jurisdiction: US

text: b"OFFICE OF INSPECTOR GENERAL \n\n for the Millennium Challenge Corporation \n\n\nAUDIT OF THE MILLENNIUM CHALLENGE\nCORPORATION\xe2\x80\x99S FINANCIAL STATEMENTS,\nINTERNAL CONTROLS, AND COMPLIANCE\nFOR THE PERIOD ENDING SEPTEMBER 30,\n2007 AND 2006\n\n\n\n\nAUDIT REPORT NO. M-000-08-001-C\nNovember 9, 2007\n\n\n\n\nWASHINGTON, DC\n\n\x0cOffice of Inspector General\n for the\nMillennium Challenge Corporation\n\n\nNovember 9, 2007\n\n\nThe Honorable John J. Danilovich\nChief Executive Officer\nMillennium Challenge Corporation\n875 15th Street, NW\nWashington, DC 20005-2203\n\n\nSubject:\t Audit of the Millennium Challenge Corporation\xe2\x80\x99s Financial Statements, Internal\n Controls, and Compliance for the Period Ending September 30, 2007 and 2006\n Report No. M-000-08-001-C\n\n\nDear Mr. Ambassador:\n\nEnclosed is the final report on the subject audit. The Office of Inspector General (OIG)\ncontracted with the independent certified public accounting firm of Williams Adley & Company,\nLLP to audit the financial statements of the Millennium Challenge Corporation (MCC) for the\nperiod ending September 30, 2007. The contract required that the audit be performed in\naccordance with United States Generally Accepted Government Auditing Standards, Office of\nManagement and Budget (OMB) Bulletin 07-04, Audit Requirements for Federal Financial\nStatements, and the GAO/PCIE Financial Audit Manual.\n\nIn its audit of the MCC\xe2\x80\x99s financial statements for the period ending September 30, 2007 the\nauditors found:\n\n \xe2\x80\xa2\t The financial statements were fairly presented in conformity with U.S. Generally \n\n Accepted Accounting Principals. \n\n\n \xe2\x80\xa2\t MCC\xe2\x80\x99s internal controls over financial reporting and its operation contained two \n\n significant deficiencies. These significant deficiencies are material weaknesses. \n\n\n \xe2\x80\xa2\t MCC had two instances of material noncompliance with laws and regulations.\n\nThe material weaknesses identified in MCC\xe2\x80\x99s internal controls process increases MCC\xe2\x80\x99s need to\ndevelop written policies and procedures to streamline its financial operations. Under current\noperating procedures, the material weaknesses increase the risk of improper recording,\nunauthorized transactions, omissions, potential funds control violations and noncompliance with\nU.S. Agency for International Development\n1401 H Street, N.W.\nWashington, DC 20005\nwww.usaid.gov\n\x0claws, regulations, contracts and grant agreements. Williams Adley & Company, LLP reported\nthe following internal control weaknesses:\n\n 1. \t MCC did not sufficiently execute its monitoring functions related to advances.\n\n 2. \t MCC lacks written policies and procedures related to financial reporting\n accountability and document control.\n\n\nWilliams Adley & Company, LLP also reported instances of noncompliance with laws,\nregulations, contracts, and grant agreements, inclusive of those referred to in the Federal\nFinancial Management Improvement Act of 1996 (FFMIA) and disclosed instances of\nnoncompliance or other matters that are required to be reported under Government Auditing\nStandards, issued by the Comptroller General of the United States, and OMB Bulletin 07-04,\nAudit Requirements for Federal Financial Statements. The instances of noncompliance are:\n\n 1. \t MCC did not fully comply with FFMIA (material noncompliance).\n\n 2. \tMCC did not fully comply with the Federal Information Security Management Act\n (FISMA) (material noncompliance).\n\nIn carrying out its oversight responsibilities, the OIG reviewed Williams Adley & Company, LLP\xe2\x80\x99s\nreport and related audit documentation. This review, as differentiated from an audit in\naccordance with U.S. Generally Accepted Government Auditing Standards, was not intended to\nenable the OIG to express, and we do not express, opinions on MCC\xe2\x80\x99s financial statements, or\ninternal control; on whether MCC\xe2\x80\x99s financial management systems substantially complied with\nFFMIA; or on MCC\xe2\x80\x99s compliance with other laws and regulations. Williams Adley & Company,\nLLP is responsible for the attached auditor\xe2\x80\x99s report, dated October 23, 2007, and the\nconclusions expressed in the report. However, our review disclosed no instances that Williams\nAdley & Company, LLP did not comply, in all material respects, with applicable standards.\n\nTo address the internal control weaknesses and the noncompliance findings reported by\nWilliams Adley & Company, LLP, we are making the following recommendations to MCC\xe2\x80\x99s\nmanagement:\n\n Recommendation No. 1: We recommend that the Millennium Challenge\n Corporation\xe2\x80\x99s management:\n\n 1.1. Implement a policy that reduces outstanding advances based on the\n First-in, First-out (FIFO) method.\n\n 1.2. Implement the common payment system for all MCAs on a more\n aggressive timeline.\n\n 1.3. Make payments in accordance with the monthly schedule, and if a\n payment is held, consider the need for it to be disbursed at all.\n\n 1.4. Ensure that there is a more rigorous review of advance requests\n including an assessment of outstanding advances.\n\n\n\n\n 2\n\x0c Recommendation No. 2: We recommend that the Millennium Challenge\n Corporation management:\n\n 2.1. Formally document the MCC accountability for ensuring MCA\n compliance with the reporting provisions.\n\n 2.2. Implement document retention policies that include standards for\n version control and a central repository for documents that are used by multiple\n MCC units.\n\n 2.3. Continue with the planned implementation of the BIDS project and\n ensure that information is validated prior to inclusion in the new system.\n\n\n Recommendation No. 3: We recommend that management continue to assess the\n automated options available to handle the Millennium Challenge Corporation\n operations and develop short range and long range plans for the implementation\n of the most appropriate information technology structure to address electronic\n integration of, at least, the payroll, procurement and travel functions and systems\n to increase the efficiencies and effectiveness of the processing of financial\n transactions, and decrease the risk of errors.\n\n\n\nIn finalizing the report, we received and considered MCC\xe2\x80\x99s response to the draft report and the\nrecommendations included therein. In its comments, MCC was generally responsive; however,\nthe corporation did not provide estimated implementation dates for corrective action on\nrecommendations 1 and 3.\n\nPlease provide revised management decisions for recommendations 1 and 3, and inform us\nwhen you have taken final action on recommendation number 2.\n\nThe OIG appreciates the cooperation and courtesies extended to our staff and to the staff of\nWilliams Adley & Company, LLP during the audit. Please contact me or Richard J. Taylor,\nDirector, Financial Audits Division, at (202) 216-6963, if you have any questions concerning this\nreport.\n\nSincerely,\n\n/s/\nJohn M. Phee\nAssistant Inspector General\nMillennium Challenge Corporation\n\n\n\n\n 3\n\n\x0c TABLE OF CONTENTS\n\n\n\n Page\n\nIndependent Auditor\xe2\x80\x99s Report 1\n\n\n Opinion on the Financial Statements 2\n\n\n Internal Control over Financial Reporting 3\n\n\n Compliance with Laws and Regulations 9\n\n\n Status of Prior Year Findings \xe2\x80\x93 Appendix A 12 \n\n\n Management Comments and Our Evaluation \xe2\x80\x93 Appendix B 21 \n\n\n Management Comments \xe2\x80\x93 Appendix C 24 \n\n\nBalance Sheet 28 \n\n\nStatements of Budgetary Resources 29 \n\n\nStatement of Net Costs 30 \n\n\nStatement of Changes in Net Position 31 \n\n\nNotes to Financial Statements 32 \n\n\x0c Williams, Adley & Company, LLP\nCertified Public Accountants/Financial Management Consultants\n\n\n\n\n Independent Auditors\xe2\x80\x99 Report\n\n\nInspector General\nUnited States Agency for International Development\n\nBoard of Directors\nMillennium Challenge Corporation\n\nWe have audited the accompanying Statements of Financial Position of the Millennium\nChallenge Corporation (MCC or Corporation) as of September 30, 2007 and 2006 and the related\nStatements of Net Costs, Changes in Net Position, and Budgetary Resources for the year ended\nSeptember 30, 2007 and 2006. These financial statements are the responsibility of Corporation\nmanagement. Our responsibility is to express an opinion on these financial statements based on\nour audit.\n\nIn the prior fiscal year MCC prepared their financial statements in accordance with the\nrequirements of the Government Corporation Control Act and the OMB Circular A-136\nrequirement for 45 day reporting. In fiscal year 2007 MCC decided to early adopt all\nrequirements of OMB Circular A-136, as permitted by the Circular. The requirements resulted\nin a change in the financial statements presented by the Corporation. The fiscal year 2006\ninformation has been formatted in accordance with the new presentation.\n\nIn connection with our audit, we also considered the MCC\xe2\x80\x99s internal control over financial\nreporting and tested the MCC\xe2\x80\x99s compliance with certain provisions of applicable laws,\nregulations, contracts and grant agreements that could have a direct and material effect on the\nfinancial statements.\n\nSUMMARY\n\nAs stated in our opinion, we concluded that the MCC\xe2\x80\x99s financial statements as of and for the year\nended September 30, 2007 and 2006 are presented fairly, in all material respects, in conformity\nwith accounting principles generally accepted in the United States of America.\n\nOur consideration of internal control over financial reporting and its operation resulted in two\nmatters that we consider to be significant deficiencies. We believe that these significant\ndeficiencies are material weaknesses.\n\x0c 1. \t MCC Did Not Sufficiently Execute Its Monitoring Functions Related to Advances\n\n\n 2. \t MCC Lacks Written Policies and Procedures Related to Financial Reporting\n Accountability and Document Control\n\n\n\nThe results of our tests of compliance with certain provisions of laws, regulations, contracts,\nand grant agreements, inclusive of those referred to in the Federal Financial Management\nImprovement Act of 1996 (FFMIA), disclosed two instances of noncompliance or other\nmatters that are required to be reported herein under Government Auditing Standards, issued\nby the Comptroller General of the United States, and Office of Management and Budget\n(OMB) Bulletin No. 07-04, Audit Requirements for Federal Financial Statements:\n\n 3.\t MCC did not fully comply with FFMIA (material noncompliance)\n\n 4.\t MCC did not fully comply with Federal Information Security Management Act\n (material noncompliance)\n\nThe following sections discuss our opinion on the MCC\xe2\x80\x99s financial statements, our\nconsideration of the MCC\xe2\x80\x99s internal control over financial reporting, our tests of the MCC\xe2\x80\x99s\ncompliance with certain provisions of applicable laws, regulations, contracts, and grant\nagreements, and the distribution of our report. The status of prior year findings is included as\nAppendix A. Management\xe2\x80\x99s response to the findings and our evaluation of said response is\nincluded as Appendix C and Appendix B, respectively. We noted other matters that were\ncommunicated to management in a separate letter.\n\n\nOPINION ON THE FINANCIAL STATEMENTS\n\nWe have audited the accompanying Statements of Financial Position of the Corporation as of\nSeptember 30, 2007 and 2006, and the related Statements of Net Costs, Changes in Net\nPosition, and Budgetary Resources for the year ended September 30, 2007 and 2006. These\nfinancial statements are the responsibility of Corporation management. Our responsibility is\nto express an opinion on these financial statements based on our audit.\n\nWe conducted our audit in accordance with auditing standards generally accepted in the\nUnited States of America and standards applicable to financial statement audits contained in\nGovernment Auditing Standards, issued by the Comptroller General of the United States, and\nthe Office of Management and Budget (OMB) Bulletin No. 07-04, Audit Requirements for\nFederal Financial Statements. Those standards require that we plan and perform the audit to\nobtain reasonable assurance that the financial statements are free of material misstatement.