State Department: Implementation of Grants Policies Needs Better Oversight
Released: 2014-07-21T00:00:00

Letter

Background

State Grants Management: Definitions and Key Roles and Responsibilities

Grants and cooperative agreements are assistance instruments used to transfer money, property, or services to accomplish a public purpose. The difference between the two instruments relates to the amount of involvement between the agency and the recipient during performance: when substantial involvement is not anticipated, State uses a grant; otherwise, it uses a cooperative agreement. For the purposes of this report, the term “grants” refers to both grants and cooperative agreements.

State’s grants vary greatly by size and recipient—from grants of less than $100 to help cover an individual’s travel expenses, to multi-million dollar grants to, for example, international nongovernmental organizations for democracy-building programs. A/OPE sets department-wide policies related to grants management, and individual bureaus may also develop their own specific policies to supplement those from A/OPE. Managing a grant involves a variety of State officials, often from multiple bureaus and posts. The principal grants officials include the following:

The grants officer (GO), who is ultimately responsible for overseeing the grant.

The grants officer representative (GOR), who often has program implementation expertise and assists the GO in overseeing a grant.

The program officer, who, if the GO is from a different bureau, may provide programmatic expertise, primarily during the preaward phase. For example, a program officer may design the grant announcement and assist in selecting recipients. In some cases, the program officer may be designated as the GOR once the grant is awarded to a recipient.

The budget officer, who is responsible for ensuring that the appropriated funds are drawn down correctly.

Some GOs and GORs also reported using a grants management specialist or other staff, such as interns, to help them manage certain aspects of their portfolios.

The various grants officials involved in the management of a grant may be from different bureaus as well as different locations. Twenty-seven bureaus and offices within State, including the U.S. Mission to the United Nations, have grant-making authority or grant oversight responsibilities. Posts, including embassies and consulates overseas, may also make grants. Ten bureaus and posts accounted for the majority of federal assistance obligations that State made in fiscal year 2012 (see table 1). For those GOs located in Washington, D.C., the GOR is usually located in the principal place of performance, which may be at State headquarters in Washington, D.C.—for cultural exchange programs, for example—or overseas. Eighteen of the 27 bureaus with grant-making authority have their own GOs. Those that do not have GOs or whose GOs do not have a high enough grant-making authority rely on the Office of Acquisitions Management to fulfill the GO role. This office provides a full range of grant management services, including planning, negotiations, cost and price analysis, and administration. In those instances, the bureau requesting the grant then generally provides the GOR, program officer, or both to supply program-specific expertise. As of May 2014, there were 571 GOs worldwide, with 503 of them based overseas. Most GOs at posts are Foreign Service Officers with multiple other duties. In addition, Foreign Service Officers usually rotate to another post within 1-3 years, per State’s normal operating procedures. This considerable turnover rate means that a single grant may have multiple GOs over its life cycle.

State’s grants generally follow a life cycle that consists of four phases— preaward, award, postaward, and closeout. In the preaward phase, grants officials develop the program idea, evaluate proposals, and select a recipient. The GO then negotiates the costs of the grant with the recipient and drafts the award document during the award phase. In the postaward phase, grants officials monitor the recipient’s progress and disburse payments as appropriate. Finally, in the closeout phase, grants officials assess final programmatic and financial reports and determine any final payments or reimbursements that are necessary.

Internal Control Standards Applicable to State Grants Management

As we have noted in prior reports, effective oversight and internal control are important when awarding and managing federal grants to provide reasonable assurance to federal managers and taxpayers that grants are awarded properly, recipients are eligible, and federal grant funds are used as intended and in accordance with applicable laws and regulations. The Standards for Internal Control in the Federal Government (the federal standards) sets forth the standards that provide the overall framework for establishing and maintaining internal control and for identifying and addressing major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement.

Control environment: Management and employees should establish and maintain an environment that sets a positive and supportive attitude toward internal control and conscientious management. A positive control environment is the foundation for all other standards.

Risk assessment: Internal control should provide for an assessment of the risks the agency faces from both external and internal sources. Risk assessment is the identification and analysis of relevant risks associated with achieving the agency’s objectives and forming a basis for determining how risks should be managed.

Control activities: Internal control activities help ensure that management’s directives are carried out. Control activities are the policies, procedures, techniques, and mechanisms that enforce management’s directives. They help ensure that actions are taken to address risks, and they are integral to the stewardship of government resources and achieving effective results. Information and communications: Information should be recorded and communicated to management in a form and within a time frame that enables management to carry out its internal control and other responsibilities.

Monitoring: Internal control monitoring should assess the quality of performance over time and ensure that any issues are promptly resolved.

State Has Established Policies and Guidance That Provide a Supportive Environment for Administering and Overseeing Grants State’s Policies Incorporate Federal Regulations

State has established a core set of policies and guidance incorporating federal regulations for administering and overseeing grants. A/OPE has established policies and training to further assist grants officials as they implement the department’s policies and to reduce wasteful spending in government. A/OPE has taken steps to improve its policies, revising many of them since their issuance. State has provided these policies, as well as training and other support, to staff to encourage effective grant management throughout the life cycle of a grant.

State’s grant management policies incorporate requirements established in federal regulations and guidance, which are codified in the Code of Federal Regulations (CFR). These regulations are based on Office of Management and Budget (OMB) circulars on grants and cooperative agreements with nongovernmental organizations and institutions of higher education as well as with state and local governments. OMB circulars provide guidance to grants officials for implementing rules regarding allowable costs, program purposes, and financial management procedures. In addition, the authorities for specific assistance programs may provide requirements for associated grants. OMB guidance and regulations contained in the CFR inform State’s policies for grants management. State collects and articulates the department’s policies in the Foreign Affairs Manual and its associated handbooks. This manual assigns A/OPE the authority to prescribe acquisition and assistance policies, regulations and procedures for State. State officials told us that A/OPE also works closely with the Office of the Deputy Chief Financial Officer to develop policies related to the financial management of grants.

Since 1992, A/OPE has issued 59 grants policy directives to provide additional guidance specific to State’s staff explaining how they should conduct grants management in accordance with federal regulations. A/OPE has issued or revised more than half of these policies since 2008, creating at least two of them in response to concerns from its Inspector General and us about State’s internal controls for grants management.

State’s Policies and Guidance Establish Internal Controls throughout the Grant Life Cycle

State’s policies and guidance help establish a control environment framework for grants management. Two of the directives related to risk assessment, for example, directly cite the federal standards, which call on federal agencies to identify risks as part of a positive internal control environment. State’s policies also provide guidance for implementing key internal control activities throughout the life cycle of a grant, such as approval of the monitoring plan or review of quarterly or annual reports (see fig. 1).

State’s control environment also includes a variety of additional guidance, including mandatory training, “best practices” dissemination, and online resources.

Training: State offers its staff several grants management courses, covering such topics as monitoring and evaluation, cost principles, and ethics. GOs must take at least 24 hours of grants management training, and GORs must take both an introduction and a monitoring course to obtain certification. Both must update their training with at least 16 hours of courses every 3 years. Some courses are also available online, and A/OPE has worked with several bureaus to hold training focused on their specific needs. In addition, A/OPE occasionally offers regional or post training in the field, depending on resources, and has recently begun holding webinars to train and answer questions from grants officials overseas.

Best practices dissemination: According to State officials, A/OPE began holding quarterly meetings in 2004 for grants officials throughout the department to both raise issues and share best practices. More recently, A/OPE has begun to offer a 2-day course twice a year in lieu of the quarterly meetings. The course offers an update on trends and regulation changes as well as a refresher on grants administration and policy.

Online resources: Finally, State has a number of Intranet resources available for grants officials. Beyond distance learning courses, A/OPE also has sample templates for a variety of grant documentation, including a preaward survey, financial management survey, risk assessment tool, and several types of monitoring reports. An A/OPE official told us A/OPE is currently updating the Federal Assistance Policy Manual, which will provide additional guidance for the entire grant life cycle. Furthermore, bureaus and posts are allowed to design guidance appropriate to the varying circumstances surrounding their grants. For example, three of the bureaus and two of the posts in our sample have developed their own risk assessment checklists.

State guidance also directs grants officials to document key internal control activities throughout the life cycle of a grant, including the use of funds, the recipient’s progress, and the grants officials’ assessment of that progress. State has several policies either dedicated to documentation or requiring documentation. For example, one policy describes the roles and responsibilities for both the GOs and the GORs, listing what information they must document as well as where and at what phase in the grant life cycle they should document it. For certain internal control activities, State has created additional policies with detailed documentation and reporting requirements. The policies cover topics such as competition versus sole source decisions, risk identification and assessment processes, and developing monitoring plans. These policies also include sample templates outlining various approaches to documenting these activities. Under State guidance, bureaus and posts may tailor these policies to their specific needs. Given the considerable turnover rate of GOs who are Foreign Service Officers, as well as the fact that grants management is not often their primary task, a strong internal controls environment is essential for accountability.

Inconsistent Implementation of State Policies and Guidance Weakens Assurance That Grant Funds Are Used as Intended

State has not consistently implemented the risk analysis and documentation of internal controls required by grants management policies and guidance, a fact that weakens assurance that grant funds are used as intended. In particular, grants officials have not adhered consistently to State’s policies about identifying, assessing, and mitigating risks associated with the grants we reviewed. Furthermore, grants officials do not always document the implementation of key internal controls activities as required. State has established procedures for assessing grants officials’ implementation of its internal controls. In conducting these reviews, A/OPE found insufficient documentation in the grant files at all 10 of the bureaus and posts that were also in our review and recommended solutions, but did not systematically follow up to ensure that the bureaus and posts had implemented them.

Grants Officials Often Did Not Conduct Required Risk Analysis

Grants officials responsible for the files in our sample often did not adhere to State’s policies on risk assessment. Federal standards define risk assessment as “the identification and analysis of relevant risks associated with achieving the objectives.” A risk analysis helps ensure that grants officials undertake the necessary control activities and use oversight resources appropriately. State’s policy on risk management further elaborates that risk assessment should begin in the preaward phase and continue throughout the grant life cycle. Furthermore, it states that a risk management plan must include identification, assessment, and monitoring and mitigation of risk. In most of the files we reviewed, however, we did not find evidence that grants officials had fulfilled these requirements, as described below.

Risk identification: State’s policies require grants officials to carry out a comprehensive review of potential recipients to identify risks. Risk factors could include a lack of stable financial infrastructure or experience in managing a U.S. government grant, past performance problems, an unusual or difficult environment, responsibility for a large amount of funds, and concern the organization might be involved in terrorist activities. Of the 61 grant files we reviewed, 45 showed that grants officials had at least partially undertaken a risk identification process. However, 33 of these were missing key elements of a risk identification process, such as a review of the recipient’s financial systems and internal controls.

Risk assessment: State policy requires grants officials to exercise a greater level of oversight for high-risk versus low-risk grants; however, we found in our file reviews that grants officials often did not assess identified risks to determine the grants’ risk level. Of the 45 grants that underwent a risk identification process, 28 had risks identified. However, only 15 of those 28 grants that identified risks also included at least a partial assessment of risks, such as a preaward checklist at one post that included some questions about prior federal grant management experience and other past performance issues. In addition, while State has established a variety of guidance on risk assessment, the wording of the guidance is not consistent in certain aspects, such as assessment of external risk factors. For example, while one of the grants policy directives lists Transparency International’s Corruption Perception Index as a risk assessment resource, none of A/OPE’s sample risk assessment templates mention the index or corruption in general. In another example, we found that a grant to support civil society had received a “low-risk” determination, based on calculations from a risk assessment checklist, although grants officials remarked in the notes section of the checklist that corruption was rampant in that country. Since corruption was not an element of the checklist itself, it did not factor into the overall risk-level determination—nor was it reflected anywhere else in the grant file documentation.

Risk mitigation: State policies require grants officials to document how they will mitigate, or address, identified risks, including by preparing and implementing a monitoring plan. Of the 15 grants that showed both identification and assessment of risks, 11 showed at least partial mitigation of those risks (see fig. 2). Of the remaining 4 grants that showed no risk mitigation, 1 included an audit report identifying significant financial management risks, such as noncompliance with allowable costs, on the part of the grant recipient. The grants officials, however, did not reflect these risks in a risk mitigation or monitoring plan. In two other grant files we reviewed, grants officials identified allegations of prior financial mismanagement, but awarded the grant without addressing how the risk would be mitigated. Furthermore, State’s various risk-related guidance does not clearly emphasize the importance of linking risk assessment to monitoring. Federal standards state that risk analysis generally includes deciding how to manage the risk and what actions should be taken. Of the five sample monitoring templates that A/OPE has developed, however, three do not mention risk. Grants officials who use these templates, therefore, may not make the link between monitoring and risk. For example, of the 13 grants from two bureaus in our sample that had developed their own risk assessment checklists based on A/OPE’s templates, we found that 7 did not reflect risks identified in a monitoring plan. Moreover, of the 23 grants in our sample overall that had assessed risks and had a monitoring plan, only 10 reflected the risks in the plan.

Without identifying and assessing risks, it may be difficult for State to determine whether there are any observable impediments to the recipient’s effective management of State funds that would need to be mitigated. Determining which grants warrant greater oversight and which require less helps managers ensure the appropriate allocation of resources for safeguarding grant funds.

Grants Officials Often Did Not Document Control Activities

Grants officials in the sample of grants we reviewed generally did not adhere to State policies and procedures relating to documenting control activities. Federal standards call for the clear, prompt, and accurate documentation of internal control and all other significant events, including risk assessments and monitoring activities, and state that this documentation should be readily available for examination. State guidance directs grants officials to document key internal control activities throughout the life cycle of a grant, including the use of funds, the recipient’s progress, and the grants officials’ assessment of that progress (see fig. 3). To support officials as they implement this guidance, State has created multiple systems for organizing, retaining, and sharing information about grants, whether the files are in electronic or hard copy form. Documenting grant management activities is particularly important because of grants officials’ considerable turnover rate, which can leave newly assigned grants officials dependent on files to determine what control activities are required and which have been conducted.

However, the grant files we reviewed did not consistently document key grant activities as required, to demonstrate that internal controls had been implemented. In many of the files we reviewed, required documents were missing from the official file or incomplete, as described below.

Internal control checklist: State requires each grant file to contain a checklist, which grants officials are supposed to use to document the completion of many internal control activities throughout the grant’s life cycle. These activities include vetting recipients, identifying the amount of funds and project duration, identifying key contacts at State and the recipient organization, and tracking receipt of information from the recipient about progress made and costs incurred. State’s training further emphasizes the importance of keeping all sections of this checklist current to assist managers in monitoring grants and ensure that they fulfill the U.S. government’s obligation to grant recipients. However, 17 out of the 61 files we reviewed did not contain this checklist, and only about 11 percent (5 out of 44) of the forms that did exist were completely filled out.

Grant award justification: State requires grant files to contain a justification for awarding any grants without a full and open competition. However, for the 24 grants in our sample that were sole-sourced, 7 did not contain this justification.

Monitoring plans: State policies require grants officials to prepare a monitoring plan to measure the recipient’s progress toward achieving the grant’s goals and objectives and ensure that the recipient complies with the grant agreement. The grants officials must use the plan to indicate the type and frequency of monitoring they will conduct given the risks involved and the resources available for these activities. However, about half of the files we reviewed (32 of the 61) did not contain a monitoring plan. Furthermore, some of the 29 plans that were documented did not address key aspects of monitoring the terms and conditions of the grant agreement, such as risk analysis and evaluation. For example, 3 of the 29 documented plans we reviewed did not describe how the GO planned to monitor progress toward the grant’s specific goals and objectives.

Monitoring activities conducted: While most of the files contained evidence of some monitoring activities, such as e-mail communication with recipients, this monitoring did not completely adhere to State’s guidance. Of the 29 documented monitoring plans, the evidence showed that grants officials had fully executed 8 of them and partially executed an additional 10. For example, some of the partially executed plans indicated that the grants officials were to conduct site visits and review recipient reports, but the grant files showed that the grants officials had closed the grants without documenting any evidence of these planned monitoring activities. Regardless of whether grants had monitoring plans, we found that only 16 of the 61 files contained evidence that the grants officials had completed the required review of all the recipient’s financial and programmatic reports to monitor for key information—including verifying timely progress toward the goals, as well as identifying and addressing any delays or inappropriate expenditures. Another 24 of the 61 files contained evidence that grants officials had done partial reviews of these reports. These reviews, as well as reviews of the final recipient reports, are required to close an award, but we found four awards that GOs had closed without evidence that they had reviewed the recipient’s final reports. On more than one occasion, State had difficulty providing required internal control documentation to us, either because a grants official was on leave or had moved on to another post. For example, we identified incomplete documentation in some award files at one post, including missing final financial and programmatic reports. Three months after our site visit, the GO still could not produce the documents, because the grants management specialist whose computer’s hard drive contained the documents was on extended leave. Two other GOs we interviewed said the files they inherited did not contain required documents, such as the approval forms from bureau headquarters for awards exceeding $25,000.

Without documentation such as the internal control checklist, the grant award justification, monitoring plans, and monitoring reports, State cannot provide adequate oversight to ensure grant funds are being used as intended. Without the required checklist, for example, managers cannot readily ensure that the required documentation supporting the management of each grant is present and complete. State also cannot determine whether the GO’s decision not to award a grant through open competition was justifiable according to State’s guidance unless the GO documents that decision. Furthermore, while grants officials told us they do conduct monitoring, absent adequate monitoring plans and reports, it is difficult for managers to determine whether grants officials are effectively allocating resources or conducting monitoring, or that a grant accomplished its intended goals.

Grants Officials Cited Several Reasons for Nonadherence to Risk Analysis and Documentation Requirements, and State Does Not Have Processes for Ensuring Compliance

GOs and GORs we interviewed cited a variety of reasons for not conducting the required risk analysis and documentation, including a misunderstanding of State policies and guidance, a heavy workload, and a lack of staff expertise. For example, several of these grants officials told us they did not do a risk analysis either because the recipient was well known or they knew intuitively that the risk level was low—particularly if the grant was relatively small or funded a short-term project such as a 2- day photography exhibit. State policies, however, do not preclude well- known organizations from risk analysis. Moreover, we found an example where the GO assumed the grant was low-risk without doing a full risk analysis, even though it was the first time that State had awarded a grant to the recipient. The grant files contained evidence that as the grant progressed, the recipient had a variety of performance issues, including trying to use the grant funds for activities other than what was intended. The amount of time and resources dedicated to an appropriate risk analysis may vary for lower dollar value grants, well-known recipients, or other factors; nonetheless, according to an A/OPE official, a risk analysis is still required in these circumstances. State, however, does not have a process in place for ensuring that grants officials conduct a risk analysis.

According to State officials and the files we reviewed, multiple responsibilities and large portfolios limited the oversight they conducted to ensure that required documentation was in place. Grants officials reported having high numbers of grants to manage and multiple responsibilities beyond managing grants. At bureaus with GOs based in Washington, D.C., workloads tended to be higher, according to an A/OPE official. This official reported that the average number of grant transactions undertaken by these domestic GOs in fiscal year 2013 was 46, and two Washington, D.C.-based GOs we interviewed reported having portfolios of 110 and 200 active grants, respectively. At two posts we visited, the GOs were responsible for managing portfolios of about 56 to 66 grants in fiscal year 2012, in addition to their primary responsibilities as public affairs officers for the embassies. Both GOs reported relying on GORs and others to complete the award documentation. They reported conducting occasional spot checks of the files compiled by the GORs. At both posts, however, we found that each grant file in our sample managed by these GOs was missing required internal control documents. Furthermore, we brought oversight issues to the attention of the GOs of which they had previously been unaware, such as unexpended funds from a closed-out grant.

Some grants officials told us that State’s systems for documenting key management activities are not easy to use. A/OPE officials told us they are working to improve the main electronic management systems used by grants officials (the Grants Database Management System and the State Assistance Management System), but the accuracy of some information will still depend on the person inputting it, and State does not have a process for ensuring that all of the required documentation is included. Three grants officials we interviewed reported that interns and grant assistants update the paper and electronic files and that the grants officials do not check their work. In addition, some grants officials told us that while official files might be missing required documentation, the information was stored elsewhere and could be retrieved upon request. While some grants officials eventually produced the requested information, others did not. Some grants officials told us that they kept information about recipient performance on their computer’s hard drive, a fact that may limit other grants officials’ access to this information. Furthermore, the official files did not indicate where this information could be found.

State Has Assessed Implementation of Internal Controls at Bureaus and Posts, but Has Not Followed Up on Most Recommendations for Improvement

State has assessed the implementation of internal controls at several bureaus and posts and has recommended improvements; however, it has not followed up to ensure the implementation of its recommendations. According to the federal standards, successful monitoring should include policies and procedures for regularly assessing the effectiveness of the internal controls in place and for ensuring that the findings of audits and other reviews are promptly resolved. In 2008, A/OPE issued a policy to systematically review grants management at posts and bureaus. The policy stated that the number and extent of the reviews conducted each year would be dependent on A/OPE’s available resources. monitoring should assess the quality of performance over time and ensure that any issues are promptly resolved.

A/OPE has assessed compliance with grant management policies at some bureaus in Washington, D.C., and overseas posts and found some deficiencies in grants officials’ implementation of those policies. In 2008, State created a Grants Management Review (GMR) program with guidelines and a checklist for reviews. The bureaus and posts are to be selected for review based on weaknesses identified by the Inspector General, dollar amount and volume of grants processed, informal risk assessments, public visibility of the grants, and bureau or post requests to be reviewed. In addition to the GMRs and other reviews of grant- making bureaus headquartered in Washington, D.C., A/OPE has conducted less formal reviews at grant-making posts overseas, combining file reviews with training. These reviews—called Grants Review Evaluation and Assistance Trainings (GREAT)—are initiated in response to requests for training or when A/OPE becomes aware of challenges faced at certain posts, including considerable turnover. According to officials, A/OPE tries to select posts for review if they are located at or near destinations where A/OPE staff have other reasons to travel, so as to conserve resources. A/OPE officials said their method for conducting GREATs was similar to that used for GMRs, but less in-depth. As a result, unlike the formal GMRs—which State officials said can take 2 to 3 months to conduct—these informal GREATs take 2 to 3 days and result in shorter reports. Between 2001 and February 2014, A/OPE completed 13 GMRs and other reviews at 12 bureaus and offices headquartered in Washington, D.C., and 42 GREATs at 37 posts around the world.

These assessments of grants officials’ implementation of grants management policy at bureaus and posts have found insufficient documentation, among other deficiencies, and recommended solutions. Specifically, 52 of the 55 reviews found insufficient documentation in grant files, affecting 47 bureaus and posts. Ten of the bureaus and posts where A/OPE had conducted GMRs, GREATs, and other reviews were included in our review samples. At all 10 bureaus and posts, State found challenges with documentation similar to those we identified. For example, in 5 of the 10 bureaus and posts, A/OPE found that grants officials did not consistently document monitoring reports or site visit reports, and in one case the post had no monitoring plans in its award files. A/OPE found insufficient documentation in the other 4 bureaus as well, such as incomplete internal control checklists or inadequate documentation of sole source justification. One bureau in Washington, D.C., kept its monitoring reports on an electronic shared drive, but the award files did not indicate where to find the reports. A/OPE has made many recommendations to bureaus and posts aimed at correcting the deficiencies it identified. These recommendations have included the establishment of standard operating procedures and more effective use of electronic systems for documentation, among others.

However, State has not systematically followed up to ensure the implementation of these recommendations. State’s system for tracking compliance with its grants management policies has yielded recommendations for improvement at 48 of the 49 bureaus and posts it has reviewed, but State has conducted follow-up with only 6 of those 48 bureaus and posts to ensure that these recommendations were implemented. State’s policy for GMRs outlines how State will select and conduct a review, but does not provide a procedure for ensuring that corrective action has been taken and no further management action is needed. However, A/OPE officials report that they have limited staff, with currently only one individual leading both the GMR and GREAT reviews. In addition, they report having a limited travel budget for conducting follow-up reviews. A senior A/OPE official said it is necessary to be vigilant about regularly sending messages regarding important grant- related tasks, particularly when there is considerable turnover among personnel at posts. Because State does not track or report on the implementation of recommendations, State cannot determine whether its grants management reviews and training are achieving their purpose of strengthening the management and oversight of assistance agreements.

Conclusions

Given the relatively large amount of funding for grants and the widespread use of these instruments to achieve foreign policy goals, it is important for State to ensure that grant funds are used as intended. State has made progress toward establishing the internal controls it needs to gain this assurance. For example, State has outlined its expectations for grants management in detailed policies and guidance that should be clear for all grants officials. In particular, the requirements to conduct a risk analysis and document the implementation of required control activities conform to the federal standards for internal control. However, we found that most of the grant files we reviewed did not contain evidence of an appropriate risk analysis or were missing other required internal control documentation, and State has not developed processes for ensuring that grants officials implement these requirements. Therefore, State’s assurance that grant funds are used as intended is weakened. Recommendations made in State’s internal reviews of grant-making practices reinforce expectations concerning documentation. However, State management does not systematically follow up to ensure that grants officials throughout the department consistently implement these required control activities or act upon recommendations made. As a result, State cannot be certain that its oversight of grants management is adequate or that it is using its limited oversight resources effectively.

Recommendations for Executive Action

To help ensure that State’s grants officials fully implement grants management policies and internal controls that are in place, and that grant funds are used as intended, we recommend that the Secretary of State take the following two actions: Develop processes to help ensure that bureaus and missions conduct appropriate risk assessments, and grants officials complete required documentation for all grants. Such a process could include systematic inspections of grant files, with the results shared among A/OPE, the appropriate bureaus and missions, and the grants officials themselves, so as to promote accountability.

In addition, we recommend that the Secretary of State take the following action: follow up systematically on recommendations from State’s internal reviews of its grants management.

Agency Comments

We provided a draft of this report to State for its review and comment. State provided written comments, which we have reprinted in appendix III, as well as technical comments, which we incorporated, as appropriate.

State provided additional information about its efforts to establish policies and guidance to provide a supportive environment for administering and overseeing grants. In particular, State noted that, in addition to the policies and guidance described in our report, the department has implemented processes regarding grant-making authority and certification for grants officials and has cooperated with the Office of Management and Budget on governmentwide foreign assistance management issues.

State concurred with our recommendations to develop processes for ensuring that bureaus and missions conduct appropriate risk assessments and that grants officials complete required documentation. Specifically, State indicated that it will modify risk assessment guidance to include suggestions from our report, provide additional training focused on risk assessment, and specifically evaluate compliance with risk assessment requirements in State’s own assessments of internal controls at bureaus and posts. State also indicated that it will increase the emphasis on file documentation and expand the extent of file reviews during these assessments at bureaus and posts to help ensure that grants officials complete required documentation for all grants. In addition, State concurred with our recommendation to follow up systematically on recommendations from State’s internal reviews of its grants management. Specifically, it said that it will require formal responses to recommendations from its grant management assessments at bureaus and posts, to include recommendation implementation status updates.

We are sending copies of this report to the appropriate congressional committee and the Secretary of State. In addition, the report is available at no charge on GAO’s website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-3149 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 who made major contributions to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) the policies and guidance that the Department of State (State) has established to administer and oversee grants and cooperative agreements, and (2) the extent to which the implementation of those policies and guidance provides reasonable assurance that funds are being used as intended.

To define grants and cooperative agreements (grants) and to describe the roles and responsibilities of those involved in managing State’s grants and the key activities grants officials must conduct during each phase, we reviewed State’s grants policy directives (GPD) and State’s required grants officials training, and interviewed State officials. To describe the internal control standards applicable to State grants management, we reviewed the Standards for Internal Control in the Federal Government (the federal standards).

To describe the policies and guidance that State has established to administer and oversee grants, we reviewed federal regulations, Office of Management and Budget (OMB) circulars, and State’s GPDs, as well as training and other resources the department provides its grants officials. We collected and analyzed all 54 active GPDs issued by State’s Office of the Procurement Executive (A/OPE). We reviewed State Department training regarding State’s incorporation of federal regulations into its grants policies and interviewed A/OPE officials regarding this topic. We interviewed officials from A/OPE and the Office of the Deputy Chief Financial Officer, who set department-wide policies on grant performance and financial management, and bureau and post officials regarding any additional policies and guidance they provide that is specific to the programs they manage. To describe the extent to which State’s GPDs establish internal controls throughout the phases of a grant’s life cycle, we compared the key activities the grants officials must conduct at each phase, as well as the additional training and guidance A/OPE provides to grants officials, with the federal standards and with federal regulations for grants management.

To assess the extent to which State’s policies and guidance provide reasonable assurance that funds are being used as intended, we assessed State’s policies and guidance for grants management against the implementation of those policies, as well as reviewing State’s own process for conducting internal assessments of the implementation of those policies. We interviewed State officials from A/OPE, the Office of the Deputy Chief Financial Officer, and various functional and regional bureaus and offices headquartered in Washington, D.C., and three overseas missions to determine how State both designs and implements department-wide internal control policies on grants performance and financial management.

To further determine how State implements these policies, we selected three case study countries —Afghanistan, Cambodia, and Turkey— based on criteria that included total dollar value of grants in a country, geographic diversity, and balance among the bureaus involved in managing the awards. For these countries we examined a nongeneralizable sample of 48 grants by award size and bureau that had obligations in fiscal year 2012. In addition, we used the same criteria to draw another nongeneralizable sample of 13 grants managed in the United States, Washington, D.C. Overall, the 61 grants we reviewed ranged in value from just over $25,000 to $28,000,000, and totaled approximately $172 million. To arrive at these 61 grants, we included all grants over $25,000 with obligations in fiscal year 2012 in Cambodia and Turkey, which had 15 and 21 such grants respectively, and selected 20 such grants managed in the other two countries, for a total of 76 files. We excluded grants where multiple places of performance were listed and selected only those grants where our four countries were listed as the only place of performance. However, once we began conducting interviews regarding these grants, we discovered that some of the grants had been mislabeled in State’s Grants Database Management System. Specifically, 2 were managed in countries other than the ones listed in the database; another grant was listed in the database as being managed in Cambodia alone, but was in fact managed from Washington, D.C., and implemented worldwide; and a fourth grant was a duplicate of a grant already in our sample. Correcting for these errors and adjustments, our sample was reduced to 72 grants. Three bureaus each managed 10 or more of these, accounting for 39 of the 72 grants. We determined that we had obtained sufficient coverage of grants from the three bureaus in question by reviewing 28 of their 39 grants. This determination further reduced our overall sample size from 72 to 61 grants. The final sample of 61 grants we conducted file reviews for included 19 in Afghanistan, 10 in Cambodia, 19 in Turkey, and 13 in the United States.

Collectively, the grants in our samples were managed by 3 posts and 14 bureaus of the 27 grant-making bureaus and offices in State. Our sample included grants by 6 of the top 10 bureaus and posts in terms of State’s total federal financial assistance obligations in fiscal year 2012. Our sample was nongeneralizable and did not allow us to determine whether there were any statistically significant differences by factors such as bureau or award size. In this report, we presented the overall results of the data on internal control activities for all 61 grants that we selected for data collection instrument review. During our analysis, we also looked for any overall patterns or differences by bureau and award size in terms of dollar value, but did not note any. We identified examples of concerns about controls that we reported on, such as incomplete documentation and absence of a risk assessment, in awards with high and low dollar values across the bureaus in our sample. To examine how grants officials implemented grants management policies, we conducted file reviews for 61 grants using a data collection instrument and interviews regarding those 61 grants using a standard set of questions. We developed the data collection instrument to assess grants officials’ implementation of a selection of State’s required internal control activities for grants management, including risk assessment, monitoring of recipients, and documentation of key activities. To identify these required internal control activities, we analyzed federal regulations and State policies and guidance related to management of grants across their life cycle and compared them against the federal standards. The data collection instrument asked a series of questions about critical elements of these internal control activities. During our reviews, we examined the files that State provided for each grant to determine whether they contained sufficient evidence to indicate whether the control activities had been performed. Our file review guidance indicated that while State policy requires the complete official file to be located in at least one place, analysts completing the reviews were directed to contact grants officials responsible for the files to request missing information where possible. Comments sections in the data collection instrument allowed the reviewers to document these requests and other notes they had about each question in the file. Two analysts reviewed each file, with the second analyst verifying the first analyst’s review. The focus of our analysis was the degree to which the grants officials had performed the required control activities for the grants in our sample. As noted above, we also considered whether there were any patterns or differences by award size in dollars or by bureau, but did not find any. In addition, the interview questions asked grants officials to identify training and guidance they found helpful, as well as any challenges they encountered as they implemented these policies. We pretested both the data collection instrument and interview questions in Kabul, and tested revised versions in Washington, D.C. Our file review and interview questions covered each phase of the grant life cycle, from preaward to closeout. We then compared the file review results for control activities against responses collected using the standard interview questions to provide a more complete picture of how the grants officials implemented the policies and identify reasons these officials cited for instances of noncompliance, as well as any State policies and guidance they found helpful.

We conducted interviews using the standard set of questions with at least one grants officer (GO) for each of the 61 grants in our sample, ultimately interviewing more than 50 GOs and grants officer representatives (GOR), as well as some program officers. To identify any internal control deficiency patterns or trends, we analyzed and compared the data we collected from our file reviews and interviews and also compared them to the findings from State’s internal inspections of grant-making operations.

To describe State’s assessment of grants officials’ implementation of its internal controls, we reviewed State’s guidance for conducting these reviews, interviewed A/OPE officials regarding the review process, and reviewed 55 assessment reports A/OPE issued between 2001 and February 2014. These 55 included the assessment reports A/OPE conducted in 12 grant-making bureaus, including 10 Grants Management Reviews and 3 other reviews, and reports from the 42 Grants Review Evaluation and Assistance Trainings A/OPE conducted at 37 posts around the world. Of the 55 assessment reports, 10 covered 10 of the 17 bureaus and posts included in our review. We analyzed those 10 reports to identify any findings related to the federal standards. We also reviewed all 55 reports to identify any instances where A/OPE either made recommendations and then returned to the bureaus and posts to follow up, or documented receiving recommendation implementation progress reports from those bureaus and posts.

We conducted this performance audit from May 2013 to July 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Internal Control Standards as Designed and Implemented in State’s Grants Management

We analyzed State’s grants policy directives (GPD) as well as its own grants management reviews, and we conducted file reviews for 61 grants in our sample to help determine both the policies State established for internal controls in grants management as well as how grants officials implemented those policies. To conduct the file reviews, we developed a data collection instrument that focused on basic documentation, decisions about competitive selections, risk management approach, monitoring approach, and closeout activities. For a full description of the methodology for the file reviews, see appendix I.

The following tables reflect our overall analysis of State’s policies and management reviews as well as selected results from our file reviews that correspond to the five internal control standards of control environment, risk assessment, control activities, information and communication, and monitoring. We analyzed A/OPE’s GPDs against each internal control standard to describe the control environment (see table 2). For risk assessment, control activities, and information and communications, we selected results from our 61 file reviews using a data collection instrument we developed to analyze these three internal control standards in particular (see tables 3-8). Finally, for monitoring, we analyzed A/OPE’s findings from its internal reviews assessing the implementation of the internal control activities at eight bureaus and two posts included in our sample (see table 9). We selected these results because they add additional detail to the information summarized in the report.

Control Environment

As shown in Table 2, we analyzed all 54 of A/OPE’s active GPDs against each internal control standard to help describe the control environment.

Risk Assessment: Risk Management Approach

To determine the extent to which overall risk management was conducted for each grant, each file reviewer first answered a series of questions in our data collection instrument about key elements of risk management, including the risk identification process, review of financial and systems controls, consideration of external risks, risk identification, risk assessment, and risk mitigation. On the basis of the responses to those questions, the reviewers made a final determination on overall risk management (see table 3).

Control Activities: Monitoring Approach and Closeout

To determine the extent to which overall monitoring (see table 4) and closeout activities (see table 5) were conducted for each grant, each file reviewer first answered a series of questions in our data collection instrument about key elements of monitoring and closeout, including whether there was a monitoring plan, and if so, whether it reflected risks, whether monitoring mechanisms were described in the plan, whether the plan had been executed, and whether monitoring had been carried out in the absence of a plan. On the basis of the responses to those questions, the reviewers made a final determination about overall monitoring.

Information and Communications

The data collection instrument we used to conduct the 61 file reviews also contained questions related to information and communications. For example, it contained questions and statements to verify whether required documentation was present and if so, whether it was complete. The documentation we looked for included the required internal control checklist, or DS-4012 (see table 6); overall documentation of competitive selection decisions (see table 7); and the required justification for awarding any grants without a full and open competition (sole-sourcing) (see table 8). To determine the extent to which overall competitive selection decisions were justified for each grant, each file reviewer first answered a series of questions about key elements of that justification, including—but not limited to—whether the award was sole-sourced, and if so, whether the decision to sole-source was justified in writing. On the basis of the responses to those and other questions, the reviewers made a final determination about the overall documentation of justification of competitive selection decisions (see table 7).

Monitoring

A/OPE has assessed compliance with grant management policies at some bureaus in Washington, D.C., and overseas posts using its Grants Management Reviews (GMR) and Grants Review Evaluation and Assistance Trainings (GREAT) and other reviews. The 55 reviews State conducted between 2001 and February 2014 found some deficiencies in grants officials’ implementation of State’s grant management policies. Eight of the bureaus and two of the posts where State conducted there reviews were included in our sample of grants. We analyzed those 10 reports to identify any findings related to the federal standards (see table 9).

Appendix III: Agency Comments

Appendix IV: GAO Contacts and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, James B. Michels (Assistant Director), Judith Williams, Katherine Forsyth, Jacob Beier, Debbie Chung, Oliver Culley, Martin De Alteriis, Jon Fremont, Farhanaz Kermalli, Anne McDonough-Hughes, Kimberly McGatlin, Shakira O’Neil, and Justin Fisher made key contributions to this report. Etana Finkler, Ernie Jackson, Julia Jebo Grant, and Cristina Ruggiero provided technical assistance.

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