The United States administered the islands under  this trusteeship until 1986, when it entered into a Compact of Free  Association with the FSM and the RMI, both of which are located in the  Pacific Ocean. For the 15-year period from  1987 through 2001, it provided funding at levels that decreased every 5  years. While these reports did not specifically identify any  findings as instances of misuse of Compact funds, they did identify  problems that could leave Compact funds susceptible to misuse, including  poor control over cash and equipment. In addition, we reviewed the audit findings  to determine if they recurred in successive single audits over the 5-year  period. Pervasive Audit Findings Demonstrate Poor Accountability over Compact Funds

Single audits of the FSM, the four FSM states, and the RMI identified  pervasive audit findings involving noncompliance with Compact  requirements and financial statement problems in areas that we consider  highly susceptible to misuse. In addition, the independent auditor  performing the single audits issued qualified opinions or disclaimers of  opinion on the financial statements in all 30 single audit reports reviewed  and for 60 percent of the Schedules of Expenditures of Federal Awards. In total,  they contained 458 audit findings relevant to Compact funds and significant  numbers of findings for each of the auditees for which we reviewed single  audit reports. This is an example of an equipment problem. Amended Compact Agreements Contain Improved Accountability Measures

In responding to our previous reviews of the original Compact program,  Interior officials expressed concerns about the U.S. government’s limited  ability to enforce accountability over Compact funds due to certain  provisions of the original Compact and the related FPA. Interior officials expressed frustration with the lack  of tools available to them to administer or track this assistance in a manner  that could reasonably ensure that such assistance was having its intended  effect. The amended Compacts strengthen reporting and monitoring  measures that could improve accountability over assistance, if diligently  implemented. Recommendations for Executive Action

To help promote compliance with Compact requirements and sound  financial management, the Secretary of the Interior should delegate  responsibility to the Office of Insular Affairs and hold appropriate officials  in that office accountable for ensuring the adequacy of staff dedicated to Compact oversight and monitoring FSM and RMI progress in addressing Compact-related single  audit report findings, reporting on the FSM and RMI actions to correct Compact-related  compliance and financial management findings identified in single audit  reports to the Secretary of the Interior or other appropriate high-level  Interior official,  initiating appropriate actions when the FSM or the RMI do not  undertake adequate actions to address Compact-related single audit  findings in a timely manner, and  investigating single audit findings that indicate possible violations of  grant conditions or misuse of funds and taking appropriate actions  when such problems are verified.
Why GAO Did This Study

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

What GAO Found

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