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Testimony:
Before the Committee on Energy and Natural Resources, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EST:
Thursday, February 8, 2007:
Commonwealth Of The Northern Mariana Islands:
Serious Economic, Fiscal, and Accountability Challenges:
Statement of Jeanette Franzel, Director:
Financial Management and Assurance:
GAO-07-436T:
GAO Highlights:
Highlights of GAO-07-436T, a testimony to Committee on Energy and
Natural Resources, U.S. Senate
Why GAO Did This Study:
The U.S. insular area of the Commonwealth of the Northern Mariana
Islands (CNMI) is a self-governing commonwealth of the United States
that comprises 14 islands in the North Pacific. In a December 2006
report—U.S. Insular Areas: Economic, Fiscal, and Financial
Accountability Challenges (GAO-07-119)—regarding four insular areas
including CNMI, GAO identified and reported the following: (1) economic
challenges, including the effect of changing tax and trade laws on
their economies; (2) fiscal condition; and (3) financial
accountability, including compliance with the Single Audit Act. The
Chairman of the Senate Committee on Energy and Natural Resources, which
requested the December 2006 report, asked GAO to present and discuss
the results as they pertain to CNMI. Our summary and conclusions are
based on our work performed for our December 2006 report on U.S.
insular areas. For this testimony we also had available CNMI’s fiscal
year 2005 audited financial statements, which we have included in our
review, along with some recent developments in fiscal year 2006.
What GAO Found:
The Commonwealth of the Northern Mariana Islands (CNMI) faces serious
economic, fiscal, and financial accountability challenges. CNMI’s
economy depends heavily on two industries, garment manufacturing and
tourism. However, recent changes in U.S. trade law have increased
foreign competition for CNMI’s garment industry, while other external
events have negatively affected its tourism sector.
CNMI’s garment industry has declined in recent years with factory
closings and reduced production. The value of garment shipments to the
United States dropped by more than 16 percent between 2004 and 2005 and
by an estimated 25 percent in 2006.
Tourism in CNMI declined sharply in the late 1990s as a result of a
series of external events, including the Asian financial crisis;
cancellation of Korean Air service; and fears of international crises
such as the SARS epidemic, terrorism, and the Iraq war. In 2005, Japan
Airlines withdrew direct flights to the capital.
The fiscal condition of CNMI’s government has steadily weakened from
fiscal year 2001 through fiscal year 2005, as government spending has
exceeded revenues each year since 2002. CNMI ended fiscal year 2005
with a deficit of $84.1 million in its governmental fund balance.
CNMI’s liabilities also exceed its assets for its primary government.
Indicators point to a severe financial crisis in fiscal year 2006. In
response, the CNMI government has implemented cost-cutting and
restructuring measures, including “austerity holidays,” consisting of
biweekly furloughs during which government workers are not paid and
many government operations are closed to reduce personnel and operating
costs.
CNMI’s long-standing financial accountability problems include the late
submission of financial audit reports, inability to achieve “clean”
opinions in its financial statements by the independent financial
auditors, and reports showing serious internal control weaknesses over
financial reporting. Many of the auditors’ findings are longstanding,
going back in some cases to 1987.
Federal agencies and CNMI have sponsored and participated in
conferences, training sessions, technical assistance, and other
programs to improve CNMI’s economy, fiscal condition, and
accountability. During 2006, the CNMI government took steps to reverse
its prior patterns of deficit spending. It will need to continue to
work toward long-term sustainable solutions, with concentrated
attention on the challenges facing the islands and feedback mechanisms
for continuing improvement. Leadership on the part of the CNMI
government and the Department of the Interior’s Office of Insular
Affairs is critical to providing long-term stability and prosperity for
this U.S. insular area.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-436T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jeanette Franzel, (202)
512-9471, franzelj@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the Commonwealth of the
Northern Mariana Islands' (CNMI) serious challenges in strengthening
its economy, fiscal condition, and financial accountability. CNMI is a
self-governing commonwealth of the United States that administers its
own local government functions under its own constitution. CNMI
consists of 14 islands in the North Pacific with a total land area
about 2.5 times the size of Washington, D.C. In recent years, CNMI has
experienced serious economic and fiscal challenges, and several
indicators point to a fiscal crisis in fiscal year 2006.
Today, I will highlight our December 2006 report[Footnote 1] on the
recent economic trends in the CNMI economy, its weakening fiscal
condition, and its financial accountability challenges, which we have
updated to include information for fiscal years 2005 and 2006.
Our summary and conclusions are based on our work performed for our
December 2006 report on U.S. insular areas, which included audited
financial statements through fiscal year 2004. For this testimony we
also had available CNMI's fiscal year 2005 audited financial
statements, which we have included in our review, along with some
recent developments in fiscal year 2006. We provided a draft of this
statement to Department of the Interior (DOI) officials who agreed with
our conclusions and provided technical comments, which we have
incorporated throughout the statement as appropriate. We conducted our
work in accordance with generally accepted government auditing
standards.
Summary:
The government of CNMI faces serious economic, fiscal, and financial
accountability challenges. The government's ability to strengthen
CNMI's economy has been constrained by CNMI's lack of diversification
in industries. CNMI's economy is highly dependent on two industries:
garment manufacturing and tourism. The garment manufacturing industry
is facing the challenges of remaining internationally competitive
against low-wage nations given recent changes in trade agreements.
CNMI's tourism sector experienced a sharp decline in the late 1990s,
and a series of external events, such as the economic trends of nearby
countries and changes in airline practices, have further hampered the
sector. Both the garment and tourism industries employ non-citizen
workers who are paid wages lower than the U.S. minimum wage.
The fiscal condition of CNMI's government has steadily weakened from
fiscal year 2001 through fiscal year 2005, the most recent year for
which audited financial statements for CNMI were available. CNMI's fund
balance, which generally reflects the amount of resources available for
current government operations, went into a deficit balance during
fiscal year 2002 and continued to decline to a deficit balance of $84.1
million by the end of fiscal year 2005. CNMI has also shown significant
declines and negative balances in its reported net assets, which is
another measure of fiscal health, and which represents the balance of
total assets less liabilities. In order to finance its government
activities in an environment where expenditures have exceeded revenues,
CNMI has increased its debt, causing its debt to asset ratio to
increase significantly since fiscal year 2002. In addition, several
indicators point to a severe fiscal crisis during fiscal year 2006. The
CNMI government has implemented several drastic cost-cutting and
restructuring measures, including "austerity holidays" consisting of
biweekly furloughs, during which government workers are not paid and
many government operations are closed to reduce personnel and operating
costs during fiscal years 2006 and 2007. In addition, other measures
were passed, including restructuring of payments to the retirement plan
and reforming the rate of compensation for boards and commissions.
