Testimony of Gregory D . Kutz, GAO: NASA Leadership and Systems Needed to Effect Financial Management Improvements

United States General Accounting Office

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to discuss the financial management
challenges facing the National Aeronautics and Space Administration
(NASA) .

My testimony today will focus on our recent work related to NASA’s
financial management difficulties and its attempts to implement an
integrated financial management system. Although we have not performed
a comprehensive review of NASA’s financial management systems or
information since fiscal year 1993,
¹
in response to legislative mandates and
requests of other interested committees we have performed work and
issued several reports
²
that specifically address the issues included in my
testimony today. My statement today is drawn from the findings and
conclusions in those reports, which include detailed information on our
scope and methodology. Also, as you have requested, my statement will
address the results of this year’s financial statement audit for which the
auditor’s opinion is a marked departure from the previous 5 years.

Summary

For the past 5 years NASA was one of the few agencies to be judged by its
auditors as meeting all of the federal financial reporting requirements – an
unqualified opinion on its financial statements, no material internal
control weaknesses, and financial management systems that are in
substantial compliance the requirements of the Federal Financial
Management Improvement Act (FFMIA) . This implied that NASA not only
could generate reliable information once a year for external financial
reporting purposes but also could provide accurate, reliable information
for day-to-day decision-making.

In contrast with the unqualified or “clean” audit opinions of its previous
auditor, Arthur Andersen, for fiscal years 1996 through 2000, NASA’s new

¹
Financial Management:NASA’s Financial Reports Are Based on Unreliable Data
(GAO/AFMD-93-3, October 29, 1992) and NASA’s FMFIA Assertions and CFO Plan
(GAO/AFMD-93-65R, June 11, 1993) .

²
NASA:Compliance with Cost Limits Cannot Be Verified (GAO-02-504R , To be issued) ,
NASA:International Space Station and Shuttle Support Cost Limits (GAO-01-1000R,
August 31, 2001) , Financial Management:Misstatement of NASA’s Statement of
Budgetary Resources (GAO-01-438, March 30, 2001) , and Major Management Challenges
and Program Risks:National Aeronautics and Space Administration (GAO-01-258,
January 2001) .

independent auditor, PricewaterhouseCoopers, disclaimed an opinion on
the agency’s fiscal year 2001 financial statements because of significant
internal control weaknesses. PricewaterhouseCoopers also concluded that
NASA’s financial management systems do not substantially comply with
the requirements of FFMIA.

Although the auditor’s report draws attention to the issue, NASA’s
financial management difficulties are not new. NASA has been on GAO’s
High-Risk list³
for contract management since 1990, in part, because the
agency has failed to successfully implement a modern, integrated financial
management system, which is central to producing accurate and reliable
financial information needed to support contract management.

Further, about a year and a half ago, congressional staff members found a
$644 million misstatement in NASA’s fiscal year 1999 financial
statements – an error not previously detected by NASA or its auditor. As
we reported in March 2001, this error resulted because NASA’s systems
could not produce the budgetary data required by federal accounting
standards; instead, the agency was relying on an ad hoc, year-end data call
from its 10 reporting units and the aggregation of data using a computer
spreadsheet. Based on our work, we questioned NASA management’s and
Arthur Andersen’s determination that the agency’s systems substantially
complied with the requirements of FFMIA. FFMIA builds on previous
financial management reform legislation by emphasizing the need for
agencies to have systems that can generate timely, accurate, and useful
information with which to make informed decisions and to ensure
accountability on an ongoing basis. We also reported that Arthur
Andersen’s work did not meet professional audit standards in the area we
reviewed and that the auditors did not perform sufficient work to render
opinions on the fiscal year 1999 NASA budgetary financial statements.
Arthur Andersen and the NASA Inspector General disagreed with our
findings and conclusions.

