness of the financial  statements. Adverse opinions are expressed on financial statements when  the auditors have sufficiently definitive data to conclude that the financial  statements are not fairly presented in conformity with GAAP. A disclaimer  of opinion states that the auditor does not express an opinion on the  financial statements. Auditors may decline to express an opinion due to  scope or data limitations when they are unable to conclude about the  fairness of the financial statements in conformity with GAAP.
In accordance with OMB Circular No. A-133, auditors are required to  determine and express an opinion as to whether the auditee has complied  with laws, regulations, and the provisions of contracts or grant agreements  that may have a direct and material effect on each of its major federal  programs. Auditors are to identify the applicable compliance requirements  to be tested and reported on in a single audit. OMB’s Compliance  Supplement lists and describes the 14 types of compliance requirements  and related audit objectives and suggested audit procedures that auditors  should consider in single audits conducted in accordance with OMB  Circular No. A-133.
subsections: section_title: Opinions on the Insular Areas’ Financial Statements
paragraphs: The four insular area governments have been unable to achieve  unqualified (“clean”) audit opinions on their financial statements,  receiving either disclaimers or qualified opinions on the financial  statements issued for fiscal years 1997 through 2004 as shown in table 9.
American Samoa has made progress in reducing the number of matters  that caused the auditors to render qualified opinions on the financial  statements, but, for fiscal year 2004, the auditors could not obtain  sufficient information about the following items in the American Samoan  primary government: (1) the amount of funds owed to or from the other  funds—pooled cash; (2) the physical inventory records; and (3) the  accuracy of the beginning fund balances. The auditors also could not  obtain the information needed to attest to the fairness of the information  presented for the discretely presented component units. Specifically, the  auditors could not obtain the information needed concerning (1) the cost  of property, plant, and equipment in accordance with U.S. generally  accepted accounting principles and the operating revenues of the  American Samoa Telecommunication Authority and (2) the financial  position and activity of the American Samoa Medical Center Authority –  Lyndon B. Johnson Tropical Medical Center.
CNMI has also made progress in addressing the matters that resulted in  the qualified opinions on its financial statements for fiscal years 2001  through 2003. However, the auditors identified the following issues in  fiscal year 2004 as matters leading to the qualified audit opinion:   (1) inadequacies in the accounting records regarding taxes receivable and  receivables from agencies, advances, accounts payable, tax rebates  payable, other liabilities and accruals, amounts owed to component units,  and the reserve for continuing appropriations and (2) inadequacies in  accounting records and internal controls regarding the capital assets of  the Northern Marianas College, and in accounting records and internal  controls in inventory, federal agencies receivables, utility plant, accounts  payable, and obligations under capital lease of the Commonwealth  Utilities Corporation.
Guam has made progress in reducing the number of matters associated  with the auditors’ qualified opinions rendered on the government’s  financial statements for fiscal years 2001 through 2004. The auditors cited  the following matters associated with its qualified opinion for fiscal year  2004: (1) inability to access tax-related balances, (2) lack of audited  financial statements for Guam Memorial Hospital Authority, and (3) lack  of audited financial statements for the Guam Visitors Bureau.
Although USVI has made progress in addressing some of the matters that  were previously cited as leading to the auditors’ qualified opinions, the  auditors have identified new matters for fiscal year 2004. The auditor’s  qualified opinion on the general fund, governmental activities, and  discretely presented component units was due to the following: (1) lack of  accounting records for corporate income tax receivables for tax year 2002  in the general fund and governmental activities, (2) failure to record a  provision for landfill closure and postclosure costs in governmental  activities, and (3) inability to determine whether capital assets and land  held for sale by the Virgin Islands Housing Authority (VIHA) and the Virgin  Islands Housing Finance Authority (VIHFA) were fairly stated. The  auditors issued a disclaimer on the USVI government’s business-type  activities because (1) the financial statements as of September 30, 2003,  did not include a receivable for unemployment insurance contributions  due to inadequate records; and (2) liability for Workers’ Compensation  claims was not included.
section_title: Opinions on Insular Areas’ Compliance with Requirements for Major Federal Programs
paragraphs: Auditors for the four insular areas rendered qualified opinions,  disclaimers, or adverse opinions on the insular area governments’  compliance with the requirements for each major federal award program.
When auditors identify instances of noncompliance, they are required to  report whether the noncompliance could have a direct and material effect  on a major federal program. The audit opinions rendered on the insular  area governments’ compliance with the requirements for major federal  programs for the fiscal years under review are shown in table 10.
section_title: Number and Significance of Reported Internal Control Weaknesses Indicate Inadequate Internal Control over Financial Reporting and Inadequate Compliance with Requirements for Major Federal Programs
paragraphs: The large number and the significance of reported internal control  weaknesses raise serious questions about the integrity and reliability of  the insular area governments’ financial statements and their compliance  with requirements of major federal programs. The auditors, in their reports  on internal control over financial reporting and on compliance with  federal requirements for major federal programs, disclosed many internal  control weaknesses.
subsections: section_title: Material Weaknesses and Reportable Conditions in Internal Control over Financial Reporting
paragraphs: The insular area governments’ 29 reported internal control material  weaknesses and reportable conditions for fiscal year 2004 indicate a lack  of sound internal control over financial reporting needed to provide  adequate assurance that transactions are properly recorded, assets are  properly safeguarded, and controls are adequate to prevent or detect  fraud, waste, abuse, and mismanagement. Reportable conditions over  financial reporting are matters that come to an auditors’ attention related  to significant deficiencies in the design or operation of internal controls  that could adversely affect the entity’s ability to produce financial  statements that fairly represent the entity’s financial condition. Material  weaknesses in financial reporting are reportable conditions in which the  design or operation of internal controls does not reduce to a relatively low  level the risk that misstatements caused by error or fraud—material in  relation to the financial statements being audited—may occur and not be  detected in a timely period by employees in the normal course of  performing their duties. Table 11 shows the number of material  weaknesses and reportable conditions for each of the four insular areas,  for fiscal year 2004.
The reported internal control weaknesses revealed serious deficiencies in  internal controls over financial reporting. For example, auditors for the  American Samoa government reported for fiscal years 2001 through 2004  that accountants and clerks doing the general accounting were not  adequately trained and supervised. The auditors also reported that  account reconciliations, journal entries, and other basic transactions were  not adequately performed and summarized, a material weakness that casts  doubt on the integrity and reliability of the financial information presented  in the single audit report. Another internal control weakness reported by  the auditors was that the government records had not been maintained in  an organized manner due to a lack of formal procedures for the  maintenance and storage of records. Due to this material internal control  weakness, documentation may be misplaced, lost, or destroyed without  being detected.
One of the internal control weaknesses that the auditors reported for  CNMI’s government for fiscal year 2004 involved liabilities recorded in the  General Fund. Due to the lack of detailed subsidiary ledgers, the auditors  could not determine the propriety of these account balances, and whether  the negative balances in the accounts, as in prior years, also included  prepaid items. The recording of prepaid items as expenditures will cause  expenditures to be overstated and the related liabilities to be understated.  One of the control activities mentioned in GAO’s Standards for Internal  Control in the Federal Government is accurate and timely recording of  transactions and events. This control activity is applicable to the entire  process or life cycle of a transaction or event from the initiation and  authorization of a transaction through its final classification in summary  records. CNMI’s auditors also reported as an internal control weakness, in  at least two of its single audit reports, a Commonwealth Health Center  (CHC) receivable balance that represented accounts outstanding in excess  of 120 days due to inadequate billing and collection procedures. According  to the auditors, the effect of this weakness was a possible misstatement of  CHC’s receivable balances, partially mitigated by a corresponding  uncollectible account balance of the same amount. The auditors  recommended that the uncollectible accounts be written off, and that the  CHC implement procedures for processing all billings on a timely basis  and for following up on aged accounts.
