Palau meets most Compact accountability requirements

The GAO team was in Palau in January to begin the audit and last May GAO representatives  again visited Palau for a follow-up audit.However, GAO in its report said that Palau has a limited capacity to address internal control weaknesses such as in financial reporting due lack of financial accounting resources and expertise limits Palau’s capability to address the weaknesses.The report also that the Office of the Insular Affairs (OIA) only made a single audit of Palau’s use of Compact funds.The report said because of these internal weaknesses , Palau will be unable to sustain its improvements in financial accountability and to operate a major federal program within the applicable requirements. These weaknesses put Palau at risk of being unable to sustain its improvements in financial accountability and to operate a major federal program within applicable requirements. Palau met the majority of the compact’s and related agreements’ accountability requirements, such as submitting annual reports and economic development plans. OIA and State officials, as well as officials from the government of Palau, reported that they participated in the economic consultations required by the fiscal procedures agreement but that the meetings were not held annually. Moreover, U.S. and Palau officials acknowledged that the required trust fund consultations were not held at all. According to OIA officials, OIA uses Palau’s single audit results and compact annual reports to monitor Palau’s use of compact funds but views its oversight role as limited. From 1995 to 2009, the U.S. aid to Palau is expected to exceed $852 million while compact direct assistance, providing general budgetary support for Palau’s government operations, will account for $411 million, or 48 percent of the assistance provided. Compact federal services—postal, weather, and aviation—will account for about $25 million, or 3 percent of the assistance, and compact road construction accounted for $149 million, or 17 percent of the assistance. Palau’s receipt of discretionary federal program assistance will account for another $267 million, or 31 percent of the total assistance provided. For 1995-2006, five U.S. agencies—Education, HHS, Interior, DOD, and DOT—contributed the majority of discretionary federal program assistance to Palau. The report said that Palau’s road to economic self-sufficiency will depend on four factors which are the continued U.S. assistance; availability and value of trust funds withdrawals, fiscal reform to reduce Palau’s dependence on the withdrawals and private sector growth and business environment.The report said that that the expiration of $13.3 million in the U.S. Compact direct assistance at the end of 2009 will likely cause a net decline of less than four percent in Palau’s national government revenues.The report also said that Palau will lose postal, weather and aviation services that are estimated to cost U.S. agencies almost $1.6 million in 2009.The report said that a compounded annual return of at least 8.1 percent will allow Palau to withdraw $15 million per year from its trust fund for the planned 35 years.However this could be affected by market volatility and future inflation.GAO said that Palau should improve its tax income by addressing the problem of weak administration and an inefficient income and business tax structure and reduce its expenditures through lowering the public sector wage bill.The GAO also recommended that Palau will need to improve on its business environment.It said that Palau has a restrictive foreign investment regulations and practices, “ deficient financial oversight, inadequate access to land, and an inability to attract skilled workers raise private sector costs and weaken investment incentives.” To address the internal control weaknesses, the Secretary of the Interior can direct the Office of the Insular Affairs to formally consult with the government of Palau regarding these challenges and provide technical assistance.