\nAn audit includes examining, on a test basis, evidence supporting the amounts and\ndisclosures in the financial statements. An audit also includes assessing the accounting\nprinciples used and significant estimates made by management, as well as evaluating the\n\n\n\n Page 2 of 40\n\x0coverall financial statement presentation. We believe that our audit provides a reasonable\nbasis for our opinion.\n\nIn the prior fiscal year MCC prepared their financial statements in accordance with the\nrequirements of the Government Corporation Control Act and the OMB Circular A-136\nrequirement for 45 day reporting. In fiscal year 2007 MCC decided to early adopt all\nrequirements of OMB Circular A-136, as permitted by the Circular. The requirements\nresulted in a change in the financial statements presented by the Corporation. The fiscal year\n2006 information has been formatted in accordance with the new presentation.\n\nIn our opinion, the financial statements referred to above present fairly, in all material\nrespects, the financial positions of the Corporation as of September 30, 2007 and 2006, and\nchanges in net position, net costs, and budgetary resources for the years ended September 30,\n2007 and 2006, in conformity with accounting principles generally accepted in the United\nStates of America.\n\nOur audit was made for the purpose of forming an opinion on the basic financial statements\nof the Corporation taken as a whole. The information contained in the Management\xe2\x80\x99s\nDiscussion and Analysis and Performance Section is not a required part of the financial\nstatements, but is supplementary information required by the Federal Accounting Standards\nAdvisory Board guidance. We have applied certain limited procedures, which consisted\nprincipally of inquiries of management regarding the methods of measurement and\npresentation of the information. However, we did not audit the information and do not\nexpress an opinion thereon.\n\n\nINTERNAL CONTROL OVER FINANCIAL REPORTING\n\nIn planning and performing our fiscal year 2007 audit, we considered MCC\xe2\x80\x99s internal control\nover financial reporting by obtaining an understanding of MCC\xe2\x80\x99s internal control, determined\nwhether internal controls had been placed into operation, assessed control risk, and\nperformed tests of controls in order to determine our auditing procedures for the purpose of\nexpressing an opinion on the financial statements. We limited our internal control testing to\nthose controls necessary to achieve the objectives described in OMB Bulletin No. 07-04 and\nGovernment Auditing Standards. We did not test all internal controls relevant to operating\nobjectives as broadly defined by the Federal Managers\xe2\x80\x99 Financial Integrity Act of 1982\n(FMFIA), such as those controls relevant to ensuring efficient operations. The objective of\nour audit was not to provide assurance on internal control; accordingly, we do not provide an\nopinion on internal control.\n\nOur consideration of internal control over financial reporting would not necessarily disclose\nall matters that might be reportable conditions. Under standards issued by the American\nInstitute of Certified Public Accountants, significant deficiencies are matters coming to our\nattention relating to significant deficiencies in the design or operation of the internal control\nover financial reporting that, in our judgment, could adversely affect MCC\xe2\x80\x99s ability to record,\n\n\n\n\n Page 3 of 40\n\x0cprocess, summarize, and report financial data consistent with the assertions by management\nin the financial statements.\n\nMaterial weaknesses are significant deficiencies in which the design or operation of one or\nmore of the internal control components does not reduce to a relatively low level the risk that\nmisstatements, in amounts that would be material in relation to the financial statements being\naudited, may occur and not be detected within a timely period by employees in the normal\ncourse of performing their assigned functions. Because of inherent limitations in internal\ncontrols, misstatements, losses or noncompliance may occur and not be detected.\n\nWe noted two matters involving the internal control over financial reporting and its operation\nthat we consider to be significant deficiencies. We believe that these significant deficiencies\nare material weaknesses. We noted other matters that were communicated to management in\na separate letter.\n\n\nMATERIAL WEAKNESSES\n\n\n\nMCC Did Not Sufficiently Execute Its Monitoring Functions Related to Advances\n\n\n\nCondition:\n\nMCC entered into various compacts and provided several advances during fiscal year 2007.\nMCC personnel indicated that monthly disbursements were made based upon the quarterly\ndisbursement requests. Current policies and procedures require that the disbursement\nrequests are reviewed by several organizations within MCC for reasonableness, accuracy and\nneed. Also, MCC personnel indicated that advances are generally liquidated within\napproximately 180 days using the quarterly financial reports provided by the Millennium\nChallenge Accounts (MCAs). The current policy requires that outstanding advances are\nliquidated within the Oracle Federal Financial System on the First-in First-out (FIFO) basis.\nHowever, we noted the following:\n\n 1.\t Several advances were not liquidated within 180 days (see chart below).\n\n 2.\t Advances were not always liquidated on the FIFO basis. For example, we noted that\n although Georgia had an advance for $255,713 outstanding for 541 days, re-\n disbursements equaling $6,477,332 were posted against an advance that was 348 days\n outstanding instead. Additionally, we noted that Ghana had advances totaling\n $3,065,233 outstanding for 290 days or greater, however, re-disbursements totaling\n $685,738 were posted against an advance outstanding for 207 days.\n\n\n\n\n Page 4 of 40\n\x0c 3.\t MCAs were granted additional funds in spite of open advances that were outstanding\n for 180 days or greater. We noted that Madagascar had outstanding advances totaling\n $13,790,783 as of June 30, 2007, with re-disbursements posted of $2,467,082, and\n received additional advances of $1,110,762 for August and $3,663,616 for\n September.\n\n 4.\t We noted that monthly tranches were not always issued properly. Three MCAs\n received two months of advances within one month. We noted that El Salvador\n received $1,361,939 and $364,347 on August 1, 2007 for the months of July and\n August; and Georgia received $3,655,620 and $3,500,000 on June 29, 2007 for the\n months of March and June.\n\n 5.\t The fourth quarter financial reports indicated that four MCAs had cash on hand of\n greater than 30 days cash needs as evidenced by no disbursement requested until the\n second month of the quarter or in one instance no disbursement was requested for the\n entire quarter.\n\n\n Country Date of Amount of Amount Days\n Disbursement Disbursement Remaining as Outstanding\n of 9/30/07\n Benin 8/31/2007 $1,531,951 $556,849 264\n\n Georgia 2/26/2007 $10,913,824 $5,966,180 348\n\n Ghana 6/14/2007 $863,315 $299,414 294\n 3/7/2007 $55,620 $55,620 207\n\n\nAlso, in our review of the outstanding advances we noted that interagency advances to the\nDepartment of Treasury of $1,611,899 and U.S. Agency for International Development\n(USAID) of $120,000 were over 365 days outstanding.\n\nThe Department of the Treasury\xe2\x80\x99s Financial Management Service publications did not\nenvision the inclusion of sovereign governments; however, in the analysis of cash\nmanagement, we used the Treasury Financial Manual (TFM) as a valuable source of sound\nbusiness practices. The TFM is the Department of the Treasury's official publication for\nfinancial accounting and reporting of all receipts and disbursements of the Federal\nGovernment. The purpose of the TFM is to provide policies, procedures, and instructions for\nFederal departments and agencies to follow in carrying out their fiscal responsibilities.\n\nAlso, through various OMB Circulars, OMB has attempted to address the need for advances\nto cover immediate cash needs or timely disbursements of an entity for direct program costs\nfor carrying out the purpose of the approved program or project. Thus, funds paid to a\ngrantee are not to be held, but are to be promptly applied to the grant purpose. Although the\ntimeframe for immediate cash needs has not been clearly defined by OMB, the general rules\n\n\n Page 5 of 40\n\x0cemployed by various Federal agencies are 30 days for non-governmental entities as outlined\nin the TFM. Based upon this definition, MCC has provided Federal funds in excess of\nimmediate cash needs.\n\nCriteria:\n\nPer the Appropriations Law Volume II, advances under an assistance program are intended to\naccomplish the program purposes and not to profit the recipient other than in the manner and\nextent specified in the program. Section 2025 of The Treasury Financial Manual \xe2\x80\x93Volume 1,\nPart 6-Chapter 2000, states that advances to a recipient organization will be limited to the\nminimum amounts necessary for immediate disbursement needs and will be timed to be in\naccord only with the actual immediate cash requirements of the recipient organization in\ncarrying out the purpose of an approved program or project. The timing and amount of cash\nadvances will be as close as is administratively feasible to actual disbursements by the\nrecipient organization.\n\nBest business practice defines immediate cash needs as money used for the purpose of\ncarrying out the Compact\xe2\x80\x99s approved programs within a thirty day period. Also, when funds\nare drawn from Treasury before it is needed, or in excess of current needs, the government\nloses the use of the funds.\n\nCause:\n\nAlthough, MCC\xe2\x80\x99s management has changed the advance issuance and monitoring policies\nand procedures, several aspects of advance monitoring have not been effectively\nimplemented. The review of the advance requests related to immediate cash needs and\noutstanding advances currently performed is inadequate.\n\nEffect:\n\nThe lack of effective advance monitoring has lead to excess cash on hand and increasing\namounts of interest remitted from FY 2006 ($304,000) to FY 2007 ($1,624,762). Not using\nthe FIFO method to liquidate the advances distorts the aging of outstanding advances and\nprovides inaccuracies in the data.\n\nRecommendation # 07-01:\n\nWe recommend that MCC management:\n\n (1) Implement a policy that truly reduces o\t utstanding advances based on the FIFO\n method;\n (2) Implement the common payment system for all MCAs of a more aggressive timeline;\n (3) Make payments in accordance with the monthly schedule and if a payment is held\n consider the need for it to be disbursed at all; and\n (4) Management should ensure that there is a more rigorous review of advance requests\n including an assessment of outstanding advances.\n\n\n\n Page 6 of 40\n\x0cMCC Lacks Written Policies and Procedures Related to Financial Reporting\nAccountability and Document Control\n\n\n\nCondition:\n\nIn performing our analysis of compact expenses and advances, we requested supporting\ndocumentation of approved disbursement requests and final quarterly financial reports (QFR)\nby country for FY 2007. MCC\xe2\x80\x99s Department of Administration and Finance was hampered in\naddressing our request in a timely manner because of the lack of a centralized data/document\nrepository. Also, MCC does not have adequate version control over the documents to ensure\nthat the final documents are maintained in a manner that is accessible to all MCC employees\nrequiring information.\n\nDuring FY 2007, MCC disbursed over $82 million to compact countries who in turn reported\napproximately $72 million in expenses on their quarterly reports. The disbursement requests\nand quarterly reports are essential to ensuring that expenses and advances are accurately\nreported in the proper period. MCC has policies and procedures for processing and clearing\nthe disbursement requests and quarterly financial reports that are received from the MCAs.\nThe MCA is required to submit the QFR by the 10th day of the third month of the quarter.\nThe remaining 20 days of the month are used by MCC to process and clear the reports\nthrough various MCC departments including the country teams, legal, Fiscal Accountability,\nand Department of Administration and Finance. However, MCC does not have written\npolicies and procedures related to the non-receipt of the QFR and identification of the\naccountable person(s) for ensuring compliance and notification.\n\nMCC has decided to invest in an enterprise information system that will serve as a central\nrepository for the documentation related to the various countries supported by the MCC. The\nprojected implementation of the system is the third quarter of FY 2008.\n\nCriteria:\n\nThe GAO Standards for Internal Control in the Federal Government states that internal\ncontrol and all transactions and other significant events need to be clearly documented and\nthe documentation should be readily available for examination. Also, information should be\nrecorded and communicated to management and others within the entity who need it and in a\nform and within a timeframe that enables them to carry out their internal control and other\nresponsibilities.\n\nOMB Circular A-127 \xe2\x80\x9cPolicies and Standards for Financial Management Systems\xe2\x80\x9d states\nthat financial management in the Federal government requires accountability of financial and\n\n\n\n Page 7 of 40\n\x0cprogram managers for financial results of actions taken, control over the Federal\ngovernment's financial resources and protection of Federal assets. To enable these\nrequirements to be met, financial management systems must be in place to process and\nrecord financial events effectively and efficiently, and to provide complete, timely, reliable\nand consistent information for decision makers and the public.\n\nAdditionally, management and employees should establish and maintain an environment\nthroughout the organization that sets a positive and supportive attitude toward internal\ncontrol and conscientious management. A positive control environment is the foundation for\nall other standards. It provides discipline and structure as well as the climate which\ninfluences the quality of internal controls.\n\n\nCause:\n\nThe country teams and specifically, the program officer, are responsible for ensuring that\nquarterly financial reports are received from each country in accordance with the timeline\nestablished. However, the written roles and responsibilities of the position and operational\narea do not include the accountability for these reports and provision for a centralized\nrepository. Also, MCC has not established document retention standards that include\ndocument versioning controls. Additionally, MCC believes that because the agreements\nrequire the submission of the reports and funds cannot be disbursed to the MCA without\ncurrent reports on file, the possibility of nonsubmission is nonexistent. However, if the MCA\nhas sufficient funds on hand and thus does not require a disbursement, the incentive to\nprovide timely reporting decreases.\n\nEffect:\n\nIf compact expenses are not recorded timely and accurately based upon approved\ndocumentation, the MCC financial reporting and financial statements will be inaccurate and\nMCC management\xe2\x80\x99s ability to rely on the financial statements to make informed decisions\nwill be impaired. As the number of compact countries and amounts of funds disbursed\nincreases, the ability to maintain documentation and report accurately and timely becomes\nincreasingly more important to the effective and efficient running of MCC operations.\n\nAlso, operating efficiency is reduced because the lack of centralized records causes people to\nkeep their own set of records because they can not rely on information being available when\nneeded. Specifically, it has required the Department of Administration and Finance to\nexpend additional efforts to track down the required reports for recording in the accounting\nsystem and providing to the auditors. The lack of version control and central repository also\naffects other reports and documentation required from the various countries including\nperformance reports, monitoring and evaluations plans, etc. Currently, the 9 compacts that\nare in force require 4 QFRs, at least 4 disbursement requests, and 2 performance reports on\nan annual basis. Also, countries receiving Compact Implementation Funds (CIF) and 609g\nfunds required to submit quarterly QFRs. Additionally, there are untold draft versions of\nthese same reports. If you multiply these reports by the additional countries that will be\n\n\n\n Page 8 of 40\n\x0creporting in the future, the proper controls over documentation become increasingly critical\nto effective data management.\n\nRecommendation # 07-02:\n\nWe recommend that MCC management:\n\n (1) Formally document the MCC accountability for ensuring MCA compliance with the\n reporting provisions;\n (2) Implement document retention policies that include standards for version control and\n a central repository for documents that are used by multiple MCC units; and\n (3) Continue with the planned implementation of the enterprise information system and\n ensure that information is validated prior to inclusion in the new system.\nThe status of prior year\xe2\x80\x99s findings is provided in Appendix A. Management\xe2\x80\x99s response in its\nentirety is included in Appendix C.\n\nAs required by OMB Bulletin No. 07-04, with respect to internal controls related to\nperformance measures determined by management to be key and reported in the\nManagement\xe2\x80\x99s Discussion and Analysis, we obtained an understanding of the design of\nsignificant internal controls relating to the existence and completeness assertions. Our\nprocedures were not designed to provide assurance on internal control over performance\nmeasures and, accordingly, we do not provide an opinion thereon.\n\n\nCOMPLIANCE WITH LAWS AND REGULATIONS\n\nMCC\xe2\x80\x99s management is responsible for complying with laws and regulations applicable to\nMCC. As part of obtaining reasonable assurance that MCC\xe2\x80\x99s balance sheet is free of\nmaterial misstatements, we performed tests of its compliance with certain provisions of laws\nand regulations, noncompliance with which could have a direct and material effect on the\ndetermination of financial statement amounts, and certain other laws and regulations\nspecified in OMB Bulletin No. 07-04, including the requirements referred to in the FFMIA.\nWe limited our tests of compliance to these provisions and we did not test compliance with\nall laws, regulations, contracts, and agreements applicable to MCC. Providing an opinion on\ncompliance with laws, regulations, contracts, and grant agreements was not an objective of\nour audit and, accordingly, we do not express such an opinion.\n\nUnder OMB Bulletin No. 06-03 and FFMIA, we are required to report whether MCC\xe2\x80\x99s\nfinancial management systems substantially comply with: (1) Federal financial management\nsystems requirements, (2) applicable Federal accounting standards, and (3) the United States\nGovernment Standard General Ledger at the transaction level. To meet this requirement, we\nrelied on the results of a SAS 70 review of the Department of Interior\xe2\x80\x99s Oracle Federal\nFinancial System performed by an Independent Audit Firm. The results of that review have\nbeen presented to MCC in a separate report. Providing an opinion on compliance with those\nprovisions was not, however, an objective of our audit and, accordingly, we do not express\nsuch an opinion.\n\n\n\n Page 9 of 40\n\x0cThe results of our tests disclosed that the Corporation did not fully comply with the FFMIA,\nwhich is required to be reported under Government Auditing Standards or OMB Bulletin No.\n06-03.\n\nUnder FFMIA, we are required to report whether the Corporation\xe2\x80\x99s financial management\nsystems substantially comply with the Federal financial management systems requirements,\napplicable Federal accounting standards, and the United States Government Standard\nGeneral Ledger at the transaction level. To meet this requirement, we performed tests of\ncompliance with FFMIA section 803(a) requirements.\n\nThe results of our tests disclosed two instances of noncompliance with laws and regulations.\n\n\n\nMATERIAL NONCOMPLIANCE\n\nMCC Does Not Fully Comply With The Federal Financial Management Improvement Act\n\nCondition:\n\nMillennium Challenge Corporation (MCC) systems do not comply with the Federal Financial\nManagement Improvement Act (FFMIA). The FFMIA requires an integrated financial\nmanagement system. MCC does not have an integrated financial management system. MCC\nhas multiple incompatible systems that cannot exchange data electronically, i.e. E-Travel and\nFederal Personnel/Payroll System (FPPS). The entry of the travel expenses and\ndisbursements must be done manually. The entry of obligations and commitments requires a\nprocess of manual entry into Oracle Federal Financial (OFF). The payroll expenses and\ndisbursements must be uploaded into OFF from FPPS.\n\nDuring FY 2007, the Department of Accounting and Finance (A&F) traveled to NBC\xe2\x80\x99s\nHeadquarters to perform testing of the interface between E-travel and OFF. A&F tested the\ninterface based on 17 different employee travel scenarios, and noted that only five standard\nscenarios processed through both E-travel and OFF successfully.\n\nCriteria:\n\nThe FFMIA requires MCC to implement and maintain a financial management system that\ncomplies substantially with Federal requirements for an integrated financial management\nsystem.\n\nCause:\n\nThe MCC does not have its own financial system. The Corporation has contracted with NBC\nto provide accounting and IT services including usage of its OFF application. The MCC is\nrequired by government regulations to use Federal Centers of Excellence of which NBC is\n\n\n\n Page 10 of 40\n\x0cone. According to MCC officials the Corporation has been directed to use the systems\navailable through NBC. MCC believes that in fiscal year 2007 it used the only options\navailable. NBC is working with MCC to provide enhancement to the system to\naccommodate MCC needs within the context of the OMB requirements for Centers of\nExcellence.\n\nEffect:\n\nThe financial systems may not provide users with complete, accurate, timely financial\ninformation needed for decision-making purposes because of the inefficiencies caused by the\nmanual processes.\n\n\nRecommendation # 07-03:\n\nWe recommend that management continue to assess the automated options available to\nhandle MCC operations and develop short range and long range plans for the implementation\nof the most appropriate information technology structure to address electronic integration of\nat least the payroll, procurement and travel functions and systems to increase the efficiencies\nand effectiveness of the processing of financial transactions; and decrease the risk of errors.\n\n\nMCC Does Not Fully Comply With The Federal Information Security Management Act\n(FISMA)\nAn OIG audit identified significant non-compliance with FISMA requirements. Also, MCC\nengaged an outside expert to perform an independent security audit. MCC acknowledged that\nit had not met the majority of the FISMA requirements and proposed a timetable for\ncompliance.\n\nWe are reporting this deficiency as required by the guidance issued by the Office of\nManagement and Budget. However, because this deficiency was addressed in a prior OIG\naudit report, we are not making any recommendations in this report.\n\n\nDISTRIBUTION\n\nThis audit was performed pursuant to the Government Corporation Control Act, OMB\nCircular A-136, and is intended solely for the information and use of the United States\nCongress, the President, the Director of the Office of Management and Budget, Comptroller\nGeneral of the United States, the Corporation and its Inspector General, and is not intended\nto be, and should not be, used by anyone other than these specific parties.\n\n\n\nOctober 23, 2007\nWashington, D.C.\n\n\n Page 11 of 40\n\x0c Appendix A\n\n\n\nSTATUS OF PRIOR YEAR FINDINGS\n\nMCC Does Not Fully Comply with The Federal Information Security Management Act\n(FISMA)\nIn a report issued June 2005, an OIG audit identified significant non-compliance with\nFISMA requirements. Subsequently, MCC completed its FISMA report to OMB as of\nSeptember 30, 2005, where it acknowledged that it had not met the majority of the FISMA\nrequirements and proposed a timetable for compliance.\n\nWe are reporting this deficiency, as required by the guidance issued by the Office of\nManagement and Budget. However, because this deficiency was addressed in a prior OIG\naudit report, we are not making any recommendation in this report.\n\nThe OIG continues to report significant noncompliances with FISMA requirements in fiscal\nyear 2006 and 2007.\n\n\nMCC\xe2\x80\x99s Policies and Procedures Were Not Always Complete and Consistent (material\nweakness)\n\nDuring fiscal year (FY) 2006, the Millennium Challenge Corporation (MCC) used various\nprocesses to address the financial aspects of its operations. These processes evolved during\nthe year as the organization grew in both number of personnel and span of operations.\nHowever, during this growth, the development and implementation of final written policies\nand procedures to guide MCC\xe2\x80\x99s streamlined operational structure was not adequately\naddressed. During the fiscal year, MCC lacked final written policies and procedures.\nWritten policies and procedures must be in place to ensure operational efficiencies, risk\nreduction, and consistent application. Several policies and procedures, i.e. advances, budget,\nand accruals, remained in draft form, throughout the year. Additionally, several procedures\ndo not address the responsible positions at the various control levels for the processing of\ndata/data entry functions, or submission and approval levels and procedures in the areas of\nfixed assets and the open obligations review required revision.\n\nWhile the current Department of Administration and Finance (A&F) management team has\nemphasized the preparation and issuance of a comprehensive financial management policies\nand procedures (FMPP) manual, as of the end of the FY, such a manual was being drafted.\nMCC has hired contractors to assist in the production of the FMPP manual by December 31,\n2006.\n\nRecommendation #06-01:\n\nWe recommend that Millennium Challenge Corporation\xe2\x80\x99s Department of Administration and\nFinance complete the Financial Management Policies and Procedures (FMPP) manual and\nimplement the written policies and procedures for all areas that result in a financial event.\n\n\n\n Page 12 of 40\n\x0c Appendix A\n\n\n\n\nStatus:\n\n\n\nThe Department of Administration and Finance completed the FMPP manual in March 2007.\nIt was implemented and also updated in August 2007.\n\n\n\n\nMCC Policies for Disbursing Advances to Grantees Do Not Accommodate Effective Cash\nManagement (material weakness and noncompliance)\n\n\n\nCondition:\n\nMCC entered into various compacts and provided several advances during fiscal year 2006.\nMCC personnel indicated that monthly disbursements were made based upon the quarterly\nrequest. However, we noted that for most Millennium Challenge Authorities (MCAs), MCC\ndisbursed funds on a quarterly basis based upon the disbursement request, rather than\nmonthly. We noted that several disbursements were not used within 30 days nor the quarter.\n\n Projected Date when\n Cash Balance disbursement was\n Date of Amount of at September completely\n Country Disbursement Disbursement 30, 2006 expended\nMadagascar July 28, 2005 $ 2,500,924 - March 30, 2006\n December 13, 2005 $ 1,755,506 - June 30, 2006\n May 31, 2006 $ 5,391,665 $2,311,342 Not expected to be\n expended by\n September 30, 2006\n\nGeorgia May 2, 2006 $ 3,603,404 $221,594 Not expected to be\n September 15, 2006 $6,509,706 6,509,706 expended by\n September 30, 2006\n\nHonduras February 28, 2006 $ 1,646,545 $138,840 Not expected to be\n September 29, 2006 $1,369,849 $1,369,849 expended by\n September 30, 2006\n\nCape Verde February 1, 2006 $ 7,526,864 $3,913,663 Not expected to be\n expended by\n\n\n Page 13 of 40\n\x0c Appendix A\n\n\n Projected Date when\n Cash Balance disbursement was\n Date of Amount of at September completely\n Country Disbursement Disbursement 30, 2006 expended\n September 30, 2006\n\nVanuatu June 30, 2006 $ 1,127,055 $1,023,658 Not expected to be\n August 9, 2006 $ 219,504 $219,504 expended by\n September 6, 2006 $ 111,688 $111,688 September 30, 2006\n September 18, 2006 $ 116,377 $116,377\n\nNicaragua June 30, 2006 $ 1,483,399 433,889 Not expected to be\n August 28, 2006 $ 378,550 378,550 expended by\n August 31, 2006 $ 289,110 289,110 September 30, 2006\n\nThe Department of the Treasury\xe2\x80\x99s Financial Management Service publications did not\nenvision the inclusion of sovereign governments; however, in the analysis of cash\nmanagement, we used the Treasury Financial Manual (TFM) as a valuable source of sound\nbusiness practices. The TFM is the Department of the Treasury's official publication for\nfinancial accounting and reporting of all receipts and disbursements of the Federal\nGovernment. The purpose of the TFM is to provide policies, procedures, and instructions for\nFederal departments and agencies to follow in carrying out their fiscal responsibilities.\n\nAlso, through various OMB Circulars, OMB has attempted to address the need for advances\nto cover immediate cash needs or timely disbursements of an entity for direct program costs\nfor carrying out the purpose of the approved program or project. Thus, funds paid to a\ngrantee are not to be held, but are to be promptly applied to the grant purpose. Although the\ntimeframe for immediate cash needs has not been clearly defined by OMB, the general rules\nemployed by various Federal agencies are 30 days for non-governmental entities as outlined\nin the TFM. Based upon this definition, MCC has provided Federal funds in excess of\nimmediate cash needs.\n\nRecommendation # 06-02:\n\nWe recommend that Millennium Challenge Corporation:\n\n 1) Develop and implement policies and procedures to ensure that the payment schedules\n and other agreements entered into with grantees are reflective of the U.S. Treasury\n requirements concerning advances and immediate cash needs.\n 2) Develop and implement policies and procedures to ensure that all disbursement\n requests from the accountable entity of the recipient countries follow the official\n format that documents the cash requirements for each month of the quarterly period.\n 3)\t Make and document all payments to the recipient countries on a monthly basis\n instead of a quarterly basis.\n\n\n\n\n Page 14 of 40\n\x0c Appendix A\n\n 4)\t Establish and implement policies and procedures to ensure that any custodial\n liabilities, e.g. interest owed to the U.S. government resulting from the grantee\n advances, are properly recorded.\n\nStatus:\n\nThe Millennium Challenge Corporation developed and implemented policies and procedures\nreflective of the GAO policy based on an evaluation of what was needed to meet grant\npurposes in any given quarter, through the funds will be released in tranches on a monthly\nschedule. The MCAs submit quarterly financial reports that include disbursement requests.\nThe disbursement requests provide a monthly schedule of cash needs that NBC and the\nDivision of Finance follow to issue the disbursements. DF and The National Business Center\n(NBC) have implemented controls and review procedures to ensure quarterly disbursement\nrequests and subsequent monthly disbursements comply with policies and procedures per the\nFMPP. Disbursements are recorded when issued and expenses are recorded on a quarterly\nbasis based upon the financial reports received from the MCA. The interest receipts are\nrecorded in the general ledger by NBC.\n\n\n\nMCC Does Not Have a Property Management System (material weakness)\n\n\n\nWe noted that MCC reported $5,656,567 in property as of June 30, 2006; however, they were\nunable to provide detailed records to support the amount reported. The MCC does not have a\nproperty management system that provides detail information on original cost, date of\npurchase, location, useful life, depreciation, and accumulated depreciation.\n\nFor the year end financial statements, sufficient analysis was performed to ensure consistent\napplication of the capitalization policy and to determine an appropriate measure of\ndepreciation expense to ensure that fixed assets would be fairly stated.\n\nRecommendation #06-03:\n\nWe recommend that Millennium Challenge Corporation develop and maintain appropriate\nfixed asset records to ensure accurate reporting and physical control.\n\nStatus:\n\nMCC implemented new property policies and procedures in FY 2007. MCC with the\nassistance of a contractor conducted an inventory and reconciled it to the general ledger.\nAlso, MCC established fixed asset records and computed and recorded depreciation expenses\nduring the year.\n\n\n\n\n Page 15 of 40\n\x0c Appendix A\n\n\nMCC Did Not Properly Record Compact Expenses During the Fiscal Year (material\nweakness)\n\n\n\nAs a result of our review of the third quarter financial statements, we noted that MCC did not\nreport any compact program costs. Although MCC had received disbursement requests that\ncan be used to post the expenses incurred, nothing was recorded. According to the compact\nand disbursement agreement, each MCA is required to submit quarterly disbursement\nrequests that include the expenses incurred to date. These requests are due regardless of the\nneed for funding. The requests should provide the following:\n\n \xe2\x80\xa2 Previous quarter advances;\n \xe2\x80\xa2 Previous quarter disbursements;\n \xe2\x80\xa2 Estimated expenses; and\n \xe2\x80\xa2 Next quarter\xe2\x80\x99s advance request.\n\nFor the year end financial statements, MCC recorded compact expenses of $8,493,394.\nAdditional analysis was performed utilizing the disbursement requests to increase expenses\nrecorded and to ensure that advances and compact expenses were fairly stated.\n\nRecommendation #06-04:\n\nWe recommend that Millennium Challenge Corporation\xe2\x80\x99s management:\n\n (1) Require that the final quarterly request received from the accountable entity of the\n recipient countries be made available to the Department of Administration and\n Finance and the Fiscal Accountability Office.\n\n (2) Develop and implement policies and procedures that ensure compact expenses are\n properly and accurately recorded and reported on a quarterly basis\n\n (3) Implement written procedures requiring that appropriate and timely follow-up\n measures are performed and are recorded for historical reference on incomplete,\n outstanding, or late disbursement requests.\n\n (4) Develop and implement policies and procedures that require the Department of\n Administration and Finance to perform a thorough review of the financial statements\n to ensure that costs are not omitted.\n\n\n\nStatus:\n\n\n\n\n Page 16 of 40\n\x0c Appendix A\n\nThe Department of Administration and Finance in conjunction with the Fiscal Accountability\nOffice developed and implemented revisions to the quarterly financial reports to streamline\nthe process for recording compact expenses and related accruals. The current process\nrequires that quarterly reports and disbursement requests are cleared by the Department of\nAdministration and Finance and the Fiscal Accountability Office thereby ensuring that they\nare received. MCC issued policies and procedures for tracking and follow-up on outstanding\nquarterly disbursement requests and financial reports. Also, procedures for the review of\nquarterly and annual financial statements were developed and implemented by the Division\nof Finance.\n\n\n\n\nMCC\xe2\x80\x99s Chief Financial Officer Was Not an Integral Part of the Compact/Grant Processes\n(material weakness)\n\n\nBased on interviews and observations, we noted that MCC\xe2\x80\x99s Division of Finance was not\nintegrally involved in the compact/grant processes to ensure that the financial aspects are\naddressed, recorded and reported in their proper sequence and appropriate timing. The Chief\nFinancial Officer or his designees should be integrally involved in all MCC operations that\nresult in a financial transaction. The CFO should be integrally involved in the:\n (1) establishment of the compact amount to\t ensure that there is sufficient\n appropriations available,\n (2) development of grant policies and procedures to ensure that they are in\n compliance with Federal government laws and regulations and to ensure that\n sufficient financial information is provided to MCC to accomplish its\n responsibilities,\n (3) review of compacts in order to initiate accounting transactions in the system and\n budget transactions with OMB, and\n (4) establishment of the reporting structure to ensure that financial information is\n provided timely and in the format necessary for required financial reporting.\n\nRecommendation #06-05:\n\n\nWe recommend that Millennium Challenge Corporation\xe2\x80\x99s management revise their policies\nand procedures to invest the Office of the Chief Financial Officer with the level of\nresponsibility, role, and all levels of authority established by the Chief Financial Officer Act.