Iraq Audits Expose Poor Controls

Problems with Coalition Provisional Authority oversight included mixing cash and accrual accounting, allotting $19 billion to ''miscellaneous,'' and hiring a consultant to do an accountant's job.

Over the past few months, American and international agencies have released audit reports citing accounting and financial-transparency problems at the Coalition Provisional Authority (CPA), the U.S.-led governing body that was set up in Iraq after the fall of Saddam Hussein.

The CPA was shuttered in June after its administrator, Paul Bremer, ceded control of the government to interim Prime Minister Ayad Allawi. Since then, several groups with oversight responsibility for the Iraq reconstruction — including the CPA’s Office of the Inspector General (CPA-OIG), the UN’s International Advisory and Monitoring Board (IAMB), and the U.S. Government Accountability Office (GAO) — have revealed chronic problems with the CPA’s financial record-keeping, internal controls, segregation of duties, funds management, and oversight of contract procedures.

The CPA’s internal auditors pointed to cash-control problems affecting more than $600 million in Iraqi funds available for disbursement. The auditors noted that the CPA created policies and regulations that “although well-intended, did not establish effective funds controls and left accountability open to fraud, waste, and abuse.”

Indeed, the auditors found it difficult to reconcile the financial statements of the Development Fund for Iraq (a bank account holding Iraqi oil revenues), mainly because the CPA used cash accounting, rather than the accrual accounting mandated by the Department of Defense. The audit team concluded that accrual accounting procedures — which the CPA did use to track U.S. funds — could have been “easily adapted” to the Iraqi fund.

In response, CPA management contended that when the Iraqi fund was established in 2003, “accounting guidance was not well defined, nor were clear policies and procedures in place.”

The auditors also noted that $400 million of the Iraqi funds were disbursed to the field with limited visibility — that is, complete documentation and receipts for disbursements were absent. In a written response, former CPA controller Colonel Don Davis maintained that the auditor’s claim is incorrect, emphasizing that “the records clearly reflect to whom funds had been issued.” While that’s true, wrote the auditors in their final report, records were not available to identify who made the payouts.

Similarly, the UN’s IAMB audit for the period ending in December 2003, conducted by the Bahrain office of accounting firm KPMG, disclosed that while all known Iraqi oil proceeds were accounted for properly, CPA internal controls were “insufficient to provide reasonable assurance” that oil-export sales records were complete and that disbursements from the Iraqi fund were made for the intended purposes.

Among the issues with which KPMG auditors took exception were poor access to CPA officials and documents during the audit process; the use of several different policies and procedures to control cash payments and receipts; the absence of segregation among cash-transaction duties, such as recording, sign-off authority, and custodial functions; and the award of a $1.4 million internal-control-review contract to California-based North Star Consultants Inc.

According to the KPMG audit report, the CPA was required to hire an independent certified public accounting firm to ensure that the Iraqi funds were being administered transparently. North Star — a consultancy, not an accounting firm — was charged with the task but “did not perform a review of internal controls as required by the contract.” It is unclear whether the full $1.4 million fee was paid out.

Col. Davis explained that while North Star employees did not perform a review of internal controls “down to the ministry level…this was a result of change in the CPA mission” between the time the contract was awarded and the decision to dissolve the CPA.

A GAO audit report released in July also identified deficiencies with the CPA’s accounting procedures. The study revealed that “large amounts” of CPA funds were assigned to various “miscellaneous” categories, “thus providing little insight on how those funds have been spent.” The GAO reported that $15.5 billion of the $32 billion earmarked for operating support — which includes fuel, spare parts, and “facilities and base support” — was dumped into the miscellaneous category, as was $3.8 billion of the $15.6 billion allocated for military personnel.

All three audit reports acknowledge that the CPA was operating in a war zone. Indeed, CPA management maintains that one reason KPMG had limited access to officials and documents was that security measures made it difficult for personnel to move about freely for meetings or to retrieve and deliver documents.

Yet Svetlana Tsalik, a director with the Open Source Institute (OSI) in New York, believes that the “double-standard accounting” policies used by the CPA were not a function of war-zone limitations. “Why would the CPA use federally mandated [accrual] accounting for U.S. funds and not for Iraqi funds?” she asks.

The OSI was founded by financier George Soros, who has openly criticized the war in Iraq. In September, it released 20-page report — through its Iraq Revenue Watch division, which monitors the country’s oil industry — that lambasted the Coalition Provisional Authority. “Disorder, Negligence and Mismanagement: How the CPA Handled Iraq Reconstruction Funds” aggregated much of the information presented in public audit reports.

(For more on how failed Pentagon financial reforms put more than just dollars at risk, read CFO magazine’s October cover story, “Losing Battles.”)

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