USAID: Testimony of Richard C. Nygard, Acting Assistant Administrator for the Bureau for Management, 5/8/2001

This is an archived USAID document retained on this web site as a matter of public record.

Testimony of Richard C. Nygard
Acting Assistant Administrator for
the Bureau for Management

Before the Committee on Government Reform's
Subcommittee on Government Efficiency
Financial Management and Intergovernmental Relations
United States House of Representatives
May 8, 2001

Mr. Chairman and members of the committee, I am pleased to be here today with Mr. Everett Mosley, the Inspector General of USAID. Mr. Michael Smokovich, the CFO, and Mr. Elmer S. Owens, the Deputy CFO are also here with me. I will discuss USAID's progress and challenges in implementing its financial management improvement program. My testimony is intended to assure that we and the IG have identified the impediments that have precluded the IG from rendering an opinion on USAID's financial statements in the past. We are committed to ensuring that they do not impair the 2001 financial statement audit. In this effort, we are working closely with the IG.

IMPROVING READINESS FOR AUDIT

One of the benchmarks of improved financial accountability is obtaining a "clean," unqualified opinion on the Agency's annual financial statements. Technology investments alone cannot assure this. Effective policies, procedures, and the performance of people and organizations are essential.

Rather than redirecting limited resources to heroic efforts to obtain an opinion over the past two years, we have chosen to focus our resources on the fundamental financial management problems that the IG and we have identified. If we did not focus on correcting these root problems, we would be consigning the limited resources of the IG and the CFO organizations to months of effort each year to prepare and audit the financial statements; fixing the fundamental problems continues to be a guiding principle for us.

The IG has highlighted four areas, based on past audit work, which are very important for the 2001 financial statement audit. The four areas are:

reconciliation of fund balance (that is cash balances) with Treasury,

reporting on credit program receivables,

valuation of advances to grantees through letters of credit, and

estimates of accrued expenses at year-end.

We must continue to perform cash reconciliation which result in reconciling differences with Treasury that the auditors deem not to be material. By material, I mean that the total of the reconciling amount would adversely affect the quality and reliability of the financial statements. Our challenge this year is to stay current with the cash reconciliation while the same staff is dealing with the final phases of our accounting system implementation in Washington. Cash reconciliation at the overseas locations has not been affected by system implementation in Washington.

USAID's credit program loan receivables have a face value of $10.6 billion with an additional $11.5 billion in outstanding loan guarantees. For the past two audits, the IG has found that the credit program balances were reasonably accurate. In 1998 the Agency outsourced its credit program servicing to a commercial bank. This contract has helped to improve significantly our credit program accounting. We fully expect that this year's audit will reach the same conclusion as last year. In the area of accounts receivable, the IG has also noted that the Agency does not have an effective system for reporting receivables. The IG is correct. We are recording the Washington accounts receivable into the new system during FY 2001. We do have an effective procedure through annual data calls to the field to obtain overseas accounts receivable information. In the short run, prior to field implementation of Phoenix, we have determined that it is not economical to attempt to establish a different system since our accounts receivable amount to only 0.25% of USAID's total assets.

The value of grantee advances outstanding at the end of the fiscal year and the methodology used by the agency to account for advances has been an audit issue for several years. These issues relate to grantee advances made under the pooled letter of credit method of payment. The method allows the grantee to draw down funds under all of its grants with the Agency on a cash needed basis without identifying the specific grant or grants from which it is drawing funds. The grantee must report quarterly how much it has spent by grant. The problem that the IG and we have agreed upon is that using the "pooled method" of making advances does not give the individual project managers current information on the status of each program. It also does not allow my accounting staff to book the advances to the correct appropriation account until the expenditure reports are received and processed several months after the cash is actually drawn. To solve this problem, we are currently reconciling our advance balance with each grantee as a pre-requisite to converting these grants to an individual grant by grant advance methodology. To date we have reconciled 162 out of 317 grantees and have converted 43 to the new advance methodology. In a related issue we are also working with the IG audit team to identify how the auditors may confirm the advance balances for the 2001 audit.

The Agency's estimate of accrued expenses for Washington-funded activities (goods and services received which have not yet been paid for) has been a problem. This estimate was based on flawed data and financial management concepts used by the old Washington accounting system. Each year the IG would recommend a year-end adjustment to more accurately reflect the accrued expenses and accounts payable. For FY 2000, we implemented a new methodology for estimating the year-end accruals using a three-year trend analysis for invoices paid in the subsequent year that were for goods and services received in the prior year. Because we did not complete the analysis until very late in the process, the IG did not have time to validate the new methodology. We are planning to use the same methodology for FY 2001 and are working with the IG's audit team to facilitate their review.

In addition to these four areas highlighted by the IG, we must also ensure the timeliness and quality of Agency financial statements. We must ensure that all of our opening and closing balances are accurate and that all transactions are posted to the proper accounts. The public accounting firm, PriceWaterhouse Coopers, is helping us to assure that this is achieved. We believe the quality of the Agency's financial statements will be markedly better this year because hundreds of people in the Agency did an outstanding job last year improving the quality of their financial data prior to migrating their data to the new accounting system. The financial data migration was 99 percent correct-far exceeding expectations.