Our recent work on the International Space Station continues to highlight
NASA’s financial management difficulties. In response to a legislative
mandate, we have been attempting for almost a year to validate the
amounts that NASA has reported to the Congress as obligated against
statutory space station and related shuttle support cost spending limits.
After a protracted effort, NASA has acknowledged that it is unable to

³
High Risk Series:NASA Contract Management (GAO-HR-93-11, December 1992) .

provide the detailed obligation data needed to support amounts reported
to the Congress against the spending limits. This is the same problem that
NASA’s current financial auditors, PricewaterhouseCoopers, faced in
attempting to audit NASA’s fiscal year 2001 financial statements.
Specifically, according to the auditor’s report, NASA was unable to
provide sufficient documentation to support obligation and expense
transactions and certain transaction-level cost allocations that had been
selected by the auditor for testing.

We also found that NASA was not able to provide support for the actual
cost of completed space station components – either in total or by
subsystems or elements. As we reported in August 2001, NASA does not
track the actual costs of completed space station components even though
it often estimates the cost of these components for planning and budgeting
purposes. As a result, NASA cannot examine its cost estimates for validity
by comparing actuals to estimates after costs have been realized. Further,
we found that the $8 billion of capitalized space station equipment
reported in NASA’s fiscal year 2000 financial statements was not based on
actual costs incurred but instead was based primarily on cost estimates.
Similarly, NASA’s fiscal year 2001 financial statement audit revealed that
NASA did not have sufficient documentary evidence for the auditors to
determine the accuracy and completeness of amounts capitalized as space
station costs.

It has become increasingly clear that modernizing NASA’s financial
management system is essential to providing accurate, useful financial
information for external financial reporting as well as internal
management decision-making. To its credit, NASA is working toward
implementing an integrated financial management system that it expects
to be fully operational in fiscal year 2006 at an estimated cost of $475
million. This is NASA’s third attempt to implement a new financial
management system. The first two efforts were abandoned after 12 years
and after spending $180 million. Given the high stakes involved, it is
critical that NASA’s leadership provide the necessary direction, oversight,
and sustained attention to ensure that this project is successful. In this
regard, NASA’s new Administrator comes to the position with a strong
management background and expertise in financial management. Based
on our discussions with the Administrator, he has made clear that he plans
to make financial management a top priority.

Financial Audit
Results

After five years of receiving an unqualified opinion on its financial
statements, on February 22, 2002, NASA’s new independent auditor
⁴
disclaimed an opinion on the agency’s fiscal year 2001 financial
statements. Specifically, the audit report states that NASA was unable to
provide the detailed support needed to determine the accuracy of the
agency’s reported obligations, expenses, property, plant, and equipment,
and materials for fiscal year 2001. According to the report, each of NASA’s
10 centers uses a different financial management system – each of which
has multiple feeder systems that summarize individual transactions on a
daily or monthly basis. Financial information from the centers may be
summarized more than once before it is uploaded into NASA’s General
Ledger Accounts System (GLAS) . The successive summarization of data
through the various systems impedes NASA’s ability to maintain an audit
trail through the summary data to the detailed transaction-level source
documentation. Current OMB and GAO guidance on internal control
requires agencies to maintain transaction-level documentation and to
make the transaction-level documentation readily available for review.
NASA was unable to provide sufficient transaction-level documentation to
support certain obligation and expense transactions and certain
transaction-level cost allocations that the auditors had selected for testing.

In addition, the fiscal year 2001 audit report identifies a number of
significant internal control weaknesses related to accounting for space
station material and equipment and to computer security. The report also
states that NASA’s financial management systems do not substantially
comply with federal financial management systems requirements and
applicable federal accounting standards.

NASA’s Financial
Management
Difficulties Are Not
New

While the fiscal year 2001 auditor’s report draws attention to the issue,
NASA’s financial management difficulties are not new. The weaknesses
discussed in the auditor’s report are consistent with the findings discussed
in our previous reports. We have reported on NASA’s contract
management problems, misstatement of its Statement of Budgetary
Resources, lack of detailed support for amounts reported against certain
cost limits, and lack of historical cost data for accurately projecting future
cost.