In Guam, the lack of required physical inventories of government  equipment and the lack of uniform maintenance procedures to keep  equipment in good condition were cited as material weaknesses by  auditors for fiscal years 2003 and 2004. The auditors also stated that the  government of Guam did not perform a comprehensive inventory of its  capital assets, including infrastructure. According to Guam’s single audit  report for fiscal year 2004, the government was working to tag all of its  equipment with bar code property identification labels so that it would be  able to conduct a physical inventory. Another internal control weakness  was reported in the accounts payable-trade account: accounts payable that  had aged 2 or more years remained in the accounts payable listing while  more current balances were liquidated. Moreover, the auditors reported  that all nine of the general ledger liability accounts tested included invalid  accruals. The auditors attributed these problems—which could result in a  potential misstatement of accounts payable—to poor internal control over  the filing of supporting documentation of recorded transactions.  Unreconciled differences in the combined cash balances for some  governmental funds for fiscal year 2004 were reported by the auditors. The  auditors attributed these differences to the lack of timeliness of the  performance of bank reconciliations, which does not appear to have been  monitored—the effect being a misstatement of cash balances. GAO’s  Standards for Internal Control in the Federal Government highlights  reconciliation as a key control activity.
Auditors for USVI reported that the reconciliations of all USVI government  bank accounts as of September 30, 2003 (fiscal 2003 year-end) were not  completed until June 2004. The auditors stated that performing timely and  accurate reconciliation of bank accounts is a key control over cash  receipts and disbursements, and that the lack of timely reconciliation of all  bank accounts may result in errors or irregularities in cash transactions to  not be promptly detected. USVI’s auditors attributed the failure to prepare  timely bank reconciliations to a lack of established procedures. Auditors  also reported this material weakness in the single audit report for fiscal  year 2004 for USVI and stated that the reconciliations of all USVI  government bank accounts as of September 30, 2004, were not completed  until July and August of 2005. Auditors also found weaknesses in the  government’s ability to quantify and record certain key financial activity,  such as a workers’ compensation claims liability, due to the lack of  complete and accurate financial data. During 2004, as in previous years,  the government experienced delays in its year-end closing process and in  the preparation of complete and accurate financial statements in  accordance with GAAP. In numerous year-end closing entries that, in  some instances, represented corrections to routine transactions that  occurred throughout the year, auditors found their nature, timing, and  extent indicative of weaknesses in controls over financial reporting.
section_title: Material Weaknesses and Reportable Conditions in Compliance with Requirements for Major Federal Programs
paragraphs: Auditors reported material weaknesses and reportable conditions in the  insular area governments’ compliance with requirements for major federal  programs and the internal controls intended to ensure compliance with  these requirements. In the context of compliance, reportable conditions  are matters that come to an auditor’s attention related to significant  deficiencies in the design or operation of internal controls over  compliance that could adversely affect the entity’s ability to operate a  major federal program within the applicable requirements of laws,  regulations, contracts, and grants. Material weaknesses in this context are  reportable conditions in which internal controls do not reduce to a  relatively low level the risk of noncompliance with applicable  requirements of laws, regulations, contracts, and grants that would be  material to the major federal program being audited and undetected in a  timely way by employees in the normal course of performing their duties.
As shown in table 12, auditors reported nine material weaknesses in  compliance with requirements for major federal programs for the  American Samoa government for fiscal year 2004. One of these  weaknesses involved a receiving report that showed that an item  purchased with 2004 grant funds was not received until August 31, 2005,  the end of the 2005 grant year. The effect of this delay was that the  government received and expended from the 2004 grant, but did not  complete the transaction and receive the goods from the vendor until   1 year later. The auditors attributed this weakness to the vendor’s  requirement of advance payment for this purchase and lack of follow up to  determine whether the goods that had been paid for had been delivered.  For fiscal year 2004, another reported internal control weakness in  compliance with requirements for major federal programs involved delays  in the completion of the single audit, which did not occur within 9 months  of the fiscal year end, as required by the Single Audit Act. The auditors  stated that the cause of the missed single audit due date was (1) a failure  of the accounting system and (2) the lack of trained, qualified, and  competent personnel. These two factors resulted in a delay in closing the  accounting records.
One of the two internal control weaknesses affecting compliance with  major federal programs reported for CNMI’s government for fiscal year  2004 was the failure to record expenditures for the Medical Assistance  Program when they were incurred. In one instance, the auditor identified  expenditures for billings from service providers for services rendered in  previous years. The auditors attributed this weakness to the lack of  policies and procedures regarding the timely recognition of expenditures  at the time services are rendered. The effect of this weakness is that  expenditures reported to the grantor agency, the U.S. Department of  Health and Human Services (HHS), are based on the paid date and not, as  required, the service date. In addition, actual expenditures incurred during  the year are not properly accrued and therefore, current year expenditures  and unrecorded liabilities are understated. The other internal control  weakness related to the lack of adherence to established policies and  procedures regarding physical inventory counts of property and  equipment and the lack of reconciliation between the Division of  Procurement and Supply’s (P&S) master listing and the listings of several  CNMI divisions and offices. For example, CNMI’s Emergency Management  Office (EMO) provided a list of equipment acquired with Office of  Domestic Preparedness grants, but the listing did not include the serial  number or other identification of the equipment or its condition.  Moreover, a physical inventory was not conducted in the past 2 years by  either the EMO or P&S. As a result, CNMI’s government was not in  compliance with federal property standards and its own property  management policies and procedures.
section_title: Guam
paragraphs: In prior-year single audits and the fiscal year 2004 report, Guam’s auditors  stated that the government was in noncompliance with applicable  procurement requirements. The auditor noted, in the fiscal year 2004  report, that there was insufficient documentation on file supporting the  procurement for four of seven transactions tested related to a DOL grant.  For two additional transactions, Guam’s Chief Procurement Officer  determined that the lease of space from a vendor was an unauthorized  procurement because the lease agreement had expired. The method of  procurement, selection of contract type, contractor selection or rejection,  and the basis for the contract price are to be included in the procurement  records, according to applicable procurement requirements. The auditor  attributed this weakness to a lack of internal control over compliance with  applicable procurement requirements. Noncompliance with applicable  procurement requirements was also noted for transactions related to U.S.  Environmental Protection Agency and HHS grants. The auditors also  reported that the government of Guam may have been noncompliant with  earmarking requirements associated with an HHS block grant for maternal  and child health services. According to federal law, 30 percent of the total  grant payments must be used for preventive and primary care services for  children, 30 percent must be used for services for children with special  health care needs, and not more than 10 percent of the allotted funds can  be used by a grantee for administrative expenses. The government of  Guam did not provide the auditors with documents that demonstrated  compliance with these requirements for its 2004 Maternal and Child Health  Services Block Grant. The auditors reported that they could not determine  whether the government of Guam was in compliance with these  earmarking requirements due to weak internal control over recordkeeping.
Auditors reported that for fiscal years 2003 and 2004, the USVI government  failed to provide accurate, current, and complete disclosure of financially  assisted activities as required by U.S. Department of Agriculture (USDA)  grants. In one instance, auditors found that financial reports prepared by  the USVI Department of Health for the Women, Infants, and Children  (WIC) Program did not reconcile with the USVI government’s financial  management system (FMS). The auditors identified the cause of this  weakness to be due to current procedures, which do not require a  reconciliation of WIC Program records with the FMS. This lack of  reconciliation could result in incorrectly posted transactions going  undetected and uncorrected and therefore also incorrect financial  information being reported to USDA. The lack of reconciliation between  the government’s records and its FMS was also noted as a weakness  related to a DOL grant for unemployment insurance. In its fiscal year 2004  single audit report, the auditors noted that the USVI Department of  Education did not fully comply with 12 of the 18 requirements for the  second year of the compliance agreement with the U.S. Department of  Education. For example, the auditors reported that the inventory  management system, which was to be fully implemented by December 31,  2004, was not implemented by that date. According to the auditors, failure  to fully comply with the compliance agreement by the specified deadlines  was due to a lack of the necessary resources.
