Nearly 40 Percent of OIA Grant Projects Have Internal Control Weaknesses That Could Increase Susceptibility to Mismanagement

On the basis of our review of grant files from a random probability sample  of grant projects, we determined that previously reported internal control  weaknesses still exist and estimate that 39 percent of the 1,771 grant  projects in OIA’s grant management database demonstrate at least one  internal control weakness that may increase the projects’ susceptibility to  mismanagement. As shown in figure 2, the  internal control weaknesses we identified were most often associated with  grant recipient activities, followed by joint activities and OIA grant  ant  management activities. management activities. Internal control weaknesses associated with grant recipient activities were  the most common internal control weaknesses we found, accounting for  62 percent of the weaknesses exhibited by OIA grant projects. Of the joint activities between OIA and grant recipients, project  redirection, whereby grant funds may be moved between projects, can  contribute to increased susceptibility to mismanagement. In addition, frequent project redirection can result in projects that  are started but do not have sufficient funds to be completed. Insular Areas Face Challenges in Implementing OIA Grant Projects, as Selected Projects Illustrate

Insular areas confront both project planning and management challenges  in implementing OIA grant projects as a result of decisions made by the  insular area governments and external factors. Project management challenges include issues  such as a limited local capacity for implementing OIA projects and poor  contractor performance. External factors include issues such as declining  economic conditions and various U.S. policies. While some of these  challenges, which influence the insular areas’ abilities to effectively  complete OIA grant projects, are beyond their control, others can be  overcome. OIA Has Taken Steps to Improve the Implementation and Management of Grant Projects

Over the past 5 years, OIA has taken steps to improve project  implementation and management, including implementing a competitive  allocation system that establishes incentives for insular areas to make  financial management improvements and complete projects; establishing  grant expiration dates; and taking steps to improve administrative  continuity in insular areas. This  system provides incentives for financial management improvements and  project completion by tying a portion of each insular area’s annual  allocation to the insular governments’ efforts in these areas—such as their  efforts to submit financial and status reports on time. Several Obstacles to Timely and Effective Project Completion Remain

Despite these efforts, some insular areas are still not completing their  projects in a timely and effective manner, and OIA faces the following key  obstacles in compelling them to do so:  Lack of sanctions for delayed or inefficient projects. Current OIA grant  procedures provide few sanctions for delayed or inefficient projects. OIA officials report that resource constraints  impede effective project completion and proactive monitoring and  oversight. The Office of Inspector General initially had insular field  offices in American Samoa, the CNMI, Guam, and the USVI. Inconsistent and insufficiently documented project redirection policies. OIA’s current project redirection approval practices do little to discourage  insular areas from redirecting project funds in ways that hinder project  completion. OIA’s current data system for  tracking grants is limited in the data elements it contains, leading to  inconsistencies in the data that some grant managers rely on for  monitoring and oversight activities. Such occurrences increase the  susceptibility of grant funds to mismanagement. Along these lines, Interior is  currently phasing in a centralized agencywide system—the Financial and  Business Management System—that is scheduled to be implemented in  OIA in 2011. For this review, we determined (1) whether  previously reported internal control weaknesses have been addressed and,  if not, to what extent they are prevalent among OIA grant projects; (2) the  challenges, if any, insular areas face in implementing OIA grants; and  (3) the extent to which OIA has taken action to improve grant project  implementation and management. For our first objective, our review focused on OIA grants that were  provided to all insular areas that receive noncompact types of grants— including American Samoa, the Commonwealth of the Northern Mariana  Islands (CNMI), Guam, the U.S. Virgin Islands (USVI), and three Freely  Associated States (the Federated States of Micronesia, Palau, and the  Republic of the Marshall Islands). 4).
Why GAO Did This Study

The U.S. insular areas of American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, and the U.S. Virgin Islands (USVI) face serious economic and fiscal challenges and rely on federal funding to deliver critical services. The Department of the Interior (Interior), through its Office of Insular Affairs (OIA), provides roughly $70 million in grant funds annually to increase insular area self-sufficiency. GAO and others have raised concerns regarding insular areas' internal control weaknesses, which increase the risk of grant fund mismanagement. GAO was asked to determine (1) whether previously reported internal control weaknesses have been addressed and, if not, to what extent they are prevalent among OIA grant projects; (2) the challenges, if any, insular areas face in implementing OIA grant projects; and (3) the extent to which OIA has taken action to improve grant project implementation and management. GAO reviewed a random sample of 173 OIA grant files, conducted site visits, and interviewed OIA and insular area officials.

What GAO Found

Internal control weaknesses previously reported by GAO and others continue to exist, and about 40 percent of grant projects funded through OIA have these weaknesses, which may increase their susceptibility to mismanagement. These weaknesses, including insufficient reporting and record-keeping discrepancies, can be categorized into three types of activities that may increase the possibility of mismanagement: grant recipient activities, joint activity between grant recipients and OIA, and OIA's grant management activities. Weaknesses associated with grant recipient activities were the most common issues GAO found, encompassing 62 percent of the weaknesses exhibited by OIA grant projects. The joint activity--redirection of grant funds, a practice by which OIA allows insular areas to move grant funds between projects--accounts for 24 percent of the weakness present in OIA grant projects. While project redirection can be a helpful tool, it can contribute to project mismanagement if not used appropriately. Weaknesses associated with OIA grant management activities, including discrepancies in grant management data, account for 14 percent of the weaknesses in grant projects. Insular areas confront a number of challenges in implementing OIA grants, which can be categorized into project planning challenges such as frequently changing local priorities; project management challenges such as limited local capacity for project implementation; and external risk factors, including the declining economic conditions of American Samoa and the CNMI. While some of these challenges are beyond the insular areas' control, others result from decisions made by the insular area governments. These challenges can result in implementation delays for grant projects. Over the past 5 years, OIA has taken steps to improve project implementation and management. Most notably, OIA established incentives for financial management improvements and project completion by tying a portion of each insular area's annual allocation to the insular governments' efforts in these areas--such as their efforts to submit financial and status reports on time. In addition, OIA established expiration dates for grants to encourage expeditious use of the funds. Despite these and other efforts, some insular areas are still not completing their projects in a timely and effective manner, and OIA faces key obstacles in compelling them to do so. Specifically, (1) current OIA grant procedures provide few sanctions for delayed or inefficient projects, and the office is not clear on its authorities to modify its policies; (2) resource constraints impede effective project completion and proactive monitoring and oversight; (3) inconsistent and insufficiently documented project redirection policies do little to discourage insular areas from redirecting grant funds in ways that hinder project completion; and (4) OIA's current data system for tracking grants is limited and lacks specific features that could allow for more efficient grant management. Interior is currently phasing in an agencywide database that is scheduled to be implemented in OIA in 2011, but to be effective, it will require some flexibility to address OIA's needs for grants management.