Compact of Free Association: Single Audits Demonstrate Accountability Problems over Compact Funds
Published: 2003-10-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 1986, the United States entered into a Compact of Free Association (Compact) that provided about $2.1 billion in U.S. assistance from 1987 through 2003 to the Pacific Island nations of the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI). GAO has issued a number of reports raising concerns about the effectiveness of this assistance. GAO was asked to review possible FSM and RMI misuse of Compact funds. We reviewed single audits for 1996 through 2000 and this report summarizes the audit results.
section_title: What GAO Found
paragraphs: GAO's review of 30 single audit reports for the FSM, 4 FSM states, and the RMI for the years 1996 through 2000 identified pervasive and persistent noncompliance with Compact requirements and financial statement-related audit findings. These single audit reports identified 458 audit findings relevant to the Compact. Significant numbers of these audit findings occurred during each year of the 5-year period and at each of the auditees. In addition, successive single audits identified recurring audit findings over the 5-year period despite corrective action plans prepared by the auditees. While none of the audit findings specifically discussed misuse of Compact funds, they did describe noncompliance with Compact requirements and financial management problems in areas that GAO considers highly susceptible to misuse, such as poor control over cash and equipment. When considered in conjunction with the qualified opinions or disclaimers of opinion on the financial statements in all 30 reports and for 60 percent of the Schedules of Expenditure of Federal Awards required by the Single Audit Act, the audit findings reveal one thing: overall poor accountability of Compact funds. In responding to GAO's previous reviews of the original Compact, Interior officials expressed concerns about the U.S. government's limited ability to enforce accountability over Compact funds due to certain provisions of the Compact and the related fiscal procedures agreement (FPA). Recently, an Interior official noted that departmental officials have been frustrated with the lack of tools to administer or track federal assistance in a manner that could reasonably ensure that such assistance is having its intended effect. GAO found that the amended Compacts and related FPAs, which are scheduled to become effective upon legislative approval in the three countries, include many strengthened reporting and monitoring measures that could improve accountability, if diligently implemented. For example, funds could be withheld for noncompliance with Compact terms and conditions. In addition, joint economic committees and an Interior oversight team will focus on monitoring and overseeing Compact funds.

section_title: Letter
paragraphs: In 1986, the United States entered into a Compact of Free Association  (Compact) with the Pacific Island nations of the Federated States of  Micronesia (FSM) and the Republic of the Marshall Islands (RMI).  Through  the Compact, the United States has provided about $2.1 billion in  assistance to these nations in the form of direct funding and federal  services and programs.  Further, the Compact established U.S. defense  rights and obligations in the region and allowed for migration from both  nations to the United States.  The Compact provisions that address  economic assistance were scheduled to expire in 2001; however, they  remained in effect while the United States negotiated amended Compacts  with each nation.
Over the last several years, we issued reports that raised concerns about  the effectiveness of the FSM and the RMI use of and accountability over  U.S. assistance provided under the Compact. In commenting on the  accountability issues raised in our 2000 report, officials at the Department  of the Interior, the agency responsible for overseeing the assistance  program, pointed out the limited ability of the United States to enforce  accountability over Compact funds because basic elements of federal grant  management were lacking.  They also noted that additional personnel and  funding could have been committed to Compact oversight, but the United  States would still have had almost no ability to influence fiscal decisions  made by the FSM and the RMI.  In recent testimony, an official from the  Office of Insular Affairs, Department of the Interior, noted that the  department was hampered by the fact that the Compact provided for large,  loosely defined grants with no express enforcement mechanisms to ensure  the efficient and effective expenditure of funds.  This official also stated  that departmental officials “have been greatly frustrated with the lack of  tools to properly administer or track Federal assistance in a manner that  could reasonably ensure that such assistance is having its intended effect.”
In conjunction with our monitoring and reporting on Compact  renegotiation efforts, you asked us to review possible FSM or RMI misuse  of Compact funds.  The annual single audits of the FSM and the RMI, which  are required by the fiscal procedures agreement (FPA) for implementing  the Compact, are a potential source of this information.While the single  audit reports do not specifically use the phrase “misuse of Compact funds,”  many of the problems they identify are in areas that are susceptible to the  misuse of funds.