section_title: High-Risk Designations and Receiverships
paragraphs: The late submission of single audit reports combined with ongoing,  significant audit findings, have been key reasons for the designation of the  insular area governments as high-risk grantees by several federal agencies.  Under the Grants Management Common Rule, federal awarding agencies  may designate a grantee as high-risk if the grantee has a history of  unsatisfactory performance, is not financially stable, has an inadequate  management system, has not conformed to the terms and conditions of  previous awards, or is otherwise not properly managing federal funds.  Federal agencies that designate a grantee as high-risk may impose special  conditions including (1) issuing funds on a reimbursement basis;   (2) withholding authority to proceed to the next phase until receipt of  evidence of acceptable performance within a given funding period;   (3) requiring additional, more detailed financial reports; (4) requiring the  grantee to obtain technical or management assistance; or (5) establishing  additional prior approvals for expenditures of federal funds. Agencies, in  carrying out their regulations associated with the Grants Management  Common Rule, can place special conditions either at the agencywide level  or at the individual program level.
section_title: American Samoa
paragraphs: OIA designated the government of American Samoa as a high-risk grantee  in June 2005, as GAO had recommended in its report on American Samoa’s  accountability for key federal grants. In making this designation, OIA  recognized that the government of American Samoa had made significant  progress in improving its financial accountability, and stated that the high- risk designation was to encourage other federal agencies to support  American Samoa’s fiscal reform process. OIA placed several special  conditions on the American Samoan government, including the completion  of single audits by the statutory deadline and having balanced budgets for  2 consecutive years—without considering nonrecurring windfalls such as  insurance settlements.
The American Samoa government or its agencies have also been  designated as high-risk by the departments or components of USDA,  Education, HHS, and the U.S. Department of Transportation (DOT).  USDA’s Food and Nutrition Service (FNS) has also designated American  Samoa as a high-risk grantee. According to a USDA official, GAO’s prior  recommendation that DOI designate American Samoa as a high-risk  grantee influenced the FNS decision in February 2006 to designate  American Samoa as a high-risk grantee for three of its programs. Some of  the reasons cited by FNS officials for the high-risk designation include  delinquent audits, noncompliance with laws and regulations, failure to  resolve audit findings or to follow up on review findings, incurring  unallowable or questionable costs, and weak systems for monitoring the  programs and managing program data. In a letter to the Governor of  American Samoa, FNS officials also stated that they were concerned that  other serious problems might exist but had not been identified due to  weaknesses and inadequate controls described in the letter. FNS officials  further stated that the additional requirements associated with a high-risk  designation would help to determine whether other serious but  unidentified problems exist.
While the U.S. Department of Education initially designated American  Samoa as a high-risk grantee in 2003 due to the lack of timely and  complete single audits, American Samoa has now submitted its single  audits through fiscal year 2005. The American Samoan government  remains a high-risk grantee for the U.S. Department of Education due to  continuing concerns about weaknesses and internal control issues  identified in the single audits. One of HHS’s operating divisions, the  Substance Abuse and Mental Health Services Administration (SAMHSA),  designated American Samoa as a high-risk grantee due to the government’s  delinquent single audits. The insular area remains a high-risk grantee of  SAMHSA, due to several older audits that were late and audit issues  identified in submitted single audit reports. SAMHSA also designated  American Samoa’s Department of Human and Social Services as a high- risk grantee due to the lack of compliance of its financial management  system with federal regulations. DOT’s Federal Motor Carrier Safety  Administration (FMCSA) has considered American Samoa to be a high-risk  grantee for its Motor Carrier Safety Assistance Program (MCSAP) due to  past performance problems, although no formal designation was made in  writing and no special conditions were imposed. DOT officials provided an  example of a past performance problem for American Samoa: the insular  area justified purchase of a vehicle for MCSAP purposes, but the vehicle  was provided to the Governor’s office. Instead of a formal high-risk  designation, FMCSA provided additional oversight and required American  Samoa to submit additional supporting documentation for all progress and  final vouchers. American Samoa cooperated voluntarily by submitting the  documentation and accepting the disallowed costs.
The U.S. Department of Education designated CNMI as a high-risk grantee  in 2003 because CNMI’s Department of Education was unable to provide  timely and complete single audits for 4 consecutive years. In September  2004, the U.S. Department of Education removed the high-risk designation  based on site visits and the completion of the fiscal year 2003 single audit  for CNMI with few audit findings.
section_title: Guam
paragraphs: Guam was designated as a high-risk grantee by the U.S. Department of  Education in 2003 because Guam’s Public School System was unable to  provide timely and complete single audits for 5 consecutive years. As of  October 27, 2006, Guam remained as a high-risk grantee for the U.S.  Department of Education. Additional special conditions have been placed  by U.S. Department of Education officials on its grants to Guam requiring  them to demonstrate improved management stability and effective fiscal  controls. DOT’s FMCSA has considered Guam to be a high-risk grantee for  its MCSAP due to past performance problems, although no formal  designation was made in writing and no special conditions were imposed.  DOT officials provided an example of a past performance problem for  Guam—two vehicle inspectors paid by MSCAP funds were accepting  payments for themselves in exchange for inspection decals. Instead of a  formal high-risk designation, FMCSA provided additional oversight and  required Guam to submit an action plan detailing corrective actions. The  government of Guam cooperated voluntarily by submitting the action plan  and proof that the inspectors’ employment had been terminated.
The U.S. Department of Housing and Urban Development (HUD) has  designated the Guam Housing and Urban Renewal Authority (GHURA) as  a high risk agency because of its poor performance under both the Public  Housing Assessment System (PHAS) and Section Eight Management  Assessment Program (SEMAP). HUD’s Real Estate Assessment Center  sent staff to Guam in 2006 to perform a quality assurance review of the  auditor and a report of its review is expected soon. A memorandum of  agreement is being developed to set targets and strategies for improving  GHUR’s performance.
The U.S. Department of Education, HHS, and HUD have designated the  USVI government (or its components) as a high-risk grantee. The USVI  government was designated as a high-risk grantee by the U.S. Department  of Education in 1999. Although USVI was already designated as a high-risk  grantee, the U.S. Department of Education entered into a comprehensive  3-year compliance agreement with USVI on September 23, 2002, due to  serious and recurring deficiencies in USVI’s administration of the U.S.  Department of Education programs. In fiscal year 2005, U.S. Department  of Education officials determined that the USVI government would be  unable to meet all of the terms of the compliance agreement by its  expiration on September 23, 2005. In a letter dated June 17, 2005, U.S.  Department of Education notified the USVI government that, in  accordance with the terms of the compliance agreement, it would apply  special conditions to its grant awards, requiring the USVI government to  procure the services of a third-party fiduciary to perform the financial  management duties for all U.S. Department of Education grant awards  made to USVI. As of August 25, 2006, all contract terms between the USVI  government and the recommended third party fiduciary had been settled,  the contract had been signed, and the fiduciary has begun work.
The Centers for Disease Control and Prevention (CDC), a component of  HHS, designated USVI’s Department of Health as a high-risk grantee in  January 2006 due to the lack of compliance with financial management  standards. According to the letter to USVI’s Department of Health, one of  the criteria for removing the high-risk designation is the establishment of  appropriate internal controls to safeguard federal funds. The  Administration of Children and Families (ACF), another component of  HHS, placed USVI’s Department of Human Services as a high-risk grantee  in April 1997 for delinquent single audits. According to an April 9, 1997,  letter, the USVI government had not submitted single audits, other than  one received for the 2-year period beginning October 1, 1988, and ending  September 30, 1990. Subsequent updates to the high-risk listing have  referred to the USVI government’s chronically late single audits.
