Congressional Statement of Alan Lamoreaux, Assistnt NASA Inspector General for Audits Part 2

On September 18, 2001, the OIG started an audit on the IFMP Core Financial Module Project. Our specific audit objectives and the status of each, based on our initial work are as follows:

Objective 1: Assess the adequacy of the procurement actions taken to acquire and implement the module. We noted no discrepancies in procurement documentation reviewed and procurement actions taken as of November 2001 that support acquisitions and implementation of the core financial module. ¹⁵ We plan no further audit work under this objective.

Objective 2: Determine whether module implementation is on target with budget and schedule expectations. As of January 2002, the core financial module was within budget and NASA met the first two major milestones. ¹⁶ At that time, nothing came to our attention to indicate that the module will not fall within budget and will not meet schedule. We plan no further audit work under this objective.

Objective 3: Determine whether the module meets Federal financial management system requirements. As a result of our initial work, we plan to perform a detailed audit to determine whether:

-The IFMP’s Core Financial and Budget Formulation Modules will properly implement NASA’s full cost initiative.

• The Core Financial Module will adequately support NASA’s preparaž€ð9 and audit of its financial statements. In considering the circumstances surrounding the recent disclaimer of opinion in the audit of NASA’s financial statements, we will determine whether the Core Financial Module will provide an adequate audit trail to support all transactions processed and ultimately support the financial statements. Additionally, we plan to determine how the system will compile the financial statements and whether this process will support the current and projected revised financial statement due dates.

We recently announced a review of the IFMP’s change management ¹⁷ plans and accomplishments. Specifically, we will determine whether NASA Centers are receiving adequate funding and support to implement the IFMP modules. Also, our Information Assurance Audit Directorate will be conducting information security and integrity-related audits at both the pre- and post-implementation phases of the IFM system project. The scopes of these audits will include the adequacy of security planning prior to the implementation of the system as well as verification of adequate security controls after implementation.

Until project completion, NASA managers will not have complete financial visibility and insight into major programs such as the ISS and Space Shuttle. In addition, until the IFMP is fully implemented, NASA will have to use cumbersome, alternative procedures to fully account for major programs. Finally, without the IFMP, NASA will incur substantial costs to maintain legacy systems that an IFM system would replace.

COST-BENEFIT ANALYSES AND COST ESTIMATING

History.

IFM systems that provide reliable and accurate full cost information serve as the basis for reliable and accurate cost estimates. For many years, NASA has faced significant financial management challenges in providing accurate cost estimates for its programs and projects. In 1996, we reported ¹⁸ that NASA had not fully established an independent program assessment function in accordance with the recommendations of the Augustine Report ¹⁹ and a 1992 GAO review. ²⁰ Specifically, NASA did not implement the Augustine Report recommendation to establish an adequately staffed Systems Concept and Analysis Group at Headquarters to serve the Administrator. NASA also did not follow GAO’s recommendations that the Agency direct the independent cost analysis group to review program estimates at all major milestones, decision points, or other significant events; strengthen the independent cost analysis staff with sufficient personnel to generate independent estimates; ensure that the cost analysis group operated independently with the results of cost reviews reported directly to the Administrator; and require that the advice on cost estimates be formally documented. We recommended that the Agency’s independent cost analysis group, the Independent Program Assessment Office 21 (IPAO), be assigned organizationally to Headquarters to ensure its independence, even if physically located at a NASA Center. Management did not agree with the recommendation. Management agreed with our recommendation to enhance staff capabilities in systems analysis and cost estimation.

Impeded steps to improvement.

In September 2000, we reported that NASA was taking steps to improve the Agency’s independent cost estimating capability by establishing a Systems Management Office 22 at each Center and by adding cost estimators to the IPAO at Langley. ²³ However, we found that NASA had not established career development plans for its cost estimators and did not have a requirement to develop independent cost estimates at all major reviews. Further, we questioned whether the Agency’s reporting and funding structures provide assurance that the cost estimates were independent in both fact and appearance. Management agreed to institute a requirement for an independent cost estimate after a program’s critical design review and agreed to improve the training of cost estimators. However, management did not agree to establish an independent funding source for either the IPAO or for Systems Management Offices.

Follow-up review.

Our September 2001 report, on a follow-up of our 1996 review, again found that the effectiveness of the IPAO could be improved by increasing the organization’s independence and enhancing its capabilities. ²⁴ In addition, criteria for delaying or canceling an independent annual review should be clarified to ensure that projects needing an independent review receive such a review. NASA also needed to strengthen the capacity of the IPAO by recruiting experienced cost analysts and estimators. Further, relocating the IPAO organizationally (not necessarily physically) to NASA Headquarters could improve its effectiveness and independence. True independence and impartiality require the IPAO to report operationally and administratively to officials that have no stake in the competition for program funding.

NASA needed to modify the recently approved Integrated Review Process to ensure that the independence and effectiveness of the program/project reviews are maintained. Management agreed with five of the report’s nine recommendations. Management disagreed with our recommendations to reassign the IPAO to Headquarters and to make improvements in the Integrated Review Process. Management was not responsive to our recommendation to establish clearly defined criteria for conducting independent reviews throughout the various phases of programs and projects. Management stated that criteria exist informally and have been used in the past.

Need for cost-benefit analyses.

The lack of credible cost estimates has prevented the preparation of reliable cost-benefit analyses so that sound decisions can be made by carefully examining alternatives that can result in expenditures of billions of dollars. For example, NASA did not perform a cost-benefit analysis as part of the decision-making process prior to awarding ²⁵ the Consolidated Space Operations Contract ²⁶ (CSOC) to ensure that the consolidation was the best approach for fulfilling space operations.²⁷ Without this analysis, NASA is not assured that the integrated operations approach will reduce the Agency-estimated $1.4 billion cost of operations over 10 years. Similarly, NASA cannot substantiate, as required, the $62 million of cost savings reported to the Congress for the first 2 years of the CSOC.²⁸ NASA based the reported cost savings on budget reductions rather than on an analysis of actual costs for work performed under the contract. As a result, the Congress and NASA cannot evaluate current cost savings for the CSOC or whether it will achieve the anticipated $1.4 billion cost savings through FY 2008. NASA faces additional challenges in its management of the CSOC. The contractor’s recent reorganization and performance issues including cost overruns, inadequate customer service and weaknesses in property management will require NASA’s careful oversight.²⁹ Management agreed with our recommendation to perform a cost-benefit analysis before exercising any CSOC contract options. However, management does not plan to report cost savings in the future because NASA based anticipated savings on a mission model that is no longer valid. Also, management did not agree with our recommendation to revise cost savings amounts previously reported to the Congress to reflect savings based on actual costs.

In addition, NASA did not perform a cost-benefit analysis ³⁰ prior to consolidation of Space Shuttle contracts under the Space Flight Operations Contract (SFOC).³¹ The NASA Associate Administrator for the Office of Space Flight directed the consolidation of Space Shuttle contracts ³² in 1995 based on recommendations of a review team³³ commissioned by the N”AAdministrator. Without a cost-benefit analysis and periodic evaluation, NASA cannot be certain it will achieve net savings from further consolidation of Space Shuttle contracts valued at about $10 billion for main engines, external tanks, and reusable solid rocket motors. Management agreed with our recommendation to perform a cost-benefit analysis before further consolidation of contracts into the SFOC.

The absence of cost estimating data has impacted outsourcing decisions.³⁴ For example, in FY 1997, NASA management decided to outsource the Agency’s desktop computing requirements.³⁵ Management made the decision based on a business case (outsourcing) analysis that concluded that desktop outsourcing could produce costs savings (about $226 million over 5 years) and other nonquantified benefits. However, NASA lacks a full cost accounting system, and many in-house desktop computing costs had to be estimated. The data the Centers used were incomplete and inconsistently compiled. Consequently, NASA made the decision to outsource its desktop computing needs without assurance that this alternative would save money. After its decision to outsource, NASA conducted additional cost analyses, but the data remained deficient.

Conclusion.

NASA financial managers are committed to providing adequate analyses and documentation that support NASA financial statement balances. PricewaterhouseCoopers is committed to working diligently with NASA managers to provide an early understanding of what is required for the FY 2002 audit. PricewaterhouseCoopers is also committed to providing to the NASA Administrator early warnings of problems that will jeopardize the the FY 2002 audit opinion. In addition, it is vital to ensure that independent program assessment officials are independent in fact and in appearance and report their results directly to the NASA Administrator. Equally important is the successful implementation of an integrated, full cost NASA financial management system that provides accurate cost data in support of major program and project decisions by NASA leaders.

References

¹ Under a transaction-based system, the general ledger is updated automatically as transactions are entered into the financial management system.

² A “some” controls reliance approach requires a more substantial level of transactions testing; internal controls are not fully relied upon to reduce testing.

³ An unqualified opinion means that the financial statements present fairly, in all material respects, the financial position of NASA for the period, its budgetary resources for the fiscal year then ended, and its net cost, changes in net position, and financing for the fiscal year ended, in conformity with accounting principles generally accepted in the United States.

⁴ The 11 Centers are NASA Headquarters, Ames Research Center, John H. Glenn Research Center, Langley Research Center, Dryden Flight Research Center, Goddard Space Flight Center, Jet Propulsion Laboratory (processed by Goddard), George C. Marshall Space Flight Center, John C. Stennis Space Center, Lyndon B. Johnson Space Center, and John F. Kennedy Space Center.

⁵ The system Arthur Andersen used was the Financial and Contractual Status system that summarized obligations and costs by fund source, unique project number, and object class type.

⁶ Weekly status meetings were held January 9, 16, and 23 and February 1, 6, 13, and 20, 2002.

⁷ These assets were valued at $1.2 billion on the financial statements.

⁸ The cost of depreciable property is “capitalized” as an asset on the financial statements. Capitalized costs benefit more than 1 year and are, therefore, expensed over multiple years rather than in a single year.

⁹ The Agency uses Form 1018, “NASA Property in the Custody of Contractors,” as the primary documentation in establishing the value of ISS property in its annual financial statements. 10 Of the $8.9 billion in total ISS costs since inception, $5.8 billion in costs occurred in FY 2001.

¹¹ The agreement was the result of an Armed Services Board of Contract Appeals Consent Judgment.

¹² The eight projects and scheduled completion dates as of February 15, 2002, are Resume Management (completed in March 2002), Position Description Management (October 2002), Travel Management (December 2002), Core Financial (June 2003), Budget Formulation (September 2003), Human Resources (July 2005), Asset Management (June 2006), and Procurement Management (June 2008).

¹³ According to NASA’s “Full Cost Initiative Agencywide Implementation Guide,” February 1999, full cost is the concept of tying all Agency costs, including civil service personnel costs, to major activities.

¹⁴ The COTS software for the Core Financial Module is supplied by SAP Public Sector and Education, Inc., of Washington D.C., under NASA contract number H 32946D with the George C. Marshall Space Flight Center.

¹⁵ We reviewed documentation supporting purchases made from Accenture LLP; PriceWaterhouseCoopers; SAP Public Sector Education, Inc.; Credit Card Solutions, Inc.; OAO Corporation; and Thomson Financial Publishing.

¹⁶ The two main milestones completed by the Core Financial Module were the formulation and design phases. The formulation phase developed system requirements, and the design phase developed a standard operating solution based on re-engineered business processes that would operate within the software’s capabilities.

¹⁷ Change Management is the process of aligning an organization’s people and culture with changes in systems, processes, structure, and/or strategy. This alignment is achieved when people are successfully compelled to accept the value of the change and to transition into their new roles and working environment.

¹⁸ The OIG issued a report on “Assessment of the Relocation of NASA Independent Program Evaluation & Assessment Activities to LaRC [Langley Research Center]” on July 8, 1996.

¹⁹ The Augustine report was issued in December 1990 as the “Report of the Advisory Committee on the Future of the U.S. Space Program.”

²⁰ GAO issued report NSIAD-93-73, “SPACE PROGAMS: NASA’s Independent Cost Estimating Capability Needs Improvement,” in November 1992.

²¹ The IPAO serves as Agency lead for the independent technical and programmatic assessment of advanced systems concepts and programs to provide Agency senior management with information needed to make sound decisions.

²² The Systems Management Office provides (1) support and independent evaluations of programs and projects for compliance with implementation of NASA guidelines; (2) leadership, consultation services, and technical expertise on system engineering processes; and (3) support in forecasting costs for advanced program and project planning initiatives. 23 The OIG issued report IG-00-045, “NASA’s Independent Cost Estimating Capability,” on September 20, 2000.

²⁴ The OIG issued report G-01-019, “Followup Review of the Independent Program Assessment Office,” on September 28, 2001.

²⁵ NASA awarded the CSOC to the Lockheed Martin Space Operations Company on September 25, 1998. The contract is valued at more than $3.6 billion and includes a 5-year base period and a 5-year option period. The CSOC consolidates 13 NASA contracts.

²⁶ The CSOC contractor will provide and manage space operations services to meet the requirements of the NASA space flight programs. The contractor will also be accountable for data transmission to the end user, data processing and storage, mission support display and control, spacecraft operations support, mission planning and analysis, and mission control center operations.

²⁷ The OIG issued report IG-00-043, “Consolidated Space Operations ContractÑCost Benefit Analysis and Award Fee Structure,” on September 30, 2000.

²⁸ The OIG issued report IG-01-029, “Consolidated Space Operations Contract: Evaluating and Reporting Cost Savings,” on August 31, 2001.

²⁹ Although we did not make a formal recommendation, we identified these issues in a June 27, 2001, memorandum to the Associate Administrator for Space Flight.

³⁰ The OIG issued report IG-00-015, “Space Flight Operations Contract Phase IIÑCost-Benefit Analysis,” on March 14, 2000.

³¹ The basic SFOC contract awarded to United Space Alliance (a joint venture between Boeing and Lockheed Martin) is 6 years with a value of $6.949 billion. The contract has two 2-year option periods.

³² Under the SFOC, NASA identified 12 Space Shuttle contracts to be combined during Phase 1 and 15 contracts to be combined during Phase II. NASA’s plan for the SFOC was designed to include a subset of Space Shuttle contracts and activities specifically focused on operational (rather than developmental) functions. As part of the SFOC, United Space Alliance is also responsible for certain Space Station Program mission operations functions.

³³ This team is known as the Kraft review team and was headed by the former Johnson Space Center Director, Dr. Christopher Kraft.

³⁴ The OIG issued report IG-98-029, “Outsourcing of Desktop Computers,” on September 14, 1998.

³⁵ Desktop computing includes hardware, software, local area networks, and customer support.