The government of CNMI has long-standing financial accountability
problems, including the inability to achieve unqualified ("clean")
audit opinions on its financial statements, and numerous, long-standing
material weaknesses in internal control over financial reporting and
compliance with laws and regulations governing federal grant awards.
CNMI received $65.6 million in federal grants in fiscal year 2005, and
its audited financial statements are used by federal agencies for
overseeing and monitoring the use of federal grants. Progress has been
made by CNMI concerning the timely submission of its audit reports.
Specifically, for fiscal year 2004, CNMI's audited financial statements
were 22 months late compared with 1 month late for its fiscal year 2005
submission. However, given CNMI's continued inability to achieve clean
opinions on its financial statements and the continuing material
internal control weaknesses over financial reporting, there is limited
accountability over federal grants to this insular area. Furthermore,
the lack of timely and reliable financial information hampers CNMI's
ability to monitor programs and the reliability of financial
information, such as revenues and expenditures, in order to make
informed decisions.
The DOI's Office of Insular Affairs[Footnote 2] (OIA) has ongoing
efforts to support economic development in CNMI and assist CNMI in
addressing its accountability issues. To help diversify and strengthen
the insular area economies (including CNMI), OIA has programs aimed at
attracting American businesses to the insular areas. However, the
effectiveness of these conferences and business opportunity missions is
uncertain due to the lack of formal evaluation of these efforts. In
addition, DOI's OIA and Inspector General (IG), along with other
federal IGs, oversee CNMI's efforts to improve its financial
accountability. OIA monitors the progress of completion and issuance of
audit reports and provides general technical assistance funds to train
insular area employees and enhance financial management systems and
processes. Yet, progress has been slow and inconsistent. A focused
effort is called for where direct and targeted attention is
concentrated on the challenges facing CNMI to help CNMI achieve
economic and fiscal stability. OIA plays a key role in this effort by
helping CNMI and the other insular areas improve their business
climates, identify areas of potential for private sector investment,
and market insular areas to potential investors.
Strong leadership is needed to address CNMI's current challenges.
During 2006, the CNMI government took dramatic steps to reverse prior
patterns of deficit spending. The CNMI government will need to continue
to work toward long-term sustainable solutions. In response to our
recent report, OIA expressed its commitments to continuing its
comprehensive approach and to implementing other innovative ideas to
assist CNMI and the other insular areas to continue to improve
financial management and accountability and to support economic
development. We are encouraged by OIA's commitment to taking a
leadership position in assisting CNMI and monitoring CNMI's progress in
facing its current economic, fiscal, and accountability challenges.
Narrow Economic Base and Intrinsic and External Factors Limit Economic
Progress in CNMI:
Several factors constrain CNMI's economic potential, including the lack
of diversification, scarce natural resources, small domestic markets,
limited infrastructure, and shortages of skilled labor. The United
States exercises sovereignty over CNMI, and, in general, federal laws
apply to CNMI.[Footnote 3] However, federal minimum wage provisions and
federal immigration laws do not apply.[Footnote 4] CNMI immigration
policies and the demands for labor by the garment manufacturing
industry and tourism sector have resulted in rapid population growth
since 1980 such that the majority of the population are non-U.S.
citizens. (See fig. 1.) According to U.S. Census Bureau data for 2000,
the most recent census data available, about 56 percent of the CNMI
population of 69,221 were not U.S. citizens.
Figure 1: Reported CNMI Population by Citizenship:
[See PDF for image]
Source: U.S. Census Bureau; CNMI Central Statistics Division.
[A] U.S. citizenship was not conferred to residents of CNMI until 1986.
However, the CNMI Central Statistics Division has classified persons
born in CNMI together with persons born in the United States or other
territories as "U.S. citizens" for 1980.
[B] The 2000 decennial population census is the most recent population
census information available.
[End of figure]
According to U.S. Census Bureau data for 2000, the median household
income in CNMI was $22,898, a little more than half of the U.S. median
household income of almost $42,000 for 2000. The percentage of
individuals in poverty in 2000 was 46 percent, nearly four times the
continental U.S. rate of 12 percent in that same year.
CNMI's economy depends on two industries, garment manufacturing and
tourism, for its employment, production, and exports. These two
industries rely heavily on a noncitizen workforce. This
workforce[Footnote 5] represents more than three quarters of the labor
pool that are subject to the CNMI minimum wage, which is lower than the
U.S. minimum wage. The garment industry, for example, uses textiles and
labor imported mostly from China. A 1999 study found that garment
manufacturing and tourism accounted for about 85 percent of CNMI's
total economic activity and 96 percent of its exports.[Footnote 6] A
2005 estimate of CNMI's gross domestic product (GDP) suggest that, in
2002, the garment industry contributed to roughly 40 percent of CNMI's
GDP and 47 percent of payroll.[Footnote 7] However, recent changes in
trade laws have increased foreign competition for CNMI's garment
industry, while other external events have negatively impacted its
tourism sector.
Decline in Garment Industry Tied to Trade Law Changes:
Recent developments in international trade laws have reduced CNMI's
trade advantages, and the garment industry has declined in recent
years. Historically, while garment exporters from other countries faced
quotas and duties in shipping to the U.S. market, CNMI's garment
industry benefited from quota-free and duty-free access to U.S. markets
for shipments of goods in which 50 percent of the value was added in
CNMI.[Footnote 8] In recent years, however, U.S. agreements with other
textile-producing countries have liberalized the textile and apparel
trade. For example, in January 2005, in accordance with one of the 1994
World Trade Organization (WTO) Uruguay Round agreements, the United
States eliminated quotas on textile and apparel imports from other
textile-producing countries, leaving CNMI's apparel industry to operate
under stiffer competition, especially from low-wage countries such as
China.[Footnote 9] According to a DOI official, more than 3,800 garment
jobs were lost between April 2004 and the end of July 2006, with 10 out
of 27 garment factories closing.[Footnote 10] U.S. Department of
Commerce data show that the value of CNMI shipments of garments to the
United States dropped by more than 16 percent between 2004 and 2005,
from about $807 million to $677 million, and down from a peak of $1
billion in 1998--2000. In 2006, reported garment exports to the United
States fell further, by an estimated 25 percent compared to 2005, with
exports declining to an estimated $497 million. The reported level of
shipments to the United States in 2006 was comparable to levels of
sales in 1995--1996, prior to the significant build-up of the industry.
(See fig. 2.) In December 2006, the largest and oldest garment factory
closed. Given that the garment industry is significant to CNMI's
economy, these developments will likely have a negative financial
effect on government revenue. For example, reported fees collected by
the government on garment exports fell 37 percent from $38.6 million in
2000 to $24.4 million in 2005.
Figure 2: Reported U.S. Apparel Imports from CNMI:
[See PDF for image]
Sources: U.S. Dept. of Commerce, International Trade Administration,
Office of Textiles & Apparel.
[A] Import value for 2006 reflects 11 months of Commerce data and a GAO
estimate for December imports based on changes in monthly shipments in
2005.
[End of figure]
External Events Affect Tourism:
CNMI's tourism sector experienced a sharp decline in the late 1990s,
and a series of external events have further hampered the sector.
Tourism became a significant sector of economic activity in CNMI by the
mid-1980s and continued to grow into the 1990s. Due to its proximity to
Asia, Asian economic trends and other events have a direct effect on
CNMI's economy. For example, tourism in CNMI experienced a sharp
decline in the late 1990s with the Asian financial crisis and due to
the cancellation of Korean Air service to CNMI following an airplane
crash on Guam in August 1997. (See fig. 3.) Visitors from Korea, the
second largest source of tourists, decreased by 85 percent from 1996 to
1998. After a modest recovery in 2000, tourism faltered again with the
September 11, 2001, terrorist attacks on the United States. In 2003,
according to CNMI officials, tourism slowed--with a double-digit
decline in arrivals for several months--in reaction to the SARS
epidemic and to the war in Iraq.
Tourism in CNMI is also subject to changes in airline practices. For
example, Japan Airlines (JAL) withdrew its direct flights between Tokyo
and Saipan in October 2005, raising concerns because roughly 30 percent
of all tourists and 40 percent of Japanese tourists arrive in CNMI on
JAL flights, according to CNMI and DOI officials. The Marianas Visitors
Authority's June 2006 data show that the downward trend in Japanese
arrivals is not being offset by the growth in arrivals from other
markets such as China and South Korea, with the total number of foreign
visitors dropping from 43,115 in June 2005 to 38,510 a year
later.[Footnote 11] At the same time, CNMI has experienced increased
Chinese tourists in recent years, which offer the potential to
reenergize the industry.
Figure 3: Reported CNMI Visitor Arrivals by Nation:
[See PDF for image]
Source: Marianas Visitors Authority.
[A] USA includes visitors from Guam.
[B] Effective October 2006, arrivals from Hong Kong are included with
China.
[End of figure]
CNMI's Reported Fiscal Condition Continues to Weaken:
The fiscal condition of CNMI's government has steadily weakened from
fiscal year 2001 through fiscal year 2005, the most recent year for
which audited financial statements for CNMI were available. In
addition, several indicators point to a severe financial crisis in
fiscal year 2006. As shown in figure 4, CNMI's reported governmental
fund balance declined from a positive $3.5 million at the beginning of
fiscal year 2001 to a deficit of $84.1 million by the end of fiscal
year 2005, as CNMI's expenditures for its governmental activities
consistently exceeded revenues in each year since fiscal year 2002.
Most of CNMI's governmental activities, which include basic services
such as public safety, health care, general administration, streets and
parks, and security and safety, are reported in its governmental
activities, or government funds. The fund balance (or deficit) for
these activities reflects the amount of funds available at the end of
the year for spending. A significant contributing factor to the gap
between expenditures and revenues is that actual expenditures have
exceeded budgeted expenditures each fiscal year during the period 2001
through 2005.[Footnote 12]
Figure 4: Reported Revenues, Expenditures, and Fund Balance for CNMI's
Government Activities:
[See PDF for image]
Source: GAO analysis of single audit reports covering fiscal years
2001, 2002, 2003, 2004, and 2005.
[End of figure]
Another measure of fiscal health is the measure of net assets for
governmental activities, which represents total assets minus total
liabilities. As shown in table 1, CNMI has experienced a negative trend
in its balance of net assets for governmental activities, going from a
reported positive $40.6 million balance at the end of fiscal year 2001
to a negative $38 million balance at the end of fiscal year
2005.[Footnote 13] The primary difference between the fund balance
measure and net assets is that the net assets include capital assets
and long-term liabilities, whereas the fund balance figure focuses on
assets available for current period expenditures and liabilities that
are due and payable in the current period.
Table 1: CNMI's Fiscal Condition:
Data: Population;
Fiscal Years Ending September 30,: 2001: 71,868;
Fiscal Years Ending September 30,: 2002: 74,003;
Fiscal Years Ending September 30,: 2003: 76,129;
Fiscal Years Ending September 30,: 2004: 78,252;
Fiscal Years Ending September 30,: 2005: 80,362.
Data: Population: Own source revenues;
Fiscal Years Ending September 30,: 2001: 227,709,651;
Fiscal Years Ending September 30,: 2002: 215,650,986;
Fiscal Years Ending September 30,: 2003: 225,412,808;
Fiscal Years Ending September 30,: 2004: 235,754,891;
Fiscal Years Ending September 30,: 2005: 244,183,778.
Data: Population: Federal contributions;
Fiscal Years Ending September 30,: 2001: 49,348,134;
Fiscal Years Ending September 30,: 2002: 71,964,627;
Fiscal Years Ending September 30,: 2003: 57,560,034;
Fiscal Years Ending September 30,: 2004: 63,006,595;
Fiscal Years Ending September 30,: 2005: 64,346,950.
Data: Total Revenues;
Fiscal Years Ending September 30,: 2001: $277,057,785;
Fiscal Years Ending September 30,: 2002: $287,615,613;
Fiscal Years Ending September 30,: 2003: $282,972,842;
Fiscal Years Ending September 30,: 2004: $298,761,486;
Fiscal Years Ending September 30,: 2005: 308,530,728.