In August 2003, HUD designated the Virgin Islands Housing Authority  (VIHA) as a high-risk grantee, and shortly thereafter placed VIHA into  receivership. VIHA had been under examination for several years due to  its failure to submit balanced budgets, a violation of HUD financial  reporting requirements, and the general deterioration of management  operations. VIHA’s Board of Directors was unable to provide adequate  oversight of housing authority programs, including the Section 8 program.  VIHA also had failed to submit timely audited financial statements for  fiscal years 2001 and 2002. VIHA’s failure to submit timely verifiable  financial information had adversely affected HUD’s ability to verify that  federal funds were being used properly and in accordance with program  requirements and regulations. A preliminary review done by HUD  indicated that VIHA was operating under a budget deficit of approximately  $3.5 million. Moreover, HUD officials discovered that VIHA was  improperly funding a Virgin Islands government nursing home for elderly  residents in one of its public housing developments. VIHA was also cited  for providing rent rebates of $3 million annually to public housing  residents in violation of HUD regulations. In its audits of VIHA’s fiscal year  2001 and 2002 single audits, the independent public auditor found that  VIHA had serious deficiencies in financial reporting, financial analysis, and  financial management systems. For example, the auditor noted that VIHA  maintained incompatible accounting systems that precluded effective  recording and reporting processes. Therefore, VIHA’s accounting records  did not reflect an accurate or complete accounting of the financial position  and, in addition, VIHA was unable to track and identify expenditures of  federal funds. According to HUD officials, serious fiscal irregularities and  ineffective VIHA Board leadership, factors such as VIHA staff with  insufficient skills, VIHA’s inability to adequately manage programs, and its  failure to improve and correct other operational problems, all pointed to a  breakdown in the management of VIHA.
On August 1, 2003, HUD notified VIHA that it was in substantial default of  Section 15 under the Annual Contributions Contract (ACC) for failure to  produce reliable financial statements. Violations of Section 15 (A) of the  ACC were based on the numerous deficiencies noted in the authority’s  books and records identified by VIHA’s independent auditors and late  submission of financial reports. All of these actions identified VIHA as a  high-risk agency. On August 20, 2003, HUD imposed an administrative  receivership, assuming VIHA’s decision-making authority and management  by sending in a recovery team to stabilize the authority’s operations. As of  August 15, 2006, VIHA was still in receivership. While HUD officials told us  that no special conditions have been placed on VIHA, HUD will look for  the following actions to be completed before ending the receivership:  improvement in Public Housing Assessment System (PHAS) scores for a  sustained period in the areas in which the authority was failing;   evidence that VIHA has put in place an advisory board to begin taking  management control of the authority;   evidence that key personnel have been hired, such as an executive  director, chief financial officer, and managers in areas such as  procurement, maintenance, construction/development, information  technology, occupancy, and resident services;   evidence that the VIHA has established policies and procedures that  conform to HUD requirements, staff has been trained in these policies and  procedures, and these policies and procedures are being followed; timely and accurate submission of required HUD reports; and   unqualified audit opinion on both the financial statements and compliance  with OMB Circular No. A-133 for major programs.
HUD is currently evaluating the conditions at VIHA and expects new PHAS  scores in early 2007. All recent required HUD reports have been submitted  by VIHA in a timely and accurate manner. In 2006, VIHA revised its  procurement policy and, according to HUD officials, implemented the new  policy successfully. VIHA has also instituted new financial internal  controls and procedures to correct the financial oversight deficiencies that  have been noted in the past. VIHA received an unqualified financial audit  for fiscal year ending December 31, 2005. In November 2006, VIHA hired a  new Chief Financial Officer with a background in housing authority  finance. HUD and VIHA are considering hiring additional experienced  permanent staff for the housing authority in 2007. Also, HUD and VIHA are  currently evaluating additional changes to various policies and procedures  in order to improve oversight and efficiency throughout the housing  authority.
section_title: Efforts to Assist the Insular Areas in Improving Financial Accountability
paragraphs: DOI’s OIA and IG, other federal inspectors general, and local auditing  authorities assist or oversee the insular areas’ efforts to improve their  financial accountability. OIA monitors the progress of completion and  issuance of the single audit reports as well as providing general technical  assistance funds to provide training for insular area employees and funds  to enhance financial management systems and processes. DOI’s IG has  audit oversight responsibilities for federal funds in the insular areas. In  addition, the IG evaluates the effectiveness of OIA programs. Each insular  area’s cognizant agency for the single audit monitors the submissions of  the insular area government’s single audit report for the insular area and  considers extensions requested for submitting the report. The insular  areas’ cognizant agencies for fiscal years 2001-2005 were DOI for American  Samoa and CNMI, HHS for Guam, and USDA for USVI. According to an  OMB official, DOI will be the cognizant agency for all four insular areas for  the fiscal year 2006-2010 single audits. When the single audit report is  completed, the Office of Inspector General of the cognizant agency  reviews the report to determine whether it meets applicable reporting  standards and the requirements of OMB Circular No. A-133 for  implementing the Single Audit Act. The inspectors general of other federal  grant-making agencies perform audits of the insular area governments’  implementation of federal programs to assess whether federal funds are  used for intended purposes and effectively and efficiently. Local auditing  authorities audit, assess, and analyze the insular area governments’  activities for improving accountability, effectiveness, and efficiency of  government operations. Interagency groups, such as IGIA, and other less  formal groups also have worked to improve the financial accountability of  the insular areas.
subsections: section_title: Interior’s OIA and Federal IGs
paragraphs: A key part of OIA’s mission is to promote sound financial management  processes in the insular area governments. To accomplish this mission,  OIA has increased its focus on bringing the insular area governments into  compliance with the Single Audit Act. For example, OIA created an  incentive for the insular areas to comply with the act by stating that an  insular area cannot receive capital funding unless its government is in  compliance with the act or has presented a plan, approved by OIA that is  designed to bring the government into compliance by a certain date. In  addition, OIA provides general technical assistance funds for training and  other direct assistance, such as grants, to help the insular area  governments comply with the act and to improve their financial  management systems and environments.
The Graduate School of the USDA has been working with OIA for over a  decade through its Pacific Islands and Virgin Islands Training Initiatives  (PITI and VITI) to provide training and technical assistance. In fiscal year  2004, OIA began a joint program with the Graduate School to address the  long-standing problem of audit findings and resolutions that had not been  addressed by the insular area governments. The USDA Graduate School  also works with the Island Government Finance Officers Association  (IGFOA) to promote improved financial management in the insular areas.  Table 13 shows OIA funding of USDA Graduate School activities.
In addition to funding the training and other services provided by the  USDA Graduate School, OIA makes direct grants using its general  technical assistance funds. Some of these grants are targeted at the  resolution of specific financial management and reporting problems.
OIA has staff members in headquarters and field representatives in  American Samoa and CNMI who make site visits to the insular areas.  According to an OIA official, the office does not use a standard framework  to write up the results of these site visits, although staff members do make  notes while they are visiting the insular area. Establishing a routine  procedure of writing up the results of site visits in a standard framework  would help ensure that (1) all staff members making site visits are  consistent in their focus on overall accountability objectives and (2) OIA  staff has a mechanism for recording and following up on the unique  situations facing each of the insular area governments.
DOI’s IG performs the functions and duties that were once the  responsibility of government comptrollers for the four insular areas. In  this role, the IG has audit oversight responsibilities for the insular areas. It  is also responsible for reviewing and following up on single audits for  American Samoa and CNMI due to its role as the cognizant agency for the  two insular areas for the single audits for fiscal years 2001-2005. For fiscal  years 2006-2010, DOI’s IG will be responsible for reviewing and following  up on the single audits for all four insular areas because DOI will be the  cognizant agency for all four. The IG also evaluates the effectiveness of  OIA’s programs and has issued three reports in 2002 and 2003 that  addressed the use of federal funds in the four insular areas. One of the  reports, dated March 1, 2002, identified what the IG believed to be the top  management challenges for the U.S. insular areas and compact states.  The report included assessments for each of the insular areas regarding  the following four challenges: (1) overall financial management,   (2) internal audit capabilities, (3) audit resolution issues, and (4) areas for  improvement. In its evaluation report of oversight and follow up on audit  findings and recommendations related to the insular area governments’  use of federal funds provided by DOI, the IG stated that the single audit  report findings were not sufficiently addressed, due to a lack of federal  control over the funds and DOI’s lack of adequate audit follow-up  procedures. Noting OIA’s lack of enforcement authority over subsidies and  entitlement-type funding, the IG stated that OIA should increase its  oversight of these findings by encouraging the insular areas to address  them and to monitor the implementation of corrective actions. In  September 2003, the IG issued a report about grants OIA administers for  the insular areas. The IG reported that OIA had properly processed awards  and distributed grant funds, but needed to improve the control process  used to monitor grants.
