[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT: WHAT MUST BE DONE TO
RESOLVE USAID'S LONGSTANDING FINANCIAL MANAGEMENT PROBLEMS?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
FINANCIAL MANAGEMENT AND
INTERGOVERNMENTAL RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MAY 8, 2001
__________
Serial No. 107-53
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
77-918 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida DANNY K. DAVIS, Illinois
DOUG OSE, California JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JIM TURNER, Texas
JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida WM. LACY CLAY, Missouri
CHRIS CANNON, Utah ------ ------
ADAM H. PUTNAM, Florida ------ ------
C.L. ``BUTCH'' OTTER, Idaho ------
EDWARD L. SCHROCK, Virginia BERNARD SANDERS, Vermont
------ ------ (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations
STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida MAJOR R. OWENS, New York
DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Earl Pierce, Professional Staff Member
Grant Newman, Clerk
Mark Stephenson, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on May 8, 2001...................................... 1
Statement of:
Mosley, Everett L., Inspector General, U.S. Agency for
International Development, accompanied by Bruce N.
Crandlemire, Deputy Assistant Inspector General for Audit;
Richard Nygard, Acting Assistant Administrator for
Management U.S. Agency for International Development,
accompanied by Michael T. Smokovich, Chief Financial
Officer; and Elmer S. Owens, Deputy Chief Financial Officer
for Policy and Credit Programs............................. 6
Letters, statements, etc., submitted for the record by:
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Mosley, Everett L., Inspector General, U.S. Agency for
International Development, prepared statement of........... 10
Nygard, Richard, Acting Assistant Administrator for
Management U.S. Agency for International Development,
prepared statement of...................................... 25
Owens, Elmer S., Deputy Chief Financial Officer for Policy
and Credit Programs, information concerning administrative
receivables................................................ 31
THE U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT: WHAT MUST BE DONE TO
RESOLVE USAID'S LONGSTANDING FINANCIAL MANAGEMENT PROBLEMS?
----------
TUESDAY, MAY 8, 2001
House of Representatives,
Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 11:18 a.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Putnam, and Schakowsky.
Staff present: J. Russell George, staff director and chief
counsel; Dianne Guensberg, detailee; Bonnie Heald, director of
communications; Earl Pierce, professional staff member; Grant
Newman, assistant to the committee; Alex Hurowitz, intern; Mark
Stephenson, minority professional staff member; and Jean Gosa,
minority assistant clerk.
Mr. Horn. A quorum being present this hearing of the
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations will come to order. We're here
today to continue our examination of how Federal departments
and agencies in the executive branch of the government account
for the billions of taxpayer dollars they spend each year. This
morning the subcommittee examined financial management efforts
at the government's largest agency in terms of people and
budget. Now we will examine one of the government's smaller
agencies, the U.S. Agency for International Development.
Similar to the Department of Defense for the 5th consecutive
year, the Agency for International Development has had such
significant problems with its financial systems that it was
unable to produce financial statements that auditors could
certify as reliable.
Also, similar to the Department of Defense, the Agency
again received the unacceptable grade of F on the
subcommittee's annual report card on Federal financial
management.
In this hearing, we will focus on what actions must be
taken to resolve these financial management issues. The U.S.
Agency for International Development provides nonmilitary
international aid to further U.S. interests abroad. The agency
focuses on six principal areas: economic growth and
development, population health and nutrition, environment,
democracy and governance, education and training, and
humanitarian assistance.
The agency provides aid primarily through grants and loan
guarantees to foreign governments and to humanitarian
organizations. Although small by Federal Government standards,
the operations of the Agency for International Development are
substantial. The Agency for International Development receives
appropriated funds of about $7 billion annually, and manages
and estimated $10 billion in outstanding loans. An estimated $4
billion of that amount is believed to be uncollectible.
Furthermore, the Agency estimates it may be required to pay out
$1.1 billion in defaulted agency guaranteed loans made by other
entities. The Agency's inability to properly account for these
asset liabilities and costs is frankly intolerable.
For fiscal year 2000, USAID's Inspector General was unable
to provide an opinion on the reasonableness of amounts reported
in the Agency's financial statements. The Inspector General
also found that the Agency had significant weaknesses in its
system of internal controls and did not comply with Federal
financial management laws and regulations. Although many
improvements have been made, the Inspector General reported
that agency systems and processes still do not provide reliable
financial information on a regular basis.
Now we have a new administration, which hopefully will
focus close attention on the U.S. Agency for International
Development and its continuing inability to address these long-
standing financial management problems.
We welcome our witnesses today. The Honorable Evert Mosley,
Inspector General of the U.S. Agency for International
Development; Richard Nygard, Acting Assistant Administrator for
Management of U.S. Agency for International Development.
[The prepared statement of Hon. Stephen Horn follows:]
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Mr. Horn. Gentlemen, we look forward to your testimony,
your insight and your recommendations to resolve these
financial management problems at the U.S. Agency for
International Development. I will now yield for an opening
statement to the ranking member of the subcommittee, and that
is the gentlewoman from Illinois, Ms. Schakowsky.
Ms. Schakowsky. Thank you, Mr. Chairman, and welcome to our
witnesses. The Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations is in the process of
examining financial management issues in a number of troubled
agencies. Last month we began the series of hearings with an
inspection of the consolidated financial statement of the
United States. The U.S. Agency for International Development is
one of three agencies which has been unable to produce
auditable financial statements since that requirement became
law 4 years ago. USAID was created in 1961 to advance the
foreign policy interests of the United States by promoting
sustainable development and providing humanitarian assistance,
goals which I strongly support.