Data: Total Expenditures;
Fiscal Years Ending September 30,: 2001: 258,177,431;
Fiscal Years Ending September 30,: 2002: 314,985,333;
Fiscal Years Ending September 30,: 2003: 303,986,379;
Fiscal Years Ending September 30,: 2004: 352,488,419;
Fiscal Years Ending September 30,: 2005: 343,370,293.
Data: Revenues less Expenditures [Surplus/(Deficit)];
Fiscal Years Ending September 30,: 2001: 18,880,354;
Fiscal Years Ending September 30,: 2002: (27,369,720);
Fiscal Years Ending September 30,: 2003: (21,013,537);
Fiscal Years Ending September 30,: 2004: (53,726,933);
Fiscal Years Ending September 30,: 2005: (34,839,565).
Data: Total net other financing[A];
Fiscal Years Ending September 30,: 2001: 6,511,003;
Fiscal Years Ending September 30,: 2002: 3,510,667;
Fiscal Years Ending September 30,: 2003: 0;
Fiscal Years Ending September 30,: 2004: 39,493,350;
Fiscal Years Ending September 30,: 2005: 7,625.
Data: Governmental funds beginning year balance[C];
Fiscal Years Ending September 30,: 2001: 3,540,878;
Fiscal Years Ending September 30,: 2002: 19,609,305[ B];
Fiscal Years Ending September 30,: 2003: (4,249,748);
Fiscal Years Ending September 30,: 2004: (35,011,807)[B];
Fiscal Years Ending September 30,: 2005: (49,245,390).
Data: Governmental funds end of year balance;
Fiscal Years Ending September 30,: 2001: 17,219,852;
Fiscal Years Ending September 30,: 2002: (4,249,748);
Fiscal Years Ending September 30,: 2003: (25,263,285);
Fiscal Years Ending September 30,: 2004: (49,245,390);
Fiscal Years Ending September 30,: 2005: (84,077,330).
Data: Net Assets, end of year[D];
Fiscal Years Ending September 30,: 2001: 40,575,181;
Fiscal Years Ending September 30,: 2002: 30,760,955[E];
Fiscal Years Ending September 30,: 2003: 15,596,170;
Fiscal Years Ending September 30,: 2004: (18,656,437);
Fiscal Years Ending September 30,: 2005: (38,131,589).
Data: Net Assets, end of year[D]: Change in net assets;
Fiscal Years Ending September 30,: 2001: --;
Fiscal Years Ending September 30,: 2002: (9,814,226);
Fiscal Years Ending September 30,: 2003: (15,164,785);
Fiscal Years Ending September 30,: 2004: (34,252,607);
Fiscal Years Ending September 30,: 2005: (19,475,152).
Calculations: Federal contributions as a percent of revenues;
Fiscal Years Ending September 30,: 2001: 17.8;
Fiscal Years Ending September 30,: 2002: 25.0;
Fiscal Years Ending September 30,: 2003: 20.3;
Fiscal Years Ending September 30,: 2004: 21.1;
Fiscal Years Ending September 30,: 2005: 20.9.
Calculations: Government revenue per capita;
Fiscal Years Ending September 30,: 2001: $3,855;
Fiscal Years Ending September 30,: 2002: $3,887;
Fiscal Years Ending September 30,: 2003: $3,717;
Fiscal Years Ending September 30,: 2004: $3,818;
Fiscal Years Ending September 30,: 2005: $3,839.
Calculations: Government expenditures per capita;
Fiscal Years Ending September 30,: 2001: 3,592;
Fiscal Years Ending September 30,: 2002: 4,256;
Fiscal Years Ending September 30,: 2003: 3,993;
Fiscal Years Ending September 30,: 2004: 4,505;
Fiscal Years Ending September 30,: 2005: 4,273.
Calculations: Government revenue as percent of GDP[F];
Fiscal Years Ending September 30,: 2001: --;
Fiscal Years Ending September 30,: 2002: .30;
Fiscal Years Ending September 30,: 2003: --;
Fiscal Years Ending September 30,: 2004: --;
Fiscal Years Ending September 30,: 2005: --.
Calculations: Government expenditures as percent of GDP[F];
Fiscal Years Ending September 30,: 2001: --;
Fiscal Years Ending September 30,: 2002: .33;
Fiscal Years Ending September 30,: 2003: --;
Fiscal Years Ending September 30,: 2004: --;
Fiscal Years Ending September 30,: 2005: --.
Source: GAO analysis of single audit reports covering fiscal years
2001, 2002, 2003, 2004, and 2005. The estimate of GDP, in the amount of
$946,854,877, came from Final Trip Report on Benchmark Estimates of
2002 Gross Domestic Product in the Commonwealth of the Northern Mariana
Islands, U.S. Census Bureau, Feb. 11, 2005.
Notes: Financial data in table 1 reflects CNMI's financial statements
for its governmental activities, which include most of CNMI's basic
services. This financial data does not include CNMI's component units,
which are legally separate but related to CNMI. This financial data
also does not include CNMI's fiduciary funds, because those funds
cannot be used to finance CNMI operations.
CNMI's audited financial statements received qualified opinions from
its external auditors and therefore, these amounts are subject to the
limitations cited by the auditors in their opinions and to the material
internal control weaknesses identified.
[A] Other financing includes transfers in and out of other funds.
[B] The end-of-year fund balance for the prior fiscal year may not
agree with the beginning of year fund balance for the succeeding fiscal
year due to amounts being restated in subsequent financial statements.
We could not readily identify explanations for these restatements
because comparative information was not always available or disclosures
were not made in subsequent financial statements.
[C] Governmental funds finance most of the basic services provided by
the government.
[D] Net assets are capital assets and other assets, such as cash and
receivables, less liabilities.
[E] The amount reported is the restated amount from the 2003 Single
Audit Report, corrected because of excluded and misstated amounts.
[F] GDP estimates are not available for 2001, 2003, 2004, and 2005.
[End of table]
In order to finance its government activities in an environment where
expenditures have exceeded revenues, CNMI has increased its debt and
has not made the required contributions to its retirement fund. CNMI's
reported balance of notes and bonds payable has increased from $83
million in fiscal year 2002 to $113 million in fiscal year 2005,
representing an increase of 36 percent. CNMI's balance owed to its
pension fund has increased from $72 million in 2002 to $120 million in
2005, representing an increase of 67 percent. CNMI has also been
incurring penalties on the unpaid liabilities to the pension fund. The
total amount of assessed penalties was $24 million as of September 30,
2005.
As shown in figure 5, CNMI's reported debt to assets ratio[Footnote 14]
has increased significantly, from 89.8 percent in fiscal year 2002 to
113.5 percent in 2005. In other words, at the end of fiscal year 2005,
CNMI owed $1.14 for every $1.00 in assets that it held.
Figure 5: CNMI Debt to Assets:
[See PDF for image]
Source: Single audit reports, statements of net assets for fiscal years
2002, 2003, 2004, and 2005.
[End of figure]
Although CNMI's audited fiscal year 2006 financial statements are not
yet available, indicators point to a severe fiscal crisis during fiscal
year 2006. In a May 5, 2006 letter to the CNMI Legislative leaders,
Governor Benigno R. Fitial stated that "the Commonwealth is facing an
unsustainable economic emergency. . . . I regret to say that the nature
and extent of these financial problems are such that there is no simple
or painless solution." CNMI has implemented several significant cost-
cutting and restructuring measures during fiscal year 2006. For
instance, in August 2006, CNMI enacted its Public Law No. 15-24 to
implement "austerity holidays" consisting of bi-weekly furloughs,
during which government employees are not paid and many government
operations are closed. This measure was taken to help alleviate the
financial crisis by saving millions of dollars in both personnel and
operational costs. The measure declared unpaid holidays once per pay
period for the remainder of fiscal years 2006 and 2007, reducing the
government's normal pay period to 72 hours every 2 weeks. In June of
2006, CNMI enacted Public Law No. 15-15 to authorize the CNMI
government to suspend the government's employer contributions to the
retirement fund for the remainder of fiscal years 2006 and 2007. In
addition, CNMI has passed laws to restructure loans among its component
units, reform the rate of compensation for members of boards and
commissions, increase the governor's authority to reprogram funds,
extend the date for full funding of the retirement fund's defined
benefit plan,[Footnote 15] and create a defined contribution retirement
plan for government employees hired on or after January 1, 2007. These
measures are immediate and dramatic, and are indicative of severe
financial problems that will likely call for long-term solutions.
CNMI's Financial Accountability Remains Weak:
CNMI has had long-standing financial accountability problems, including
the late issuance of its single audit reports, the inability to achieve
unqualified ("clean") audit opinions on its financial statements, and
numerous material weaknesses in internal controls over financial
operations and compliance with laws and regulations governing federal
grant awards.
CNMI's Compliance with Single Audit Requirements:
CNMI received a reported $65.6 million in federal grants in fiscal year
2005 from a number of federal agencies. The five largest federal
grantors in 2005 for CNMI included the Departments of Agriculture,
Health and Human Services, Interior, Homeland Security, and Labor. As a
nonfederal entity expending more than $500,000 a year in federal
awards, CNMI is required to submit a single audit report each year to
comply with the Single Audit Act, as amended.[Footnote 16] Single
audits are audits of the recipient organization--the government in the
case of CNMI--that focus on the recipient's financial statements,
internal controls,[Footnote 17] and compliance with laws and
regulations governing federal grants.[Footnote 18] One of the
objectives of the act is to promote sound financial management,
including effective internal controls, with respect to federal
expenditures of the recipient organization. Single audits also provide
key information about the federal grantee's financial management and
reporting and are an important control used by federal agencies for
overseeing and monitoring the use of federal grants.
For fiscal years 1997 through 2005, CNMI did not submit its single
audit reports by the due date, which is generally no later than 9
months after the fiscal year end.[Footnote 19] CNMI's late submission
of single audit reports means that the federal agencies overseeing
federal grants to CNMI did not have current audited information about
CNMI's use of federal grant funds. As shown in table 2, CNMI's single
audit submissions were significantly late for fiscal years 1997 through
2004. However, CNMI has made significant progress in 2005 by submitting
its fiscal year 2005 single audit report less than 1 month late.
Table 2: Reported Single Audit Act Report Submissions for Fiscal Years
1997 through 2005:
Fiscal year end: 09/30/1997;
Date single audit report due: 10/31/1998;
Date single audit report received: 12/28/1999;
Number of months late[A]: 14.
Fiscal year end: 09/30/1998;
Date single audit report due: 10/31/1999;
Date single audit report received: 12/28/1999;
Number of months late[A]: 2.
Fiscal year end: 09/30/1999;
Date single audit report due: 06/30/2000;
Date single audit report received: 10/19/2000;
Number of months late[A]: 4.
Fiscal year end: 09/30/2000;
Date single audit report due: 06/30/2001;
Date single audit report received: 10/17/2002;
Number of months late[A]: 16.
Fiscal year end: 09/30/2001;
Date single audit report due: 06/30/2002;
Date single audit report received: 06/06/2003;
Number of months late[A]: 11.
Fiscal year end: 09/30/2002;
Date single audit report due: 06/30/2003;
Date single audit report received: 08/09/2004;
Number of months late[A]: 13.
Fiscal year end: 09/30/2003;
Date single audit report due: 06/30/2004;
Date single audit report received: 07/06/2005;
Number of months late[A]: 12.
Fiscal year end: 09/30/2004;
Date single audit report due: 06/30/ 2005[B];
Date single audit report received: 04/17/2006;
Number of months late[A]: 22.
Fiscal year end: 09/30/2005;
Date single audit report due: 06/30/2006;
Date single audit report received: 07/19/2006;
Number of months late[A]: 1.
Source: Auditors' reports, Federal Audit Clearinghouse, and GAO
analysis.
[A] Calculated based on the submission form date without regard to
extensions granted to CNMI. The form date is the date the Federal Audit
Clearinghouse receives the required single audit form certifying that
the audit has been performed and summarizing its findings.
[B] CNMI received an extension until February 28, 2006 for submission
of the fiscal year 2004 single audit report.
[End of table]
CNMI Unable to Achieve "Clean" Audit Opinions Due to Persistent,
Significant Weaknesses:
Auditors are required by OMB Circular No. A-133 to provide opinions (or
disclaimers of opinion, as appropriate) as to whether the (1) financial
statements are presented fairly in all material respects in conformity
with generally accepted accounting principles (GAAP) and (2) auditee
complied with laws, regulations, and the provisions of contracts or
grant agreements that could have a direct and material effect on each
major federal program.
The CNMI government has been unable to achieve unqualified
("clean")[Footnote 20] audit opinions on its financial statements,
receiving qualified opinions on the financial statements issued for
fiscal years 1997 through 2005. Auditors render a qualified opinion
when they identify one or more specific matters that affect the fair
presentation of the financial statements. The effect of the auditors'
qualified opinion can be significant enough to reduce the usefulness
and reliability of CNMI's financial statements.
CNMI has made some progress in addressing the matters that resulted in
the qualified opinions on its financial statements for fiscal years
2001 through 2003. However, some of the issues continued to exist in
2004 and 2005. The auditors identified the following issues in fiscal
year 2005 that resulted in the most recent qualified audit opinion: (1)
inadequacies in the accounting records regarding taxes receivable,
advances, accounts payable, tax rebates payable, other liabilities and
accruals, and the reserve for continuing appropriations, (2)
inadequacies in accounting records and internal controls regarding the
capital assets of the Northern Marianas College, and (3) the lack of
audited financial statements for the Commonwealth Utilities
Corporation, which represents a significant component unit of CNMI.
Auditors for CNMI also rendered qualified opinions on CNMI's compliance
with the requirements for major federal award programs from 1997
through 2005. In fiscal year 2005, the auditors cited noncompliance in
the areas of allowable costs, cash management, eligibility, property
management, procurement, and other requirements.
Weaknesses over Financial Reporting and Compliance with Requirements
for Major Federal Programs:
CNMI has long-standing and significant internal control weaknesses over
financial reporting and compliance with requirements for federal
grants. Table 3 shows the number of material weaknesses and reportable
conditions for CNMI for fiscal years 2001 through 2005. The large
number and the significance of reported internal control weaknesses
raise serious questions about the integrity and reliability of CNMI's
financial statements and its compliance with requirements of major
federal programs. Furthermore, the lack of reliable financial
information hampers CNMI's ability to monitor programs and financial
information such as revenues and expenses and to make timely, informed
decisions.
Table 3: Reported Weaknesses Identified in the Auditors' Reports for
Fiscal Years 2001 through 2005:
Fiscal year: 2001;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Material
weaknesses: 10;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Reportable
conditions: 0;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Total: 10;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Material weaknesses: 4;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Reportable conditions: 13;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Total: 17.
Fiscal year: 2002;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Material
weaknesses: 9;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Reportable
conditions: 1;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Total: 10;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Material weaknesses: 2;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Reportable conditions: 14;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Total: 16.
Fiscal year: 2003;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Material
weaknesses: 10;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Reportable
conditions: 2;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Total: 12;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Material weaknesses: 1;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Reportable conditions: 15;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Total: 16.
Fiscal year: 2004;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Material
weaknesses: 8;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Reportable
conditions: 5;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Total: 13;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Material weaknesses: 2;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Reportable conditions: 31;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Total: 33.
Fiscal year: 2005;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Material
weaknesses: 9;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Reportable
conditions: 4;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Total: 13;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Material weaknesses: 2;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Reportable conditions: 36;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Total: 38.
Source: CNMI single audit reports for fiscal years 2001 through 2005.
[End of table]
CNMI's 13 internal control reportable conditions[Footnote 21] for
fiscal year 2005, 9 of which were material weaknesses,[Footnote 22]
indicate a lack of sound internal control over financial reporting
needed to provide adequate assurance that transactions are properly
recorded, assets are properly safeguarded, and controls are adequate to
prevent or detect fraud, waste, abuse, and mismanagement. For example,
one of the material internal control weaknesses that the auditors
reported for CNMI's government for fiscal year 2005 was the lack of
audited fiscal year 2005 financial statements of the Commonwealth
Utilities Corporation (Corporation), a significant component unit of
CNMI.[Footnote 23] Because the Corporation's financial statements were
unaudited, the auditors could not determine the propriety of account
balances presented in the financial statements that would affect CNMI's
basic financial statements. CNMI's auditors also reported other
significant material internal control weaknesses that have continued
from previous years, such as improper tracking and lack of support for
advances to vendors, travel advances to employees, liabilities recorded
in the General Fund, and tax rebates payable. Due to the lack of
detailed subsidiary ledgers and other supporting evidence, the auditors
could not determine the propriety of these account balances. According
to the auditors, the effect of these weaknesses is a possible
misstatement of expenditures and related advances and liabilities,
which also resulted in a qualification of the opinion on the fiscal
year 2005 CNMI financial statements. Consequently, CNMI's financial
statements may not be reliable.
As shown in table 3, auditors also reported 38 reportable
conditions[Footnote 24] in CNMI's compliance with requirements for
major federal programs and the internal controls intended to ensure
compliance with these requirements. Two of these reportable conditions
were considered material weaknesses.[Footnote 25]
One of the two material internal control weaknesses affecting
compliance with federal programs reported for CNMI's government for
fiscal year 2005 included the failure to record expenditures for the
Medical Assistance Program when they were incurred. Specifically, the
auditors identified expenditures in fiscal year 2005 for billings from
service providers for services rendered in previous years. The effect
of this weakness is that expenditures reported to the grantor agency,
the U.S. Department of Health and Human Services, are based on the paid
date and not, as required, the service date. In addition, actual
expenditures incurred during the year are not properly recorded and,
therefore, current year expenditures and unrecorded liabilities are
understated. The other material weakness affecting compliance related
to the lack of adherence to established policies and procedures for
managing and tracking property and equipment purchased with federal
grant funds. As a result, CNMI's government was not in compliance with
federal property standards and its own property management policies and
procedures. The other 36 reportable conditions concerned compliance
with requirements regarding allowable costs; cash management;
eligibility; equipment and property management; matching, level of
effort, and earmarking; procurement and suspensions and debarment;
reporting; subrecipient monitoring; and special tests and provisions
that are applicable to CNMI's major federal programs.