We obtained the 30 single audit reports for the years 1996 through 2000 for  the national government of the FSM; the FSM state governments of Chuuk,  Kosrae, Pohnpei, and Yap; and the national government of the RMI.  We  reviewed and summarized the audit findings contained in these reports, the  most recently completed reports available at the start of our review, to  identify instances of possible misuse of Compact funds.  On February 12,  March 12, and March 13, 2003, we briefed your staffs on our results.  This  report summarizes our briefing results regarding the single audit reports.  In addition, it provides information on the enhanced accountability  measures that are built into the amended or renegotiated Compacts.  The  amended Compacts and related FPAs, which are scheduled to become  effective upon legislative approval in the United States, the FSM, and the  RMI, include many strengthened reporting and monitoring measures that  could improve accountability, if diligently implemented.(Further details  on our scope and methodology are provided later in this report.)
subsections: section_title: Background
paragraphs: In 1947, the United Nations (U.N.) created the Trust Territory of the Pacific  Islands.  The United States entered into a trusteeship with the U.N. Security  Council and became the administering authority of the current islands of  the FSM and the RMI.  The United States administered the islands under  this trusteeship until 1986, when it entered into a Compact of Free  Association with the FSM and the RMI, both of which are located in the  Pacific Ocean.
The original Compact represented both a continuation of U.S. rights and  obligations first embodied in the U.N. trusteeship agreement and a new  phase in the unique and special relationship that had existed between the  United States and these island nations.  It also provided a framework for  the United States to work toward achieving its three main goals of  (1) securing self-government for the FSM and the RMI, (2) assisting the  FSM and the RMI in their efforts to advance economic development and  self-sufficiency, and (3) ensuring certain national security rights for all of  the parties.
The Department of the Interior’s Office of Insular Affairs was responsible  for disbursing and monitoring Compact funds.  For the 15-year period from  1987 through 2001, it provided funding at levels that decreased every 5  years.  For 2002 and 2003, while negotiations to renew the expiring  Compact provisions were ongoing, funding levels increased to equal an  average of the funding provided during the previous 15 years.  For 1987  through 2003, total U.S. assistance to the FSM and the RMI to support  economic development is estimated, based on Interior data, to be about  $2.1 billion.
In addition, the Compact identified several services that U.S. agencies  would supply to the FSM and the RMI and further stated that these  agencies could provide direct program assistance as authorized by the  Congress.  This assistance included grants, loans, and technical assistance  that, for fiscal years 1987 through 2001, totaled about $700 million from 19  U.S. agencies.  The Department of the Interior was responsible for  supervising, coordinating, and monitoring program assistance, while the  Department of State was responsible for directing and coordinating all U.S.  government employees in foreign countries, except those under the  command of U.S. area military commanders.
In 2000, we reported that one tool that should be used for ensuring  accountability over Compact assistance was the annual audits required by  the Compact.  FPAs for implementing the Compact required that financial  and compliance audits be conducted in accordance with the provisions of  the Single Audit Act. This act is intended to, among other things, promote  sound financial management, including effective internal controls, with  respect to the use of federal awards.  Entities that expend $300,000 or more  in federal awards in a year are required to comply with act’s requirements.  Further, the act requires entities to  (1) maintain internal control over  federal programs, (2) comply with laws, regulations, and the provisions of  contracts or grant agreements, (3) prepare appropriate financial  statements, including a Schedule of Expenditures of Federal Awards,  (4) ensure that the required audits are properly performed and submitted  when due, and (5) follow up and take corrective actions on audit findings.  Deloitte Touche Tohmatsu, an independent public accounting firm,  conducted the 30 single audits that we reviewed for the FSM; the 4 FSM  states of Chuuk, Kosrae, Pohnpei, and Yap; and the RMI.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objective was to review possible FSM and RMI misuse of Compact  funds.  One source of this type of information is the annual single audits  that the fiscal procedures agreement for the implementation of the  Compact requires the FSM and the RMI to obtain.