In accordance with the Reports Consolidation Act of 2000, DOI’s IG also  submits annual summaries of issues that it has determined to be the most  significant management and performance challenges facing the  department. One of the challenges the IG listed, in DOI’s fiscal year 2005  performance and accountability report, related to the insular areas. The  IG noted in describing this challenge that these governments have long- standing financial and program management deficiencies. The IG has also  issued many audit reports covering issues on individual insular areas.  Since January 2000, it has issued 2 audit reports on American Samoa, 1 on  CNMI, 8 on Guam, and 29 relating to the government of USVI. The  citations for these reports are in appendix III.
Inspectors general of other federal agencies that provide grants also  conduct audits and evaluations on issues related to the insular areas’ use  of awarded funds. The U.S. Department of Education’s IG has recently  issued several reports—including reports on the USVI government’s  administration of funds under Title IV of the Higher Education Act and  grant funds for the Infants and Toddlers program—as well as the  previously mentioned report on the USVI government’s lack of progress in  meeting the terms of the compliance agreement.
section_title: Local Authorities
paragraphs: In addition to U.S. federal government audit organizations, each of the  four insular areas has its own local auditing authorities. The USVI has its  Office of Inspector General; Guam and CNMI, the Offices of the Public  Auditor; and American Samoa, the Territorial Audit Office. All four of  these audit authorities have the authority to review their governments’ use  of federal grant funds. These audit authorities also determine whether  government operations are efficient and effective and government assets  are properly safeguarded and protected from fraud, waste, abuse, and  mismanagement.
All of these local audit authorities are members of the Association of  Pacific Islands Public Auditors (APIPA), formed in January 1988 through a  memorandum of understanding (MOU) executed by the heads of the audit  organizations of five Pacific island nations. APIPA was formed to achieve  several objectives, including (1) the establishment of an organized body to  promote efficiency and accountability in the use of public resources of  emerging nations of the Pacific and (2) sponsorship of auditing and  accounting training workshops. APIPA has an annual conference to  provide continuing education for its members.
section_title: Interagency Coordination
paragraphs: While multiple entities oversee the insular areas’ efforts to improve their  financial accountability, in 1999 and 2003 the White House recognized the  need to improve coordination of federal programs as they relate to insular  areas and established the Interagency Group on Insular Areas (IGIA)  consisting of representatives from several federal agencies. This group is  responsible for identifying issues that affect the insular areas and for  making recommendations to the President and other appropriate officials  regarding these issues. Executive agencies were to coordinate significant  decisions or activities relating to the insular areas with the IGIA. The most  recent meeting of the IGIA was in February 2006 to discuss ongoing issues,  such as fiscal management, and work done during 2005 in the areas of  economic and tax policy, infrastructure financing, and healthcare. We  were unable to obtain information concerning the outcome of IGIA efforts.  Furthermore, there appears to be limited joint monitoring or coordination  of financial assistance programs and grants management across the many  federal grant-making agencies as evident from discussions held with  agency officials we contacted. With increased coordination, the federal  agencies could collectively share key information, such as high-risk  designations, and work with the insular area governments to substantially  improve their financial accountability.
section_title: Insular Areas’ Corrective Action Plans
paragraphs: Under the Single Audit Act and OMB Circular No. A-133, auditees, when  the audit is completed, are to prepare corrective action plans to address  each audit finding in the current year’s single audit report. Corrective  actions are defined in OMB Circular No. A-133 as action taken by the  auditee that (1) corrects identified deficiencies, (2) produces  recommended improvements, or (3) demonstrates that audit findings are  invalid or do not warrant action by the auditee. The corrective action  plan should provide the names of the contact persons responsible for  corrective actions, the corrective actions planned, and the anticipated  completion date.
subsections: section_title: American Samoa
paragraphs: In its corrective action plan for fiscal year 2004, American Samoa  government managers acknowledged the auditor’s finding that there were  significant failures in the operation of the internal control structure related  to general accounting and grants administration. Management commented  in its corrective action plan that 7 years had passed since the  implementation of the new computer system and the hiring of new staff.  According to the corrective action plan, new internal control policies and  procedures have been implemented. In this same corrective action plan,  American Samoa government managers stated that they disagree with the  finding that government records have not been maintained in an organized  manner due to the lack of formal procedures regarding the maintenance  and storage of records. According to the plan, the American Samoan  government has made progress in the Grants Division by assigning grants  analysts to specific departments to work with the grants program  administrator to ensure that expenditures are allowable under the  program.
In its corrective action plan for fiscal year 2004, CNMI officials responded  to the auditor’s finding that due to the lack of detailed subsidiary ledgers,  the auditors could not determine the propriety of two liability account  balances and whether the negative balances in the accounts, as in prior  years, also included prepaid items. CNMI government officials stated that  the negative balances may not have been properly closed for prepaid  items. According to the corrective action plan, balances are being  reviewed and adjusted as needed and new procedures for receiving  procurements were implemented, and reconciliation procedures will be  developed. In its corrective action plan for the Commonwealth Health  Center’s (CHC) receivable balance with accounts outstanding in excess of  120 days, management stated that they agreed with the findings, but  management also asserted that it had made major progress in correcting  the problems. According to management, the cause of the problem is a  combination of the inefficiency of the present computer billing system, an  inadequate number of staff in the Billing and Collection Office,  nonpayment of bills by the Government Health Insurance program, and  the inclusion of Medicaid expenditures beyond the annual cap as  receivables.
section_title: Guam
paragraphs: In its corrective action plan for fiscal year 2004, government of Guam  officials responded to the auditor’s finding of the lack of the required  physical inventories of equipment by reporting that GASB No. 34, Basic  Financial Statements and Management’s Discussion and Analysis for  State and Local Governments, was being adopted using a two-stage  approach. The first stage is to record all capital assets such as buildings  and infrastructure. The second stage is to compile all fixed asset records.  For the findings related to noncompliance with procurement  requirements, the government of Guam stated that GSA will continue to  improve the processes and to uphold the integrity of the procurement  activities of the government.
In response to the auditors’ repeated findings about single audit  compliance, the USVI government stated that it is committed to  completing and submitting its single audit reports within 9 months after  the end of the fiscal year in accordance with federal laws and regulations.  However, the government plans to request and obtain a written extension  from its cognizant agency if the audit cannot be completed within the   9-month deadline. For fiscal years 2003 and 2004, the auditor  recommended that the USVI Department of Finance develop procedures  to accelerate the bank reconciliation process and establish procedures  that include the review and approval of the reconciliations by a member of  management. The government responded that it will hire employees to  assist with the reconciliation process, and it will change its policies and  procedures for recording and handling deposits. At the 2006 IGFOA  Conference held in May 2006, USVI government officials reported that  with the implementation of a new Enterprise Resource Planning System,  they expect timely reporting, reconciliations, information to decision  makers, and completion of single audits, as well as a reduction or  elimination of audit findings.
section_title: Conclusions
paragraphs: American Samoa, CNMI, Guam, and USVI face daunting economic, fiscal,  and financial accountability challenges. The viability of their economies  depends on a few key industries. While Guam will benefit from DOD’s  decision to reassign troops from Japan to Guam, changes in treaties, tax  laws, and other external events have or will likely negatively affect the  other insular areas’ key industries. OIA has a number of initiatives  underway to promote economic development in the insular areas. OIA’s  efforts in helping create linkages between the business communities in the  U.S. states and the insular areas are key to helping meet some of these  challenges. Nevertheless, the islands would benefit from formal periodic  OIA evaluation of its conferences and business-opportunity missions,  including assessments of the cost and benefit of its activities and the  extent to which these efforts are creating partnerships with the economies  of other nations.