In fact, I have been a beneficiary of one session of
training with USAID on international disaster. I keep my FOG
guide on my desk. You never know what's going to happen. I have
got all the instructions right there. So I do support the work
that you do. It has an overseas presence in more than 70
countries. And again, I had the pleasure of going with Brady
Anderson on the trip with the President to visit some sites in
India that USAID supports, 42 of which have formal missions in
fiscal year 2000. USAID has a total obligation authority of
$7.5 billion. USAID's international mandate causes financial
management challenges unique to this agency. This must not,
however, be an excuse for lack of improvement because better
financial management will ultimately mean resources more
efficiently dedicated to their intended worthwhile purposes.
I'm therefore glad that there appears to be some
improvement in the financial management of USAID as the
Agency's Inspector General has said in his written statement,
``USAID has made progress toward resolving some long-standing
problems with its financial management systems and has
committed significant resources for additional improvements
necessary for preparing auditable financial statements as well
as information to use for managing operations.'' These are
encouraging words from the Agency's independent watchdog. I
urge the Agency's senior management to continue to devote
serious attention and resources to correcting the financial
management concerns at USAID. Thank you, Mr. Chairman.
Mr. Horn. Let me explain, since many of you have not
appeared before this subcommittee, we will administer the oath,
all testimony is under oath in this investigating committee.
When I call on you the full text of your written testimony will
be immediately put in the record at that point. If you could
summarize it between 5 and 10 minutes, it would be appreciated,
because we can then get down to the questions. And those are
the ones that each member has dear feelings about; and they
should.
So if you will stand and raise your right hand, we'll swear
you all in. If there are any assistants in back of you that
might whisper to you, have them put up their right hand too.
The clerk will take their names and put them in the hearing at
this point.
[Witnesses sworn.]
Mr. Horn. The five witnesses have taken the oath. We will
now start here, and we'll begin with the Inspector General, the
Honorable Everett L. Mosley.
STATEMENTS OF EVERETT L. MOSLEY, INSPECTOR GENERAL, U.S. AGENCY
FOR INTERNATIONAL DEVELOPMENT, ACCOMPANIED BY BRUCE N.
CRANDLEMIRE, DEPUTY ASSISTANT INSPECTOR GENERAL FOR AUDIT;
RICHARD NYGARD, ACTING ASSISTANT ADMINISTRATOR FOR MANAGEMENT
U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT, ACCOMPANIED BY
MICHAEL T. SMOKOVICH, CHIEF FINANCIAL OFFICER; AND ELMER S.
OWENS, DEPUTY CHIEF FINANCIAL OFFICER FOR POLICY AND CREDIT
PROGRAMS
Mr. Mosley. Mr. Chairman, other committee members and
committee staff, good morning and thank you for the opportunity
to appear before you today, along with Mr. Nygard, who is
representing agency management. I have with me today Mr. Bruce
Crandlemire, who is our Deputy Assistant Inspector General for
Audit with responsibility for the financial audit process at
the U.S. Agency for International Development. We're pleased to
be here today to provide testimony and answer questions on the
results of the Office of Inspector General's audit of USAID's
fiscal year 2000 financial statements and actions needed to
correct longstanding problems in USAID's financial management
systems. As documented, we were unable to render opinion on
USAID's annual financial statements for the last 4 years. In
this testimony, I will discuss the results of our audit of
USAID's fiscal year 2000 financial statements and USAID's
corrective actions to date. I will also discuss what remains to
be done from USAID's perspective of correcting system problems
and preparing auditable financial statements for fiscal year
2001.
As a result of the Chief Financial Officer's Act of 1990,
the Government Management Reform Act of 1994, and the Federal
Financial Management Improvement Act of 1996, the Federal
Government has embarked on a course to improve the quality of
financial information used to manage its activities. Each of
these laws has impacted the preparation and audit of annual
financial statements by the Federal agencies. However, the
overwhelming theme woven through these legislative initiatives
is that the Federal Government needs to have good financial
systems which will enable them to produce complete, consistent,
reliable, and timely information throughout the fiscal year.
The audit opinion of the financial statements, which
represents the status of the financial operations at a specific
point in time, is, or should be, a simple by-product of good
financial management systems because the opinion is based on
everyday information contained in its accounting records.
We do not believe that the legislation contemplated the use
of heroic measures to prepare and audit a set of financial
statements which do not reflect the information normally
present and used to manage operations.
For example, it is possible for an agency that has
inadequate financial systems to receive an opinion, even an
unqualified opinion. However, to do so, two things would have
to be done: First, the Agency would have to invest significant
time and money to create work around procedures to achieve
accurate information that the system could not produce. Second,
the OIG or other audit organizations would have to invest
significant time and money to perform extensive testing of
these procedures, due to the increase in audit risk associated
with unreliable systems.
In my opinion it would be a waste of resources and a
contradiction of the legislative intent for an agency to go
through such efforts to receive an opinion on its financial
statements when it does not have systems that could provide
complete, consistent, reliable, and timely information for
managers to use throughout the year in making decisions.
During the last 18 months USAID has made progress toward
resolving some longstanding problems with its financial
management systems and has submitted significant resources for
additional improvements necessary for preparing auditable
financial statements. However, at the time the audit began,
USAID still faced some immediate challenges with its fiscal
year 2000 financial statements.
These challenges included: correcting outstanding financial
management systems deficiencies; implementing an integrated
financial management system; reconciling financial data; and
processing, recording, and reporting financial information in
accordance with general accepted accounting principles.
Because USAID's efforts to improve the system that produces
financial statements had not fully implemented all related
corrective actions, the OIG and USAID management agreed that it
would be most beneficial to focus our audit efforts on the five
areas that were prohibiting USAID from getting an opinion.