We obtained the single audit reports for the years 1996 through 2000, the  most recent single audit reports available at the time of our review, for the  national government of the FSM; the FSM state governments of Chuuk,  Kosrae, Pohnpei and Yap; and the national government of the RMI.  In total,  this amounted to 30 single audit reports representing 5 years, a period that  we considered sufficient for identifying misuse of funds and common or  persistent compliance and financial management problems involving  Compact funds.  While these reports did not specifically identify any  findings as instances of misuse of Compact funds, they did identify  problems that could leave Compact funds susceptible to misuse, including  poor control over cash and equipment.
We reviewed each report to identify and categorize the audit findings  relevant to the Compact, paying particular attention to those involving  assets or other financial accounts (i.e., cash and equipment) that we  considered particularly susceptible to misuse.  (We did not independently  assess the quality of these audits or the reliability of the audit finding  information.  However, based on the fact that the audited entities  developed corrective action plans for about 93 percent of the findings  contained in the audit reports, we concluded that the audit findings provide  an accurate representation of the problems reported.)  We also reviewed  the reports to identify auditee responses to the audit findings and their  corrective action plans.  These plans indicate auditee agreement or  disagreement with the audit findings and the actions they planned to take  or had taken to fix the findings.  In addition, we reviewed the audit findings  to determine if they recurred in successive single audits over the 5-year  period.  We completed our review of each single audit report by identifying  and categorizing the auditor’s opinions on the financial statements and the  Schedules of Expenditures of Federal Awards.
In responding to our previous review of the Compact program, Interior  officials expressed concerns about the U.S. government’s limited ability to  enforce accountability over Compact funds due to certain provisions of the  original Compact and the related FPA.  In light of these concerns, we  reviewed the amended Compacts and related FPAs to determine if they  included measures that could increase accountability over Compact funds.  In addition, we supplemented our review of these documents with a  discussion about the amended Compacts with Interior officials to  determine if the new provisions addressed their prior concerns about  limited actions available to them for holding the FSM and the RMI  accountable.
Interior’s Compact-related expenditures represented about 80 percent of  the total expenditures of U.S. assistance made by the FSM, the 4 FSM  states, and the RMI during the 5-year period.  Because of the relatively  small amount of funding from other federal agencies at these recipients, we  did not discuss finding resolution with representatives of those agencies.
We conducted our audit from August 2002 through May 2003 in accordance  with generally accepted government auditing standards.  We requested  written comments on a draft of this report from the governments of the  FSM and the RMI and the Secretary of the Interior.  Their comments are  discussed in the section entitled Government and Agency Comments and  Our Evaluation and are reprinted in appendixes I, II, and III.  Further, we  considered all comments and made changes to the report, as appropriate.
section_title: Pervasive Audit Findings Demonstrate Poor Accountability over Compact Funds
paragraphs: Single audits of the FSM, the four FSM states, and the RMI identified  pervasive audit findings involving noncompliance with Compact  requirements and financial statement problems in areas that we consider  highly susceptible to misuse.  In addition, the independent auditor  performing the single audits issued qualified opinions or disclaimers of  opinion on the financial statements in all 30 single audit reports reviewed  and for 60 percent of the Schedules of Expenditures of Federal Awards.  Taken together, these findings and opinions demonstrate that the FSM, the  four FSM states, and the RMI did not provide reasonable accountability  over Compact funds and assurance that these funds were used for their  intended purposes.
subsections: section_title: Single Audit Reports Identify Pervasive Audit Findings Involving Compact Funds
paragraphs: The 30 single audit reports that we examined contained about 90 audit  findings for each year of the 5-year period covered by our review.  In total,  they contained 458 audit findings relevant to Compact funds and significant  numbers of findings for each of the auditees for which we reviewed single  audit reports.  Further, successive single audits during the 5-year period  contained recurring audit findings despite corrective action time frames  established by the auditees and our conclusion that few of the findings  involved significant issues, such as implementing an accounting system,  that could be expected to require more than 2 years to correct.
