Audit of USAID/Ecuador ESF local currency generations, project no. 518-0058

Economic Stabilization Program. Audit covers the period 9/85-5/87 and is based on document review and interviews with Mission and GOE officials. The audit revealed a number of problems. (1) The highest legal exchange rate was not used to determine the amount of local currency to be provided by the GOE. As a consequence, the equivalent of some $6.3 million was lost to the program. This occurred because USAID/E failed to negotiate the highest rate in the original program agreement in 9/85 and again in amendments signed in 1/86. Subsequent efforts by the Mission to renegotiate the rate have not been successful. (2) USAID/E also failed to aggressively pursue interest negotiations and as a result most of the local currency was not placed in interest-bearing accounts. Already a potential $1.4 million equivalent in interest earnings has been lost, and another $2 million equivalent may be lost over the remaining life of the program. (3) The equivalent of $4 million was deposited in an irregular USAID/E trust fund account at La Previsora bank, which is not a financially sound institution - but one in which the GOE Ministry of Finance had a controlling interest. (These funds were deposited at La Previsora in the name of the USAID/E Controller, a matter which is fully discussed in a separate audit, PD-AAV-981.) When USAID/E asked that the funds be transferred to the special program account at the Central Bank, La Previsora did not have sufficient liquidity to effect this; as of 6/87 all funds had been transferred, however. (4) Independent audits by private accounting firms for program activities were not made. (5) Disbursement procedures established for the program allowed the program manager (the Ministry of Finance or his Under-Secretary) to both authorize (with USAID/E approval) disbursement of funds and actually disburse the funds. This arrangement was established to avoid delays in disbursing funds. However, as there were no controls at the Central Bank to ensure that disbursements were authorized, the Minister was able to make unauthorized disbursements for program purposes of $6.3 million equivalent. Recommendations are made with regard to earning interest on program LC, auditing program activities, and improving controls over authorizations and disbursements. A recommendation to recover the $6.3 million equivalent lost in the exchange rate has been closed as legally impossible in Ecuador.