A healthy private sector can improve the insular areas’ fiscal condition by  increasing local tax revenues. The fiscal condition of three of the four  insular areas generally worsened during fiscal years 2001 to 2004, with the  fourth—American Samoa—showing a more stable trend than the other  insular areas.
Efforts to meet formidable fiscal challenges and build strong economies in  the insular areas are hindered by delayed and incomplete financial  reporting that does not provide officials with the timely and complete  information they need for effective decision making. Questions about the  reliability and completeness of the reporting have prevented auditors from  issuing unqualified, or “clean,” opinions on the island governments’  financial statements. Auditors also identified many weaknesses likely to  have a material, detrimental effect on the insular area governments’  accountability over federal funds in their reviews of internal controls over  financial reporting and compliance with major federal grant requirements.
OIA officials monitor the insular area governments’ progress in submitting  single audit reports, and OIA provides funding to improve financial  management. Other agencies that provide funding for the insular areas  provide their own oversight, such as their monitoring of entities with high- risk designations. Yet, progress has been slow and inconsistent, leaving  the insular areas in current economic, fiscal, and financial difficulty. The  benefit to the insular areas of past and current assistance is unclear, as is  the way toward prosperity and fiscal stability. Federal agencies and the  insular area governments have sponsored and participated in conferences,  training sessions, and other programs to improve accountability, but  knowing what has and hasn’t been effective and drawing the right lessons  from this experience is hampered by a lack of formal evaluation and data  collection, the diffusion of responsibility with little coordination between  agencies, and no central access to information. The conscientious yet  disparate efforts of many federal agencies now individually engaged in  improving the insular areas’ economic development, fiscal stability, and  financial accountability could make more efficient use of government and  human resources. In a planned and well-coordinated effort, and with  feedback mechanisms for continuing improvement of that effort, federal  agencies can help the insular areas achieve the economic, fiscal, and  financial conditions expected by nationals and citizens of a developed  nation.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of the Interior direct the Deputy  Assistant Secretary for Insular Affairs to:  Increase coordination activities with officials from other federal grant- making agencies on issues of common concern relating to the insular area  governments, such as late single audit reports, high-risk designations, and  deficiencies in financial management systems and practices.
Conduct formal periodic evaluation of OIA’s conferences and business  opportunities missions, assessing their impact on creating private sector  jobs and increasing insular area income.
Develop a framework for OIA employees to use in conducting site visits to  help ensure objectives are achieved, to assure that relevant information is  shared with the responsible officials, and to allow more efficient and  effective monitoring of issues.
Develop and implement procedures for formal evaluations of progress  made by the insular areas to resolve accountability findings and set a time  frame for achieving clean audit opinions.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from DOI. In  commenting on a draft of this report, DOI officials agreed with our  conclusions and recommendations, stating that our recommendations are  consistent with OIA’s top priorities and ongoing activities. DOI’s specific  comments on each recommendation are summarized below.
DOI officials agreed with our recommendation to increase coordination  with officials from other federal grant-making agencies on issues of  common concern. While DOI officials noted that it currently has processes  to promote coordination with other federal agencies, additional  coordination efforts are underway. Specifically, DOI officials stated that in  fiscal year 2005, OIA began preparations for a conference to be held in  June 2007 that will bring together officials from the federal grantor  agencies and the insular areas, to coordinate efforts to address issues  related to material findings identified in single audit reports and other  financial management issues, including high-risk designations. We  encourage OIA to utilize the planned conference to address accountability  issues of common concern and use the results of the conference as a basis  for regularly scheduled ongoing monitoring and followup on these issues.
DOI officials commented that they agree with our recommendation that  OIA conduct periodic evaluation of its conferences and business  opportunities missions because such evaluation of all federal activities is  worthwhile. DOI officials added that while these conferences and missions  are the primary activities through which OIA pursues its top priority for  the insular areas, the costs associated with these activities are only a  fraction of a percent of OIA’s budget. Nevertheless, OIA supports  evaluating these activities.
DOI officials agreed with our recommendation that a framework be  developed for OIA employees to use in conducting site visits to ensure  objectives are achieved, assure that relevant information is shared with  responsible officials, and to allow more effective monitoring of issues. In  its comments, DOI officials referred to a form in its Financial Assistance  Manual, that was modified during fiscal year 2006, to better ensure that  the required grant and project information is included in the project file  after each site visit. While inclusion of this information for individual  grants or projects should be valuable, our recommendation envisions  developing a broader framework that would include information beyond  that dealing with individual OIA grants or projects to include information  about each of the insular areas’ financial accountability environments. The  information to be collected in this broader framework would include the  status of required single audit reports, the progress of actions to resolve  reported internal control weaknesses, and current needs for technical  assistance, capacity building, and staff level expertise. This information  should also be integrated into a comprehensive monitoring process.
DOI officials also agreed with our recommendation that OIA develop and  implement procedures for formal evaluations of progress made by the  insular areas to resolve accountability findings and set a time frame for  achieving clean audit opinions. In its comments, DOI officials noted that it  has a formal process for monitoring and tracking the insular areas’  resolution of audit findings in place. DOI officials also indicated that they  will consider establishing a timetable for achieving unqualified (“clean”)  audit opinions after the insular areas have had sufficient time to fully  implement corrective actions to resolve material findings identified in the  fiscal year 2004 and 2005 single audits. While these actions directed at  improved monitoring and resolution of audit findings are a step in the right  direction, they do not specifically address the broader accountability  issues highlighted in our draft report. In this regard, the inability of the  insular areas to achieve unqualified audit opinions over a number of years  indicates the need for more attention and formal evaluation of progress  toward to resolving accountability problems as called for by our  recommendation in this area.
In addition to providing copies of this report to your office, we will send  copies of this report to other appropriate committees. We will also provide  copies of this report to interested Congressional Committees and to the  Secretary of the Interior as well as to the governors and delegates of the  insular areas. We will also make copies available to other interested  parties upon request. In addition, the report will be available at no charge  on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact Jeanette Franzel, Director, Financial Management and Assurance  at (202)512-9471 or Franzelj@gao.gov, or David Gootnick, Director,  International Affairs and Trade at (202)512-4128 or gootnickd@gao.gov.
Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report. GAO staff that made  major contributions to this report are listed in appendix V.
section_title: Appendix I: Matters Leading to Qualified Audit Opinions
paragraphs: Appendix I: Matters Leading to Qualified  Audit Opinions Unable to verify the accuracy of the due to/from other  funds—pooled cash due to the lack of reliance on the  internal control system.
Unable to verify the amount due from other governments  and advances from grantors of the Special Revenue  Fund due to the condition of the insular area’s records.
Unable to confirm the $182,320 due from American  Samoa Medical Center Authority—Lyndon B. Johnson  Tropical Medical Center (Medical Center) since another  auditor disclaimed their opinion on the Medical Center.
Unable to verify the accuracy of the physical inventory  records.
Unable to ensure the physical presence and cost of  recorded fixed assets and the records were incomplete.
Unable to obtain sufficient audit evidence to determine if  bank overdrafts represented held checks (accounts  payable) or actual overdrafts. No adjustments had been  made to accounts payable.
Unable to obtain and test detailed schedules of the  immigration deposits.
Unable to obtain from the Territory’s Attorney General  an adequate discussion, evaluation, or estimation of  pending or threatened litigation.
Unable to obtain from the Attorney General any  information on settlement negotiations with its former  workers’ compensation carrier.
Sufficient auditing procedures could not be performed  on the compensated balances recorded as of  September 30, 2001.
In accordance with GASB 33, the insular area didn’t  restate the beginning fund balance of the general fund  for amounts that would have been deferred as of  September 30, 2000.
Unable to be satisfied as to the amounts due from other  governments and advances from grantors of the Special  Revenue Fund as of September 30, 2001, due to the  conditions of the American Samoa Community College  records.
Unable to satisfy the validity of the amounts due from  taxpayers due to the state of the insular area’s records.
