The Reports Consolidation Act of 2000 requires that the Department's Performance and Accountability Report include a statement by the Inspector General that summarizes the most serious management and performance challenges facing the Department and briefly assesses the progress in addressing those challenges. The Office of Inspector General (OIG) considers the most serious management and performance challenges to the Department to be in the following areas:

• Protection of People and Facilities
• Information Security
• Financial Management
• Human Resources
• Counterterrorism and Border Security
• Public Diplomacy
• Post-Conflict Stabilization and Reconstruction

The first five challenges previously appeared on OIG's list. The last two challenges, Public Diplomacy and Post-Conflict Stabilization and Reconstruction, recently were added. OIG has removed from this year's list Strategic and Performance Planning in recognition of the Department's considerable progress in addressing that challenge.

Protection of People and Facilities

The protection of people and facilities is fundamental and continues to be one of the Department's highest priorities. A number of issues arose during OIG reviews indicating that such protection remains a management and performance challenge. While security at all posts abroad has improved since the bombings of the Embassies in Nairobi and Dar es Salaam in 1998, many posts, e.g., still do not meet essential security standards for setback and blast protection.

OIG's inspections of the security programs at 25 overseas missions identified substantial progress by the Department in addressing this challenge. The majority of the findings and recommendations from these reviews were in the areas of physical security and emergency preparedness. A common finding was that posts needed to expand their Intrusion Detection Notification Systems to increase their ability to react to a terrorist attack. OIG also found room for improvement in emergency action plans, emergency preparedness, and emergency drills.

OIG's review of contractual agreements for a compound security upgrade construction project led to more than $3 million being deobligated from the current contract and reprogrammed for immediate use to fund other, high-priority security construction projects. OIG's report recommended options to restart the construction project as a partnership between OBO and the post in order to enhance the security posture at facilities located at this high-threat location.

In a procurement audit review, OIG recommended improved communication between the Bureau of Overseas Buildings Operations (OBO) and posts in the early stages of planning to prevent problems during construction. In response to an OIG review of compound perimeter lighting standards for security upgrade projects, OBO created a condensed version of guidelines for site lighting to assist regional security officers at all worldwide locations.

Based upon an OIG investigation, it was found that the Department was unaware that official certification standards for forced entry, ballistic resistant structural systems were posted on an approved vendor website on the Internet, thus potentially providing information to entities seeking to harm U.S. facilities abroad. Once aware, the Department took steps to ensure this material was removed from the Internet.

Information Security

The Department's information security program and practices continue to evolve. The Department recognizes that more must be done to develop fully and ensure the continuity of its information systems security program, and OIG considers information security to be a continuing management and performance challenge.

As mandated by the Federal Information Security Management Act of 2002 (FISMA), OIG conducted its annual evaluation of the Department's information security program and noted several improvements over last year's evaluation. The Department is in the process of upgrading the information technology application baseline to strengthen the connections between enterprise architecture, e-Authentication, privacy, systems authorization, the plan-of-action-and-milestones process, and the capital planning process. Additionally, to identify the number of contractor services or facilities performing work for the Department using their own systems or connecting to Department networks, the Department has initiated a project to be completed within the next three years. The separation of the cyber security roles and responsibilities continues to affect the Department's information security program and continues to be a work-in-progress. Implementation of information security at overseas posts and domestic bureaus continues to require Department attention. OIG observed problems with information system security officer duties, patch management, contingency planning, and inappropriate use at many of the sites visited.

OIG conducted the congressionally mandated review of the protection of classified information at Department headquarters and also reviewed the Department's compliance with Director of Central Intelligence Directives regarding the storage and handling of sensitive compartmented information (SCI) and removing access of employees no longer requiring it. During the review, OIG found that the Department generally met the requirements of the directives for personnel and information security, but found that opportunities existed to improve security program management.

Financial Management

OIG believes that financial management remains a management and performance challenge. The Department has made great strides in financial management in recent years and last year received an eighth consecutive unqualified opinion as a result of the audit of the FY 2004 principal financial statements. In August 2005, however, OIG became aware of a potentially material understatement of assets that could affect the Department's previously issued FY 2004 financial statements. Based on preliminary information, a significant amount of spare parts and aircraft were not included in the FY 2004 statements.

Once these issues were identified, the Department notified appropriate officials that the FY 2004 financial statements and the related report by an independent public accountant (IPA) should no longer be relied upon. The Department quickly developed a plan to resolve this matter. In addition to the issues related to personal property, the IPA's report on the audit of the Department's FY 2004 financial statements identified concerns consistent with previous years regarding information systems security, the adequacy of the Department's financial systems, undelivered orders, and managerial cost accounting.

During its audit of the FY 2005 financial statements, the IPA noted other concerns related to personal property, including inadequate controls over recording items in a timely manner, reporting the full cost of personal property improvements (eg. armoring of vehicles), and tracking items maintained by contractors, which also could have had an impact on the FY 2004 financial statements.