⁴
PricewaterhouseCoopers replaced Arthur Andersen LLP as NASA’s independent auditor
for its fiscal year 2001 financial statements. NASA received unqualified opinions on its
financial statements for fiscal years 1996 through 2000 from its previous auditor.

Long-standing Problems
With Contract
Management

We first identified NASA’s contract management as an area at high risk in
1990 because of vulnerabilities to waste, fraud, abuse, and
mismanagement. Specifically, we found that NASA lacked effective
systems and processes for overseeing contractor activities and did not
emphasize controlling costs. While NASA has made progress in managing
many of its procurement practices, little progress has been made in
correcting the financial system deficiencies that prevent NASA from
effectively managing and overseeing its procurement dollars. As a result,
contract management remains an area of high risk.

The agency’s financial management systems environment is much the
same as it was in 1993, the last time we performed comprehensive audit
work in that area. It is comprised of decentralized, nonintegrated systems
with policies, procedures, and practices that are unique to each of its 10
centers. For the most part, data formats are not standardized, automated
systems are not interfaced, and on-line financial information is not readily
available to program managers. As a result, NASA cannot ensure that
contracts are being efficiently and effectively implemented and budgets
are executed as planned.

Misstatement of NASA’s
Fiscal Year 1999 Statement
of Budgetary Resource

NASA’s long-standing problems in developing and implementing integrated
financial management systems contributed to a $644 million misstatement
in NASA’s fiscal year 1999 Statement of Budgetary Resources (SBR) ,
which we discussed in our March 2001 report.
⁵ This error was not detected
by NASA Chief Financial Officer (CFO) personnel or by its auditor, Arthur
Andersen. Instead, the House Committee on Science discovered the
discrepancy in comparing certain line items in the NASA SBR to related
figures in the President’s Budget.

NASA used an ad hoc process involving a computer spreadsheet to gather
the information needed for certain SBR line items because the needed data
were not captured by NASA’s general ledger systems. Because each of
NASA’s 10 reporting units maintained different accounting systems, none
of which were designed to meet FFMIA requirements, it was left up to the
units to determine how best to gather the requested data. This
cumbersome, time-consuming process ultimately contributed to the
misstatement of NASA’s SBR. The SBR is intended to provide information
on an agency’s use of budgetary resources provided by the Congress. If

⁵
GAO-01-438

reliable, the SBR can provide valuable information for management and
oversight purposes to assess the obligations related to prior-year agency
activities and to make decisions about future funding.

Based on this work, we questioned NASA management’s and its auditor’s
determination that NASA’s systems were in substantial compliance with
the requirements of FFMIA. As I mentioned earlier, and it bears repeating,
FFMIA builds on previous financial management reform legislation by
emphasizing the need for agencies to have systems that can generate
timely, accurate, and useful information with which to make informed
decisions and to ensure accountability on an ongoing basis. This is really
the end goal of financial management reforms. In particular, we
questioned whether NASA complied with the federal financial
management systems requirements for using integrated financial
management systems.
⁶

NASA Lacks Detailed
Support for Amounts
Reported Against Cost
Limits

NASA’s financial management problems were also highlighted in our effort
to verify amounts NASA reported to the Congress against legislatively
imposed spending limits on its International Space Station and Space
Shuttle programs. Since NASA began the current program to build the
space station, the program has been characterized by a series of schedule
delays, reduction in space station content and capabilities, and a
substantial development cost overrun. In February 2001, NASA revealed
that the program faced a $4 billion cost overrun that would raise the cost
of constructing the space station to $28 billion to $30 billion, 61 percent to
72 percent above the original 1993 estimate.

In part to address concerns regarding the escalating space station costs,
section 202 of the National Aeronautics and Space Administration
Authorization Act for Fiscal Year 2000 (P. L. 106-391) , establishes general
cost limitations on the International Space Station and Space Shuttle
programs. The act requires that NASA, as part of its annual budget request,
update the Congress on its progress by (1) accounting for and reporting
amounts obligated against the limitations to date, (2) identifying the

⁶
According to OMB Circular A-127, Financial Management Systems , each agency must
establish and maintain a single, integrated financial management system that is a unified
set of financial systems that are planned for and managed together, operated in an
integrated fashion, and linked together electronically in an efficient and effective manner to
provide agencywide financial system support necessary to carry out an agency’s mission
and support its financial management needs.

amount of budget authority requested for the future development and
completion of the space station, and (3) arranging for the General
Accounting Office to verify the accounting submitted to the Congress

It was our intention to verify NASA’s accounting for the space station and
shuttle limits by testing the propriety of charges to various agency
programs to ensure that all obligations charged to the space station and
shuttle programs were appropriate and that no space station or shuttle
obligations were wrongly charged to other programs. However, NASA was
unable to provide the detailed obligation data needed to support amounts
reported to the Congress against the space station and shuttle program
cost limits. NASA’s inability to provide detailed data for amounts obligated
against the limits is again due to its lack of a modern, integrated financial
management system. As I mentioned earlier, NASA’s 10 centers operate
with decentralized, nonintegrated systems and with policies, procedures,
and practices that are unique to each center. Consequently, the systems
have differing capabilities with respect to providing detailed obligation
data. According to NASA officials, only 5 of its 10 centers are able to
provide complete, detailed support for amounts obligated during fiscal
years 1994 though 2001 – the period in which NASA incurred obligations
related to the limits. In fact, at one center, detailed obligation data are not
available for even current-year obligations.

Historical Cost Data
Needed to Accurately
Project Future Costs

As part of our effort to verify NASA accounting for the space station and
shuttle cost limits, we also found that NASA was not able to provide
support for the actual cost of completed space station components –
either in total or by subsystems or elements. For example, NASA cannot
identify the actual costs of individual space station components such as
Unity (Node 1) or Destiny (U. S. Lab) . Although in its audited fiscal year
2000 financial statements, NASA capitalized the cost of Unity, Destiny, and
other items in orbit or awaiting launch at about $8 billion, according to NASA officials, these amounts are based primarily on cost estimates, not
actual costs⁷

NASA officials stated that its accounting systems were designed prior to
the implementation of current federal cost accounting standards and
financial systems standards that require agencies to track and maintain
cost data needed for management activities, such as estimating and
controlling costs, performance measurement, and making economic trade-
off decisions. As a result, NASA’s systems do not track the cost of
individual space station subsystems or elements. According to NASA
officials, the agency manages and tracks space station costs by contract
and does not need to know the cost of individual subsystems or elements
to effectively manage the program. To the contrary, we found that NASA
estimates potential and probable future program costs to determine the
impact of canceling, deferring, or adding space station content. These cost
estimates often identify the cost of specific space station subsystems.
However, because NASA does not attempt to track costs by element or
subsystems, the agency does not know the actual cost of completed space
station components and is not able to reexamine its cost estimates for
validity once costs have been realized. We continue to believe that NASA
needs to collect, maintain, and report the full cost of individual
subsystems and hardware so that NASA can make valid comparisons
between estimates and final costs and so that the Congress can hold NASA
accountable for differences between budgeted and actual costs.

Transformation of the
Finance Organization
Needed To Reap the
Full Benefit of New
System

Modernizing NASA’s financial management system is essential to
providing timely, relevant, and reliable information needed to manage
cost, measure performance, make program-funding decisions, and analyze
outsourcing or privatization options. However, technology alone will not
solve NASA’s financial management problems. The key to transforming
NASA’s financial management organization into a customer-focused
partner in program results hinges on the sustained leadership of NASA’s
top executives. As we found in our study of leading private sector and

⁷
Expenditures that are expected to benefit more than one accounting period are considered
capital expenditures and are to be reported on the statement of financial position as capital
assets. NASA capitalized $2. 5 billion for completed space station assets orbiting the earth
and $5. 4 billion for completed contractor-held assets that are at the launch site, for a total
of $8 billion. Completed assets at the launch site are reported in NASA’s financial
statements as contractor-held work in process. However, NASA was not able to categorize
the $5. 4 billion by space station versus other programs. Therefore, $8 billion represents the
maximum amount attributable to the space station.

state organizations, ⁸
clear, strong executive leadership – combined with
factors such as effective organizational alignment, strategic human capital
management, and end-to-end business process improvement – will be
critical for ensuring that NASA’s financial management organization
delivers the kind of analysis and forward-looking information needed to
effectively manage NASA’s many complex space programs. Specifically, as
discussed in the executive guide, to reap the full benefit of a modern,
integrated financial management system, NASA must go beyond obtaining
an unqualified audit opinion toward (1) routinely generating reliable cost
and performance information and analysis, (2) undertaking other value-
added activities that support strategic decision-making and mission
performance, and (3) building a finance team that supports the agency’s
mission and goals.

An independent task force created by NASA to review and assess space
station costs, budget, and management reached a similar conclusion. In its
November 1, 2001, report the International Space Station (ISS)
Management and Cost Evaluation (IMCE) Task Force found that the space
station program office does not collect the historical cost data needed to
accurately project future costs and thus perform major program-level
financial forecasting and strategic planning. The task force also reported
that NASA’s ability to forecast and plan is weakened by diverse and often
incompatible center level accounting systems and uneven and non-
standard cost reporting capabilities. The IMCE also concluded that the
current weaknesses in financial reporting are a symptom, not a cause, of
the problem and that enhanced reporting capabilities, by way of a new
integrated financial management system, will not thoroughly solve the
problem. The root of the problem, according to the task force, is that
finance is not viewed as intrinsic to NASA’s program management decision
process. The taskforce concluded that under the current organizational
structure, the financial management function is centered upon tracking
and documenting what “took place” rather than what “could and should
take place” from an analytical cost planning standpoint.

NASA has cited deficiencies with its financial management system as a
primary reason for not having the necessary data required for both internal

⁸
U. S. General Accounting Office, Executive Guide:Creating Value Through World-class
Financial Management, GAO/AIMD-00-134 (Washington, D. C. :Apr. 2000 ) . Our executive
guide was based on practices used by nine leading organizations – Boeing, Chase
Manhattan Bank, General Electric, Pfizer, Hewlett-Packard, Owens Corning, and the states
of Massachusetts, Texas and Virginia.

management and external reporting purposes. To its credit, NASA
recognizes the urgency of successfully implementing an integrated
financial management system. The stakes are particularly high,
considering this is NASA’s third attempt since 1988 to implement a new
system. The first two attempts were abandoned after 12 years and after
spending about $180 million. NASA expects to complete the current
systems effort by 2006 at a cost of $475 million.

The President’s Management Agenda includes improved financial
management performance as one of his five governmentwide management
goals. In addition, in August 2001, the Principals of the Joint Financial
Management Improvement Program – the Secretary of the Treasury, the
Director of the Office of Management and Budget, the Director of the
Office of Personnel Management, and the Comptroller General – began a
series of quarterly meetings that marked the first time all four of the
Principals had gathered together in over 10 years. To date, these sessions
have resulted in substantive deliberations and agreements focused on key
issues such as better defining measures for financial management success.
These measures include being able to routinely provide timely, reliable,
and useful financial information and having no material internal control
weaknesses.

Our experience has shown that improvements in several key elements are
needed for NASA to effectively address the underlying causes of its
financial management challenges. These elements, which will be key to
any successful approach to financial management reform, include: