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	Cover Letter Summary of Results Background Audit Objective Report on USAID's Financial Statements Report on Internal Control Accruals Reporting System Process for Reconciling Fund Balance with the U.S. Treasury Intragovernmental Transactions Process for Recognizing and Reporting Overseas Accounts Receivable Report on Compliance with Laws and Regulations Reportable FFMIA Noncompliance Evaluation of Management Comments Appendix I - Scope and Methodology Appendix II - Management Comments Appendix III - Status of Prior Year Findings and Recommendations
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Independent Auditor's Report – USAID's Accruals Reporting System Needs Improvement

Summary: USAID's Accruals Reporting System produced erroneous information that limited the ability of Cognizant Technical Officers (CTOs) to accurately reflect their estimates of accrued expenditures and accounts payable in USAID's accounting records. In our testing of the Accruals Reporting System in Washington, DC, the OIG determined that it did not correctly compute unliquidated obligation information, and used this incorrect information as an upper limit for accrual estimates. This occurred because USAID's Accruals Reporting System was not correctly programmed to calculate unliquidated obligations based on the amounts obligated and amounts vouchered. As a result, USAID's accrued expenditures and accounts payable were recorded inaccurately and USAID was required to record $440 million in upward adjustments. The OIG recommended an additional $131 million in downward adjustments based on the projected errors in accrual calculations by CTOs in Washington. The OIG did note improvements in the accrual methodologies used by CTOs in USAID's overseas missions during FY 2005.

OMB's Core Financial System Requirements stipulate that an agency's core financial system must be able to provide timely and useful financial information to support: management's fiduciary role; budget formulation and execution functions; fiscal management of program delivery and program decision making and; internal and external reporting requirements. External reporting requirements include the requirements for financial statements prepared in accordance with the form and content prescribed by OMB, reporting requirements prescribed by Treasury, and legal, regulatory and other special management requirements of the agency. The core financial system must provide complete, reliable, consistent, timely and useful financial management information on operations.

According to USAID's Automated Directives System (ADS) 631, financial documentation represents any documentation that impacts on or results in financial activity. It is not limited to documentation within the financial management operations but includes any source material resulting in a financial transaction. CTOs, Loan Officers, Grants Officers, Strategic Objective teams, and others are responsible for retaining financial documentation and ensuring its availability for audit. ADS 631 states that these individuals must gather cost data—such as supporting project documentation, activity reports, delivery reports, or fixed reoccurring expenses—for the accruals exercise and then compare the data to payment histories and advances to estimate quarterly accruals.

At USAID, accrued expenditures are accounting estimates of services or goods rendered which have not yet been paid. In conducting quarterly accrual estimates, USAID relied on a combination of its automated Accruals Reporting System and the efforts of its CTOs at overseas missions and in Washington, DC. The OIG found that amounts accrued via accrual worksheets prepared by CTOs sometimes lacked sufficient documentation to support accrual estimates and that such documentation could often not be produced subsequent to the recording of the estimates.

The larger problem, however, was that USAID's Accruals Reporting System did not always correctly compute unliquidated obligation information resulting in many instances of under-estimation of accrual information. The system is designed to generate a logical estimate of quarterly contract and grant expenditures that can be modified by CTOs who have more direct information on the quarterly activity of contractors and grantees. However, both the system estimate and the modified CTOs calculations were ignored by the system when the unliquidated amount contained in the system was lower. This lower unliquidated amount was ultimately posted to USAID's accounting records. The OIG noted various instances where this occurred and determined that the default to a lower unliquidated amount reduced accounts payable and accrued expenditures by as much as $440 million. Once presented with this information, USAID identified a programming error that it corrected within hours of its discovery. Based on the OIG discovery, USAID made a $440 million adjustment to more accurately present accrued expenditures and accounts payable for year-end financial reporting.

With respect to CTO estimates, we found accrual documentation errors, including incorrect calculations, misinterpretation of grantee information, and incorrect comparisons of estimated expenditure reports. Based on the projected errors of accruals estimated by CTOs in Washington, the OIG recommended an additional $131 million in adjustments to more accurately reflect accounts payable and accrued expenditures. These errors occurred more frequently within USAID's three pillar which are responsible for 90 percent of all accrual estimates in Washington, DC, as the table below illustrates:

In response to a previous OIG recommendation, USAID has worked with the contractor maintaining its core accounting system (Phoenix) to improve the quality of CTO information, allowing the OIG to more easily locate the USAID managers responsible for maintaining accrual estimates and to perform a more complete analysis of the accrual information. In addition, USAID hired a contractor to train its CTO and, as a result, 471 CTOs were trained in Washington, DC during 2005. USAID should continue its commitment to train its CTOs.

To address the deficiencies of the Accruals Reporting System, the OIG is making the following recommendation.

Recommendation 1: We recommend that USAID's Office of the Chief Financial Officer modify USAID's interface between the Accruals Reporting System and the USAID accounting system general ledger so that it correctly calculates and posts accrual information and that it establishes a review mechanism in the Accruals Reporting System to review accrual information for propriety before it is posted to the general ledger.

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