While the Department has improved its management of undelivered orders, and has established a database to track them, the balance of such orders is high and has grown over the past few years. For instance, undelivered orders increased from over $6.4 billion at the end of FY 2003 to $7 billion at the end of FY 2004. During the FY 2004 audit, the IPA estimated that at least $524 million should have been de-obligated. The Department has initiatives underway that it believes will improve the management and oversight of obligations.

The Department provides Federal financial assistance through a variety of instruments including grants, cooperative agreements, loans, and certain types of contributions, which is projected to exceed $5 billion in fiscal year 2005. However, the Department lacks comprehensive and reliable information on Federal financial assistance. This is due, in part, to the Department's use of non-standardized policies and procedures and disparate tracking systems. Another contributing factor is the decentralized manner in which Federal financial assistance is managed in the Department (i.e., no one office is responsible for managing, and no one existing system is capable of capturing, data essential for overseeing, administering, managing, and reporting Department-wide Federal financial assistance). In 2005, the Department established a Department-wide steering committee to oversee and coordinate all aspects (e.g., awarding, monitoring, and closure) of State's Federal financial assistance. In addition, the Department is standardizing Federal financial assistance policies and procedures for use throughout the Department and implementing a financial management system that meets the government-wide Federal financial assistance requirements and managerial demands of the Department.

OIG conducted several investigations involving financial matters affecting different areas of the Department. For example, a private company under contract to OBO double billed the Department for equipment costs which occurred when the company developed a new inventory tracking form after OBO changed the contract terms from a time-and-materials to firm-fixed-price procurement. The company fully cooperated with the investigation, took appropriate administrative actions, reduced its equipment prices and refunded $44,000 to OBO. Additionally, OBO took steps to ensure that proper internal management controls were in place to prevent similar problems in the future.

Human Resources

The Department's goal is to have a high-performing, well-trained and diverse workforce aligned with mission requirements. Rightsizing has been an element of the President's Management Agenda since 2001. In FY 2004, responding to a congressional mandate, the Department established the Office of Rightsizing (M/R) to serve as the focal point for the Department's role in the OMB-led President's Management Agenda initiative to rationalize the federal government's overseas presence. A number of Department initiatives related to rightsizing are underway, including M/R rightsizing reviews, a regionalization working group, State-USAID Joint Management Council efforts, and staffing incentives for hard-to-fill overseas positions. Nevertheless, rightsizing and other issues broadly related to human resources continue to be a management and performance challenge.

OIG in its inspections has focused on the Department's progress in rightsizing, including regionalization and consolidation, of overseas missions and domestic bureaus. Overall, OIG found that the Department has made positive but limited progress to address rightsizing issues. The most recent OMB scorecard gives the Department a green light in assessing State's progress towards key rightsizing milestones, and OIG concurs.

OIG found numerous untapped regionalization opportunities overseas that could reduce costs and security vulnerabilities or improve operations. In Bandar Seri Begawan, for example, OIG found that most administrative functions (as well as nonimmigrant visa services, due to unique circumstances in Brunei) could be provided more securely and more effectively from a regional center.

Redundant administrative structures continue to exist overseas and in Washington. OIG recommended that Embassy Paris and the U.S. Missions to the Organization for Economic Cooperation and Development and the United Nations Educational, Scientific, and Cultural Organization share a joint management structure. OIG also recommended that a number of like functions be consolidated in Frankfurt, including functions in the Vienna Regional Program Office, Paris Financial Support and Training Office, and Embassy Berlin, and identified duplicate administrative support structures in Amman, Paris, Gaborone, Harare, and Lilongwe.

Domestically, OIG found that unclear lines of authority, uneven workload, and unproductive competition impeded performance of the Bureaus of Arms Control, Nonproliferation, and Verification and Compliance. Following OIG's recommendation, the Department is consolidating the first two bureaus and restructuring the third.

OIG also found that in particular cases regional center growth had not been planned or managed effectively. During inspections of some of the Department's largest regional centers, including those in Thailand, Germany, and South Africa, it was found that in some cases growth occurred in a piecemeal fashion and strained existing resources and structures. These reports also cited weaknesses in managing regional center growth due to the inherent difficulty in hosting regional support services and the complexity of dealing with such growth in other agencies.

Counterterrorism and Border Security

The Department continues to play a central role in combating international terrorism, including efforts to stop terrorists before they reach our shores. Posts abroad are encouraged to maintain vigilance in identifying, reporting on, and denying documentation to persons engaged or likely to engage in terrorist activity or in support for such activity. High priority is also given to enlisting the cooperation of host governments in implementing joint counterterrorism initiatives. Counterterrorism and border security are of critical importance and remain a management and performance challenge for the Department.

During inspections of 25 embassies and 10 constituent posts over the past year, OIG found that coordinated interagency efforts to identify and report on international terrorist activities are working well. However, this coordination was found to be more difficult to achieve at those small posts where other-agency representatives working on counterterrorism were based at other posts in the region. At those larger posts where counterterrorism is a major activity, the organizational structure of the American staff appears well suited to the operation.