MATERIAL WEAKNESSES

Material weaknesses have been a significant impediment to obtaining a "clean" opinion in the past. We have made significant progress in correcting these material weaknesses. We needed to do this for sound business reasons as well as to avoid the high audit risk these weaknesses entail

In its 1998 accountability report, USAID reported nine material weaknesses. Any material weakness is serious, but this very high number was particularly disturbing. Today that number is down to four. The weaknesses were as follows:

Direct loan program - closed 1999

Program performance reporting - closed 1999

Financial management procedures - closed 2000

Year 2000 compliance - closed 2000

NMS Security - closed 2000

USAID's primary accounting system - will be closed 2001

Financial reporting and resource management capabilities - will be closed 2001

Information resource management processes - will be closed 2001

Computer security program - will be closed 2002

The primary accounting system material weakness will be corrected in 2001 with the deployment of the new core accounting system. The financial reporting and resource management material weakness will be corrected in 2001 with the interfacing of the overseas accounting system and the new core accounting system in Washington. The information resource management material weakness will be substantially corrected in 2001 with the Agency's improved software control and disciplined software practices. The computer security material weakness will be corrected in 2002, a year ahead of schedule.

USAID used the computer security material weaknesses as an impetus to become a cyber-security leader within federal government. Because of the nature of our Agency's businesses and our widely dispersed operations, senior management has recognized security and privacy as critical for its success. Our IRM Director made the financial management systems his top security priority and directed the Agency's Information Systems Security Officer to personally assist me in creating a security success story, thus many of USAID's innovations have occurred as part of our financial management systems development. A model computer security program has been developed and has been selected by the Federal CIO Council as a best security practice. Other federal agencies are adopting it. USAID has made the commitment not to close the material weakness until it has met all of its legal and regulatory requirements in a way that is beyond question and in a way that will have benefits throughout Government.

IMPROVING SYSTEMS

During the mid-1990s, the Agency planned financial management improvement efforts well beyond its capacity to manage and implement successfully. After spending over $100 million, much of the resulting system failed to meet expectations and deliver the financial management improvements required by law and regulations. Correcting these deficiencies will require continued incremental investments in systems, people and improved business practices for our core business processes.

During 1999, we moved very rapidly to create a plan and to initiate actions that would address many of the Agency's historical financial management challenges. A very important part of the planning was to establish an incremental improvement strategy and implement disciplined practices that would assure success.

Rather than investing in new initiatives for many of our older financial systems, we retired them and are currently using private sector firms and federal agencies for transaction processing services. Using this approach, we now have outsourced our transaction processing services for loans, grants, personnel and payroll. This has saved us millions by avoiding systems development costs.

Our accounting and procurement systems are the core business processing tools for our people and our partners. They must be effective for us to be effective in the 21st century. We decided to replace the accounting system incrementally, using commercial software products with prior successful implementations in government and certified compliant with federal requirements and standards. We implemented a new accounting system in Washington during December 2000 using American Management Systems' Momentum Financials. The IG provided an invaluable role in advising Agency management on improvements to our implementation efforts.

We applied many industry best practices in this successful implementation that can serve as an example to other federal agencies. For example, we redesigned business practices to ensure that we could implement the commercial software product without any costly customization of the baseline software typical of other federal implementations. We committed to having zero changes to the software. Hundreds of users in diverse offices agreed to change their business practices to save money and accelerate the implementation schedule. Our testing was so rigorous and exhaustive that we uncovered software defects, which the vendor has now corrected, that other federal implementations of the vendor's product had not uncovered.

This year we are interfacing or connecting the new accounting system with existing systems in Washington and in the field. The new accounting system will be interfaced to our internal procurement system and with systems for loans, grants, personnel information and payroll transaction processing, each of which is outsourced to a commercial provider or cross-serviced by another federal agency.

The new core accounting system will also work with the existing overseas accounting system to provide consolidated Agency-wide financial reporting. Beginning in 2001 transaction level accounting data from Missions will be sent to Washington and stored in a database for Agency-wide financial reporting. An automated interface will be implemented to allow data to be reported and recorded easily and accurately in the Phoenix accounting system.

The implementation of the new accounting system, combined with other interim financial management improvements, is intended to enable the Agency to produce auditable financial statements for FY 2001 and correct long outstanding material weaknesses in management controls.

REMEDIATION PLAN

The Agency has had many audit findings and recommendations to deal with as a result of its past financial management practices and system deficiencies. We have gone through a process with the IG to identify the audit recommendations that affect their financial statement audit objectives. Many have been corrected in FY 2000 and still more will be corrected in FY 2001 with the implementation of the new accounting system. We are now focusing our efforts on those that still require additional work or further system investments. The remedies, resource requirements and target dates for correcting these audit findings are described in the Agency's financial management remediation plan. In the spirit of enhancing our accountability to the public, we included the remediation plan in the USAID FY 2000 Accountability Report released in March of this year.

The auditors identified more than 80 audit findings and recommendations that impaired their audit objectives in 1999. The Agency has focused its efforts in 2000 and 2001 to address all of these audit recommendations. We have closed 75% of the recommendations, and those remaining will be closed this year and next.

Overall last fiscal year, USAID closed a total of 738 audit recommendations. While we are proud of this record, our objective is to reduce substantially the number of new audit findings by the IG. Training our employees is essential to achieving this. We provided training, in collaboration with the IG, to over 1,000 people on the various aspects of audit management, and more training is scheduled in our remediation plan.

Over 180 have been trained in a new course on management accountability and control.

Over 600 employees received training on the management of obligations.

Over 630 people were trained to use the new accounting system.

Over 200 received training on revised performance indicators and another 100 attended workshops on improving program performance.

Over 120 finance professionals were trained on the new accounting system and an array of electronic commerce products available in the marketplace.

CLOSING

USAID is a complex, global organization that operates in more than 70 countries overseas. The IG and Agency management are in agreement on the major management challenges that we face. We know what needs to be done to improve our financial management practices and performance and to get a "clean" audit opinion. We have made significant progress over the past two years and we have a good plan for completing the work that needs to be done. We are committed to executing the plan.