Figure 1 shows the number of audit findings reported annually from 1996  through 2000.  It demonstrates that the auditors performing the 30 single  audits in our review identified a significant number of audit findings both in  total and in each year of the 5-year period of our review.
In addition, the 30 audit reports identified a significant number of audit  findings for each of the auditees.  Figure 2 shows the percentages of the 458  audit findings related to Compact funds for each auditee.
Office of Management and Budget (OMB) Circular No. A-133, Audits of  States, Local Governments, and Non-Profit Organizations, establishes  policies for federal agency use in implementing the Single Audit Act, as  amended, and provides an administrative foundation for consistent and  uniform audit requirements for nonfederal entities that administer federal  awards.  In part, the circular requires the auditee to follow up and take  corrective actions on audit findings identified by the single audits.  It  clarifies this requirement by stating that, at the completion of the single  audit, the auditee shall prepare a corrective action plan (CAP) to address  each audit finding included in the current year auditor’s report.  If the  auditee does not agree with the audit findings or believes corrective action  is not required, the CAP is to include an explanation of and justification for  this position.  Based on our review of the audit reports, the FSM, the four  FSM states, and the RMI generally fulfilled their responsibility to either  prepare a CAP or indicate their disagreement with the audit finding and  provide reasons for their disagreement.  As figure 3 shows, they prepared  CAPs for 93 percent of the audit findings identified by the single audits in  our review and indicated their disagreement and reasons for this  disagreement for 5 percent of the findings.
Our review of these CAPs showed that about 33 percent (138) included  anticipated completion dates, and, of these plans, only 4 percent (16)  indicated that the planned corrective actions would require more than 2  years to complete.  Based on a review of the CAPs that did not include  anticipated completion dates (287), we concluded that, with a few  exceptions,the problems addressed by these plans could be corrected  within a year.  For example, Financial Status Reports submitted to the  grantor agencies for fiscal year 2000 were not available during the single  audit of the RMI.  The auditors recommended that an adequate filing  system, including the maintenance of Financial Status Reports, be  maintained for all federal awards.  The CAP called for the Ministry of  Finance to ensure that an adequate filing system was in place and to review  status reports periodically.
Further analysis of the findings revealed that successive single audits  identified recurring audit findings over the 5-year period despite the time  frames identified in the auditee-prepared CAPs or our estimate of the  amount of time corrective action should take.  As figure 4 shows, many  audit findings that were identified in more than one single audit report  recurred in 3 or more years over the 5-year period.  The percentage of each  auditee’s single audit findings that recurred 3 or more years over the 5-year  period of our review ranged from RMI’s high of 69 percent to a low of 17  percent for the FSM.
section_title: Compliance and Financial Statement Problems Persisted over Compact Funds
paragraphs: The auditors categorized the audit findings related to the Compact into  three areas—federal award findings, local findings, and financial statement  findings.  Upon further review, we determined that 117 audit findings that  the auditors categorized as federal award findings or local findings  discussed problems related to compliance with Compact requirements, and  the remaining 341 discussed financial statement problems.  The auditors  who performed these single audits qualified or disclaimed their opinion on  all of the financial statements and about 60 percent of the Schedules of  Expenditures of Federal Awards generally because the auditees did not  provide them with all needed financial statements or documentation to  support transactions recorded in their books.  Taken together, the  compliance and financial statement findings and audit opinions  demonstrate poor accountability over Compact funds and an inability on  the part of the entities involved to provide assurances that all program  funds are used as intended.  They highlight the need for a stronger control  environment and greater efforts to implement control activities that  strengthen accountability and help ensure that Compact funds are used for  program purposes.