OIG conducted two management reviews of the Department's visa function: one on the standards used for refusing visa applicants suspected of terrorist or other harmful intent in visiting the United States; and another on management of post visa referral programs. In the former review, OIG found that adjudication officers were generally aware of the possibility of applying a particular section of the law in those cases where they believe the intent of the applicant may involve activities deemed harmful to the U.S. in terms of national security. In the latter review, OIG found that over 95 percent of visa officers responding said they were fully supported by senior management in their visa decisions and not subject to any pressure to approve visa issuance. In a separate review of the Department's visa and passport fraud prevention programs, OIG found that the joint program of the bureaus of Consular Affairs and Diplomatic Security to establish DS special investigator positions at 25 of the most fraud-prone posts is proving to be successful in countering visa fraud and corruption. OIG has recommended that this new program be expanded as funding permits. In FY 2005, OIG testified twice before congressional committees concerning inspections of U.S. border security.

OIG established the "Passport Sentinel" identity theft initiative to determine if individuals have fraudulently obtained U.S. passports through the use of false identities and to identify and address weaknesses in the passport issuance system. Close interagency cooperation through the Passport Sentinel Alliance now ensures a comprehensive law enforcement approach and addresses systemic aspects relating to the subversion of the nation's passport system by individuals, terrorists, and domestic/transnational criminal organizations.

Public Diplomacy

The Department, as a strategic goal, aims to increase understanding for American values, policies, and initiatives to create a receptive international environment. The Under Secretary for Public Diplomacy and Public Affairs has made clear the importance and urgency of this goal. Given the work yet to be done, OIG now views public diplomacy as a management and performance challenge for the Department.

In order to realize its vision, the Department needs to make progress on the public diplomacy agenda in three major areas: coordination of public diplomacy; perceptions in the Muslim World; and performance measurement.

With regard to the coordination of public diplomacy, OIG reports have identified a mixed picture regarding coordination within missions abroad and a complex system of lines of authority weaving together public diplomacy resources within the Department in Washington. In both the field and in Washington, there is a need to include public diplomacy officers more effectively in the early stages of all policy development and implementation.

Independent surveys such as the Pew Global Attitudes Project, audience research by the Broadcasting Board of Governors, and work by the Office of Research all paint the picture of a tough audience in the Muslim World to which the Department must play in order to generate greater understanding of U.S. policy as well as recognition of the non-threatening U.S. goals of mutual understanding, regional stability, and the promotion of democracy and human rights.

The conventional wisdom is that the impact or results of public diplomacy efforts and activities cannot be easily measured. However, this does not negate the Department's need for better, objective information so that it can consider carefully where to apply resources and how to evaluate the results that can be expected.

The Bureau of Educational and Cultural Affairs (ECA) reported to the Management Control Steering Committee, as a material weakness, the Department's inability to monitor compliance or abuse by designated sponsors of exchange visitors within existing regulations, policies and procedures. The Office of Inspector General worked with ECA and other bureaus to develop a plan for ECA to provide effective oversight of the sponsors and their programs. In addition, the Office of Inspector General took the initiative to create a law enforcement subcommittee to develop practical and effective methods to vet sponsors to ensure they are not associated with criminal or terrorist elements. When implemented this will strengthen the Department's ability to ensure the integrity of the J-Visa program and add another link to the protection of the U.S. borders.

Post-Conflict Stabilization and Reconstruction

The Department views regional stability as one of its strategic goals. In the view of OIG, post-conflict stabilization and reconstruction — in Iraq, Afghanistan, and elsewhere — is now a management and performance challenge.

Operations in both Iraq and Afghanistan offer some of the greatest risks and potential rewards facing the Department. The Department's responsibilities in those locations include: managing massive economic reconstruction and development assistance packages; assisting in the development of integrated democratic systems and the rule of law; training local security forces; recruiting embassy staff; and, in Iraq, constructing the largest and most costly embassy in the world.

OIG completed with the Department of Defense OIG an Interagency Assessment of Iraqi Police Training which concluded that the police training has been a qualified success, but there were several areas that required urgent attention. Embassy Baghdad and Coalition military officials have worked to implement key recommendations including greater involvement of Iraqi officials in all aspects of training, shifting the emphasis from the numbers trained to the quality of training, and addressing issues such as the Iraqi commitment and capacity to sustain the police force being trained. An OIG audit reviewed contractor diesel fuel overcharges at the Jordan International Police Training Center (used for Iraqi police training) and resulted in reimbursements to the Department of about $685,000. An audit of demining operations identified potential savings of about $21.8 million.

As of this writing, OIG is about to release its report on Rule of Law Programs in Iraq. This should provide a valuable framework from which those numerous entities participating in rule-of-law activities in Iraq can go forward in a more integrated and effective manner.

The newly created Office of the Coordinator for Reconstruction and Stabilization in the Department is defining and implementing its mission to strengthen international capacities to address conditions in failed, failing, and post conflict states.

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