Congressional Statement of Alan Lamoreaux, Assistnt NASA Inspector General for Audits Part 1

Statement of ALAN J. LAMOREAUX

Assistant Inspector General for Audits
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

Before the HOUSE SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT, AND INTERGOVERNMENTAL RELATIONS

March 20, 2002

Mr. Chairman and Members of the Committee, thank you for the opportunity to be here today to discuss NASA financial management issues.

INTRODUCTION

NASA’s financial management system is comprised of 10 decentralized, non-integrated systems established many years ago in response to requirements, policies, procedures, and practices that have changed substantially throughout NASA’s history. The systems are not transaction-based,¹ standardized, or interfaced. Although the systems have been upgraded over the years, they remain antiquated and expensive to maintain. Data entered by Center personnel is summarized and processed to update the Center’s general ledger accounts. Subsequently, this summarized data is reported to NASA Headquarters. The financial management systems do not provide NASA management with on-line, up-to-date information designed to assist managers in making daily decisions. Each system is unique, and the cost to maintain the systems is high because each system must be evaluated and updated based on its unique capabilities. In fiscal year (FY) 2001, as it has done for the past several years, NASA management designated financial management systems as a “significant area of management concern” because these systems lack standardization and need to be modernized. NASA’s nonintegrated, decentralized financial management system is one of the primary causes for NASA’s receiving a disclaimer on its FY 2001 financial statements. The system contributes greatly to the inability of NASA managers essietermine complete and accurate costs of Agency projects and programs and to NASA’s lack of complete and accurate cost-benefit analyses.

FY 2001 FINANCIAL STATEMENT AUDIT

The NASA Office of Inspector General (OIG) is responsible for NASA’s annual financial statement audit. For the FY 2001 audit, the NASA OIG contracted with PricewaterhouseCoopers LLP, an independent certified public accounting firm. The audit must comply with generally accepted government auditing standards; Office of Management and Budget (OMB) Bulletin 01-02, “Audit Requirements for Federal Financial Statements”; and the General Accounting Office/President’s Council on Integrity and Efficiency “Financial Audit Manual,” published in July 2001. The contract required that the audit be done using a “some” controls ² reliance approach in the first 2 years for audit testing in all financial component areas. The “some” controls and Financial Audit Manual requirements were placed in the contract in response to a General Accounting Office (GAO) recommendation in its March 2001 report, “Misstatement of NASA’s Statement of Budgetary Resources.” After NASA received unqualified (clean) audit opinions ³ on its financial statements for the last 7 years, PricewaterhouseCoopers disclaimed an opinion. The disclaimer resulted primarily from NASA’s inability to provide, in a timely manner, documentary evidence to fully substantiate the accuracy and the classification of amounts reported as obligations; expenses; property, plant, and equipment; and materials.

What changed?

Sample size and methodology. For FY 2001, NASA reported obligations incurred of $14.9 billion and total program expenses of $14.9 billion. To obtain reasonable assurance about whether these large amounts were fairly stated, PricewaterhouseCoopers, in accordance with the Financial Audit Manual, selected a large statistical sample size of 268 obligations and 219 expense transactions covering 11 NASA Centers.⁴ The previous year’s auditor, Arthur Andersen, sampled 79 obligations and 84 expense transactions covering 3 NASA Centers and obtained the sample from a system ⁵ that NASA reconciled to the general ledger on a monthly basis. Each year, Arthur Andersen selected different Centers. Arthur Andersen was in the fifth year of a 5-year contract and had a different degree of cumulative audit knowledge and experience with NASA’s financial systems. In contrast, PricewaterhouseCoopers used a transaction-based sampling approach from a universe of transactions that comprised the general ledger accounts.

To statistically select a sample of obligations and expense transactions, the universe had to be established that agreed with the June 30, 2001, financial statement and general ledger amounts. To accomplish this, NASA financial managers tasked the Centers to electronically provide all transactions that made up their portions of the overall universe. The Centers were tasked at the end of August 2001 and were given a September 7 th deadline. Ultimately, it took until mid-December 2001, three and a half months later, to identify all of the Center transactions that made up the universe necessary to select the sample.

In the ensuing 6-week period through February 13, 2002, Center financial personnel were tasked to send supporting documentation for the sampled obligations and expenses. Although weekly audit status meetings ⁶ were attended by the acting Chief Financial Officer (CFO), the Inspector General (IG), and their staffs to identify backlogs and problems with acquiring documentation, as of February 13, 2002, 64 (24 percent) of 268 supporting obligation transaction documents were not received by PricewaterhouseCoopers. Of the 204 obligation documents that were received, 62 (30 percent) did not adequately support the sampled transactions. In comparison, only 4 (2 percent) of 219 expense documents were not received; however, of the 215 expense documents that were provided, 64 (30 percent) did not adequately support the sampled transactions. Because of the lack of adequate support for such a large percentage of transactions, PricewaterhouseCoopers could not conclude whether these amounts were fairly presented in the financial statements. This situation along with others that follow greatly contributed to the disclaimer.

Accounting Changes of Shuttle Components. NASA changed its accounting policy for certain assets ⁷ held by contractors and used in the Space Shuttle program, reclassifying them from depreciable property ⁸ to materials that will be expensed as they are consumed. This change was effected through the reporting of assets held by NASA’s contractors on the annual NASA Form 1018 reports. ⁹ In accordance with the new accounting policy, most Space Shuttle components would be expensed as they were used. But other components, such as engines that are typically refurbished and reused rather than consumed in a single mission, would not be expensed until they were destroyed or replaced by a new model. Thus the acquisition costs of the engines would not be attributed to the periods in which they were used. NASA believed that the total impact on the financial statement was only $22.8 million; however, the information provided by NASA did not contain sufficient documentary evidence for PricewaterhouseCoopers to determine the appropriateness or the effect of the accounting change.

Prior Period Adjustment for Launch Costs on the International Space Station (ISS). NASA increased the amount of costs capitalized to the ISS for Space Shuttle launches made during FY 2000 by $636 million. According to NASA (but not verified by PricewaterhouseCoopers) the Agency recorded two FY 2000 launches in its financial records at $411 million each based on budget figures. In FY 2001, NASA said the actual costs for the launches were $729 million each. NASA did not provide sufficient documentary evidence in support of this adjustment for PricewaterhouseCoopers to determine whether the additional amount that was capitalized fairly presents Shuttle launch costs attributable to the ISS.

Other documentation problems.

Makeup of ISS Costs. NASA capitalized approximately $5.8 billion ¹⁰ in costs for the ISS during the year ended September 30, 2001. These costs included $2.1 billion in hardware delivered to orbit, $3.0 billion in Shuttle launch costs, and $746 million in integration contract and testing, launch support, operations, and ground processing costs. NASA did not provide sufficient documentary evidence for PricewaterhouseCoopers to determine the accuracy and completeness of those capitalized costs.

Contractor-held property. NASA reported in its consolidated balance sheet approximately $4.7 billion of NASA-owned materials held by contractors. The contractors reported materials using a definition that commingled the Federal Accounting Standards Advisory Board’s definition of inventory (materials) and its definition of property, which impaired NASA’s ability to classify these assets in conformity with generally accepted accounting principles. NASA subsequently reclassified the materials as property, plant, and equipment. The information NASA provided did not contain sufficient documentary evidence for PricewaterhouseCoopers to determine how much of the reported contractor-held materials amount should have been presented as materials and how much should have been presented as property, plant, and equipment.

Communications during the audit.

Better communications should have occurred to earlier alert the most senior 8Jgement levels at both NASA and OMB of potential problems with the audit opinion. During the audit, monthly status meetings were conducted from August 6 through December 19, 2001. PricewaterhouseCoopers, the Acting CFO, the IG, and their staffs attended each meeting. When time began to run short, weekly meetings were held January 9, 16, and 23 and February 1, 6, 13, and 20. PricewaterhouseCoopers distributed score sheets at the meetings showing the NASA Centers that either did not provide documents or provided inadequate documents for the obligations, expenses, and property samples. The score sheets showed some progress, and NASA financial management officials repeatedly stated they would take the necessary steps to provide the requested documentation to PricewaterhouseCoopers.

At the November 19 th meeting, the PricewaterhouseCoopers timeline indicated that it would deliver a draft of the opinions to NASA on January 19, 2002. Throughout the audit, even though there was a delay in constructing the universe of transactions, NASA financial management officials consistently stated they would take the necessary steps to provide the requested documentation to PricewaterhouseCoopers. On February 13, 2002, PricewaterhouseCoopers indicated that because of multiple problems, including the lack/inadequacy of obligations and expenses documentation and the lack of supporting analyses and documentation for Shuttle, ISS, and contractor-held property costs, NASA would receive a disclaimer of opinion. The NASA Administrator was briefed for the first time on the same day. The next day, February 14, 2002, OMB was briefed.

Corrective actions planned.

NASA financial managers are formulating a corrective action plan that will be shared with PricewaterhouseCoopers and the OIG by the end of this month. Those accounts that affect next year’s audit, such as Shuttle, ISS, and contractor-held property and materials, must be analyzed and adequately documented by NASA and audited by PricewaterhouseCoopers to establish accurate opening balances for the FY 2002 audit. Methodologies for obtaining obligations and expense documentation must be established, and Center financial personnel must respond promptly with accurate supportable documents. In addition, to ensure that the most senior levels of NASA management are informed of progress on the FY 2002 audit, PricewaterhouseCoopers will set up a timeline that will include NASA Administrator briefings when milestones are not met or major problems are identified. Without adequate and timely resolution of these items, the FY 2002 financial statement opinion, due February 1, 2003 — 1 month sooner than in FY 2002, will be in jeopardy. With sufficient management attention, existing analyses and documentation issues should be resolved.

NASA’s INTEGRATED FINANCIAL MANAGEMENT SYSTEM

History.

OMB Circular A-127, “Financial Management Systems,” requires Federal agencies to establish and maintain a single, integrated financial management (IFM) system that complies with applicable accounting principles, standards, and related requirements as defined by OMB, the Department of the Treasury, and the Agency. Currently, NASA does not have a single, integrated financial system as required by Circular A-127, but instead, has 10 separate systems producing information that must be consolidated at Headquarters through cumbersome techniques. It currently takes enormous efforts to produce financial statements and information for NASA decision makers, the Congress, and the public.

First attempt.

NASA has been trying to implement an integrated financial system for more than 10 years but has not been successful. In 1989, OMB cited NASA’s financial accounting systems as “high risk” for not having a standardized, centralized financial accounting system. To correct that problem, the Agency began work on two major system development projects: (1) the NASA Accounting and Financial Information System (NAFIS) and (2) the Time Attendance and Labor Collection/Labor Distribution System (TALC/LD). NASA’s primary contractor, Computer Sciences Corporation, attempted to design both systems to incorporate and link the many different systems that already existed at the Centers and Headquarters using specially designed software. However, in February 1995, the NASA Chief Financial Officer terminated all work on NAFIS and TALC/LD and redirected efforts toward a new approach for an IFM information system through the purchase of Commercial-off-the-Shelf (COTS) software. NASA referred to the new project as the Integrated Financial Management Project (IFMP).

Second attempt.

In our audit, “Early Phases Of NASA’s Integrated Financial Management Project” (October 1996), we reported to NASA management that additional steps should be taken in its planning of the IFMP to ensure that the project is cost-effective and consistent with important management objectives and legal requirements, including:

• conducting functional and overall risk analyses as part of the requirements definition;
• performing and documenting a comprehensive analysis of alternatives for meeting requirements;
• modifying project plans to include several key cost issues and alternatives; and
• preparing a more realistic project schedule.

During a subsequent audit of the IFMP entitled, “Implementation of NASA’s Integrated Financial Management Project” (April 1999), we reported that KPMG would not deliver to NASA a COTS-based IFM system by July 1999.

Developmental and technical problems required further contract modification, and NASA was unable to determine the extent to which the problems would impact the delivery schedule.

NASA issued a stop work order to KPMG on March 10, 2000. At that time, NASA had already obligated $198 million on IFMP of which $10.2 million was paid to KPMG. On October 10, 2000, NASA and KPMG signed a Settlement Agreement and Mutual Release between the parties. Under the terms of the agreement, ¹¹ NASA paid KPMG $37.9 million.

Latest IFMP effort.

NASA is continuing its efforts to develop an IFM system, and we are continuing audit coverage in this area. In March 2000, NASA developed a new strategy in its third attempt to implement an integrated financial system by using lessons learned from its prior efforts and by benchmarking other successful business system implementations. The goal of the latest effort, the IFMP, is to modernize and improve the Agency’s business processes by implementing eight individual projects (or modules) in the areas of financial management, procurement, human resources, and logistics.¹² In addition, the IFMP is a prerequisite for implementation of the Agency’s full cost initiative.¹³ The latest IFMP is scheduled for completion on June 30, 2008, at a cost of $835 million.

One of the eight individual IFMP projects, the Core Financial Module,¹⁴ is being developed. This project is the backbone of the IFMP as it consists of the standard general ledger, accounts receivable, accounts payable, budget execution, purchasing, fixed assets, and cost management functions. NASA plans to fully implement the Core Financial Module Project by June 2003.

Continued in Part 2