Compact of Free Association:

Single Audits Demonstrate Accountability Problems over Compact Funds

GAO-04-7: Published: Oct 7, 2003. Publicly Released: Nov 6, 2003.

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In 1986, the United States entered into a Compact of Free Association (Compact) that provided about $2.1 billion in U.S. assistance from 1987 through 2003 to the Pacific Island nations of the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI). GAO has issued a number of reports raising concerns about the effectiveness of this assistance. GAO was asked to review possible FSM and RMI misuse of Compact funds. We reviewed single audits for 1996 through 2000 and this report summarizes the audit results.

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

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Department of the Interior's Office of Insular Affairs (OIA)has established a competitive process by which certain of its grant funding to the compact states and insular areas is allocated based on competitive criteria. These criteria have been developed to measure the demonstrated ability of the governments(includes the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) and the insular areas to exercise prudent financial management practices and meet federal grant requirements. The evaluation criteria used include the government's performance on recent audits, financial management practices, and ability to meet established timelines in response to OIA queries and deadlines. Thus, OIA is taking action to address those situations when the compact states and insular areas do not undertake adequate actions to address audit findings in a timely manner. The corrective actions taken are sufficient to close this recommendation.

    Recommendation: To help promote compliance with Compact requirements and sound financial management, the Secretary of the Interior should delegate responsibility to the Office of Insular Affairs and hold appropriate officials in that office accountable for initiating appropriate actions when the FSM or the RMI do not undertake adequate actions to address Compact-related single audit findings in a timely manner.

    Agency Affected: Department of the Interior

  2. Status: Closed - Implemented

    Comments: The Office of Insular Affairs (OIA) of the Department of the Interior has hired an accountability policy specialist who is responsible for monitoring the performance of the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) on such factors as the timeliness of required single audits, resolution of audit findings in these audits, and accountability over federal grant dollars. The results of the accountability policy specialist's work are communicated with the Outer Pacific Committee of the Federal Regional Council and in meetings and conferences held by the Island Government Finance Officers Association. The corrective actions taken are sufficient to close this recommendation.

    Recommendation: To help promote compliance with Compact requirements and sound financial management, the Secretary of the Interior should delegate responsibility to the Office of Insular Affairs and hold appropriate officials in that office accountable for reporting on the FSM and RMI actions to correct Compact-related compliance and financial management findings identified in single audit reports to the Secretary of the Interior or other appropriate high-level Interior official.

    Agency Affected: Department of the Interior

  3. Status: Closed - Implemented

    Comments: Based upon our recommendation, the Office of Insular Areas (OIA), within the Department of the Interior, hired an accountability policy specialist in May 2004, who has specific responsibility for the monitoring of the timeliness and other aspects of the single audits for the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) as well as for the other insular areas. While accountability policy specialist's first priority was to get the single audits submitted in a timely manner. Now, that these single audits are on time, the focus has shifted to the correction of audit findings. The accountability policy specialist reviews all of the findings in the single audits as well as the corrective action plans (CAP) to determine whether or not the planned corrective action will resolve the finding. The corrective actions taken are sufficient to close this recommendation.

    Recommendation: To help promote compliance with Compact requirements and sound financial management, the Secretary of the Interior should delegate responsibility to the Office of Insular Affairs and hold appropriate officials in that office accountable for monitoring FSM and RMI progress in addressing Compact-related single audit report findings.

    Agency Affected: Department of the Interior

  4. Status: Closed - Implemented

    Comments: The Department of the Interior's (DOI) Office of Insular Affairs (OIA) took two actions to implement this recommendation. OIA opened a field office in Honolulu, Hawaii to monitor federal assistance to the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI). This Hawaii office was established to be the focal point of OIA's efforts to ensure there is proper accountability for Compact funds. Among other duties, the Hawaii field office staff will be responsible for the day-to-day monitoring of grant assistance under the Compact. The Hawaii field office staff will also perform work to support the U.S. delegations that are involved in establishing budgets for Compact funds, applying performance measures and standards to Compact grants and oversee the trust funds established under the compacts. The second action was the hiring of an accountability policy specialist for OIA's D.C. office. The accountability policy specialist, was hired to coordinate OIA's efforts to promote accountability for federal grants to the FSM, RMI, and the four insular areas. The corrective actions taken are sufficient to close this recommendation.

    Recommendation: To help promote compliance with Compact requirements and sound financial management, the Secretary of the Interior should delegate responsibility to the Office of Insular Affairs and hold appropriate officials in that office accountable for ensuring the adequacy of staff dedicated to Compact oversight and monitoring.

    Agency Affected: Department of the Interior

  5. Status: Closed - Implemented

    Comments: The Office of Insular Affairs (OIA) has hired an accountability and policy specialist. This specialist reviews all of the single audit reports and communicates with the compact states regarding the resolution of all outstanding findings, including those that indicate a possible misuse of grant funds. The corrective actions taken are sufficient to close this recommendation.

    Recommendation: To help promote compliance with Compact requirements and sound financial management, the Secretary of the Interior should delegate responsibility to the Office of Insular Affairs and hold appropriate officials in that office accountable for investigating single audit findings that indicate possible violations of grant conditions or misuse of funds and taking appropriate actions when such problems are verified.

    Agency Affected: Department of the Interior

 

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