\n\n\n\n\nStatus:\n\n\n Page 17 of 40\n\x0c Appendix A\n\n\n\n\nThe Chief Executive Officer sent a memorandum to MCC\xe2\x80\x99s executive team iterating CFO\xe2\x80\x99s\nresponsibilities for the full spectrum of the Corporation\xe2\x80\x99s financial management activities.\nThe FMPP manual reiterates the full spectrum of the CFO\xe2\x80\x99s responsibilities also.\n\n\n\n\nMCC\xe2\x80\x99s Travel Disbursement Controls and Procedures Do Not Permit the Effective and\nEfficient Management of Travel (reportable condition)\n\n\n\nMCC follows the Federal Travel Regulations and has an overall policy related to travel.\nHowever, prior to February 2006, MCC was using blanket travel authorizations (TA) to serve\nas an approval for employee travel. Once MCC approved the blanket TA, it was submitted to\nNational Business Center (NBC) to post an obligation within Oracle. After February, MCC\nmodified the travel policy that instituted the individual TA\xe2\x80\x99s that outlined the specific\npurpose of the employee\xe2\x80\x99s travel. NBC no longer posts travel obligations in advance in\nOracle but obligates and pays the travel vouchers, simultaneously.\n\nSimilar to FY 2005, MCC requires all employees to post their travel expenses online in E-\nTravel. Although the travel voucher process is electronic, E-Travel does not interface with\nOracle Federal Financials. Therefore, an NBC accounting technician must manually enter\neach voucher. During our travel testing, we noted twenty-six instances totaling $97,802 for\nwhich employees\xe2\x80\x99 receipts were not available. We also noted the following:\n\n 1.\t Eleven of 115 (10%) travel vouchers totaling $869 exceeded per diem rates;\n 2.\t Six of 115 (5%) vouchers equaling $557 consisted of expenses in excess of $75 and\n were not supported; and\n 3.\t Four of 115 (3%) vouchers totaling $35,663 were not approved by the travel manager\n within E-Travel.\n\nMCC enhanced its travel policy in August 2006. MCC management changed the\nCorporation\xe2\x80\x99s supporting documentation requirements to require travelers to scan into the E-\ntravel system and electronically attach to the pertinent travel vouchers receipts for claimed\nexpenses of $75 or more. Division of Finance personnel are responsible for reviewing\nsubmitted vouchers to ascertain that required receipts are electronically attached to travelers\xe2\x80\x99\nvouchers. Travelers who do not scan and attach their required receipts to vouchers are\ncontacted by Division of Finance staff to obtain \xe2\x80\x9cmissing\xe2\x80\x9d receipts.\n\nRecommendation #06-06:\n\n\n\n\n Page 18 of 40\n\x0c Appendix A\n\nWe recommend that Millennium Challenge Corporation\xe2\x80\x99s management develop and\nimplement controls to reject travel expense reimbursement requests that exceed the allowable\ncountry per diem unless additional electronic authorization is provided.\n\n\n\nStatus:\n\n\nThe Deputy CFO instructed the DF\xe2\x80\x99s travel management staff to not approve any claimed\ntravel expenses that exceed established limitations as defined by the Federal Travel\nRegulations (FTR) and to reject travelers\xe2\x80\x99 claims that exceed per diem limits. The travelers\nwere provided feedback on travel voucher errors and a traveler\xe2\x80\x99s responsible\nmanager/supervisor was apprised of claimed expenses that are not in compliance with per\ndiem (actual costs) requirements. The manager/supervisor explicitly approved such expenses.\n\nDF travel management staff underwent refresher FTR training and provided training on using\nthe E-Travel system to MCC employees to better orient and guide them in properly preparing\ntravel authorizations and vouchers.\n\n\nMCC Did Not Fully Comply with FFMIA and GPRA\n\nMillennium Challenge Corporation has not fully complied with the following laws and\nregulations:\n\n \xe2\x80\xa2 Government Performance and Results Act (GPRA)\n\n \xe2\x80\xa2 Federal Financial Management Improvement Act (FFMIA)\n\nWe noted that the agency performance plans provided to us did not fully comply with GPRA\nrequirements, for example: human, capital and other resources needed to achieve\nperformance goals were not quantified as required. Also, agency performance goals were not\nwritten in a manner that could be quantified in several instances and milestones were not\nincluded. Therefore, we could not directly link measurement of agency performance goals\nwith the overall strategic plan. In addition, baseline data to be used as performance indicator\nmeasurement thresholds were not provided for some indicators.\n\n\n\nThe FFMIA requires an integrated financial management system. MCC does not have an\nintegrated financial management system. When MCC decided to outsource its accounting\noperations, MCC selected NBC from the available Federal Centers of Excellence as the best\nchoice to meet its needs. In order to address the needs of MCC, multiple systems, i.e. E-\nTravel, procurement, and Federal Personnel and Payroll System (FPPS), are used, but these\nsystems cannot exchange data electronically. The entry of the travel expenses and\n\n\n Page 19 of 40\n\x0c Appendix A\n\ndisbursements must be done manually. The entry of obligations and commitments requires a\nprocess of emails, scanning and manual entry into Oracle Federal Financial (OFF) System\napplication. The payroll expenses and disbursements must be uploaded into OFF from FPPS.\n\n\n\nAdditionally, we obtained and reviewed the Financial Management Controls and Assertion\nletter and noted the following assertion, \xe2\x80\x9cDuring FY 2006, NBC\xe2\x80\x99s sytems were not in\nsubstantial compliance with FFMIA requirements. In its assurance statement as of June 30,\n2006, NBC asserted that \xe2\x80\x98were in substantial non-compliance with FFMIA requirements\xe2\x80\x99.\xe2\x80\x9d\nSubsequently, NBC instituted several corrective actions to address the issues raised and were\nin substantial compliance by September 30, 2006, per their representation.\n\nRecommendation #06-07:\n\nWe recommend that MCC management:\n\n (1) Develop performance goal templates and follow-up training to ensure that\n Government Performance and Results Act (GPRA) requirements are adequately\n addressed and consistent. We also recommend that baseline data be finalized or\n performance indicators reviewed and amended such that they can be measured\n against obtainable data.\n\n (2) Assess the automated options available to handle MCC operations and develop short\n range and long range plans for the implementation of the most appropriate\n information technology structure to address electronic integration of at least the\n payroll, procurement and travel functions and systems to increase the efficiencies and\n effectiveness of the processing of financial transactions; and decrease the risk of\n errors.\n\nStatus:\n\nThe Department of Administration and Finance managed a performance working group,\nrepresenting all departments to revise the MCC corporate performance plan for FY 2007, and\nacquired the services of a contractor to assist in drafting the plan, setting baselines and\ntargets, and developing procedures to ensure that departmental and individual performance\nplans are aligned with the corporate plan. MCC was able to complete the performance plan\nwhich expanded the Framework, made key decisions on the baseline, performance measures,\nreliable data sources, and the vetting process to be employed by each department. The\ndepartmental plans are expected to be completed in October and the individual employee\nplans in December 2007.\n\nIn FY 2007 MCC has assessed various automated options related to the integration of its\nvarious systems and discussed options with their service provider. They have determined\nsystem requirements and performed a gap analysis. However, integration of the various\nsystems requires additional analysis, planning and assessment.\n\n\n\n Page 20 of 40\n\x0c Appendix B\n\n\n\nManagement We received and evaluated MCC\xe2\x80\x99s management comments to the\nComments and Our recommendations made in this report. We considered their\nEvaluation comments to be generally responsive except for specific exceptions\n detailed below. Management comments have been included in their\n entirety in Appendix C.\n\n In its response, MCC\xe2\x80\x99s management stated that it recognizes the\n importance of accountability, effective stewardship, and public\n disclosure related to the resources entrusted to it, and that their\n goal is to achieve and maintain excellence in financial\n management, financial reporting and internal control systems.\n Further, MCC\xe2\x80\x99s management commented that it will implement\n the recommendations as soon as possible to strengthen their\n systems of internal controls and lend further credibility to their\n financial statements and overall financial operations. MCC\xe2\x80\x99s\n management went on to address each recommendation. MCC\xe2\x80\x99s\n management also recognized and thanked the OIG and Williams,\n Adley & Company, LLP for working closely with them during the\n audit process.\n\n Based on MCC\xe2\x80\x99s comments, we consider that a management\n decision has been reached on recommendation 2 provided in this\n report but not on recommendations 1 and 3. These recommendations\n do not provide defined timelines for the corrective action\n implementation. Also, the corrective action for recommendation 1.4\n requires additional details to ensure that the recommendations are\n appropriately addressed. MCC should report to the OIG when\n management decision has been reached on the four recommendations\n and when final action has been taken on the recommendations. The\n following is a brief summary of MCC\xe2\x80\x99s management comments on\n the three recommendations included in this report and our evaluation\n of those comments.\n\n Recommendation No. 1\n\n MCC accepts the recommendation. With regard to\n Recommendation # 1, MCC\xe2\x80\x99s current Financial Management\n Polices and Procedures do not contain any requirement to liquidate\n advances on a First-in, First-out (FIFO) basis; however we agree\n that FIFO would provide for improved reporting of outstanding\n advances. MCC will work with the National Business Center\n (NBC), its financial services provider, to ensure that all prior and\n future advances are liquidated on a FIFO basis.\n\n\n\n\n Page 21 of 40\n\x0c Appendix B\n\nMCC implemented the Common Payment System (CPS) in Mali in\nMay 2007. All countries signing compacts after that date will\nutilize CPS. The CPS provides for payment of MCA expenses\nthrough the U.S. Treasury based upon presentation of a valid\napproved invoice. CPS supports sound cash management by\neliminating the current practice of cash advances to MCA compact\ncountries\n\nMCC will establish a timeline for converting to CPS countries that\nentered into Compacts prior to May 2007. In the interim, MCC\nintends to follow sound cash management practices, and will\ndisburse funds consistent with the GAO policy and based on the\nbest information available and grant requirements in any given\nquarter. MCC will continue to release the funds in tranches\nfollowing a monthly schedule.\n\nAuditor Evaluation: We conclude that management has not\nadequately addressed this issue because the response does not\naddress recommendation 1.4; and does not provide an\nimplementation date.\n\nRecommendation No. 2\n\nMCC accepts the recommendation. In conjunction with the\nreorganization of the Operations Department, MCC will be\nreviewing existing polices and procedures related to compact\nimplementation. This will include documenting the roles and\nresponsibilities for ensuring receipt of required reports from\npartner countries.\n\nMCC has submitted a comprehensive Records Disposition\n(retention) schedule to the National Archives and Records\nAssociation for review and approval within the next six to nine\nmonths. The issue of version control and a centralized repository is\nbeing addressed as part of development of the Enterprise\nArchitecture and the implementation of the Business Intelligence\nand Data Storage (BIDS). A key component of BIDS will be the\nAdministrative Data Store (ADS). The ADS is a data warehouse\nthat will include MCA Compact data, MCA Progress Reports, and\nrecords of MCC reviews, approvals and decisions captured through\nan automated workflow process. The expected implementation\ndate for this component of the BIDS is June 2008. In the interim,\nMCC will establish procedures to address the version control issue\nusing existing tools.\n\n\n\n\n Page 22 of 40\n\x0c Appendix B\n\nAuditor Evaluation: We conclude that management has adequately\naddressed this issue.\n\nRecommendation No. 3\n\nMCC accepts the recommendation. The Department of\nAdministration and Finance (A&F) will continue to work to the\nNational Business Center (NBC) on the interface between Etravel\nand Oracle to resolve the issues noted during initial testing. MCC\nwill be changing to a new government credit card provider in FY\n2008 for both travel and purchase card transactions. MCC is\ncurrently considering either JP Morgan Chase or Citibank, both of\nwhich have a fully tested and integrated interface with the Oracle\nFederal Financial System (OFFS). Regarding the payroll\nintegration, the NBC has indicated its business plan does not\ninclude the integration of FPPS with OFFS, outside of the labor\ninterface already provided.\n\nDuring FY 2007, A&F made substantial progress on reviewing its\ncurrent financial systems environment and developing alternatives\nfor a fully integrated system to meet the requirements of the\nFFMIA. A&F has established system requirements, performed a\ngap analysis based on its current environment, and developed cost\nalternatives to close the exiting gaps. A&F will also work with the\nOffice of Management and Budget (OMB) to find the best\nresolution for this condition whether with the NBC, or with some\nother federal or private center of excellence.\n\nAuditor Evaluation: We conclude that management has not\nadequately addressed this issue because no defined timetable has\nbeen stated for the corrective action.\n\n\n\n\n Page 23 of 40\n\x0cNovember 2, 2007\n\n\n\nTO: \t John Phee\n Assistant Inspector General\n\nFROM: M\n \t ichael Ryan /s/\n Vice President, Administration and Finance\n\nSUBJECT: \t Management Response to Draft Independent Auditor's\n Report on MCC's Financial Statements for Fiscal Years\n Ended September 30, 2007 and 2006, Respectively\n\n\nWe have received the subject draft report and are pleased to note that the independent\nauditors, Williams, Adley and Company, LLP, are issuing an unqualified opinion on our\nprincipal financial statements, namely the Statements of:\n\n Financial Position;\n\n Net Costs; \n\n Changes in Financial Position; and \n\n Budgetary Resources. \n\n\nThe auditor's unqualified opinion is being issued despite material internal control weaknesses\nand noncompliance with selected laws and regulation that have been identified.\n\nThe Millennium Challenge Corporation's (MCC) management recognizes the importance of\naccountability, effective stewardship and public disclosure related to the resources entrusted\nto it. Our goal is to achieve and maintain excellence in our financial management, financial\nreporting and internal control systems. Accordingly, we will implement the recommendations\nas soon as possible to strengthen our systems of internal control and lend further credibility\nto our financial statements and overall financial operations.\n\nWe wish to recognize and thank you, your team, and Williams, Adley and Company for\nworking closely with us during the audit process. Any questions may be addressed to Mr.\nDennis Nolan, Deputy Chief Financial Officer, or to me.\n\nFollowing are our management decisions and responses to Williams Adley's audit\nrecommendations.\n\n\n\n\n Page 24 of 40\n\x0c Appendix C\n\n\nMaterial Weakness 1: MCC did not sufficiently execute its monitoring functions related to\nadvances.\n\nRecommendations: Williams, Adley and Company recommend that the\nMillennium Challenge Corporation\xe2\x80\x99s management:\n\n 1.1. \tImplement a policy that reduces outstanding advances based on the FIFO method.\n\n 1.2. \t Implement the common payment system for all MCAs on a more aggressive\n timeline.\n\n 1.3. \t Make payments in accordance with the monthly schedule and if a payment is held\n consider the need for it to be disbursed at all.\n\n 1.4. \t Ensure that there is a more rigorous review of advance requests including an\n assessment of outstanding advances.\n\nManagement Decision: MCC accepts the recommendation. With regard to\nRecommendation # 1, MCC\xe2\x80\x99s current Financial Management Polices and Procedures do not\ncontain any requirement to liquidate advances on a First-in, First-out (FIFO) basis; however\nwe agree that FIFO would provide for improved reporting of outstanding advances. MCC\nwill work with the National Business Center (NBC), its financial services provider, to ensure\nthat all prior and future advances are liquidated on a FIFO basis.\n\nMCC implemented the Common Payment System (CPS) in Mali in May 2007. All countries\nsigning compacts after that date will utilize CPS. The CPS provides for payment of MCA\nexpenses through the U.S. Treasury based upon presentation of a valid approved invoice.\nCPS supports sound cash management by eliminating the current practice of cash advances\nto MCA compact countries\n\nMCC will establish a timeline for converting to CPS countries that entered into Compacts\nprior to May 2007. In the interim, MCC intends to follow sound cash management practices,\nand will disburse funds consistent with the GAO policy and based on the best information\navailable and grant requirements in any given quarter. MCC will continue to release the\nfunds in tranches following a monthly schedule.\n\nMaterial Weakness 2: MCC lacks written policies and procedures related to financial\nreporting accountability and document control.\n\nRecommendations: Williams, Adley and Company recommends that the Millennium\nChallenge Corporation management:\n\n 2.1. \t Formally document the MCC accountability for ensuring MCA compliance with\n the reporting provisions.\n\n\n\n\n Page 25 of 40\n\x0c Appendix C\n\n 2.2. \t Implement document retention policies that include standards for version control\n and a central repository for documents that are used by multiple MCC units.\n\n 2.3. \t Continue with the planned implementation of the BIDS project and ensure that\n information is validated prior to inclusion in the new system.\n\nManagement Decision: MCC accepts the recommendation. In conjunction with the\nreorganization of the Operations Department, MCC will be reviewing existing polices and\nprocedures related to compact implementation. This will include documenting the roles and\nresponsibilities for ensuring receipt of required reports from partner countries.\n\nMCC has submitted a comprehensive Records Disposition (retention) schedule to the\nNational Archives and Records Association for review and approval within the next six to\nnine months. The issue of version control and a centralized repository is being addressed as\npart of development of the Enterprise Architecture and the implementation of the Business\nIntelligence and Data Storage (BIDS). A key component of BIDS will be the Administrative\nData Store (ADS). The ADS is a data warehouse that will include MCA Compact data, MCA\nProgress Reports, and records of MCC reviews, approvals and decisions captured through an\nautomated workflow process. The expected implementation date for this component of the\nBIDS is June 2008. In the interim, MCC will establish procedures to address the version\ncontrol issue using existing tools.\n\n **********\n\nMaterial Noncompliance 1: MCC does not fully comply with the Federal Financial\nManagement Improvement Act (FFMIA).\n\nRecommendation: Williams, Adley and Company recommend that management continue to\nassess the automated options available to handle the Millennium Challenge Corporation\noperations and develop short range and long range plans for the implementation of the most\nappropriate information technology structure to address electronic integration of at least the\npayroll, procurement and travel functions and systems to increase the efficiencies and\neffectiveness of the processing of financial transactions; and decrease the risk of errors.\n\nManagement Decision: MCC accepts the recommendation. The Department of\nAdministration and Finance (A&F) will continue to work to the National Business Center\n(NBC) on the interface between Etravel and Oracle to resolve the issues noted during initial\ntesting. MCC will be changing to a new government credit card provider in FY 2008 for both\ntravel and purchase card transactions. MCC is currently considering either JP Morgan Chase\nor Citibank, both of which have a fully tested and integrated interface with the Oracle Federal\nFinancial System (OFFS). Regarding the payroll integration, the NBC has indicated its\nbusiness plan does not include the integration of FPPS with OFFS, outside of the labor\ninterface already provided.\n\nDuring FY 2007, A&F made substantial progress on reviewing its current financial systems\nenvironment and developing alternatives for a fully integrated system to meet the\n\n\n\n Page 26 of 40\n\x0c Appendix C\n\nrequirements of the FFMIA. A&F has established system requirements, performed a gap\nanalysis based on its current environment, and developed cost alternatives to close the exiting\ngaps. A&F will also work with the Office of Management and Budget (OMB) to find the best\nresolution for this condition whether with the NBC, or with some other federal or private\ncenter of excellence.\n\nMaterial Noncompliance 2: MCC does not comply with the Federal Information Security\nManagement Act (FISMA). Williams, Adley and Company makes no recommendation(s)\nrelative to this material noncompliance. This deficiency was identified by the Office of\nInspector General in a prior audit. During FY 2007, MCC management:\n\n \xe2\x80\xa2\t Hired two fulltime FISMA staff;\n \xe2\x80\xa2\t Completed an MCC Self Assessment;\n \xe2\x80\xa2\t Completed an MCC\xe2\x80\x99s Information System Security Plan (ISSP);\n \xe2\x80\xa2\t Completed Quartile scans on MCCnet;\n \xe2\x80\xa2\t Approved three additional FISMA team members-Subject Matter Expert,\n\n Technological Writer and Network Engineer; and \n\n \xe2\x80\xa2\t Created a new CISSO position with an additional slot, and hired a full-time employee\n who will start in November.\n\n\n\n\n Page 27 of 40\n\x0c BALANCE SHEETS\n\nIn dollars FY 2007 FY 2006\nAssets\nIntra-Governmental\nFund Balance with Treasury (Note 2) $5,549,289,597 $4,078,656,972\nAccounts Receivable (Note 3) 67,798 62,202\nTotal Intra-Governmental 5,549,357,395 4,078,719,174\nGeneral Property, Plant, and Equipment(Note 4, Note 5) 7,115,606 4,632,785\nAdvances (Note 1F,P) 32,243,157 18,881,386\nTotal Assets $5,588,716,158 $4,102,233,345\n\nLiabilities\nIntra-Governmental\nOther $ 1,457,862 $ 2,516,786\nTotal Intra-Governmental 1,457,862 2,516,786\nAccounts Payable 39,176,698 10,134,698\nOther 3,971,886 2,698,070\nTotal Liabilities $ 44,606,446 $ 15,349,554\nNet Position\nUnexpended Appropriations \xe2\x80\x93 Other Funds $5,536,714,361 $4,082,189,638\nCumulative Results of Operations \xe2\x80\x93 Other Funds 7,395,351 4,694,153\nTotal Net Position $5,544,109,712 $4,086,883,791\nTotal Liabilities and Net Position $5,588,716,158 $4,102,233,345\n\n The notes are an integral part of the financial statements\n\n\n\n\n Page 28 of 40\n\x0c STATEMENTS OF BUDGETARY RESOURCES\n\nIn dollars FY 2007 FY2006\nBudgetary Resources\nUnobligated Balance \xe2\x80\x93 Beginning of Period $2,671,372,416 $2,053,722,184\nRecoveries of Prior Years Obligations 15,930,609 -\nBudget Authority:\nAppropriations 1,752,300,000 1,770,000,000\nNonexpenditure Transfers, Net, Anticipated and Actual (9,415,980) -\nPermanently Not Available (Note 7) - (17,700,000)\nTotal Budgetary Resources $4,430,187,045 $3,806,022,184\n\nStatus of Budgetary Resources\nObligations Incurred\n Direct $2,174,044,542 $1,109,535,594\nUnobligated Balance Available\n Apportioned 1,516,900,216 877,383,424\nUnobligated Balance Not Available $ 739,242,287 $1,819,103,166\nTotal Status of Budgetary Resources $4,430,187,045 $3,806,022,184\n\nChange in Obligated Balance\nObligated Balance, Net \xe2\x80\x93 as of October 1, 2005\nUnpaid Obligations, Brought Forward, October 1 $1,408,398,635 $ 272,636,873\nObligations Incurred 2,174,044,542 1,109,535,594\nGross Outlays (278,605,423) (109,119,072)\nRecoveries of Prior Year Unpaid Obligations, Actual (15,930,609) -\nObligated Balance, Net \xe2\x80\x93 End of Period\nUnpaid obligations $3,287,907,145 $1,273,053,395\nNet Outlays\nGross Outlays $ 278,605,423 $ 109,119,072\n\n The notes are an integral part of the financial statements\n\n\n\n\n Page 29 of 40\n\x0c STATEMENTS OF NET COSTS\n\n Program 2007 Total 2006 Total\nProgram Costs (In dollars)\nCompact\nGross Costs (Note 6) $ 81,079,458 $ 16,747,194\nLess: Earned Revenue - -\nNet Program Costs 81,079,458 16,747,194\n609 (g) Programs\nGross Costs 17,172,113 5,895,167\nLess: Earned Revenue - -\nNet Program Costs 17,172,113 5,895,167\nThreshold Programs\nGross Costs 75,766,215 15,235,063\nLess: Earned Revenue - -\nNet Program Costs 75,766,215 15,235,063\nDue Diligence Programs\nGross Costs 32,789,662 15,137,340\nLess: Earned Revenue - -\nNet Program Costs 32,789,662 15,137,340\nAudit\nGross Costs 2,865,820 619,714\nLess: Earned Revenue - -\nNet Program Costs 2,865,820 619,714\nAdministrative\nGross Costs 77,922,457 54,785,827\nLess: Earned Revenue - -\nNet Program Costs 77,922,457 54,785,827\nProgram Costs \xe2\x80\x93 Net of All Programs $287,595,725 $108,420,305\nNet Costs of Operations $287,595,725 $108,420,305\n\n The notes are an integral part of the financial statements\n\n\n\n\n Page 30 of 40\n\x0c STATEMENTS OF CHANGES IN NET POSITION\n\n\nIn dollars FY 2007 FY 2006\nCumulative Results of Operations\nBeginning Balances $ 4,694,987 $ 4,276,833\nAdjustments - -\nBeginning Balance, as Adjusted $ 4,694,987 $ 4,276,833\nBudgetary Financing Sources\nAppropriations Used $ 288,359,297 $ 107,689,343\nOther Financing Sources\nDonations and Forfeitures of Property $ 123,750 $ -\nImputed Financing 1,813,042 1,148,282\nTotal Financing Sources 290,296,089 108,837,625\nNet Cost of Operations (287,595,725) (108,420,305)\nNet Change 2,700,364 417,320\nCumulative Results of Operations $ 7,395,351 $ 4,694,153\n\nUnexpended Appropriations\nBeginning Balance $4,082,189,638 $2,437,546,656\nChanges in Accounting Principles - -\nBeginning Balance, as Adjusted $4,082,189,638 $2,437,546,656\nBudgetary Financing Sources\nAppropriations Received $1,752,300,000 $1,770,000,000\nAppropriations Transferred In/Out (9,415,980) -\nOther adjustments (Note 7) - (17,700,000)\nAppropriations Used (288,359,297) (107,657,018)\nTotal Budgetary Financing Sources 1,454,524,723 1,644,642,982\nTotal Unexpended Appropriations 5,536,714,361 4,082,189,638\nNet Position $5,544,109,712 $4,086,883,791\n\n The notes are an integral part of the financial statements\n\n\n\n\n Page 31 of 40\n\x0cNote 1\xe2\x80\x94Summary of Significant Accounting Policies\n\n A. Basis of Presentation\n\n The accompanying principal financial statements have been prepared to report the financial\n position, results of operations and budgetary resources for MCC, as required by Section 613\n of the Millennium Challenge Act of 2003. They have been prepared using MCC\xe2\x80\x99s books and\n records in accordance with MCC accounting policies, the most significant of which are\n summarized in this note. The statements are presented in accordance with the guidance and\n requirements of the recently issued OMB Circular A-136, which incorporates and updates\n Bulletin 01-09, Form and Content of Agency Financial Statements, and the Government\n Management Reform Act of 1994. Fiscal Year 2006 statements, previously prepared in\n accordance with the Government Corporation Control Act (31 U.S.C. \xc2\xa79106), have been\n reformatted and republished for Circular A-136 comparative purposes. Fiscal year 2006\n financial statements have also been restated for comparative purposes to include Threshold\n program balances that were not reflected timely prior to final publication.\n\n MCC accounting policies follow generally accepted accounting principles for the Federal\n government, as recommended by the Federal Accounting Standards Advisory Board\n (FASAB). The FASAB has been recognized by the American Institute of Certified Public\n Accountants (AICPA) as the official accounting standard set for the Federal government.\n These standards have been agreed to, and published by the Director of OMB, the Secretary of\n the Treasury, and the Comptroller General.\n\n MCC\xe2\x80\x99s principal financial statements are:\n\n ` Balance Sheet\n ` Statement of Budgetary Resources\n ` Statement of Net Cost\n ` Statement of Changes in Net Position\n\n These notes are considered an integral part of the financial statements.\n\n B. Reporting Entity\n\n MCC was formed in January 2004 pursuant to the Millennium Challenge Act of 2003 (Public\n Law 108-199). MCC\xe2\x80\x99s mission is to reduce poverty by supporting sustainable, transformative\n economic growth in developing countries that create and maintain sound policy\n environments. The assistance is intended to provide economic growth and the elimination of\n extreme poverty, strengthen good governance, encourage economic freedom, and promote\n investments in people.\n\n\n\n\n Page 32 of 40\n\x0cC. Budgets and Budgetary Accounting\n\n MCC\xe2\x80\x99s programs and activities are funded through no-year appropriations. Such funds are\n available for obligation without fiscal year limitation and remain available until expended.\n MCC was provided total appropriations of almost $1.752 billion and $1.770 billion in FY\n 2007 and FY 2006, respectively. OMB apportions MCC administrative funds on an annual\n basis pursuant to statutory limitations in MCC\xe2\x80\x99s annual congressional appropriations. In\n addition, MCC receives from OMB a separate apportionment for due diligence funds, which\n MCC uses for compact evaluations and support, compact programs, 609(g) funds, the\n Threshold program, and audit funds. Because of the no-year status of MCC appropriations,\n unobligated administrative, audit, and due diligence funds (apportioned annually) are not\n returned to the Treasury; however, unobligated balances as of September 30 for these three\n categories of funds are transferred to the compact fund category at the beginning of the\n subsequent fiscal year for future use.\n\nD. Basis of Accounting\n\n Financial transactions are recorded on accrual and budgetary bases in accordance with\n pertinent federal accounting and financial reporting requirements. Under the accrual method\n of accounting, financing sources are recognized when used and expenses are recognized\n when incurred, without regard to receipt or payment of cash. Budgetary accounting facilitates\n MCC\xe2\x80\x99s compliance with legal constraints and controls over the use of federal funds.\n\n The accompanying Balance Sheet, Statement of Net Cost, and Statement of Changes in Net\n Position have been prepared on the accrual basis. The Statement of Budgetary Resources has\n been prepared in accordance with budgetary accounting rules.\n\nE. Fund Balance with Treasury\n\n MCC does not maintain cash in commercial bank accounts. Rather, MCC\xe2\x80\x99s funds are\n maintained in Treasury accounts. The Department of the Treasury processes all cash receipts\n and disbursements for MCC. The Fund Balances with Treasury represent no-year funds,\n which are maintained in appropriated funds that are available to pay current and future\n commitments.\n\nF. Advances to Others\n\n MCC advances funds to eligible compact and pre-compact countries in order to implement\n compact projects in an MCA country or for federal government inter-agency agreements.\n Funds advanced to compact and pre-compact countries are used to pay legitimate costs and\n expenses incurred by MCC and partner countries. Advances at the end of FY 2007 and FY\n\n\n\n Page 33 of 40\n\x0c 2006 were $32.2 million and $18.9 million, respectively. Of the twenty-one (21) MCC\n outstanding advances, four (4) are greater than 180 days.\n\n\n\n\nG. Accounts Payable\n\n MCC records as liabilities all amounts due to others as a direct result of transactions or events\n that have occurred. Accounts payable represent amounts due to federal and non-federal\n entities for goods and services received by MCC, but not paid at the end of the accounting\n period. Accounts payable reported at the end of FY 2007 and 2006 were $39.2 and $10.1\n million, respectively. The increase in the Accounts Payable is attributable to an increase from\n $7.6 million in FY 2006 to $28.6 million in FY 2007 for USAID Threshold programs.\n\nH. Actuarial FECA Liability\n\n The Federal Employees\xe2\x80\x99 Compensation Act (FECA) provides income and medical cost\n protection to covered federal civilian employees injured on the job, employees who have\n incurred a work-related occupational disease, and beneficiaries of employees whose deaths\n are attributable to a job-related injury or occupational disease.\n\n Claims incurred for benefits for MCC employees under FECA are administered by the\n Department of Labor (DOL) and later billed to MCC. MCC\xe2\x80\x99s actuarial liability for workers\xe2\x80\x99\n compensation includes any costs incurred but unbilled as of year-end, as calculated by DOL,\n and not funded by current appropriations.\n\n MCC incurred no FECA liabilities during FY 2007 and FY 2006.\n\nI. Accrued Annual Leave\n\n The value of employees\xe2\x80\x99 unused annual leave at the end of each fiscal quarter is accrued as a\n liability. At the end of each fiscal quarter, the balance in the accrued annual leave account is\n adjusted to reflect current pay rates and leave balances. Annual leave is funded from current\n appropriations. Sick leave and other types of non-vested leave are expensed when used, and\n in accordance with federal requirements no accruals are recorded for unused leave.\n\nJ. Net Position\n\n Net position is composed of unexpended appropriations and cumulative results of operations.\n Unexpended appropriations are funds appropriated by Congress to MCC that are still\n available for expenditure at the end of the fiscal year. Cumulative results of operations\n represent the net differences between financing sources and expenses from MCC\xe2\x80\x99s inception.\n\nK. Financing Sources\n\n\n Page 34 of 40\n\x0c In accordance with Note 1.C, MCC funds its program and operating expenses through no-\n year appropriations. Appropriations are recognized as an accrual-based financing source at\n the time they are used to pay program or administrative expenses, except for expenses to be\n funded by future appropriations.\n\nL. Retirement Benefits\n\n MCC\xe2\x80\x99s employees participate in either the Civil Service Retirement System (CSRS) or the\n Federal Employees Retirement System (FERS). FERS was established by Public Law 99\n 335. Pursuant to this law, most U.S. Government employees hired after December 31, 1983,\n are covered by FERS and Social Security. Federal employees hired prior to January 1, 1984,\n were allowed to elect whether they desired to participate in FERS (with Social Security\n coverage) or remain in CSRS. For employees covered by CSRS, MCC contributes 7 percent\n of their gross pay toward their retirement benefits. For those employees covered by FERS,\n MCC contributes 11 percent of their gross pay toward retirement. Employees are also\n allowed to participate in the federal Thrift Savings Plan (TSP). For employees under FERS,\n MCC contributes an automatic 1 percent of basic pay to TSP and matches employee\n contributions up to an additional 4 percent of pay, for a maximum MCC contribution\n amounting to 5 percent of pay. Employees under CSRS may participate in the TSP, but will\n not receive either MCC\xe2\x80\x99s automatic or matching contributions.\n\n For FY 2007, MCC has made contributions of $142,000 to CSRS, $2.4 million to FERS, and\n $849,000 to TSP. During FY 2006, MCC made retirement contributions of $761,000 to\n CSRS, $1.977 million to FERS, and $620,700 to TSP.\n\nM. Use of Estimates\n\n The preparation of financial statements requires management to make estimates and\n assumptions that affect the reported amounts of assets and liabilities, the disclosure of\n contingent assets and liabilities at the date of the financial statements, and the reported\n amounts of financing sources and expenses during the reporting period. Actual results could\n differ from such estimates.\n\nN. Contingencies\n\n MCC can be a party to various routine administrative proceedings, legal actions, and claims\n brought by or against it, including threatened or pending litigation involving labor relations\n claims, some of which may ultimately result in settlements or decisions against MCC. In the\n opinion of MCC\xe2\x80\x99s management and legal counsel, there are no proceedings, actions, or\n claims outstanding or threatened that would materially impact MCC\xe2\x80\x99s financial statements.\n\nO. Judgment Fund\n\n\n\n\n Page 35 of 40\n\x0c Certain legal matters to which MCC can be named as a party may be administered and, in\n some instances, litigated and paid by other federal agencies. In general, amounts paid in\n excess of $2,500 for Federal Tort Claims Act settlements or awards pertaining to these\n litigations are funded from a special appropriation administered by the Department of the\n Treasury called the Judgment Fund. Although the ultimate disposition of any potential\n Judgment Fund proceedings cannot be determined, management expects that any liability or\n expense that might ensue would not be material to MCC\xe2\x80\x99s financial statements.\n\nP. Custodial Receivables and Liabilities\n\n Under current policy and procedures, MCC funds all compacts and pre-compacts with other\n countries by advancing funds on a monthly basis to cover projected needs. Such funds\n provided to the countries are required to be deposited in interest-bearing accounts, if legally\n feasible, until disbursed. The interest earned on these accounts is remitted to MCC and\n deposited into an account at the U.S. Treasury. Such interest may not be retained or used by\n MCC, but periodically is returned to the Treasury\xe2\x80\x99s general funds. MCC had outstanding\n advances related to compact and pre-compact financing of approximately $30.8 million and\n $18.8 million on September 30, 2007, and September 30, 2006, respectively. MCC received\n and deposited $1.65 million and $304,000 in interest remittances on September 30, 2007, and\n September 30, 2006, respectively (see Note 2).\n\nQ. Donated Services\n\n MCC may on occasion use donated services from other federal agencies and private firms in\n the course of business operations. The approximate fair market value of these donated\n services for September 30, 2007, is $123,750 and was $0 in FY 2006.\n\nR. Transfers with Other Federal Agencies\n\n MCC is a party to allocation transfers with another federal agency as a transferring entity.\n Allocations are legal delegations by one agency of its authority to obligate budget authority\n and outlay funds to another agency. A separate fund account (child account) is created in the\n U.S. Treasury as a subset of the parent fund account for tracking and reporting purposes. All\n allocation transfers of budget authority are credited to this account, and subsequent\n obligations and outlays incurred by the child entity are charged to this allocation account as\n they execute the delegated activity on behalf of the parent entity.\n\n All financial activity related to these allocations and transfers (e.g., budget authority,\n obligations, and outlays) is reported in the financial statements of the parent entity, from\n which the underlying legislative authority, appropriations, and budget appointments are\n derived. MCC allocated funds, as the parent, to USAID. In FY 2007 and FY 2006, MCC\n transferred budgetary authority of $161 million and $155 million, respectively, to USAID for\n Threshold programs.\n\n\n\n Page 36 of 40\n\x0cNote 2\xe2\x80\x94Fund Balance with Treasury\n\n The U.S. Treasury accounts for all U.S. Government cash on an overall consolidated basis.\n The Fund Balance with Treasury (FBWT) line items on the Balance Sheet for September 30,\n 2007, and September 30, 2006, consisted of amounts presented in Exhibit 3-1. MCC funds its\n program and operating expenses through no-year appropriations; therefore, all unobligated\n balances as of September 30 are transferred to the compact fund category at the beginning of\n the subsequent fiscal year and are available for use in future years until fully expended.\n\n Exhibit 3-1: Fund Balance with Treasury as of September 30 (in thousands)\n September 30, 2007 September 30, 2006\n Appropriated Funds\n Unobligated $2,261,383 $2,805,604\n Obligated 3,287,907 1,273,053\n Total $ 5,549,290 $ 4,078,657\n\nNote 3\xe2\x80\x94Accounts Receivable, Net\n\n Accounts receivable reflect overpayments of payroll, travel, and other MCC current/former\n employee expenses. MCC does not record an allowance for doubtful accounts because these\n expenses are deemed wholly collectible. Total receivables were $68,000 and $62,000 as of\n September 30, 2007, and September 30, 2006, respectively.\n\nNote 4\xe2\x80\x94General Property, Plant, and Equipment, Net\n\n In March 2007, MCC revised its property capitalization threshold from an original cost of\n $25,000 or more and an estimated useful life of 2 or more years to an original cost of $50,000\n or more and an estimated useful life of 5 or more years, except for its software capitalization\n which was changed to an original cost of $200,000 or more and an estimated useful life of 5\n or more years and its information technology infrastructure capitalization to an original cost\n of $200,000 or more and an estimated useful life of 3 or more years. These revisions reduce\n MCC\xe2\x80\x99s administrative costs associated with accounting for General Property, Plant, and\n Equipment (PP&E) and results in increased operational efficiency.\n\n MCC changed its depreciation convention, converting from a half-year convention to a\n quarter-year convention. Assets are depreciated (or amortized) quarterly over their estimated\n useful lives using the straightline depreciation method. This change resulted in additional\n depreciation expense of $181,638. As required by FASAB 21, the net effect of this change\n has been included in the FY 2007 cumulative results of operations and net position.\n\n MCC\xe2\x80\x99s actual depreciation expense for FY2007 is $860,061.\n\n\n\n\n Page 37 of 40\n\x0cNote 5\xe2\x80\x94Leases\n\n MCC leases office space in two adjacent locations in Washington, D.C. These leases are on\n 10-year (Bowen Building) and 8-year (City Center) lease terms that terminate on May 25 and\n May 26, 2015, respectively (see Exhibit 3-2). MCC made significant leasehold improvements\n to the office space and amortizes the improvement based on the in-service (invoice) date of\n the improvement. Amortization is calculated on a quarterly basis. These leasehold\n improvements will be reflected as a Fixed Asset on MCC\xe2\x80\x99s Balance Sheet net of\n amortization.\n\n\n\n\n Exhibit 3-2: Operating Leases Funds (in dollars)\n Future Payments Due\n Fiscal Year Bowen City Center Totals\n FY 2008 $5,394,621 $1,889,524 $7,284,145\n FY 2009 5,394,621 1,889,524 7,284,145\n FY 2010 6,352,911 1,889,524 8,242,435\n FY 2011 6,352,911 1,942,376 8,295,287\n FY 2012 6,352,911 1,942,376 8,295,287\n After 5 Years 19,058,733 5,932,834 24,991,567\n Total Future Lease Payments $48,906,708 $15,486,158 $64,392,866\n\n\n\nNote 6\xe2\x80\x94Intra-Governmental Costs and Exchange Revenue\n\n The Statement of Net Cost reports MCC\xe2\x80\x99s gross cost less earned revenues to arrive at net cost\n of operations. Costs have been illustrated by MCC specific programs (see Exhibit 3-3). The\n format of the Statement of Net Cost is also now consistent with OMB Circular A-136\n guidance. Exhibit 3-3 shows the value of exchange transactions between MCC and other\n federal entities as well as non-federal entities. Intra-Governmental Costs relate to transactions\n between MCC and other federal entities. Public costs on the other hand relate to transactions\n between MCC and non-federal entities. MCC does not have any exchange revenues.\n\n Exhibit 3-3: Intra-Governmental Costs and Exchange Revenue (in thousands)\n Threshold\n\n\n Diligence\n Compact\n\n\n\n\n Admin\n 609(g)\n\n\n\n\n Audit\n\n\n\n\n September September\n Due\n\n\n\n\n 30, 2007 30, 2006\n Intra- - 59 - 3,567 2,789 7,741 14,156 9,428\n Governmental\n Public 81,079 17,113 75,766 29,223 77 70,181 273,439 98,992\n Total \xe2\x80\x93 Program 81,079 17,172 75,766 32,790 2,866 77,922 287,595 108,420\n\n\n\n\n Page 38 of 40\n\x0cNote 7\xe2\x80\x94 Adjustments to Beginning Balance of Budgetary Resources\n\n In FY 2006, $17.7 million of amounts appropriated under the FY 2006 Foreign Operations,\n Export Financing and Related Programs Appropriations Acts (Public Law 109-148) were\n rescinded. The rescission was part of the Across-the-Board Rescission enacted for FY 2006.\n\n There were no adjustments to the FY 2007 beginning balances of Budgetary Resources.\n\nNote 8\xe2\x80\x94Explanation of Differences Between the SBR and the Budget of the U.S.\nGovernment\n\n MCC ensures that the information reported on its books is reflected within the Budget of the\n U.S. Government. Because MCC\xe2\x80\x99s financial statements are published before the President\xe2\x80\x99s\n Budget, this reconciliation is based on the Statement of Budgetary Resources for FY 2006\n and the 2006 actual data reported in the President\xe2\x80\x99s 2008 budget submission. FY 2007 actual\n data will be published in February 2008 within the 2009 Budget of the United States.\n Material differences reported in the Budgetary resources column ($2.053 billion) represent\n unobligated balances reported on MCC\xe2\x80\x99s SBR and SF 133, but not in the Budget of the U.S.\n Government. Material differences reported in the Total Outlays column represent SF 133\n outlays reported by USAID in FY 2006 that were not reported timely to MCC to present in its\n FY 2006 financial statements. (See Exhibit 3-4.)\n\n Exhibit 3-4: Material Differences Between the SBR and the President\xe2\x80\x99s Budget (in millions)\n Distributed\n Budgetary Obligations Offsetting\n Resources Incurred Receipts Net Outlays\n Statement of Budgetary Resources 3,806 1,109 109\n Unobligated Balance Carry Forward (2,053)\n from FY 2005\n Unreported Outlays 2\n Budget of the U.S. Government 1,753 1 111\n\nNote 9\xe2\x80\x94Undelivered Orders at the End of the Period\n\n The reported net position consists of unexpended appropriations and cumulative results of\n operations, which reflects the difference between financing sources and expenses since\n MCC\xe2\x80\x99s inception. Exhibit 3-5 represents Undelivered orders\xe2\x80\x94unpaid for compact and 609(g)\n funds as of September 30, 2007 and September 30, 2006.\n\n Exhibit 3-5: Undelivered Orders\xe2\x80\x94Compact and 609(g) Funds (in dollars)\n Undelivered Orders 2007 Compacts 609(g) Funding 2006\n Armenia $ 227,716,911 $ 227,716,911 $ - $ 235,646,174\n Benin 293,870,370 293,870,370 - 1,062,985\n Cape Verde 96,151,990 96,147,871 4,119 106,077,520\n\n\n\n Page 39 of 40\n\x0c Undelivered Orders 2007 Compacts 609(g) Funding 2006\n El Salvador 458,715,779 458,715,779\n Georgia 265,875,250 264,656,190 1,219,060 296,178,084\n Ghana 538,097,271 537,668,659 428,612 13,584,891\n Honduras 204,027,319 204,027,319 - 213,166,147\n Kenya 25,000 25,000 - -\n Lesotho 16,078,147 15,668,416 409,731 902,934\n Madagascar 87,042,735 87,042,735 - 103,290,130\n Mali 462,993,330 458,630,248 4,363,082 4,421,534\n Morocco 32,400,000 32,400,000\n Mozambique 31,254,763 25,346,200 5,908,563 12,956,078\n Nicaragua 165,314,884 165,314,884 - 173,583,320\n Senegal 1,930,524 - 1,930,524 4,882,237\n Tanzania 9,800,000 - 9,800,000 -\n Vanuatu 63,683,392 63,683,392 - 65,214,603\n Total\xe2\x80\x93Undelivered Orders $2,954,977,665 $2,930,913,974 $24,063,691 $1,230,966,637\n\nNote 10\xe2\x80\x94Reconciliation of Net Cost of Operations to Budget\n\n Exhibit 3-6 reconciles the FY 2007 resources available to MCC to finance operations with the\n net cost of operating MCC\xe2\x80\x99s programs. Some operating costs, such as depreciation, do not\n require direct financing sources. This exhibit illustrates the reconciliation of Net Cost of\n Operations to Budget.\n\n Exhibit 3-6: Reconciliation of Net Cost of Operations to Budget (in dollars)\n Resources Used to Finance\n Activities Program Costs\n Budgetary Resources Obligated\n Net obligations $2,189,975,151 Gross Costs $287,595,725\n Net other resources used to 1,936,792\n finance activities\n Total resources used to finance 2,191,911,943\n activities\n Total resources used to finance (1,905,176,279) Less: Earned Revenue -\n items not part of the net cost of\n operations\n Total resources used to finance 286,735,664\n the net cost of operations\n Total components of net cost of 860,061\n operations that will not require or\n generate resources\n Net Cost of Operations $ 287,595,725 Net Cost of Operations $287,595,725\n\n\n\n\n Page 40 of 40\n\x0cU.S. Agency for International Development \n\n Office of Inspector General \n\n 1300 Pennsylvania Ave, NW \n\n Washington, DC 20523 \n\n Tel: (202) 712-1150 \n\n Fax: (202) 216-3047 \n\n www.usaid.gov/oig\n\x0c"