These five areas were: complying with the FFMIA requirements,
such as computer security and the use of Federal accounting
standards; reconciling and managing USAID's fund balances with
Treasury; reporting credit program receivables; accounting for
advances to grantees; and calculating and reporting accounts
payable and accrued expenses.
By focusing on these five areas rather than performing
substantive testing on what we agreed was unreliable financial
information, the OIG and management officials concluded that
USAID would be in a better position to establish reliable
beginning balances for future statements to be audited and
progress toward having a system capable of helping managers
manage.
We were unable to express an opinion of USAID's
consolidated financial statements for the fiscal year ending
September 30, 2000, and I shall use a disclaimer. Factors that
led to our decision to disclaim an opinion were that USAID made
some material changes in its accounting process after the close
of fiscal year 2000. These changes resulted in material
adjustments to the financial statements late in December 2000.
And because the Agency's automated system could not be used to
develop information that the OIG could use to validate the
adjustments, we did not have sufficient support to determine
whether the adjustments were reliable.
The uncorrected system deficiencies and material
adjustments created a consequential risk that the financial
statements could contain material misstatements. USAID's
management concurred with the audit findings and agreed to
eliminate these problems. We're continuing to work with USAID
management to evaluate their efforts and take corrective
actions.
To correct these deficiencies reported, USAID deployed a
core financial accounting component of a new financial
management and accounting system in December 2000. This
commercial off-the-shelf accounting system, Phoenix as it is
called, replaced key aspects of the Agency's unreliable
financial management systems, called the New Management System
[NMS].
In addition, our audit of the fiscal year 2000 financial
statements show that USAID had improved its ability to
reconcile and manage its funds balance with the U.S. Treasury
and report reliable balances for its credit program
receivables.
In late December 2000, USAID established a new methodology
for estimating its accounts payable and accrued expenses
related to advances to grantees at fiscal year's end. I am
pleased to note that during the initial phases of the fiscal
year 2000 audit, the OIG has analyzed the advance-related
accrued expenses estimating method and found it to be adequate.
Regarding the problems noted in fiscal year 2000 with the
accounts payable estimates, the OIG is currently evaluating
USAID's procedure to determine the reasonableness of its
estimating methodology.
Despite having implemented Phoenix in headquarters, there
remains work to be done. USAID needs to successfully complete
the Phoenix implementation worldwide, complete financial
actions on outstanding audit recommendations, and address
several specific issues with material line items on its
financial statements.
Along with deploying Phoenix, USAID is facing challenges
that typically occur when implementing new accounting systems.
Phoenix is not yet fully operational and in the short term,
USAID needs to: one, complete the testing and deployment of the
interfaces linking mission and procurement data to the core
financial system; two, eliminate several key operational
elements performed outside the core financial accounting
system, such as making payments and generating funds control
reports; and three, migrate the beginning balances for fiscal
year 2001.
To date, USAID has not entered into the Washington
headquarters accounting records any financial information
related to its overseas operation for fiscal year 2001.
Overseas operations are recorded and maintained in the mission
accounting and control system [MACS]. USAID does not plan to
enter the information into the Washington headquarters
accounting records until an electronic interface for field data
is deployed, currently scheduled for late in this fiscal year.
This will have a critical impact on the fiscal year's 2001
audit, because we cannot fully assess risks associated with the
electronic interface until it is deployed. Further, MACS is not
currently scheduled for replacement until fiscal year 2003.
This will continue to impact future audits until MACS is
replaced with the worldwide implementation of Phoenix.
USAID also needs to address the remaining OIG
recommendations that were not fully completed as of September
30, 2000. While management has concurred with these
recommendations, all financial actions have not been
accomplished.
Finally, USAID must be able to establish beginning balances
for material line items of its financial statements for OIG to
opine on the fiscal year 2001 financial statements. We are
currently working with USAID to review these beginning balances
for our fiscal year 2001 audit.
The challenges faced by USAID also present challenges to
OIG in planning our audit of the fiscal year 2001 financial
statements. At this time, we cannot be sure what problems may
arise as USAID continues to address its financial management
problems and complete the deployment of the Phoenix system and
its necessary interfaces.
While USAID lost valuable time during the period when it
was attempting to implement the NMS, considerable progress has
been made since a decision was made to deploy Phoenix. In
addition, USAID's financial managers have shown an increasingly
strong and supportive attitude toward the financial statement
audit and the value it brings to their systems. Specifically,
the new Administrator, who was just sworn in last week, has
said that improving the Agency's management systems will be his
primary focus in his first year.
We are currently hopeful that USAID can develop fiscal year
2001 financial statements on which we can render an opinion.
Mr. Chairman that concludes my statement. And we will be
pleased to answer questions.
[The prepared statement of Mr. Mosley follows:]
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Mr. Horn. I thank the gentleman. We now have the Acting
Assistant Administrator for Management, Richard C. Nygard, for
the U.S. Agency for International Development.
Mr. Nygard. Thank you, Mr. Chairman. Mr. Chairman and
members. It's my honor to appear today before your subcommittee
to discuss the problems we've experienced in our financial
systems and the actions we've taken to date and are taking to
correct them. I'm accompanied today by Mr. Michael Smokovich,
our chief financial officer, and by Mr. Sandy Owens, our deputy
CFO. I will, as you suggested, briefly summarize my written
testimony.
Mr. Chairman, our focus over the past 3 years has been on
solving the Agency's fundamental financial management problems.
We've devoted extraordinary efforts to correcting our systems
and processes, believing that this work is most important and
will lead to auditable financial statements. We've worked
closely with Mr. Mosley and his staff in addressing these
problems and have made considerable progress. With the efforts
that have been made and that will continue, we plan to have our
statements audited this year and to move rapidly thereafter
toward getting a ``clean,'' unqualified opinion. Our efforts
are based on solving specific problems, on eliminating material
weaknesses, on improving our financial and other business
information systems, and on carrying out a comprehensive
financial remediation plan.