In CNMI's corrective action plan for fiscal year 2005, CNMI officials
agreed with almost all of the auditors' findings. According to its
fiscal year 2005 corrective action plan, CNMI is working to get a
current audit of its component unit, the Commonwealth Utilities
Corporation. Other planned actions include properly reconciling
advances to vendors; reviewing travel advance balances and making
adjustments as needed, including making payroll deductions if expense
vouchers are not filed timely; implementing procurement receiving
procedures for prepaid items; making necessary corrections to its
automated tax system to enable auditors to better review tax returns;
determining the correct balances for construction projects;
implementing controls over verifying eligibility for Medicaid and
restricting access to the related data; and ensuring proper completion
of inventories. The plan provides that most of the findings will be
addressed by the end of fiscal year 2007. It is important to note
however, that many of the auditors' findings, particularly those
categorized as material weaknesses, are longstanding findings going
back in some cases to 1987.
Efforts to Assist CNMI in Its Economic and Accountability Challenges:
OIA has ongoing efforts to support economic development in CNMI and
assist CNMI in addressing its accountability issues. OIA has in the
last 3 years sponsored conferences in the United States and business-
opportunity missions in the insular areas to attract American
businesses to the insular areas. The main goal of these efforts is to
facilitate interaction and the exchange of information between U.S.
firms and government and business officials from the insular areas to
spur new investment in a variety of industries. Innovative projects
such as setting up a production and mass mailing facility in CNMI aimed
at the Japanese market are reported to be underway.
OIA's efforts in helping to create links between the business
communities in the United States and CNMI are key to helping meet some
of the economic challenges. In our recent report,[Footnote 26] we
concluded that the insular areas would benefit from formal periodic OIA
evaluation of its conferences and business-opportunity missions,
including assessments of the cost and benefit of its activities and the
extent to which these efforts are creating partnerships with businesses
in other nations. In our December 2006 report, we recommended that OIA
conduct such formal periodic evaluations to assess the effect of these
activities on creating private sector jobs and increasing insular area
income. OIA agreed with our recommendation.
DOI's OIA and IG, other federal inspectors general, and local auditing
authorities assist or oversee CNMI's efforts to improve its financial
accountability.[Footnote 27] OIA monitors the progress of completion
and issuance of the single audit reports as well as providing general
technical assistance funds to provide training for insular area
employees and funds to enhance financial management systems and
processes. DOI's IG has audit oversight responsibilities for federal
funds in the insular area.
To promote sound financial management processes in the insular area
government, OIA has increased its focus on bringing the CNMI government
into compliance with the Single Audit Act. For example, OIA created an
incentive for CNMI to comply with the act by stating that an insular
area cannot receive capital funding unless its government is in
compliance with the act or has presented a plan, approved by OIA, that
is designed to bring the government into compliance by a certain date.
In addition, OIA provides general technical assistance funds for
training and other direct assistance, such as grants, to help the
insular area governments comply with the act and to improve their
financial management systems and environments. The Graduate School of
the U.S. Department of Agriculture (USDA) has been working with OIA for
over a decade through its Pacific Islands and Virgin Islands Training
Initiatives (PITI and VITI) to provide training and technical
assistance.
OIA staff members make site visits to CNMI as part of its oversight
activities. In our December 2006 report, we recommended that OIA
develop a standardized framework for its site visits to improve the
effectiveness of its monitoring. We also recommended that OIA develop
and implement procedures for formal evaluation of progress made by the
insular areas to resolve accountability findings and set a time frame
for achieving clean audit opinions. OIA agreed with our recommendations
and noted that it had already made some progress during fiscal year
2006. Establishing a routine procedure of documenting the results of
site visits in a standard framework would help ensure that (1) all
staff members making site visits are consistent in their focus on
overall accountability objectives and (2) OIA staff has a mechanism for
recording and following up on the unique situations facing CNMI.
Conclusions:
CNMI faces daunting economic, fiscal, and financial accountability
challenges. CNMI's economic and fiscal conditions are affected by its
economy's general dependence on two key industries. In addition,
although progress has been made in improving financial accountability,
CNMI continues to have serious internal control and accountability
problems that increase its risk of fraud, waste, abuse, and
mismanagement.
Efforts to meet formidable fiscal challenges in CNMI are exacerbated by
delayed and incomplete financial reporting that does not provide
officials with the timely and complete information they need for
effective decision making. Timely and reliable financial information is
especially important as CNMI continues to take actions to deal with its
fiscal crisis.
OIA has ongoing efforts to assist CNMI in addressing its accountability
issues and to support economic development in CNMI. OIA officials
monitor CNMI's progress in submitting single audit reports, and OIA
provides funding to improve financial management. Yet, progress has
been slow and inconsistent. The benefit to CNMI of past and current
assistance is unclear. Federal agencies and CNMI have sponsored and
participated in conferences, training sessions, and other programs to
improve accountability, but knowing what has and has not been effective
and drawing the right lessons from this experience is hampered by a
lack of formal evaluation and data collection.
Strong leadership is needed for CNMI to weather its current crisis and
establish a sustainable and prosperous path for the future. During
2006, the CNMI government took dramatic steps to reverse prior patterns
of deficit spending. The CNMI government will need to continue to work
toward long-term sustainable solutions. A focused effort is called for
in which direct and targeted attention is concentrated on the
challenges facing CNMI, with feedback mechanisms for continuing
improvement to help CNMI achieve economic, fiscal, and financial
stability. OIA plays a key role in this effort. In its comments on our
December 2006 report, OIA pointed out that it provides "a crucial
leadership role and can provide important technical assistance" to help
CNMI and the other insular areas improve their business climates,
identify areas of potential for private sector investment, and market
insular areas to potential investors. It also noted that improving
accountability for federal financial assistance for CNMI and other
insular areas is a major priority. OIA has stated its commitment to
continuing its comprehensive approach and to implementing other
innovative ideas to assist CNMI and the other insular areas in
continuing to improve financial management and accountability.
Leadership on the part of the CNMI government and OIA is critical to
addressing the challenges CNMI faces and to providing long-term
stability and prosperity for this insular area.
Mr. Chairman and Members of the Committee, this concludes my statement.
I would be pleased to answer any questions that you and other Members
of the Committee may have at this time.
GAO Contacts:
For further information about this testimony, please contact Jeanette
Franzel, Director, Financial Management and Assurance at (202) 512-9471
or franzelj@gao.gov, or David Gootnick, Director, International Affairs
and Trade at (202) 512-4128 or gootnickd@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this testimony. The following individuals made
important contributions to this report: Norma Samuel, Cheryl Clark, Anh
Dang, Meg Mills, Maxine Hattery, and Emil Friberg, Jr.
FOOTNOTES
[1] GAO, U.S. Insular Areas: Economic, Fiscal, and Financial
Accountability Challenges, GAO-07-119 (Washington, D.C.: Dec. 12,
2006). CNMI is one of the subjects of this report.
[2] OIA's mission is to promote sound financial management processes,
boost economic development, and increase the federal government's
responsiveness to the unique needs of the insular areas.
[3] CNMI is an unincorporated territory to which Congress has
determined that only selected parts of the U.S. Constitution apply.
Residents born in CNMI are U.S. citizens and although they have many of
the rights of citizens of the 50 states, CNMI residents cannot vote in
national elections and do not have voting representation in Congress.
[4] The U.S. House of Representatives and the Senate recently passed
H.R. 2, "Fair Minimum Wage Act of 2007," which, if enacted, would make
the federal minimum wage provisions applicable to CNMI with a phased-in
implementation.
[5] The 2000 U.S. Census shows that noncitizens, predominantly Chinese
and Filipinos, make up over half of CNMI's population. Almost all of
these temporary foreign workers came to CNMI after 1990.
[6] Business Development Center, Northern Marianas College, An Economic
Study for the Commonwealth of the Northern Mariana Islands, U.S.
Department of the Interior, October 1999.
[7] See M. Rubin and S. Sawaya, Final Trip Report on Benchmark
Estimates of 2002 Gross Domestic Product in the Commonwealth of the
Northern Mariana Islands (Washington, D.C.: U.S. Census Bureau, 2005).
Many businesses, including the garment factories, are owned and
operated by foreigners.
[8] According to the U.S. Harmonized Tariff Schedule, certain items of
which at least 50 percent of the value was added in a U.S. possession
are eligible for duty-free shipment to the United States.
[9] GAO, U.S.-China Trade: Textile Safeguard Procedures Should Be
Improved, GAO-05-296 (Washington, D.C.: Apr. 4, 2005.)
[10] The burden of this job loss on the government may be mitigated to
some extent by the fact that garment industry workers are almost
exclusively foreigners on temporary guest visas. Also, data we obtained
from the U.S. Census Bureau indicate that foreign workers send much of
their earnings back to their countries of origin in the form of
remittances; the remainder, which is spent on local goods and services,
is relatively small, and as a result, has limited effect on local
economic activity. Remittances were estimated at about $80 million for
2002, roughly 10 percent of GDP, and at over $100 million in 2005.
[11] China Southern Airlines' August 2006 decision to suspend its
flights from Guangzhou City in China to Saipan in September because of
low load factor, high fuel costs, and low yield in fares is likely to
slow the growth of Chinese visitors and hinder CNMI's efforts to
attract more tourists from China.
[12] The over-expenditure of budget amounts has been recorded as a
finding in CNMI's single audits since fiscal year 2000.
[13] The net asset amount at September 30, 2005, when compared to the
fund balance amount as of the same date, includes an additional
positive balance of $46 million resulting from capital and deferred
assets of approximately $180.8 million less long-term liabilities of
$134.8 million.
[14] The debt to asset ratio measures the extent to which CNMI had
funded its assets with debt. The lower the debt percentage, the more
equity CNMI has in its assets.
[15] Based on the actuarial report, dated October 1, 2004, the unfunded
pension liability was estimated at $552,042,142.
[16] 31 U.S.C. Chp. 75.
[17] Internal control is an integral component of an organization's
management that provides reasonable assurance that the following
objectives are being achieved--effectiveness and efficiency of
operations, reliability of financial reporting, and compliance with
applicable laws and regulations. Internal control also serves as the
first line of defense in safeguarding assets and preventing and
detecting errors and fraud.
[18] Office of Management and Budget (OMB) Circular No. A-133, Audits
of States, Local Governments, and Non-Profit Organizations, establishes
policies for federal agencies to use in implementing the Single Audit
Act and provides an administrative foundation for consistent and
uniform audit requirements for nonfederal entities administering
federal awards.
[19] Under the Single Audit Act, the single audit reporting package is
generally required to be submitted to the Federal Audit Clearinghouse
either 30 days after the receipt of the auditor's report or 9 months
after the end of the period under audit.
[20] Auditors express an unqualified ("clean") opinion on financial
statements when they have determined, based on sufficient review work,
that the financial statements are presented fairly in all material
respects, in accordance with generally accepted accounting principles.
[21] Reportable conditions over financial reporting are matters that
come to an auditor's attention related to significant deficiencies in
the design or operation of internal controls that could adversely
affect the entity's ability to produce financial statements that fairly
represent the entity's financial condition.
[22] Material weaknesses in financial reporting are reportable
conditions in which the design or operation of internal controls does
not reduce to a relatively low level the risk that misstatements caused
by error or fraud--material in relation to the financial statements
being audited--may occur and not be detected in a timely period by
employees in the normal course of performing their duties.
[23] A component unit is an organization that is not part of the
primary government activities but for which the nature and significance
of their relationship with a primary government are such that excluding
the organization would cause the reporting entity's statements to be
misleading or incomplete.
[24] In the context of compliance, reportable conditions are matters
that come to an auditor's attention related to significant deficiencies
in the design or operation of internal controls over compliance that
could adversely affect the entity's ability to operate a major federal
program within the applicable requirements of laws, regulations,
contracts, and grants.
[25] Material weaknesses in this context are reportable conditions in
which internal controls do not reduce to a relatively low level the
risk of noncompliance with applicable requirements of laws,
regulations, contracts, and grants that would be material to the major
federal program being audited and undetected in a timely way by
employees in the normal course of performing their duties.
[26] GAO-07-119.
[27] Although the insular areas receive grants from many federal
agencies, one of the grant-making agencies is designated as the
cognizant agency for purposes of the Single Audit Act. The cognizant
agencies have specific responsibilities under OMB Circular No. A-133.
The cognizant agency is usually the agency that provides the
predominant amount of funding. The cognizant agency for CNMI is DOI.
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