IRAQ: Audit Slams U.S. Handling of Iraqi Funds

WASHINGTON - The U.S.-led provisional government in charge of Iraq until last summer was unable to properly account for nearly $9 billion in Iraqi funds it was charged with safeguarding, according to a scathing audit report.

The Coalition Provisional Authority may have paid salaries for thousands of nonexistent employees in Iraqi ministries, issued unauthorized multimillion-dollar contracts and provided little oversight of spending in possibly corrupt ministries, according to the report by Stuart W. Bowen Jr., the special inspector general for Iraq reconstruction.

"While acknowledging the extraordinarily challenging threat environment that confronted the CPA throughout its existence and the number of actions taken by CPA to improve the [interim Iraqi government's] budgeting and financial management, we believe the CPA management of Iraq's national budget process and oversight of Iraqi funds was burdened by severe inefficiencies and poor management," the report says in its conclusion. An advance copy of the report, scheduled for release today, was obtained by The Times.

In a letter to Bowen, former agency administrator L. Paul Bremer III blasted the findings of a draft copy, saying that the report was filled with misconceptions and inaccuracies.

Bremer acknowledged that financial systems in Iraq were weak but said that Bowen failed to consider the U.S. mandate to quickly turn over control to an Iraqi government. The agency disbanded after transferring power to the interim Iraqi government in late June.

Bremer could not be reached for comment Sunday.

The "auditors presume that the coalition could achieve a standard of budgetary transparency and execution which even peaceful Western nations would have trouble meeting within a year, especially in the midst of war," Bremer wrote. "Given the situation the CPA found in Iraq at liberation, this is an unrealistic standard."

A Pentagon spokesman also disagreed with the report's conclusions, saying Sunday that the agency had implemented reforms to improve accountability.

"The CPA was operating under extraordinary conditions from its inception until mission completion," spokesman Bryan Whitman said in a statement. "Throughout, the CPA strived earnestly for sound management, transparency and oversight."

The audit adds to a growing body of evidence that the U.S.-led occupation government created a two-tier system of oversight that continues to severely hamper the rebuilding of Iraq.

U.S. taxpayer funds received relatively close scrutiny from dozens of federal auditors and investigators. Iraqi funds stemming from oil sales and assets seized from the regime of Saddam Hussein, however, appear to have been spent without controls designed to ensure accountability.

As a result, companies tapping into the $18.4 billion in U.S. reconstruction funds have moved slowly, partly due to security fears, but also due to worries about making financial missteps in the painstaking federal government contracting process. The delay has left many Iraqis without services such as electricity, water and transportation.

Contracts paid with Iraqi funds, however, were issued with little planning or oversight. Such contracts have frequently fallen prey to charges of fraud and cronyism, reinforcing the belief of many Iraqis that corruption continues to run rampant, even under U.S. oversight.

The view that there has been too much control over U.S. funds and too little over Iraqi money has fueled a sense among those who worked in Iraq that the reconstruction was deeply flawed from the start.

"We had too few contract officers and too much to do and high turnover," Col. Thomas X. Hammes, a professor at the National Defense University who participated in the rebuilding effort last year, said at a recent symposium on contractors in Iraq. "It was penny-wise and pound-foolish."

The audit being released today focuses on about $8.8 billion in Iraqi money from a development account that passed through the coalition authority to Iraqi ministries. Previous reports by a U.N.-appointed board also found problems with the account, the Development Fund for Iraq, which amassed $20.6 billion in oil revenue and assets during the agency's tenure in Iraq. One of the past audits, conducted by the International Advisory and Monitoring Board, found that oil proceeds had been properly accounted for but that there were insufficient controls over the fund.

Today's report finds that U.S. senior advisors attached to the ministries failed to exercise adequate oversight of the money. In one case, the coalition's main budget office had 12 of the 55 staff members that were needed, and most of them were "inexperienced recent college graduates," the report says.

In another case, the coalition awarded a $1.4-million contract to Northstar Consultants to review the controls over the development fund. The firm had no certified public accountant and did not perform the review, according to the report. Attempts to reach Northstar were unsuccessful Sunday.

In yet another case, a government consultant reviewed one ministry's budget in April 2004 and found that there were insufficient controls over a $435-million budget.

The financial process was "left open to fraud, kickbacks and misappropriation of funds," the report said.

The report singles out seven senior advisors for failing to provide adequate financial oversight at their ministries, though it does not identify them. In the past, senior advisors have described chaos in the ministries. Iraqi officials frequently ignored their advice, while U.S. officials paid little attention to their pleas for more help.

In February 2004, one advisor sent top CPA officials a plea for more guidance in performing his duties, according to an e-mail provided to Bowen.

The response: "There are no written guidelines delineating the senior advisors' role, responsibilities and authorities."

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