Accuracy of the beginning fund balance due to noted  evidence of a failure of identified controls in preventing  or detecting misstatements of accounting information  and a lack of appropriate management oversight and  review and approval of transactions.
The insular area did not record a liability for workers’  compensation claims that occurred prior to 9/30/2003.
Auditors disclaimed an opinion on the American Samoa  Telecommunication Authority because the entity did not  maintain accurate inventory records and was unable to  reconcile the general ledger to the physical inventory,  cost of PP&E was no longer available, and the account  receivable subsidiary records include sufficient  discrepancies causing the system to be unreliable.
In the opinion of the American Samoa  Telecommunication Authority’s auditor, PP&E not  recorded at cost to conform with U.S. GAAP and the  lack of evidence available to test the beginning of the  year accounts receivable balance caused the auditors to  be unable to form an opinion on the amount of operating  revenues.
Auditors disclaimed an opinion on the American Samoa  Medical Center Authority—Lyndon B. Johnson Tropical  Medical Center because the entity could not locate  documentation supporting accounting records and  auditors were unable to satisfy themselves regarding  inventory quantities.
The financial statements of the Medical Center were not  audited.
Inability to obtain response from CNMI’s Attorney  General regarding litigation, claims, and assessments.
Inability to determine the propriety of fixed assets and  fund equity of the General Fixed Assets Account  Group.
Omission of the Northern Marianas College from the  university and college fund type—Higher Education  Fund.
Omission of the Public School System from the  component unit—School District.
Omission of the Commonwealth Government  Employees Credit Union from the component unit— Governmental Fund.
Lack of recognition of certain tax revenues as  nonexchange transactions.
The propriety of receivables from federal agencies for  the Fiduciary Fund Type—Agency Fund; and other  receivables and accounts payable of the Northern  Mariana Islands Government Health and Life Insurance  Trust Fund. Unable to express an opinion on the  General Long-Term Debt Account Group.
Omission of the Commonwealth Utilities Corporation  from the component units—Proprietary Funds.
Inability to determine the propriety of receivables from  federal and other agencies, advances, other liabilities  and accruals, and reserve for continuing appropriations  and their effect on the determination of revenues and  expenditures for all governmental fund types.
Inability to determine if the due to component units was  fairly stated for all government funds due to  inadequacies in the accounting records.
Inadequacies in the accounting records regarding  accounts payable.
Inability to determine the propriety of inventory and  capital assets of the Northern Marianas College.
Inability to determine the propriety of taxes receivable.
Inability to determine the propriety of inventory, due  from grantor agencies, utility plant and obligations  under capital lease of the Commonwealth Utilities  Corporation.
Inadequacies in the accounting records regarding tax  rebates payable.
Inadequacies in the accounting records regarding  capital assets of the Northern Marianas College and  inventory, federal agencies receivables, utility plant,  accounts payable, and obligations under capital lease  of the Commonwealth Utilities Corporation.
Inability to access tax-related records or perform  procedures as to the effectiveness of the systems  tax-related balances.
Incomplete inclusion of the Guam Department of  Education within the general fund due to  nonavailability of information from the Department.
Incomplete presentation of the General Fixed  Assets Account Group or incomplete presentation  of capital assets.
Accounting records inadequate to support capital  assets amounts, net of accumulated depreciation.
Incomplete presentation of the General Long-Term  Debt Account Group.
Lack of audited financial statements for the Tourist  Attraction Fund, Territorial Highway Fund, the Port  Authority of Guam, and the Guam Waterworks  Authority.
Lack of audited financial statements for or omission  of the Guam Telephone Authority.
Lack of audited financial statements for or omission  of the Guam Memorial Hospital Authority.
Omission of the Pension Trust Fund or lack of  audited financial statements for the Government of  Guam Retirement Fund.
Omission of the Guam Council on the Arts and  Humanities Agency, a Special Revenue Fund.
Lack of audited financial statements for or omission  of the Guam Community College.
Lack of audited financial statements for or omission  of the Guam Visitors Bureau.
Omission of the Guam Rental Corporation.
Lack of audited financial statements for or omission  of the Guam Housing Corporation.
Lack of audited financial statements for the Guam  Economic Development and Commerce Authority.
Inability to determine propriety of the General Fund  continuing appropriations balance.
Inability to determine propriety of the inventory  balance for the State Agency Surplus, an Internal  Service Fund—Proprietary Fund Type.
Receivables recorded in the Solid Waste  Management Fund and in the Federal Grant  Assistance Fund were unsubstantiated.
Absence of an accrual for the closure and  postclosure costs of a solid waste landfill.
Inability to determine the propriety of capital assets  and related amounts for accumulated depreciation  and depreciation expense.
Not recording a provision for landfill closure and  postclosure costs in governmental activities or general  long-term debt account group or the effect of the  exclusion of a provision on beginning net assets.
Unable to obtain sufficient evidence that land held for  sale (amounting to about $25 million) was fairly stated.
Virgin Islands Lottery had not been audited for  business-type activities.
Omission of financial data of the Roy L. Schneider  Hospital in the public benefit corporations column.
Unable to determine the amount of cash on deposit  with, and due from, the U.S. Virgin Islands Department  of Finance as of September 30, 2001.
Auditors of the Juan F. Luis Hospital were unable to  satisfy themselves about management’s contention that  the preautonomy accounts payable not recorded as a  liability as of September 30, 2001, were the  responsibility of the government.
Omission of the general fixed assets account group.
Not maintaining accounting records for income tax  receivables stated at $87 million.
Auditor of the VI Government Hospital and Health  Facilities Corporation (Roy L. Schneider Hospital) was  unable to satisfy themselves as to the propriety of  certain transactions recorded in the statement of net  assets.
Auditor of the VI Housing Authority (VIHA) and VI  Housing Finance Authority (VIHFA) financial  statements, a discretely presented component unit, was  unable to obtain sufficient evidence as to the propriety  of the revenue and expenses reported by VIHA, or to  determine whether capital assets were fairly stated.
VIHA did not report an equity interest in a joint venture  because it had not been able to determine its carrying  value.
Unable to determine the extent to which the  unemployment insurance fund (a major fund) may have  been affected by the exclusion of a receivable for  unemployment insurance contributions due to  inadequate records.
Not maintaining accounting records for corporate  income tax receivables related to tax year 2002 in the  general fund and governmental activities.
Unable to determine the extent to which the revenue,  change in fund balance/net assets of the general fund  and the governmental activities may have been affected  by the exclusion of a receivable for corporate income  taxes pertaining to tax year 2002 in the beginning net  assets due to inadequate records.
Government Employees’ Retirement System (GERS), a  fiduciary component unit (pension trust fund), is not  recording contributions pursuant to the Early Retirement  Act of 1994, had asset valuation issues, and  adjustments that may have been necessary to reflect  certain balances with the USVI government’s  Department of Finance.
Unable to determine the effects of adjustments that  might have been necessary if the other auditors had  obtained sufficient audit evidence as to whether capital  assets and land held for sale were fairly stated in the  financial statements of VIHA and VIHFA, respectively.
Omission of a liability for workers’ compensation claims  from the basic financial statements.
section_title: Appendix II: Internal Control Weaknesses and Compliance with Requirements Applicable to Major Federal Programs
subsections: section_title: American Samoa
paragraphs: The American Samoan government has seen decreases in the number of  material weaknesses and reportable conditions that auditors reported for  internal control over financial reporting. The following table shows the  numbers of material weaknesses and reportable conditions reported for  internal control over reporting and compliance with requirements  applicable to each major federal program, for fiscal years 2001-2004.
In examining the internal controls the government of CNMI uses to  provide reasonable assurance that it is properly recording financial  transactions and safeguarding public funds, the auditors found 10 or more  problems significant enough to warrant reporting. Most of these problems  were material weaknesses in internal control over financial reporting. As  shown in table 19, the auditors also reported numerous problems in  compliance with the requirements for major federal programs.
section_title: Guam
paragraphs: The numerous material weaknesses reported by Guam’s auditors reveal  the lack of sound internal controls needed to ensure that (1) transactions  are properly recorded, (2) assets are adequately safeguarded, and   (3) federal funds are administered in accordance with the applicable  requirements of laws, regulations, contracts, and grants. Table 20 shows  the total number of findings from the financial statement audit as reported  by the auditors on compliance with (1) internal controls over financial  reporting and (2) with requirements applicable to each major federal  program.
USVI audit findings (material weaknesses and reportable conditions) for  both internal controls over financial reporting and compliance with  requirements for major federal programs ranged from a total of 31 to 61  for fiscal years 2001 through 2003, as shown in table 21.
section_title: Appendix III: DOI Inspector General Reports on Four Insular Areas for Calendar Years 2000—2005
subsections: section_title: American Samoa
paragraphs: Audit Report, Assessment and Collection of Taxes, American Samoa  Government. No. 2002-I-0003. Guam: November 15, 2001.
Audit Report, U.S. Fish and Wildlife Service Federal Assistance Grants  Administered by the American Samoa Government, Department of  Marine and Wildlife Resources, from October 1, 2001, through   September 30, 2003. No. R-GR-FWS-0013-2004. Reston, Va.: March 31,  2005.
Audit Report, Saipan Harbor Improvement Project, Commonwealth  Ports Authority, Commonwealth of the Northern Mariana Islands.   No. 2003-I-0073. Washington, D.C.: September 30, 2003.
section_title: Guam
paragraphs: Audit Report, U.S. Department of Defense Contract Funds, Department  of Education, Government of Guam. No. 00-I-172. Washington, D.C.:   January 10, 2000.
Survey Report, Guam U.S. Passport Office, Government of Guam. No. 00- I-332. Washington, D.C.: April 14, 2000.
Audit Report, Loan Programs, Guam Economic Development Authority,  Government of Guam. No. 01-I-417. Guam: September 21, 2001.
Audit Report, Qualifying Certificate Program, Guam Economic  Development Authority, Government of Guam. No. 01-I-419. Guam:  September 30, 2001.
Audit Report, Bond Services, Lease Operations and Trust Fund  Activities, Guam Economic Development Authority, Government of  Guam. No. 2002-I-0016. Guam: March 28, 2002.
Audit Report, Management of Federal Grants, Department of Mental  Health and Substance Abuse, Government of Guam. No. 2002-I-0036.  Guam: August 19, 2002.
Audit Report, Guam Waterworks Authority, Government of Guam.   No. 2003-I-0072. Washington, D.C.: September 30, 2003.
Audit Report, U.S. Fish and Wildlife Service Federal Assistance Grants  Administered by the Government of Guam, Department of Agriculture,  Division of Aquatic and Wildlife Resources from October 1, 1999, to  September 30, 2000. No. R-GR-FWS-0029-2004. Reston, Va.: March 4, 2004.
Audit Report, Internal Controls over Cashier Operations, Government of  the Virgin Islands. No. 00-I-166. Washington, D.C.: January 3, 2000.
Audit Report, Administration of Federal Grants, University of the  Virgin Islands. No. 00-I-216. Washington, D.C.: February 16, 2000.
Audit Report, Head Start Program Grants, Department of Human  Services, Government of the Virgin Islands. No. 00-I-499. Washington,  D.C.: June 14, 2000.
Audit Report, Low Income Housing Program Grants, Virgin Islands  Housing Authority. No. 00-I-625. Washington, D.C.: August 24, 2000.
Audit Report, Environmental Protection Agency Grants, Department of  Public Works, Government of the Virgin Islands. No. 00-I-696.  Washington, D.C.: September 2000.
Audit Report, Administrative Functions, Legislature of the Virgin  Islands. No. 01-I-107. Washington, D.C.: December 29, 2000.
Audit Report, Administration and Collection of Excise Taxes, Bureau of  Internal Revenue, Government of the Virgin Islands. No. 01-I-291.  Washington, D.C.: March 30, 2001.
Audit Report, Billing and Collection Functions, Virgin Islands Port  Authority, Government of the Virgin Islands. No. 01-I-303. Washington,  D.C.: March 30, 2001.
Audit Report, Virgin Islands Lottery, Government of the Virgin Islands.  No. 01-I-290. Washington, D.C.: May 11, 2001.
Audit Report, Payroll Operations, Department of Education,  Government of the Virgin Islands. No. 01-I-330. Washington, D.C.: May 14,  2001.
Audit Report, Virgin Islands Fire Service, Government of the Virgin  Islands. No. 2002-I-0001. (Virgin Islands: October 30, 2001).
Audit Report, Job Training Partnership Act Programs, Department of  Labor, Government of the Virgin Islands. No. 2002-I-0002. (Virgin Islands:  November 7, 2001).
Audit Report, Virgin Islands Housing Finance Authority, Government of  the Virgin Islands. No. 2002-I-0009. Virgin Islands: December 31, 2001.
Audit Report, Administrative Functions, Virgin Islands Police  Department, Government of the Virgin Islands. No. 2002-I-0010. Virgin  Islands: February 13, 2002.
Audit Report, Federal Highway Grants, Department of Public Works,  Government of the Virgin Islands. No. 2002-I-0042. Virgin Islands: August  16, 2002.
Audit Report, Grants for the Construction of Health Care Facilities,  Department of Health, Government of the Virgin Islands. No. 2002-I-0043.  Virgin Islands: September 20, 2002.
Audit Report, Professional Service Contracts, Government of the Virgin  Islands. No. 2002-I-0046. Virgin Islands: September 30, 2002.
Audit Report, Public Finance Authority, Government of the Virgin  Islands. No. 2003-I-0002. Washington, D.C.: November 22, 2002.
Audit Report, Compliance with the Memorandum of Understanding  Between the Governor of the Virgin Islands and the Secretary of the  Interior. No. 2003-I-0003. Virgin Islands: November 27, 2002.
Audit Report, Grant for Solid Waste and Wastewater Disposal Projects,  Department of Public Works, Government of the Virgin Islands. No. 2003- I-0012. Herndon, Va.: March 31, 2003.
Audit Report, Grant for Hazard Mitigation Projects, Virgin Islands  Police Department, Government of the Virgin Islands. No. 2003-I-0031.  Herndon, Va.: March 31, 2003.
Audit Report, Grant for Hurricane Recovery Projects, Government of the  Virgin Islands. No. 2003-I-0032. Herndon, Va.: March 31, 2003.
Audit Report, Follow-up of Recommendations Relating to Internal  Revenue Taxes, Bureau of Internal Revenue, Government of the Virgin  Islands. No. 2003-I-0059. Herndon, Va.: August 29, 2003.
Audit Report, Emergency Services Surcharge Collections by Innovative  Telephone Corporation on Behalf of the Government of the Virgin  Islands. No. 2003-I-0067. Herndon, Va.: September 26, 2003.
Audit Report, Use of Official Credit Cards, Government of the Virgin  Islands. No. V-IN-VIS-0104-2003. Herndon, Va.: August 27, 2004.
Audit Report, Financial Arrangements Between the Government of the  Virgin Islands and Financial Institutions. No. V-IN-VIS-0069-2004.  Herndon, Va.: September 30, 2004.
Audit Report, Procurement Practices, Virgin Islands Port Authority,  Government of the Virgin Islands. No. V-IN-VIS-0001-2004. Washington,  D.C.: March 28, 2005.
Audit Report, Grants for Waste Disposal Projects, Department of Public  Works, Government of the Virgin Islands. No. V-IN-VIS-0072-2004.  Washington, D.C.: May 11, 2005.
Audit Report, Indirect Cost Fund, Government of the Virgin Islands.   No. V-IN-VIS-0110-2003. Washington, D.C.: June 22, 2005.
section_title: Appendix IV: Comments from the Department of the Interior
section_title: Appendix V: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: The following individuals made important contributions to this report:  Norma Samuel, Emil Friberg, Jr., James Wozny, Maxine Hattery, Gina  Ross, Sandra Silzer, Seyda Wentworth, and Elwood White.