In terms of problems, the IG staff have pointed out a
number of these that impeded their ability to audit USAID's
financial statements over the past few years. We've
concentrated this year on achieving major progress in four
problem areas. First is the reconciliation of fund or cash
balances with Treasury. We've achieved continuous improvement
in this area. As an example, our absolute difference with
Treasury was reduced from $266 million in fiscal 1999 to less
than $83 million last year. We expect further improvement this
year, and despite the workload and complexities related to
implementing our new accounting system, we plan to bring that
difference down.
Next is loan accounts receivable. We outsourced our loan
and credit servicing to a commercial bank in 1998 and have
improved performance in that area, as was noted by Mr. Mosley.
Third is advances to grantees. The Inspector General has been
concerned that using pooled advances whereby a grantee can
receive advances on multiple grants in a single transaction
doesn't give adequate accountability. So we're converting to
grant-specific advances. We've already reconciled more than
half of our grantee accounts, and have begun conversion of
these accounts to the new approach.
Fourth, our methodology for accrued expenditures has
improved to provide greater accuracy. We introduced this new
methodology late last fiscal year, but as noted, too late for
the IG to validate its accuracy. We're working with the IG to
facilitate their doing so this year.
In the area of material weaknesses, in 1998, the Agency
reported nine such weaknesses. To date, we've closed five of
them and expect to close three more this year, and the final
one next year. The three to be closed this year are the
accounting system itself, which our new COTS-based system will
resolve; financial reporting, which will be solved by an
effective interface between the new headquarters accounting
system and our ongoing system in the field; and IRM procedures,
which will be resolved through the use of the disciplined IT
methodology that we've been working on for the past 3 years.
The fourth and last remaining material weakness is computer
security, a concern to all Federal agencies. We've made major
progress in this area and have taken a leadership role in
establishing best practices under the Federal CIO council.
We've devoted high priority to assuring the security of the new
accounting system and are also strengthening the security of
systems at our overseas accounting stations.
Let me talk now about improving systems. After an
unsuccessful attempt to implement a custom built system in the
mid 90's, we followed the recommendations of an independent
review led by IBM: employing a highly skilled systems
integration firm, basing our systems on COTS packages designed
for Federal agencies, and outsourcing and cross-servicing with
other agencies wherever possible.
We procured such an accounting system late in fiscal 1999,
configured it in fiscal 2000 without making any modifications
to the software, and implemented it at headquarters earlier
this year. We plan to purchase a COTS procurement system next
year. We have outsourced our loan and credit servicing to a
commercial bank and have cross-serviced our grant letter of
credit advances programs, our payroll processing and our
personnel data system to other Federal agencies. This year we
will implement automated interfaces between our new financial
system and other systems.
On our remediation plan, we've instituted a comprehensive
plan which includes many of the actions mentioned above and
also focuses on better approaches to resolving audit findings.
Last year, the Inspector General produced some 80 findings
and recommendations related to the financial system and
statements. To date, we've closed about three-quarters of
these, and the rest will be resolved later this fiscal year or
early next fiscal year. Our goal, however, is to reduce
significantly the number of audit findings and recommendations,
financial and other, through a combination of better systems
and policies and much better training of our staff.
We believe, Mr. Chairman, that the remediation plan is
already producing better financial management at USAID, and
that we will continue to improve in the coming years. One
indicator of this will, we hope, be the IG's ability to audit
our financial statements starting this year.
I thank you, sir.
[The prepared statement of Mr. Nygard follows:]
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Mr. Horn. We thank you. Does any other member with you want
to say anything at this point that may have been missed?
OK. I have a lot of feeling for the Agency for
International Development. You have a very important mission.
And we will hope that the money the Congress gives the USAID
will go to a good cause. And if we don't have a decent
financial system and a decent management system, that money
will not go for a decent cause. So you've got quite a
responsibility ahead of you.
Let me start on the debt collection, which is dear to my
heart, since it's the law that I got passed in 1996. I'd like
to know from both of you, can you estimate the amount of
improper payments including duplicate payments, overpayments
and payments for goods and services not received made each year
by the Agency? Do we know where the debts are and how we----
Mr. Smokovich. Mr. Chairman, Mr. Smokovich. USAID payments
are generally made to contractors and vendors who have a
business relationship with the Agency. We have been able to
refer debt to Treasury which is stale debt, as you're well
aware of. We have found no substantial problem with erroneous
payments in the Agency.
Mr. Horn. How stale is the debt?
Mr. Smokovich. Mr. Owens.
Mr. Owens. Our administrative receivables are normally no
more than a year old when they're referred to Treasury. I don't
have those exact figures with me, Mr. Chairman. We can provide
them.
Mr. Horn. If you could, we'll have a place in the record at
this point.
[The information referred to follows:]
In 1999, 13 cases were referred to Treasury with a value of
$1,205,349.23. During 2000, 11 cases were referred to Treasury
totalling $661,938.77 and as for 2001, we have referred on case
for $456,766.14.''
Mr. Horn. Without objection if you could put a letter in as
to where are we on that particular debt, how--because people
we've found--and this is what every debt collector knows, when
you don't have much communication with a person that owes the
debt, that they just think it's a grant. And we're not in the
grant business. We're in a lot of these things. You're in a lot
of grant business because of humanitarian groups that are
trying to do that.
Mr. Smokovich. Mr. Chairman, let me add one comment on
that. The IG has raised some issue with our administrative
receivables. There's about $48 million out there. Those are a
small part of our portfolio, and we have followup processes in
place in Washington, which will be helped by the new accounting
system, because we'll be able to book them, but in the field,
those are handled essentially on cuff records. But we do have
good controllers and executive officers out there who do
followup with our people. And we do run a fairly aggressive
drill on delinquent credit card debt. We brought that down
dramatically last year and even more dramatically this year.
Mr. Horn. Does the Agency have contracts with the private
debt collectors to get at delinquent debts?
Mr. Smokovich. We are using the private debt collection
contractors that the U.S. Treasury has put in place.
Mr. Horn. Through the financial management?
Mr. Smokovich. Yes, sir.
Mr. Horn. Well, they do a good job. So hopefully we can get
some of that money back.
What are the processes that the Agency used to recover
them? You say you turn it all over to the financial management
group, or is there anything else you do like when somebody
picks up the phone and says look, you have an obligation here.
What are you going to do about it?
Mr. Smokovich. There are two processes at work there. One
is where it's a business related debt. When the debt becomes
stale, that debt is referred to the Treasury. On our own
internal administrative debt, we have a process in place where
our accounting and financial shop will followup with employees,
and I actually get involved in those to make sure that we don't
have to send any of those people to Treasury for offset. So
it's a fairly active approach.
Mr. Horn. How are the recovered payments accounted for in
the Agency's financial statement?
Mr. Smokovich. In the past, we had not been able to book
those into the accounting system. This year we're beginning to
do that. Where we have an account receivable recorded, that's
one of the things we're effectively doing at the end of the
year, establishing that record on the financial statements of
the Agency.
Mr. Horn. Well, that's good news. And I hope to see it in
all future balance sheets.
Are the contractors required to notify the Agency about
these overpayments? And what do you do about it? You've got how
many contractors that deal with USAID?
Mr. Smokovich. I'm not sure I understand your question
fully, but right now with USAID Washington, we have 12,000
vendors in our file composed of grantees and contractors. One
of the things we're able to do with the accounting system
implementation is clean that record up. At one point, it looked
like we had as many as 18,000.
Mr. Horn. What do you have overseas?
Mr. Smokovich. I don't have that number. I could get that
number for you.
Mr. Horn. If you could, we'll put it in the record at this
point.
And is it just a lost battle when you've got a number
overseas? How difficult is that for you to get it in a foreign
country in a foreign nation?
Mr. Smokovich. It depends on country law, but our people
typically are fairly high grade professional CPAs, MBAs, so
they know the processes. The difficulty we have is getting
access to the data, as you well know. Without the corporate
systems, everything turns into a data call from us to a
mission.
Mr. Horn. And what kind of response do you get from the
mission? Do they say, ``don't bother me?''
Mr. Smokovich. No, sir, they're very professional. They
usually turn it around in a day. The only trouble we have
sometimes is understanding what time of day it is over there.
Mr. Horn. Well, I can understand that. But if you could
just put in the record at this point how many contractors
overseas, where there were overpayments or underpayments, what
happened, just in a generic way. I'm not asking to you go
through every single one, but somebody somewhere must have some
feel for whether they just defaulted and/or they got the job
done.
And were the contractors required to pay interest to the
government on overpayments? How is that doing?
Mr. Smokovich. Yes, they are.
Mr. Horn. OK. Put a little something in the record on that
at this point, too.
What steps can Congress take to help facilitate the
identification and recovery of overpayments? And I really asked
that of the Inspector General. You've looked, I take it, at
some of these questions of loans and payments, overpayments,
underpayments, all the rest. In the Pentagon we have a lot of
that. And I don't know the degree to which that has happened in
USAID. But with missions all over the world, I can certainly
see a lot of strange things would happen. And have you sent
some of your people out to where things really happen in
different continents and seen what's happened on loans that
went to an agency and they didn't do a thing about it? Or do we
just sit here in Washington to be----
Mr. Crandlemire. One of the things that we've been working
with the Office of Procurement on is a process where in it
introduces more discipline into the recovery of questioned
costs that arise out of audits. Historically, USAID has not
pressed its contractors and grantees sufficiently to get these
moneys in. This has resulted in a number of recommendations
building up where USAID needs to make management decisions, and
it's just not good business.
Mr. Toby Jarman, the Assistant Inspector General for Audit,
and I have worked with Mr. Mark Ward, Director for procurement,
who recently came in from USAID Moscow. We've come to an
agreement where we're going to introduce some additional
disciplines into the grantee and contractor community.
One of the things that Mark has agreed to do is when an
audit report comes out, speak very directly to the grantee and
to the contractor, and in that speaking, let them know that the
entity has been doing business with USAID for some time; the
entity is a sophisticated entity. We need to get these question
costs supported and get these moneys returned. This is about
doing business.
Mark has been very good with us on that. He's invited Mr.
Jarman and myself to speak to trade groups to get this idea
across. It has been, I think, received relatively well. We have
seen a significant reduction in a number of recommendations
that did not have a management decision. It's about a
discipline. It's about a process to do business in a more
orderly fashion. I think we're getting there in this particular
area, and that's one step toward reducing the amount of
outstanding questioned costs.
Mr. Horn. I turn to the ranking member, the woman from
Illinois, Ms. Schakowsky.
Ms. Schakowsky. Thank you, Mr. Chairman. Mr. Nygard, did
you say that you thought that USAID would be able to receive an
opinion this coming year?
Mr. Nygard. What I said, Ms. Schakowsky, was that the
Inspector General has agreed to audit our financial statements
this year. I think that this is a major step forward. As Mr.
Mosley said in his testimony, in the past, there has been a
concern about the amount of actual work that would have to go
in to trying to do an audit. And if I heard him correctly, he
was saying that as of this year, we now have a system in place
with our new accounting system, and if we implement the
interface between the field and Washington where it will be
possible for the Inspector General's audit staff to do an audit
of our financial statements, coming out of that ordinarily will
be an opinion.
