Independent Auditor’s Report on the Financial
Audit of the Millennium Challenge
Corporation (MCC) Resource Managed by
Millennium Challenge Account – Honduras
(MCA – Honduras), Under the Compact
Agreement between the Millennium Challenge
Corporation (MCC), and the Government of
The Republic of Honduras
For the Period From July 1, 2009 to December 31, 2009
Financial Audit of the Millennium Challenge Corporation (MCC)
Resources Managed by Millennium Challenge Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
TABLE OF CONTENTS
Page (s)
I. TRANSMITTAL LETTER................................................................................................................. 1
II. SUMMARY
Program Background ....................................................................................................................... 2
Program Objectives ..................................................................................................................... 2 - 3
Period Covered ................................................................................................................................ 3
Identification of Entities .................................................................................................................... 4
Follow-Up on Prior Recommendations ............................................................................................ 4
III. AUDIT OBJECTIVES AND SCOPE
Audit Objectives ............................................................................................................................... 4
Audit Scope ................................................................................................................................. 4 - 5
Pre-Audit Steps ................................................................................................................................ 5
Fund Accountability Statement ........................................................................................................ 5
Internal Control ............................................................................................................................ 5 - 6
Compliance with Agreement Terms and Applicable Laws and Regulations ................................... 6
Common Payment System .............................................................................................................. 7
Procedures Performed ................................................................................................................ 7 - 8
Scope Limitations ............................................................................................................................. 8
IV. SUMMARY OF AUDIT RESULTS
Audit Findings on the Fund Accountability Statement for the Period .............................................. 8
Audit Findings on Internal Control .................................................................................................... 8
Audit Findings on Compliance with Agreement Terms
and Applicable Laws and Regulations ....................................................................................... 8 - 9
Audit Findings on the Common Payment System ........................................................................... 9
V. AUDITOR’S OPINION
Fund Accountability Statement
The Independent Report ......................................................................................................... 10 - 11
Fund Accountability Statement ...................................................................................................... 12
Notes to the Fund Accountability Statement ........................................................................... 13 - 16
Internal Control
The Independent Auditor’s Report on Internal Control .......................................................... 17 – 18
Schedule of Findings...................................................................................................................... 19
Compliance with the Compact Agreement, and Applicable Laws and Regulations
The Independent Auditor’s Reports on Compliance ...................................................................... 20
September 28, 2010
Mr. Martín Humberto Ochoa
General Director
Millenium Challenge Account
(MCA – Honduras)
Tegucigalpa, M. D. C.
Subject: Audit of the Millennium Challenge Corporation (MCC) Resource managed by
Millennium Challenge Account – Honduras (MCA - Honduras), under the Compact
Agreement between the Millennium Challenge Corporation (MCC) representing the
U.S. Government, and the Government of The Republic of Honduras for the period
from July 1, 2009 to December 31, 2009.
Dear Mr. Ochoa:
We are pleased to present the results of our financial audit of the Millennium Challenge Corporation
(MCC) Resource managed by Millennium Challenge Account – Honduras (MCA - Honduras), under
the Compact Agreement between the Millennium Challenge Corporation (MCC), representing the U.S.
Government, and the Government of Honduras for the period from July 1, 2009 to December 31, 2009.
Actual cost incurred and audited for the period July 1, 2009 to December 31, 2009 is $50,944,959
The financial statements are the responsibility of MCA - Honduras. Our responsibility is to express an
opinion of the Fund Accountability Statement based on our audit.
We seize this opportunity to thank MCA Honduras Management and staff for their collaboration.
Please contact us regarding any questions you may have on our report or for any addition information.
Sincerely,
Jorge Wilfredo Peralta
Partner
PricewaterhouseCoopers - Honduras
1
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
II. SUMMARY
This report presents the results of our financial audit of the Millennium Challenge Corporation
(MCC) Resource managed by Millennium Challenge Account – Honduras (MCA - Honduras),
under the Compact Agreement between the Millennium Challenge Corporation (MCC)
representing the U.S. Government, and the Government of Honduras for the period from July 1,
2009 to December 31, 2009.
Program Background
On June 13, 2005, the U.S. Government, acting through the Millennium Challenge Corporation
(MCC), entered into a Compact Agreement with the Government of the Republic of Honduras to
implement a program proposed by the Government of Honduras to advance its progress towards
achieving economic growth and poverty reduction. Under the Agreement, the Government of
Honduras established MCA-Honduras as the Accountable Entity to manage the implementation
of agreed activities.
MCC funding is for US$215 million, available for a five-year period from September 29, 2005,
when the compact entered into force, through September 28, 2010, and will be used for a rural
development project, a transportation project, an administration and control programs, and
monitoring and evaluation. However, in October 16, 2009 the Government of the United States
made a reduction of the budget of MCA for the amount of US$10,000,000 as follows:
Original Budget in Budget Modified in
Projects Dollars Dollars
A Rural Development $ 70,687,000 $ 66,457,683
B Transportation 127,208,000 120,537,242
C Monitoring and Evaluation 4,983,000 4,983,000
D Administration and Control 12,122,000 13,022,075
Sub total 215,000,000 205,000,000
Less: Other costs - -
$215,000,000 $205,000,000
Under the rural development project, the MCC will: 1) fund training for farmers in the production
and marketing of high-value horticultural crops, expand farmer access to credit (through technical
assistance to financial institutions and loans) and 2) construct and rehabilitate feeder roads, and
provide grants for public goods such as research, infrastructure (for example, irrigation systems,
electric power distribution lines, cold storage and packing facilities), and area pest and disease
control measures.Under the transportation project, the MCC will fund the improvement of a 50
kilometer segment of Highway CA-5 between Taulabé and Comayagua (the North segment) and
a 59 kilometer segment of Highway CA-5 between Villa de San Antonio and Tegucigalpa (the
South segment), paving of 91 kilometers of secondary roads, and establishment of vehicle weight
controls including eight vehicle weight control stations and associated weight control equipment.
However, in October 16, 2009 the Government of the United States made a reduction of the
budget of MCA and reduced the transportation component project and establishment of vehicle
weight controls.
Program Objectives
The management structure of the program implementation process is designed consistent with
the Program Management Unit (PMU) and the Board of Directors. These elements together make
up the MCA-Honduras organization.
2
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
The Program Management Unit (PMU) assist to the Board of Director and as the main
responsibility has administrative and technical management related with the successful program
implementation, the projects and the activities program included in the Compact Agreements.
MCA-Honduras operates under the authority of the Board of Directors. It is responsible for; (1)
compliance and supervision of supplemental agreements; and (2) effectiveness of the
programs/projects and the activities included in the Compact Agreement.
MCA-Honduras is subject to the budget of Honduras Law and to the execution of budget of
Honduras Law with certain exception to be documented in a fiscal responsibility plan.
The subscription of the agreement with the Fondo Nacional de Desarrollo Rural Sostenible
(FONADERS) and MCC was not signed in view of the fact that in November 2006, MCC
concluded that FONADERS (as Procurement Agent of the Agriculture Development Project) only
had the capability of making local acquisition and not international acquisitions as required by the
Compact. As a result of this evaluation, MCC informed MCA-Honduras of the elimination of this
pre-condition as well as the elimination of a supervisory firm for acquisitions.
The Program management unit is also accomplishing small and medium procurements. The
project managers and the programs management unit approves payments to suppliers but funds
are disbursed by the Ministry of Finance which serves as a fiscal agent and has exclusive access
to the bank accounts used to manage MCC funds.
The implementation arrangements is described in more detail in supplemental agreements and in
an implementation plan for each of the components that is consisted in a financial plan, fiscal
responsibilities plan, procurement plan, program and project work plans, and a monitoring and
evaluation plan.
As of December 31, 2009, disbursement as $131.07 million from the MCC to MCA-Honduras was
made, of which US$50.9 million correspond to the period of six months from July 1, 2009 to
December 31, 2009. This disbursement were made to cover transfers to the Rural Development,
Transport Project, salary expenses, rent, public services, travels, office supplies, purchases of
computer equipment and vehicles, maintenance and repairs, insurance premiums, evaluating and
monitoring costs and other administrative expenses.
Period Covered
On December 18, 2009, PricewaterhouseCoopers, signed a contract to conduct a financial audit
of the Millennium Challenge Corporation (MCC) Resource managed by Millennium Challenge
Account-Honduras (MCA-Honduras), under the Compact Agreement between the Millennium
Challenge Corporation (MCC) representing the U.S. Government, and (MCA-Honduras) by the
Government of Honduras for the year ended June 30, 2009.
Subsequently, on February 16, 2010, it was received the notification for the extension of the
optional agreement of audit services established on the original agreement and it was approved
the audit on the resources of MCC, managed by MCA – Honduras under the Compact between
MCC and MCA – Honduras for the Optional Period 1 corresponding to the period of six months
from July 1, 2009 to December 31, 2009.
Under the terms of this Contract, we conduct a financial audit for the option period 1 ended as of
July 1, 2009 to December 31, 2009.
3
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
Identification of Entities
Millennium Challenge Account – Honduras (MCA – Honduras)
Millennium Challenge Corporation (MCC)
U.S. Government - Comptroller General of the United States
Government of Honduras
Follow-Up on Prior Audit Recommendations
The findings reported in previous audits were corrected in the one-year period that ended June
30, 2009; so as of the date of this review, there is no follow-up on findings to report.
III. AUDIT OBJECTIVES AND SCOPE
Audit Objectives
The objective of this engagement was to conduct a financial audit of the MCC resources
managed by MCA-Honduras under the Compact Agreement between the Millennium Challenge
Corporation, representing the U.S. Government, and the Government of Honduras, for the period
from July 1, 2009 to December 31, 2009 in accordance with U.S. Government Auditing Standards
issued by the Comptroller General of the United States and the “Millennium Challenge
Corporation Guidelines for Financial Audits Contracted by Foreign Recipients” (MCC Audit
Guidelines) issued by the MCC Inspector General (IG).
The Fund Accountability Statement is the basic financial statement that we audited that presents
MCA-Honduras’s revenues, costs incurred, cash balance of fund provided by MCC. All currency
amounts in the Fund Accountability Statement are stated in U.S. dollars (US$).
Audit Scope
A financial audit of the funds provided by MCC was performed in accordance with U.S.
Government Auditing Standards and accordingly includes such tests of the accounting records as
deemed necessary under the circumstances.
The audit specific objectives of the funds provided by MCC were to:
a. Express an opinion on whether the Fund Accountability Statement for the MCC-funded
programs presents fairly, in all material respects, programs revenues, costs incurred and
reimbursed, for the period from July 1, 2009 to December 31, 2009 in accordance with
the terms of the agreements and in conformity with the cash basis of accounting wish is a
comprehensive basis of accounting other than generally accepted accounting principles.
See Note 2 to the Fund Accountability Statement.
b. Evaluate and obtain a sufficient understanding of MCA-Honduras’s internal controls
related to the MCC-funded programs, assess control risk, and identify reportable
conditions, including material internal control weaknesses.
c. Perform tests to determine whether MCA-Honduras has complied, in all material
respects, with the terms of Compact Agreement and related ancillary agreements, and
applicable laws and regulations related to MCC-funded programs. All material instances
of noncompliance and all illegal acts that have occurred or are likely to have occurred
were identified. Specifically, we performed tests to determine whether MCA Honduras
complied, in all material respects, with the Agreement and the Fiscal Accountability Plan
in effect during the audit period.
4
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
d. Determine if MCA-Honduras has taken adequate corrective action on prior audit report
recommendations.
We designed audit steps and procedures in accordance with U.S. Government Auditing
Standards, Chapter 4, to provide reasonable assurance of detecting situations or transactions in
which fraud or illegal acts have occurred or are likely to have occurred.
Pre-Audit Steps
We reviewed the applicable documents considered necessary to perform the audit. Following is a
list of documents applicable to different MCC-funded programs:
1. The compact agreement between MCC and MCA-Honduras.
2. Supplemental agreements between MCC and the Government of Honduras, between
MCA-Honduras and its agents (e.g., Fiscal Agent), and plans called for under the
compact agreement.
3. Plans and procedures supplementing such plans might include: Governance Agreement,
Bank Agreement(s), Reimbursement Agreement, Fiscal Agent Agreement, Fiscal
Accountability Plan, Financial Plan, Procurement Agent Agreement, Procurement Plan,
Procurement Guidelines, Implementing Entity Agreement(s), Monitoring and Evaluation
Plan(s), Implementation Plan(s), and Work Plans for the relevant Project or Project
Activity, among others.
4. The agreements between MCA-Honduras and contractors and grantees, and any other
beneficiaries of the activities of MCA-Honduras.
5. Budgets, implementation letters, and written procedures approved by MCC and/or MCA-
Honduras.
6. The sub-agreements between MCA-Honduras or other implementing entities and their
sub-implementing entities, as applicable.
7. All program financial and progress reports; charts of accounts; organizational charts;
accounting systems descriptions; procurement policies and procedures; and receipt,
warehousing and distribution procedures for materials, as necessary, to successfully
complete the required work.
Fund Accountability Statement
We examined the Fund Accountability Statement for MCC-funded programs including the
budgeted amounts by category and major items; the revenues received from MCC for the audited
period; the costs reported by MCA-Honduras as incurred during the audited period, including the
assets/technical assistance directly procured by MCC for MCA-Honduras’s use. The Fund
Accountability Statement included all MCC-provided assistance funds identified by the
Agreement. The revenues received, less the costs incurred, after considering any reconciling
items, was reconciled with the balance of cash on hand and/or in bank accounts.
Internal Control
We reviewed and evaluate MCA-Honduras’s internal control to obtain a sufficient understanding
of the design of relevant control policies and procedures and whether those policies and
procedures have been placed in operation.
5
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
The major internal control components that were studied and evaluated include, but are not
limited to, the controls related to each revenue and expense account on the Fund Accountability
Statement.
We prepared the report identifying the reportable conditions that are significant deficiencies in the
design or operation of the internal controls, and the reportable conditions considered to be
material weaknesses. Material weaknesses are reportable conditions in which the design or
operation of the specific internal control elements do not reduce to a relatively low level the risk
that errors or irregularities in amounts that would be material in relation to the Fund Accountability
Statement being audited may occur and not be detected within a timely period by management
performing its normal functions. Reportable conditions, including material weaknesses, are set
forth in the report as “findings”. Reportable conditions involve matters coming to our attention
relating to significant deficiencies in the design or operation of internal controls that, in our
judgment, could adversely affect MCA-Honduras’s ability to record, process, summarize, and
report financial data consistent with the assertions of management in the Fund Accountability
Statement. Non-reportable conditions was included in a separate management letter to MCA-
Honduras and referred to in the report on the internal controls.
a. We obtained a sufficient understanding of the internal controls to plan the audit and to
determine the nature, timing and extent of tests to be performed.
b. We assessed inherent risk and control risk, and determine the combined risk.
c. We evaluated the control environment, the adequacy of the accounting systems, and
control procedures. Emphasis was placed on the policies and procedures that pertain to
MCA-Honduras’s ability to record, process, summarize, and report financial data
consistent with the assertions embodied in each account of the Fund Accountability
Statement.
Compliance with Agreement Terms and Applicable Laws and Regulations
Our report on compliance is set forth as findings all material instances of noncompliance, defined
as instances that could have a direct and material effect on the Fund Accountability Statement.
In planning and conducting the tests of compliance:
a. We identified the requirements of the Compact and related Compact documents and
pertinent laws and regulations and determine which of those, if not observed, could have
a direct and material effect on the Fund Accountability Statement.
b. We determined whether any technical assistance and services, whether procured by
MCA-Honduras or directly procured by MCC for MCA-Honduras’s use, were used for
their intended purposes in accordance with the compact and related agreements.
c. We determined if payments have been made in accordance with the compact and related
agreement terms and applicable laws and regulations.
d. We determined if those who received services and benefits were eligible to receive them.
e. We determined if funds have been expended for purposes not authorized or not in
accordance with applicable agreement terms.
6
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
Common Payment System (CPS)
We reviewed the Common Payment System (CPS) to ensure that the invoices presented for
payment are eligible by ensuring the checking procedures are in accordance with the Millennium
Challenge Account (MCA) Fiscal Accountability Plan (FAP) and the payments are made correctly
and recorded as funds received in the accounting records of the Millennium Challenge Accounts
(MCA).
Procedures Performed
The major audit procedures performed during our review in order to meet the stated audit
objectives were the following:
a. We reviewed direct costs billed to and reimbursed with MCC and costs incurred but
pending reimbursement by MCC or MCA, identifying and quantifying any questioned
costs.
b. We reviewed general and Program ledgers to determine whether the costs incurred were
properly recorded.
c. We reviewed the procedures used to control the funds, including their channeling to
contracted financial institutions or other implementing entities.
d. We determined whether Program income was added to the funds used to further eligible
program objectives, or deducted from program costs, in accordance with the terms of the
compact and related agreements.
e. In relation to fund received from MCC, we ensured that all funding received by from MCC
was appropriately recorded in the accounting books and records. Also document in the
working papers that the records were periodically reconciled with information provided by
MCC.
f. We reviewed direct salary charges to determine whether salary rates are in accordance
with those approved by MCC, when such approval is required, and supported by
appropriate payroll records. We determined if overtime was charged to the program and
whether it is allowable under the terms of the Compact and related agreements. We
determined whether allowances and fringe benefits received by employees were in
accordance with the Agreements and Applicable Laws and Regulations.
g. We reviewed travel and transportation charges to determine whether they are adequately
supported and approved. Travel charges that are not supported with adequate
documentation or not in accordance with the Compact., We determined whether the
international travel was approved with written documentation and in accordance with the
approved budgets and work plans.
h. We reviewed commodities (e.g., supplies, materials, vehicles, equipment, food products,
etc.) procured by MCA-Honduras. We determined: (a) If the commodities are accounted
for, (b) If control procedures exist and have been place in operation to adequately
safeguard the commodities and whether the commodities have been used for their
intended purposes in accordance with the agreements.
7
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
i. We review the most important construction contracts, technical assistance, consulting
and other services, and we made inquiries to ensure that contractors and suppliers exist,
the expenditures were properly recorded, and services and construction were received
on time. Additionally, we carried out field visits to verify that goods and services have
been provided to the final beneficiaries.
j. We reviewed the Common Payment System (CPS) to ensure that the invoices presented
for payment are eligible by ensuring the checking procedures are in accordance with the
Millennium Challenge Account (MCA) Fiscal Accountability Plan (FAP) and the payments
are made correctly and recorded as funds received in the accounting records of the
Millennium Challenge Accounts (MCA). We obtained the payment ledger via CPS and
payment detail reports to the audit period and proceed and we audited procedures
necessary to ensure that the CPS is working according to the request.
Scope Limitations
During the course of our financial audit of the Millennium Challenge Corporation (MCC) Resource
managed by Millennium Challenge Account – Honduras (MCA - Honduras), under the Compact
Agreement between the Millennium Challenge Corporation (MCC) representing the U.S.
Government, and the Government of Honduras for the period from July 1, 2009 to December 31,
2009, there were no limitations on the scope of our work.
IV. SUMMARY OF AUDIT RESULTS
Audit Findings on the Fund Accountability Statement for the Period
In our opinion, the Fund Accountability Statement of Millennium Challenge Corporation (MCC)
resources, managed by the Millennium Challenge Account Honduras (MCA Honduras), presents
fairly, in all material respects, the program’s revenues, costs incurred and reimbursed, for the
period from July 1, 2009 to December 31, 2009 in accordance with the terms of the Agreement
and in conformity with the basis of accounting described in Note 2 to the Fund Accountability
Statement.
The results of our tests do not disclosed any finding on the Fund Accountability Statemen for the
period.
Audit Findings on Internal Control
In planning and performing our audit, we considered the internal control of MCA - Honduras
related to the Program in order to determine our auditing procedures for the purpose of
expressing our opinion on the Fund Accountability Statement and not to provide an opinion on the
internal control.
The results of our review disclosed no material weaknesses in internal control that must be
included in this report. However, we identified a deficiency in internal control that was included in
the schedule of internal control findings.
Audit Findings on Compliance with Agreement Terms and Applicable Laws and
Regulations
As part of obtaining reasonable assurance about whether the Fund Accountability Statement is
free of material misstatement, we performed tests of compliance with certain provisions of
agreement terms and laws and regulations. The results of our tests do not disclosed the any
material instance of noncompliance that must be reported in accordance with U.S. Government
Auditing Standards issued by the Comptroller General.
8
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
The results of our tests do not disclose any finding on Compliance with Agreement Terms and
Applicable Laws and Regulations.
Audit Findings on the Common Payment System
As part of obtaining reasonable assurance about whether the Fund Accountability Statement is
free of material misstatement, we performed test to ensure that the invoices presented for
payment are eligible by ensuring the checking procedures are in accordance with the Millennium
Challenge Account (MCA) Fiscal Accountability Plan (FAP) and the payments are made correctly
and recorded as funds received in the accounting records of the Millennium Challenge Accounts
(MCA).
The results of our tests do not disclose any finding.
9
Independent Auditor’s Report on the Fund Accountability Statement
To the Board of Directors of
MCA - Honduras
Tegucigalpa, M. D. C.
We have audited the Fund Accountability Statement of Millennium Challenge Corporation (MCC)
resources, managed by Millennium Challenge Account - Honduras (MCA-Honduras), under the
Compact Agreement between the Millennium Challenge Corporation (MCC), and the Government of
the Republic of Honduras, for the period from July 1, 2009 to December 31, 2009. The Fund
Accountability Statement is the responsibility of the management of the Millennium Challenge Account
Honduras (MCA – Honduras). Our responsibility is to express an opinion on the Fund Accountability
Statement based on our audit.
Except as discussed in the following paragraphs, we conducted our audit of the Fund Accountability
Statement in accordance with U.S. Government Auditing Standards issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Fund Accountability Statement is free of material misstatements. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
Fund Accountability Statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
We did not have an external quality control review by an unaffiliated audit organization as required by
Chapter 3 paragraph 3,55 of the U.S. Government Auditing Standards, since no such program is
offered by professional organizations in Honduras. We believe that the effect of this departure from the
U. S. Government Auditing Standards is not material because we participate in the
PricewaterhouseCoopers worldwide internal quality control review program, which requires our office
to be subjected, at least every year, to an extensive quality control review by partners and managers
from other affiliates PricewaterhouseCoopers offices.
In our opinion, the Fund Accountability Statement referred to above presents fairly, in all material
respects, program revenues, costs incurred and reimbursed for the period from July 1, 2009 to
December 31, 2009, in accordance with the terms of the Agreement and in conformity with the basis of
accounting described in Note 2.
In accordance with U. S. Government Auditing Standards, we have also issued our report dated
September 28, 2010, on our consideration of MCA-Honduras’ internal control over financial reporting
and our tests of its compliance with certain provisions of laws and regulations. Those reports are an
integral part of an audit performed in accordance with U. S. Government Auditing Standards and
should be read in conjunction with this Independent Auditor’s Report in considering the results of our
audit.
10
This report is intended for the information of Millennium Challenge Account (MCA-Honduras) and
MCC. However, upon release by MCC, this report is a matter of public record and its distribution is not
limited.
PricewaterhouseCoopers – Honduras
September 28, 2010
11
Financial Audit of the Millennium Challenge Corporations (MCC) Resources Managed by Millennium
Challenge Account – Honduras (MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
Fund Accountability Statement
For the Period From July 1, 2009 to December 31, 2009
(expressed in U.S. dollars) Budget Total Actual to Accum ulated
Modificated of Accum ulated July 1, 2009 to Decem ber Questioned Costs
Program Not Audited June 30, 2009 Decem ber 31, 2009 31, 2009 Innelegible Unsupported Notes
Revenues
MCC agreement $ 205,000,000 $ 80,177,339 $ 50,925,416 $ 131,102,755 $ - $ - Note 4
Bank interest - 27,313 - 27,313 - - Note 5
Bank interest returned to MCC - (27,313) - (27,313) - - Note 5
Other revenues - 18,092 - 18,092 - -
Counterpart contribution - 479,767 9,679 489,446 Note 6
Counterpart contribution devolution - - (79,530) (79,530) - - Note 6
Total revenues $ 205,000,000 $ 80,675,198 $ 50,855,565 $ 131,530,763 $ - $ -
Less: Costs incurred
1. Rural Development Project
a) Training and development of farmers $ 26,569,000 $ 16,287,633 $ 4,710,960 $ 20,998,593 $ - $ -
b) Access to credit for farmers 11,885,832 9,094,954 994,735 10,089,689 - -
c) Roads from farms to markets 19,197,251 1,589,286 5,643,873 7,233,159 - -
d) Subsidized public farm property agencies 8,805,600 4,739,192 2,150,585 6,889,777 - -
2. Transportation Project
a) CA - 5 highw ay 89,597,649 30,074,424 24,224,662 54,299,086 - -
b) Secondary roads 28,318,116 8,705,303 10,741,174 19,446,477 - -
c) Weight control system 97,217 46,177 21,916 68,093 - -
d) Project administration 2,524,260 2,524,260 - 2,524,260 - -
- -
3. Evaluating and monitoring 4,983,000 1,863,690 672,197 2,535,887 - -
4. Administration and control Program
a) Administration of Programs 12,088,772 5,158,387 1,784,857 6,943,244 - -
b) Audits 933,303 42,692 - 42,692 - -
Total costs incurred $ 205,000,000 $ 80,125,998 $ 50,944,959 $ 131,070,957 $ - $ - Note 7
Outstanding fund balance $ - $ 549,200 $ (89,394) $ 459,806 $ - $ - Note 8
The accompanying notes are an integral part of this fund accountability statement.
12
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
Notes to the Fund Accountability Statement
1. Background
On June 13, 2005, the United States Government, acting through Millennium Challenge
Corporation (MCC), entered into an Agreement with the Government of Honduras to implement a
program proposed by the Honduran Government to achieve sustained economic growth and
reduction of poverty. Under the Agreement, the Government of Honduras has established MCA-
Honduras as the entity responsible for managing the implementation of agreed activities.
MCC financing is for US$215 million, available over a period of five years from September 29,
2005, when the contract takes effect, until September 28, 2010, will be used for a rural
development project, a transportation project, an administration and control program, and
monitoring and evaluation.
Under the rural development project, MCC will finance the training of farmers in the production
and marketing of high-value vegetables, provide farmers with access to credit (through technical
assistance to financial institutions and loans), build and rehabilitate secondary roads, and provide
grants for purposes such as research, infrastructure (for example, irrigation systems, electricity
distribution lines, cold storage and packing facilities), and pest and disease control measures.
Under the transportation project, MCC will finance the improvement of a 50-kilometer section of
the CA-5 Highway between Taulabé and Comayagua (northern segment) and a 59-kilometer
section of the CA-5 - Highway between Villa de San Antonio and Tegucigalpa (southern
segment), the paving of 91 kilometers of secondary roads, and the establishment of vehicle
weight controls, including eight vehicle weight control stations and the related weight-control
equipment. However, in October 16, 2009 the Government of the United States made a reduction
of the budget of MCA and reduced the transportation component project and establishment of
vehicle weight controls.
MCA - Honduras consists of a Board of Directors and a Project Management Unit (PMU). MCA -
Honduras will follow the Honduran Organic Budget Law and the Honduran Budget Execution Law
with certain exceptions to be documented in a fiscal accountability plan. The PMU is responsible
for all procurements related to the Rural Development Project, Program Monitoring and
Evaluation and Administration. An external project manager is responsible for the procurements
related to the Transportation Project. The project managers and the project management unit
approve payments to suppliers but funds are disbursed by the Ministry of Finance which serve as
a fiscal agent and has have exclusive access to the bank accounts used to manage MCC funds.
Since the second semester of 2008, the procedure of payments through the CPS (Common
Payment System) was used, which consists that MCA - Honduras sends to MCC, the detail of the
payments to be done in a subsequent specific period, and MCC disburses the funds according to
the requirements of payment in a gradual form (see Note 4).
2. Summary of Accounting Policies
The principal accounting policies and practices adopted by MCA-Honduras for the Program are
summarized as follows on the next page:
13
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
Notes to the Fund Accountability Statement
Basis of Accounting
The Fund Accountability Statement reflects transactions related to MCC funds managed by MCA-
Honduras under the Millennium Challenge Agreement, for the period from July 1, 2009 to
December 31, 2009, and was prepared on the cash basis of accounting, which is a
comprehensive basis of accounting other than generally accepted accounting principles. On this
basis, revenue is recognized when received rather than when earned, and expenses are
recognized when paid rather than when incurred.
3. Monetary Unit and Exchange Rate
The Program’s records are maintained in lempiras, the official currency of Honduras. As of
December 31, 2009, the buying and selling rates of the lempira in relation to the U.S. dollar in the
interbank market were L18.8951 and L19.0285 to US$1.00, respectively. In the preparation of the
Fund Accountability Statement in U.S. dollars, MCA-Honduras converted income and expenses
in lempiras at the buying rates effective during the audit period, which was L18.8951 to US$1.00.
4. MCC Agreement Revenues
The Program’s revenues, for the period from July 1, 2009 to December 31, 2009 are presented
as follows:
(expressed in U.S. dollars)
Cooperative Agreement - MCC
Common payable systems made in the period
110 a 122 July 2009 $ 6,573,328
123 a 128 August 2009 4,767,903
129 a 145 September 2009 16,565,943
146 a 158 October 2009 2,452,110
159 a 170 November 2009 6,277,308
171 a 186 December 2009 14,288,824
Total common payable systems for the period
from July 1, 2009 to December 31, 2009 $ 50,925,416
The difference between revenue received by MCC and total revenue recorded on the Fund
Accountability Statement are shown on the following Note 6.
5. Bank Interest Returned to MCC
During the first semester of 2009, the interest-bearing bank account was canceled, and from
January 2009 the payments are deposited directly in Banco Central de Honduras accounts, which
do not generate interest.
6. Counterpart Contribution
It corresponds to cash contributions made by the municipal mayors to which secondary roads are
being repaired. These contributions are made based on the signed Agreements with the mayors,
which amount to $489,446 as of December 31, 2009; of which $9,679 correspond to additions
14
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
Notes to the Fund Accountability Statement
done on the period of six months from July 1, 2009 to December 31, 2009. Additionally, during
the period of six months from July 1, 2009 to December 31, 2009 devolutions were done to some
mayors by reduction on the original budget which affects the programmed execution.
7. Costs Incurred
Details of costs incurred per expense category for the period from July 1, 2009 to December 31,
2009 are presented as follows:
(expressed in U.S. dollars)
Rural Development Project $ 13,500,153
Farmer training and development $ 4,710,960
Farmer access to credit 994,735
Roads from farms to markets 5,643,873
Subsidized agencias 2,150,585
Transport project 34,987,752
CA - 5 highway $ 24,224,662
Secondary roads 10,741,174
Weight control system 21,916
Monitoring and Evaluation 672,197
Program administration and control 1,784,857
Total cost for administration program $ 50,944,959
8. Outstanding Fund Balances
The excess of income over costs incurred shown in the “accumulated” column is presented as
follows:
(expressed in U.S. dollars)
Cash in Bank s
Account Nº XXXX5990 with the Central Bank of Honduras $ 4,629
Account Nº XXXX618 -1 with the Central Bank of Honduras 770
Account Nº XXXX451-1 with the Central Bank of Honduras 28,920
Account Nº XXXX464-1 with the Central Bank of Honduras 1,108
Counterpart contributions 409,916
Total cash in banks 445,343
Account receivable
Rental security deposit 13,784
Other guarantee deposits 864
Gain/loss exchange rate (186)
Total excess of income over costs incurred $ 459,806
15
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
Notes to the Fund Accountability Statement
9. Trust Fund
On December 6, 2007, MCA Honduras and BAC-BAMER signed a trust fund agreement for the
management of the Agricultural Credit Access Trust Fund, the purpose of which is to acquire
administrative services to facilitate access to agricultural credit and to obtain resource liquidation
services for the entire Program at the conclusion of the agreement signed by the Government of
Honduras and MCC (September 2010). The fiduciary (trustee) bank is responsible for selecting
eligible financial institutions, including banks and second-tier institutions, which in turn will lend to
regulated and non-regulated financial institutions for the channelization of funds to farmers
participating in the Farmer Training and Development Program (EDA), who constitute the final
objective and clients of the credit line. MCA-Honduras will provide the fiduciary (trustee) bank with
a list of the Program’s farmers and the bank will give this list to the intermediaries that will
ultimately decide which farmers will have access to credit. BAC is a manager of the funds and will
not assume any credit risk for them; however, disbursements made to intermediaries will be
reimbursed by the latter, regardless of whether or not the farmers pay, that is, the financial
intermediaries will absorb 100% of the credit risk. Nevertheless, BAC and MCA-Honduras will
provide permanent follow up and monitoring on the end use of the funds by making periodic field
visits.
The amount of the trust fund will be returned to MCA-Honduras at the expiration of the agreement
and the management of MCA-Honduras is currently taking steps with MCC to determine the final
end of the funds once the Program concludes.
The trust fund began operating in January 2009 from July 1, 2008 until June 30, 2009, a total of
$6,000,000 had been granted to the fiduciary (trustee) bank. During the period of six months
ended as of December 31, 2009, it has not been granted additional funds to the trust.
16
Independent Auditor’s Report on Internal Control for MCA - Honduras
To the Board of Directors of
MCA - Honduras
Tegucigalpa, M. D. C.
We have audited the Fund Accountability Statement of Millennium Challenge Corporation (MCC)
resources, managed by Millennium Challenge Account - Honduras (MCA - Honduras), for the period
from July 1, 2009 to December 31, 2009; and have issued our report on it dated September 28, 2010.
Except for not conducting an external quality control review by an unaffiliated audit organization as
required by Chapter 3 paragraph 3,55 of the U.S. Government Auditing Standards, since no such
program is offered by professional organizations in Honduras. (as described in our report on the fund
accountability statement), we conducted our audit in accordance with U.S. Government Auditing
Standards issued by the Comptroller General of the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the Fund Accountability
Statement is free of material misstatement.
The management or those charged with governance of MCA-Honduras is responsible for establishing
and maintaining internal control. In fulfilling this responsibility, estimates and judgments by
management are required to assess the expected benefits and related costs of internal control policies
and procedures. The objectives of internal control are to provide management with reasonable, but not
absolute, assurance that the assets are safeguarded against loss from unauthorized use or
disposition; transactions are executed in accordance with management's authorization and in
accordance with the terms of the Agreements; and transactions are recorded properly to permit the
preparation of the Fund Accountability Statement in conformity with the basis of accounting described
in Note 2 to the Fund Accountability Statement. Because of inherent limitations in internal control,
errors or fraud may nevertheless occur and not be detected. Also, projection of any evaluation of the
structure to future periods is subject to the risk that procedures may become inadequate because of
changes in conditions or that the effectiveness of the design and operation of policies and procedures
may deteriorate.
In planning and performing our audit of the Fund Accountability Statement of MCA - Honduras, for the
period from July 1, 2009 to December 31, 2009 in accordance with U.S. Government Auditing
Standards, we considered MCA-Honduras internal control over financial reporting (internal control) as
a basis for designing our auditing procedures for the purpose of expressing our opinion on the Fund
Accountability Statement, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. Accordingly, we do not express an opinion on the effectiveness of the entity’s
internal control.
17
Our consideration of internal control was for the limited purpose described in the preceding paragraph
and would not necessarily identify all deficiencies in internal control that might be significant
deficiencies or material weaknesses. However, as discussed below, we identified a deficiency in
internal control that we consider to be a significant deficiency.
A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less
severe than a material weakness, yet important enough to merit attention by those charged with
governance. We consider the following deficiency to be a significant deficiency in internal control:
The cancelled invoices paid by MCA – Honduras are not stamped “Paid”, and thus do not clearly
reflect that the payments have been made to suppliers.
A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there
is a reasonable possibility that a material misstatement of the entity’s Fund Accountability Statement
will not be prevented, or detected and corrected on timely basis. We did not identify any deficiency in
internal control that we consider to be material weaknesses, as defined above.
This report is intended for the information of Millennium Challenge Account Honduras
(MCA - Honduras), and the Millennium Challenge Corporations (MCC). However, upon release by
MCC, this report is a matter of public record and its distribution is not limited.
PricewaterhouseCoopers - Honduras
September 28, 2010
18
Financial Audit of the Millennium Challenge Corporations (MCC)
Resources Managed by Millennium Challenger Account – Honduras
(MCA – Honduras), Under the Compact Agreement between the
Millennium Challenge Corporation (MCC), and the Government of the
Republic of Honduras
Schedule of Findings
For the Period From July 1, 2009 to December 31, 2009
The cancelled invoices paid by MCA – Honduras are not stamped “Paid”, and thus do not clearly
reflect that the payment have been made to suppliers.
Condition
On reviewing the payments made in the different investment categories, we observed that even though
documentation of support is enough and complete, MCA invoices does not have “Paid” stamp is an
internal control issue. It may result in invoices mistakenly paid for the second time. The “Paid” stamp on
the invoices when paid to suppliers could mitigate the risk of overpayment or duplicate payment
Criteria
Management must implement a control measure whereby invoices that have been paid are cancelled with
a “Paid” stamp, for the purpose of improving the Program’s internal control.
Cause
Management does not perform the “Paid” stamp because it is not included among the policies and
procedures established.
Effect
Paid invoices could be used again to procure payments and duplicate the expenses of the Program.
Recommendation
Management must implement the procedures of the “Paid” stamp to all paid invoices, in order to prevent
the supporting documentation of payments from being used again and on this way improve the Program’s
internal control. The accounting software should flag duplicate invoices number to show the duplicated
invoice numbers.
Management Comments
The “Paid” stamp has not been done, since it is not a procedure included among the policies and
procedures established at MCA – Honduras. However, MCA-Honduras will consider the auditor's
recommendation and will stamp the "Paid" seal to the invoices since January 1, 2010, due to the period
from July 1, 2009 to December 31, 2009 is currently being audited.
19
Independent Auditor’s Report on Compliance with Laws and Regulations
and Compact Agremeents for MCA - Honduras
To the Board of Directors of
MCA - Honduras
Tegucigalpa, M. D. C.
We have audited the Fund Accountability Statement of Millennium Challenge Corporation (MCC)
resources, managed by Millennium Challenge Account-Honduras (MCA-Honduras), for the period from
July 1, 2009 to December 31, 2009, and have issued our report on it dated September 28, 2010.
Except for not conducting an external quality control review by an unaffiliated audit organization as
required by Chapter 3 paragraph 3,55 of the U.S. Government Auditing Standards, since no such
program is offered by professional organizations in Honduras. (as described in our report on the fund
accountability statement) , we conducted our audit in accordance with U.S. Government Auditing
Standards issued by the Comptroller General of the United States. Those Standards require that we
plan and perform the audit to obtain reasonable assurance about whether the fund accountability
statements is free of material misstatement resulting from violations of agreement terms and laws and
regulations that have a direct and material effect on the determination of the Fund Accountability
Statement amounts.
Compliance with agreement terms and laws and regulations applicable to MCA-Honduras is the
responsibility of MCA-Honduras’s management. As part of obtaining reasonable assurance about
whether the Fund Accountability Statement is free of material misstatement, we performed tests of
MCA-Honduras’s compliance with certain provisions of agreement terms and laws and regulations.
However, our objective was not to provide an opinion on overall compliance with such provisions.
Accordingly, we do not express such an opinion.
The results of our tests disclosed no instances of noncompliance that are required to be reported here
under U.S. Government Auditing Standards.
This report is intended for the information of Millennium Challenge Account Honduras
(MCA - Honduras), the Millennium Challenge Corporations (MCC). However, upon release MCC, this
report is a matter of public record and its distribution is not limited.
PricewaterhouseCoopers - Honduras
September 28, 2010
20