Summary: GAO made an audit of the Agency for International Development (AID) Loan Program financial statements for the fiscal years ended June 30, 1962, 1963, and 1964, pursuant to section 635(g)(5) of the Foreign Assistance Act of 1961 (22 U.S.C. 2395). This section of the act provides that the President shall cause to be maintained in an integral set of accounts for loans made under the act which shall be audited by the GAO in accordance with principles and procedures applicable to commercial corporate transactions as provided by the Government Corporation Control Act, as amended (31 U.S.C. 841 et seq.).
The financial statements, in our opinion, do not present fairly the financial condition of the Loan Program at June 30, 1964, or the results of operations of the program for the fiscal years 1962, 1963, and 1964. Certain financial statement balances have been materially overstated and others understated because of accounting practices that we do not believe are sound. Net income for each of the 3 fiscal years and the accumulated net income shown in the June 30, 1964, Statement of Financial Condition are materially overstated because of exclusion of administrative expenses. It is to be recognized, however, that the Loan Program has unique aspects which do not lend themselves to conventional evaluation processes and which significantly affect the financial position of the program. The program assets are shown in the June 30, 1964, Statement of Financial Condition at their full face value at that date. No allowance has been made for future losses which may be sustained on loans and interest receivable, although a substantial part of the assets consists of foreign currency cash balances and loans and interest receivable which are repayable in foreign currency without maintenance-of-value provisions and which are not freely convertible to United States dollars. Because of the many indeterminable factors which my affect these loans and the related interest receivable, we do not believe that future losses can be estimated with the degree of reliability necessary to arrive at a meaningful allowance for such losses. The Agency's accounting and financial management system has a number of significant weaknesses and does not fully comply with the accounting principles and standards prescribed by the Comptroller General. The system does not, in our opinion, provide an adequate foundation for the Agency's current and prospective financial management needs for planning, programming, budgeting, accounting, and reporting in respect to both the Agency's internal management responsibilities and its responsibilities to the Congress. The need for a substantially improved financial management system is emphasized by the multibillion dollar size and diversity of the Loan Program, by the longevity of the operation, and by the President's recent directive requiring agencies to establish integrated planning, programming, and budgeting systems. AID recently has prepared a statement of basic accounting policy which is intended to provide a sound foundation for a revision of its overall accounting manual. Further, the Agency has initiated plans for review and revision of its Loan Program accounting system and has agreed to our proposal that internal audits be instituted. The Agency's recent actions are encouraging to the extent that they disclose an awareness of its financial management needs and the initiation of a plan of action. However, we do not believe that the Agency will be able to fully discharge its responsibility for accounting and reporting under the law (Foreign Assistance Act of 1961 and the Budget and Accounting Procedures Act of 1950) unless it makes the kind of improvements in its accounting, internal controls, and reporting which we have recommended. While we believe that the circumstances described above will preclude an unqualified opinion on the financial statements, we believe also that, when such improvements have been accomplished, we will be able to render an opinion properly qualified to reflect unique aspects of the program.