Ms. Schakowsky. As the chairman said, the earlier panel was
dealing with the Department of Defense, the largest agency, and
USAID, one of the smallest. How do you account for--is there
something unique about USAID that has made these problems seem
so difficult to resolve over the last several years?
Mr. Nygard. Well, for one thing as I said earlier, we were
burdened with the fact that we tried to build our own custom
built financial and comprehensive information system for the
Agency. And in retrospect, that was a mistake 6 years ago. Now
we're using commercial off-the-shelf software, which is going
to be much more effective. We've also had the difficulties, the
accounting difficulties that I summarized in my statement, and
one also has to realize that as the chairman noted earlier, we
have 70 overseas posts and 38 accounting stations overseas
where we have standard accounting systems. It's a complex
situation even given the relatively small size of our agency
compared to the Department of Defense. So we have complexities,
but we've had problems, some of which have clearly been of our
own making.
Ms. Schakowsky. I wanted to ask you about the overseas
operations. My understanding that most of the financial
management improvements have been at the Washington offices.
When will improvements made at headquarters be realized in the
field offices?
Mr. Nygard. I think we're constantly making improvements,
both in Washington and overseas, but specifically we plan to
roll out the accounting system that we have installed in
Washington to our overseas missions, probably starting in the
fiscal 2003 timeframe. Doing so requires some information
technology infrastructure work to be completed before we do it.
So it will probably be about 2 years from now before we're able
to put the system we call Phoenix out worldwide.
Ms. Schakowsky. Meaning that you would start now but it
wouldn't be completed until 2003? These timeframes are daunting
to me. They just seem so long.
Mr. Nygard. They seem long to us, too. I agree. In the next
fiscal year we will be doing pilot testing at several missions
overseas to make sure the system works. One of the difficulties
we had when we tried to put the so-called new management system
out to the field 6 years ago was that there was no real pilot
test. They assumed that what worked in Washington would work
overseas. That wasn't the case. There were communication
problems, technology problems. We're going to make sure that we
do perfectly adequate systems testing and pilot testing before
we put it out.
That will take some time. As I said also, the
communications between the field in Washington, communications
infrastructure, some of which goes through the Department of
State and some of which goes through our own satellites, needs
to be heavied up somewhat at a number of our missions in order
to accommodate the load that the new accounting system will put
overseas.
So it is a matter of not just the accounting system itself,
but the technology that goes along with it. When we put it out
this time, we don't want it to fail as it did 6 years ago.
Ms. Schakowsky. USAID reports that it has developed a model
security program which has been selected as a best security
practice by the Federal Chief Information Officer Council, yet
the Inspector General reports that its recommendations on
reporting an effective computer security program has not been
fully implemented.
I understand it is supposed to be scheduled for 2002. Is
that what I heard you say?
Mr. Nygard. That's correct.
Ms. Schakowsky. What is the status right now of computer
security at USAID?
Mr. Nygard. We have made major progress in computer
security. As I said earlier, we have worked--our computer
security professionals have worked with the Federal CIO Council
in developing and taking the lead in establishing best
practices for information technology security. We have built a
computer security risk assessment and certification process
that we have put in and implemented.
The new accounting system, Phoenix, was certified as secure
before we implemented it, something we had not done with our
previous systems.
A number of our legacy systems have been certified
compliant, and this year, later this year, the software for our
overseas accounting system, which has existed for more than a
decade, will undergo a similar certification.
Over the course of this year and the next fiscal year, we
will be doing security risk assessments and improvements at
each one of our overseas missions. This is unfortunately not
something we can do just from the center. It is a matter of
visiting each of the 38 accounting systems stations overseas
and making the necessary fixes at them. That is really what is
going to delay the closing of that material weakness until next
year.
But we have a plan. We have made excellent progress to
date. We have actually been able to move up the completion date
from what had originally been 2003 to next year, so we feel we
are moving in the right direction, though we are not there yet.
Ms. Schakowsky. I will just ask a question about the old
system, the pre-Phoenix system.
Again, to me it seems like it took an awfully long time to
figure out that it was broke and needed fixing. It sounds like
it never really worked very well.
Why didn't you see those changes made earlier?
Mr. Nygard. Actually, I don't mean to make humor of a very
serious situation, but I almost said, when we found out that we
were having serious problems with this back in 1997, and I was
not in my present job at that time, I said, why can't we just
buy something like Quicken and plug it in?
It does not work like that. IBM, as I mentioned in my
statement, carried out a study for us in 1997-1998. They made
recommendations as to how we should proceed. We brought on
board a very capable systems integration firm that has helped
guide us as we have gone ahead.
We then had to go through the procurement of a new
accounting system to look at what was available. We procured
this Phoenix system, which is what we call it, which is really
American Management System's Momentum financial software, at
the end of fiscal year 1999, so it took a year and a half to
procure that system. Then it took another year to configure it.
As I said, we didn't make any basic changes in the
software, but each agency has somewhat different ways of doing
business, so it took all of fiscal year 2000 to get the system
ready to implement. Then we did extensive testing. It takes
also an awful lot of training of individuals so they will be
able to understand what they are doing.
At the end of fiscal year 2000, at the beginning of this
fiscal year, we completed the testing and training so when we
did implement the new system, it went quite smoothly, I would
say. Nothing ever goes without bumps and bangs, but that
preliminary work that we did made for a good implementation. We
worked very closely with Mr. Mosley and his folks in doing
that.
Ms. Schakowsky. In other words, though, it has taken 4
years from the time when you knew you were going to have to
change it for that change to be not quite completed, because it
is only the Washington office?
Mr. Nygard. Two years from the time we knew we had a
problem until the time we bought the new system, and another
year and a quarter to implement in Washington, yes.
Ms. Schakowsky. That is a long time.
Mr. Nygard. Yes.
Ms. Schakowsky. Let me ask a final question. Material
discrepancies exist between USAID loan information maintained
by a private bank and USAID's records.
The Inspector General reported that on September 30, 2000,
the total discrepancy was $459 million. USAID subsequently
identified and reconciled $366 million of the discrepancy, and
made a one-time adjustment of $93 million to reconcile the
difference.
Could you explain the discrepancy, how it occurred, and
what is being done to reconcile it?
Mr. Owens. The USAID loan portfolio dates all the way back
to the post World War II reconstruction, the Marshall Plan, up
until the late eighties, when we basically quit making direct
loans under our programs.
Over the years we maintained our own home-built loan
accounting system, and in 1998, working with the Office of
Management and Budget and the Inspector General, we made a
decision to out-source our loan servicing to Riggs Bank here in
Washington. As part of that process, we did a complete
reconciliation with Riggs Bank, and that is where we identified
those differences.
We were able to resolve most of those differences after
doing the complete reconciliation, but the remaining portion we
could not determine. We agreed with the IG, the Inspector
General's Office, to make a one-time adjustment to bring our
general ledger accounts into agreement with the individual loan
records. So now our ledgers and our individual loan records are
in balance.
Ms. Schakowsky. Thank you.
Mr. Crandlemire. I would like to add that in the years
prior to this effort, where they went out and did
reconciliations, our standard practice of confirming balances
with the grantees and the debtors did not go well. We could not
get agreement. There clearly were many, many years of error and
bad accounting that had gotten in there, not through intention,
but it just happened.
This was a good effort and it resulted in some good numbers
where now we can do a standard confirmation, which is a normal
audit technique to get a third-party confirmation. This has
vastly improved the efficiency of our audit process for this
particular line item, which is one of the largest on USAID's
balance sheet. It is a good thing.
Mr. Mosley. I might also add, Ms. Shakowsky, in terms of
your concerns about what took so long, I have to be very honest
and say part of the problem on why it took so long was
communications. We now have a management that agrees and is
working with us. I think that will make a tremendous difference
in terms of getting the problems corrected.
You also talked about the problems in the field. I think I
should point out that even though they have not exposed the
field to the use of the new Phoenix system yet, the MACS system
that is being used in the field is the system that the OIG has
found the least number of problems with, so the data is being
tracked. The difficulty is that it is not as quickly interfaced
into the Washington system, and it certainly slows managers in
being able to have access to that system and manage it. But
from the standpoint of having the information, it is there.
That is one of the best systems that they have.
Ms. Schakowsky. Thank you, Mr. Chairman.
Mr. Horn. Thank you.
I just have a few round-up questions, if you will.
You have now been under the Department of State for almost
1 year or so. Has that changed anything in terms of either
financial management or management systems? What has happened
in that year?
Mr. Nygard. Let me start off responding to that. Perhaps
Mr. Mosley will want to add something else.
Under the new legislation, the Agency for International
Development remains a separate agency, but our Administrator
reports directly to the Secretary of State, rather than to the
President, as previously. This has engendered a much closer
working relationship with the State.
We are looking for areas where administrative efficiencies
can be realized. Obviously, they are overseas, we are overseas.
We are co-located with them in one-third of our overseas posts.
Our objective is, wherever they are building a new embassy
where we are located, to co-locate with them, for efficiency's
sake and also for security's sake.
In terms of financial management systems, we do not have
integrated systems with them. They are using AMS Momentum now,
starting overseas. We are using AMS Momentum.
The roles of the agencies are somewhat different.
Obviously, the great majority of the Department's money tends
to be administrative money: salaries, expenses, that sort of
thing. The great majority of our money is program money. So
again, Mike Smokovich and his staff are working with the CFO's
staff over at State to find areas where we can work together.
At this point we have not worked to merge our systems, but
clearly administrative efficiencies, particularly in overseas
operations, are the goal of both organizations.
Mr. Horn. One of the things that this subcommittee cares
about is computer security. I just wondered, is your computer
security and is the State's computer security, which we will
ask them about, and a number of other agencies--some of them
say, hey, we don't have to worry about that because we are
completely off where they cannot get us.
When I go to a place such as Italy, and they are now the
sixth largest economy in the world, they are quite correctly
worried about the access to private sector computers that could
bring down the whole economic industry. We could also be
brought down.
I notice--when you say use of a satellite, that made me
wonder, with some of these people who have quite a few billion
dollars to be rogue countries or rogue terrorists or whatever,
I wondered, to what degree are you looking out for that? Does
that come under your particular bailiwick in USAID?
Mr. Nygard. Yes, I think it does.
When we talk about information security, obviously there
are two totally different things. One is information systems
security, which clearly comes under my bailiwick. The other is
information security, which has to do with classified
information, which would come under the purview of the Director
of Security. In terms of that, we are vividly concerned with
that.
Mr. Horn. Is that person reporting to you, or is that a
State Department person?
Mr. Nygard. The Director of Security in terms of classified
information, protecting, this sort of thing, reports directly
to the Administrator of the Agency. But, obviously, our
computer security people work very closely with them. When we
are looking at information security, we also have to be looking
at computer security. We are working together closely on that.
The man we have heading our computer security program was
brought in from the private sector. He is very experienced, as
I said in my testimony. He has taken the lead with the Federal
CIO Council. He has been working with Fernando Burbano, the CIO
over at State. There are a number of areas on which they are
working together.
Our prime focus, of course, is ourselves, but we are not
just looking at ourselves.
Mr. Horn. Would you like to comment, Mr. Mosley?
Mr. Mosley. Yes. From our perspective in terms of being
under the Secretary of State, it has no real effect on our real
data because the data is kept separately.
However, we could work with the State IG. We have periodic
meetings, a minimum of quarterly, to talk about areas where we
can join our audit efforts and make sure we are giving
coverage.
We also have field people, where State does not have people
in the field, so we are able to supplement some of our reviews
by using the people in the field.
One of the areas that does involve the financial systems is
the transfer of funds under section 632 of the Foreign Service
Act. We have worked closely with State and the other Federal
agencies to try and make sure when those funds are transferred,
that they are properly recorded in the financial records of
both our agency and the agency they are transferred to, and
that correct tracking is being accomplished.
Mr. Horn. Each year in some of these statements we have
heard the same message, in a way, that improvements have been
made but much remains to be done.
What do you think can be done in this particular fiscal
year that was not done last year?
Mr. Nygard, what do you think?
Mr. Nygard. I think the four problem areas that we
discussed earlier, where we are working closely with the
Inspector General, will move a long way to both--our main goal
is to improve financial management. As a result of that, we
hope to get our financial statements audited. So that is a
major thing.
The implementation of our new accounting system clears up
the Washington accounting, which has been a major problem. As
Mr. Mosley has said, our field accounting has been less of a
problem, but it is critically important that at the end of this
fiscal year, we have an adequate interface where the
information from the field can be brought in and put into our
general ledger, along with the Washington data. That will be a
major goal for us to do this year.
I think if we accomplish those things this year, we will be
in quite good shape. Obviously, what will remain to be done
will be to put the same accounting system overseas in the
course of the next 2 years.
Mr. Horn. What kind of General Schedule personnel can you
get to help solve that problem? I think part of our problem in
a few places, and I think of the Columbus operation in Ohio,
which is under the Army's jurisdiction, but I was sort of
shocked when I saw the low level of grades in terms of people
looking at contracts and this kind of thing, and following up
on it.
So do you have any problems on personnel?
Mr. Nygard. We have had to use a higher proportion of
contractors, I think, because we have not had enough capable
financial management personnel. I will let Mr. Smokovich talk
to that. But my feeling is it is kind of a middle generation.
We have accounting technicians at relatively junior grades, and
we have a number of very capable people at the most senior
grades, but it is kind of the GS-13, 14, 15, where we have been
lacking and where we are trying desperately to recruit
qualified people.
Mr. Smokovich, do you want to add to that?
Mr. Smokovich. In the downsizing days we lost some of our
best people, before I came there. We have been blessed in this
project effort to have senior Foreign Service officers and GS-
15 level and SES level people dedicated to the project, but we
do have a challenge in rebuilding the organization, because, as
you say, people solve problems, systems don't.
In the field, we are uniquely blessed in the sense that we
have CPAs, MBAs, in the Foreign Service, but we are losing them
to a competitive economy.
The other thing we have going for us is very strong Foreign
Service national employees. I have about 650 people worldwide
who do our finances for us. Our strength is less in our systems
than in our people.
Mr. Horn. Are we reaching out into the colleges of this
country to try to find people? I would think that is a very
attractive situation where you have people who feel good about
themselves and good about our country, and get a chance to see
and do something for the good of mankind.
Mr. Smokovich. The answer is yes, but Rick might want to
respond to this, too. USAID is uniquely able to attract people
because of its mission. We have a great mission. We have
started hiring new entry professionals.
When I came 2 years ago, there were no new people. We are
starting to get them in now. Rick?
Mr. Nygard. I would say two things. We have really two
categories of employees in USAID: We have Civil Service
employees who work in Washington, and Foreign Service officers
who work both overseas and in Washington.
For the Foreign Service, we have adopted a comprehensive
work force planning system that has resulted in the new entry
professionals that Mr. Smokovich was talking about, including
comptrollers. For the most part, these people are not right out
of college but are in their thirties, have experience, and most
have overseas experience.
I was introduced to one this morning who spent 2 years as a
contract comptroller in our mission in one of the Central
American countries, so that is one area.
The other is Civil Service, where Washington systems need
to be improved. There I can tell you that our work force
planning priorities for Civil Service people include three
categories of people, all of whom happen to fall under my area:
information technology, procurement, and financial management.
I'm not saying one is more important than the other. Those are
our priorities.
We are going after college graduates. As Mr. Smokovich
said, the mission of our Agency is indeed something that is
quite attractive to people, even if they are only going to be
working in Washington. So that is helping us bring people on.
Mr. Horn. I would hope so, because, as you say very
eloquently, it is important. We should do that, and we should
be walking around the campuses of the country and seeing if we
can pick people up, because we have a real problem with human
infrastructure, if you will, with a lot of good people retiring
and going out of the system. We need to have the opportunities.
Where else do we have an opportunity like this, either in the
services or the Civil Service? That is where we need a lot of
help.
We ought to be starting in kindergarten in terms of logic
and everything else, and not be importing people from abroad.
We ought to be training our own people and educating them, and
retraining them.
Is there anything else any of you want to make a point on
before we close down? Mr. Inspector General.
Mr. Mosley. No, sir. Thank you.
Mr. Horn. Mr. Smokovich.
Mr. Smokovich. Mr. Chairman, I think this is a remarkable
hearing. You see five people who are all dedicated to fixing
the problems of the Agency and getting an opinion on an audited
statement, which has never happened before. So I am betting and
I am hoping that our grade goes up the next time you do that.
Mr. Horn. We look forward to it.
We are in recess until 1:30. That is the Department of
Agriculture.
[Whereupon, at 12:20 p.m., the subcommittee recessed, to
reconvene with other business at 1:30 p.m., this same day.]