Compliance requirements for federal assistance set forth what is to be  done, who is to do it, the purpose to be achieved, the population to be  served, and how much can be spent in certain areas.  OMB’s Single Audit  Act guidance includes 15 compliance categoriesused by auditors to  report on compliance-related findings.  Our analysis of the compliance  categories the auditors cited for the Compact-related audit findings showed  that over half of the audit findings related to two categories—allowable  costs/cost principles and equipment and real property management.  The  first category, allowable costs/cost principles, specifies the allowability of  costs under federal awards.  For example, expenditures for 17 types of  projects or activities were allowable under the original Compact capital  account, including construction or major repair of capital infrastructure,  public and private sector projects, training activities, and debt service.  The second category, equipment and real property management, specifies  how federal award recipients should use, manage, and dispose of  equipment and real property.
The following examples illustrate the types of audit findings that the  auditors categorized into the 15 areas.
Kosrae advanced $93,000 in Compact Health and Medical Program funds  to off-island health providers for medical referrals.  The advances were  immediately expensed without reference to the specific medical  expenses actually incurred.  This is an example of a compliance finding  related to allowable costs/cost principles.
Kosrae incurred over $274,000 in expenditures of Compact Capital funds  that lacked proper supporting vendor’s invoices.  This is an example of a  compliance finding related to allowable costs/cost principles.
Chuuk transferred about $169,000 in Compact Capital funds to entities  (subrecipients) that have not been audited or reviewed for compliance  with Compact requirements.  This is an example of a compliance finding  related to subrecipient monitoring.
As mentioned earlier, the auditors performing the single audits also  categorized findings as financial statement findings.  The audit findings for  this category related to the reliability of financial reporting and involved  recording, processing, summarizing, and reporting financial data.  Unlike  the findings that related to compliance with Compact requirements, the  auditors did not tie the financial statement findings to the categories  contained in the Single Audit Act guidance.  Our review of these findings  identified 101 financial statement findings involving problems with assets  or accounts that we consider susceptible to misuse.  The following  examples illustrate financial statement findings related to assets or  accounts that we consider susceptible to misuse.
Yap’s three major bank accounts (general checking, savings, and  payroll) were not reconciled to bank records at the end of fiscal year  1999.  Differences between the amounts shown for these cash accounts  in Yap’s books and the bank records amounted to over $150,000.  The  auditors identified this lack of bank reconciliations as an internal  control weakness in Yap’s single audit reports for the years 1995 through  1999.  A record being out of balance is a risk factor auditors use to  identify the possibility of fraud.  This is an example of a cash problem.
The RMI had not conducted a physical inventory or updated property  records for equipment and real property.  As of September 30, 2000, RMI  reported that its equipment was worth about $11 million, but the auditor  could not substantiate this amount due to inadequate records.  The  auditor identified a lack of updated property records for the General  Fixed Asset Group in single audit reports for the years 1988 through  2000.  Missing documents, such as the property records for equipment in  this example, are a risk factor used by auditors to identify the possibility  of fraud.  This is an example of an equipment problem.
The 30 single audit reports included auditor opinions or disclaimers of  opinion on the financial statements and Schedules of Expenditures of  Federal Awards for the FSM, the four FSM states, and the RMI.  The  financial statements reflect a federal award recipient’s financial position,  results of operations or changes in net assets, and, where appropriate, cash  flows for the year.  The Schedules of Expenditures of Federal Awards show  the amount of expenditures for each federal award program during the  year.  If the auditors are not able to perform all of the procedures necessary  to complete an audit, they consider the audit scope to be limited or  restricted.  Scope limitations may result from the timing of the audit work,  the inability to obtain sufficient evidence, or inadequate accounting  records.  If the audit scope is limited, the auditors must make a  professional judgment about whether to qualify or disclaim an opinion.  A  qualified opinion states that, except for the matter to which the  qualification relates, the financial statements are fairly presented in  accordance with generally accepted accounting principles.  In a disclaimer  of opinion, the scope limitation is serious enough that the auditor does not  express an opinion.
The auditor’s opinions on the financial statements and Schedules of  Expenditures of Federal Awards for the 30 single audits in our review  reveal overall poor financial management.  The auditors performing these  single audits qualified or disclaimed their opinions on all of the financial  statements and about 60 percent of the Schedules of Expenditures of  Federal Awards generally because they were unable to obtain sufficient  evidence or adequate accounting records.  For example, the auditor  qualified its opinion on the FSM’s financial statements for the year 2000  because of the auditor’s inability to ensure the propriety of receivables  from other governments and missing financial statements for a component  unit.  In another example, the auditor did not express an opinion on  Chuuk’s financial statements for the year 1999 because of inadequacies in  the accounting records and internal controls, incomplete financial  statements for component units, and its inability to obtain audited financial  statements supporting investments.
The significant number of audit findings involving FSM and RMI  noncompliance with Compact requirements and weaknesses in their  financial management systems, along with auditor qualified opinions or  disclaimers of opinion on financial statements, echo the control and  accountability issues that we identified in our earlier reports on Compact  assistance.  Further, the pervasive and recurring nature of the compliance  and financial statement problems highlights (1) the need for stronger  control environments that will help ensure that Compact funds are used for  program purposes and (2) the limited progress made during the 5-year  period of our review in establishing accountability in the FSM, the four  FSM states, and the RMI that would provide reasonable assurance that  Compact funds are used for their intended purposes.
section_title: Amended Compact Agreements Contain Improved Accountability Measures
paragraphs: In responding to our previous reviews of the original Compact program,  Interior officials expressed concerns about the U.S. government’s limited  ability to enforce accountability over Compact funds due to certain  provisions of the original Compact and the related FPA.  According to these  officials, administrators have been reluctant to commit oversight resources  to the Compact when no enforcement mechanisms exist due to these  provisions.  The United States and the FSM signed an amended Compact in  May 2003.  The United States and the RMI signed an amended Compact in  April 2003.  These amended Compacts are awaiting legislative approval in  the United States, the FSM, and the RMI.  They contain strengthened  reporting and monitoring measures over the original Compact that could  improve accountability over Compact assistance, if diligently implemented.
According to Interior officials, the FPA in effect during the period of our  review created a financial management regimen unique in federal practice.  They explained that it was negotiated to give the FSM and the RMI  governments clear control over Compact funding and to limit the U.S.  government’s authority to intervene in spending decisions and, most  important, to withhold payments if the terms and conditions of funding  were violated.  More specifically, these officials explained that the expiring  FPAs lacked basic elements of federal grant management practice similar  to those in OMB Circular A-102, Grants and Cooperative Agreements with  State and Local Governments, which requires standard procurement  practices and cost principles.  They elaborated that, when coupled with the  full faith and credit provisions of the Compact, this lack of standards  limited the U.S. government’s response to mismanagement.  In summing  up, they stated that while additional personnel and funding could have  been committed to Compact oversight, the United States would still have  had almost no ability to influence fiscal decisions made by the FSM or the  RMI.
The amended Compacts could potentially cost the U.S. government about  $6.6 billion in new assistance.  Of this amount, $3.5 billion would cover  payments over a 20-year period (2004-23), while $3.1 billion represents  payments for U.S. military access to the Kwajalein Atoll in the RMI for the  years 2024 through 2086.  The amended Compacts contain strengthened  reporting and monitoring measures that could improve accountability over  Compact assistance, if diligently implemented.  In addition, the Department  of the Interior has taken actions to increase resources dedicated to  monitoring and oversight of Compact funds.
The following are amended Compact and related FPA measures that  represent changes from the prior Compact and FPAs.
In 2000, we reported that Compact funds were placed in a general  government fund and commingled with other revenues and, therefore,  could not be further tracked.  In addition, some Compact assistance was  only traced at a high level with few details readily available regarding  final use.  The amended Compacts and FPAs include requirements that  should address these accountability concerns.  Specifically, they require  fiscal control and accounting procedures sufficient to permit  (1) preparation of required reports and (2) tracing of funds to a level of  expenditures adequate to establish that such funds have been used in  compliance with applicable requirements.  Further, the amended  Compacts specify standards for the financial management systems used  by the FSM and the RMI.  For example, these systems should maintain  effective controls to safeguard assets and ensure that they are used  solely for authorized purposes.
The new FPAs would establish a joint economic management  committee for the FSM and the RMI that would meet at least once a  year.  The committee would be composed of three U.S. appointed  members, including the chairman, and two members appointed, as  appropriate, by either the FSM or the RMI.  The committee’s duties  would include (1) reviewing planning documents and evaluating island  government progress to foster economic advancement and budgetary  self-reliance, (2) consulting with program and service providers and  other bilateral and multilateral partners to coordinate or monitor the  use of development assistance, (3) reviewing audits, (4) reviewing  performance outcomes in relation to the previous year’s grant funding  level, terms, and conditions, and (5) reviewing and approving grant  allocations (which would be binding) and performance objectives for  the upcoming year.
Grant conditions normally applicable to U.S. state and local  governments would apply to each grant.  General terms and conditions  for the grants would include conformance to plans, strategies, budgets,  project specifications, architectural and engineering specifications, and  performance standards.  Specific postaward requirements address  financial administration by establishing, for example, (1) improved  financial reporting, accounting records, internal controls, and budget  controls, (2) appropriate use of real property and equipment, and  (3) competitive and well-documented procurement.
The United States could withhold payments if either the FSM or the RMI  fails to comply with grant terms and conditions.  The amount withheld  would be proportional to the breach of the term or condition.  In  addition, funds could be withheld if the FSM or RMI governments do not  cooperate in U.S. investigations of whether Compact funds have been  used for purposes other than those set forth in the amended Compacts.
The new FPAs include numerous reporting requirements for the two  countries.  For example, each country must prepare strategic planning  documents that are updated regularly, annual budgets that propose  sector expenditures and performance measures, annual reports to the  U.S. President regarding the use of assistance, quarterly and annual  financial reports, and quarterly grant performance reports.
The successful implementation of the new accountability provisions will  require a sustained commitment by the three governments to fulfilling their  new roles and responsibilities.  Appropriate resources from the United  States, the FSM, and the RMI represent one form of this commitment.  While the amended Compacts do not address staffing issues, officials from  Interior’s Office of Insular Affairs have informed us that they intend to post  six staff in a new Honolulu office:  a health grant specialist, an education  grant specialist, an accountant, an economist, an auditor, and an office  assistant.  Interior can also contract with the Army Corps of Engineers for  engineering assistance, when necessary.  These Honolulu-based staff may  spend about half of their time in the FSM and the RMI.  Further, an Interior  official noted that his office has brought one new staff member on board in  Washington, D.C. and intends to post one person to work in the RMI (one  staff member already works in the FSM).  We have not conducted an  assessment of Interior’s staffing plan and rationale and cannot comment on  the adequacy of the plan or whether it represents sufficient resources in the  right locations.
section_title: Conclusions
paragraphs: The 30 single audit reports demonstrate a lack of or poor accountability  over U.S. Compact assistance that has totaled an estimated $2.1 billion  since 1987.  The large number and recurring nature of the findings involving  noncompliance with Compact requirements or financial management  weaknesses, along with the preponderance of auditor’s qualified opinions  or disclaimers of opinion on FSM and RMI financial statements, clearly  indicate the need for improved FSM and RMI management of U.S.  assistance and greater U.S. oversight and monitoring of the use of this  assistance.  Changes are needed especially considering the fact that the  amended Compacts with these nations could potentially cost the U.S.  government about $3.5 billion in new assistance over the next 20 years.
Under the original Compact, the Department of the Interior was  responsible for supervising, coordinating, and monitoring the program  assistance provided.  Interior officials expressed frustration with the lack  of tools available to them to administer or track this assistance in a manner  that could reasonably ensure that such assistance was having its intended  effect.  The amended Compacts strengthen reporting and monitoring  measures that could improve accountability over assistance, if diligently  implemented.  These measures include strengthened fiscal control and  accounting procedures requirements, expanded annual reporting and  consultation requirements, and the ability to withhold funds for  noncompliance with grant terms and conditions.  The successful  implementation of the new accountability provisions will require  appropriate resources and sustained commitment from the United States,  the FSM, and the RMI.  The joint economic committees called for in the  Compact with each nation and Interior’s planned increase in staff  associated with Compact oversight and monitoring functions should play  key roles in improving accountability over Compact funds.
section_title: Recommendations for Executive Action
paragraphs: To help promote compliance with Compact requirements and sound  financial management, the Secretary of the Interior should delegate  responsibility to the Office of Insular Affairs and hold appropriate officials  in that office accountable for ensuring the adequacy of staff dedicated to Compact oversight and monitoring FSM and RMI progress in addressing Compact-related single  audit report findings, reporting on the FSM and RMI actions to correct Compact-related  compliance and financial management findings identified in single audit  reports to the Secretary of the Interior or other appropriate high-level  Interior official,  initiating appropriate actions when the FSM or the RMI do not  undertake adequate actions to address Compact-related single audit  findings in a timely manner, and  investigating single audit findings that indicate possible violations of  grant conditions or misuse of funds and taking appropriate actions  when such problems are verified.
section_title: Government and Agency Comments and Our Evaluation
paragraphs: In commenting on this report, the Office of Insular Affairs of the  Department of the Interior, FSM, and RMI agreed with our findings or  conclusions and recommendations.  They also cited the amended  Compacts as mechanisms that should result in improved financial  management over Compact assistance.  The FSM and RMI also provided  technical comments and information on current actions to address  financial management issues.  We considered all comments and made  changes to the report, as appropriate.
The FSM comments noted that it found the report constructive and useful  as it continues to prepare for the implementation of the amended Compact  and its related agreements.  The comments (reprinted in app. I) recognized  that, although FSM has worked hard to develop a consistent approach to  satisfy the Compact and FPA requirements, significant work remains to be  done to improve and strengthen accountability in all aspects throughout  the nation.  Further, FSM agreed that it must continue to improve internal  financial control through upgrading the current financial management  system, providing for capacity building, and retaining its most productive  and experienced employees.  Finally, it noted that the amended Compact  and related fiscal procedures agreement include requirements that will  address all of the accountability concerns expressed in the report.
RMI’s comments (reprinted in app. II) stated that it concurred with the  report’s findings and noted that the report will be useful since it gives a  summary of the financial and management situation of the RMI between  1996 and 2000.  RMI noted that its problems stem partly from the fact that it  has not had a global system for following up on audits that would apply  throughout all ministries of the government as well as other entities that  receive Compact grant assistance.  RMI stated that it has made progress  recently by upgrading its information system and strengthening its internal  control procedures and noted that it will add personnel to the budget,  procurement, and supply areas.
In its comments (reprinted in app. III), the Office of Insular Affairs of the  Department of the Interior agreed with the conclusions and  recommendations in the report.  The Office also noted that it looks forward  to discharging its responsibilities under the amended Compacts and that it  is confident that it will now have the tools needed to properly protect the  American taxpayer’s investment in the freely associated states.
As agreed with your offices, unless you publicly announce its contents  earlier, we will not distribute this report until 30 days after its date. At that  time, we will send copies to the Secretary of the Interior, the President of  the Federated States of Micronesia, the President of the Republic of the  Marshall Islands, and appropriate congressional committees.  Copies will  also be made available to others on request.  This report will also be  available at no charge on GAO’s Web site at http://www.gao.gov.
For future contacts regarding this report, please call McCoy Williams at  (202) 512-6906 or Susan S. Westin at (202) 512-4128.  Staff contacts and  other key contributors to this report are listed in appendix IV.
section_title: Comments from the Federated States of Micronesia
section_title: Comments from the Republic of the Marshall Islands
section_title: Comments from the Department of the Interior
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to the contacts named above, Perry Datwyler and Leslie Holen  made key contributions to this report.
section_title: GAO’s Mission
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subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs