Federal Research

In this third annual audit of the financial statements of SEMATECH, Inc., a consortium of U.S. semiconductor manufacturers and the Defense Department (DOD), GAO concludes that Price Waterhouse's opinion on SEMATECH's 1990 financial statements and its reports on internal control structure and compliance with laws and regulations should be reliable. While it has incorporated GAO recommendations in its 1990 financial statements, SEMATECH did not disclose postemployment payments to its former chief operating officer as GAO had suggested. An earlier GAO report found that at least two of SEMATECH's member companies had included part of their SEMATECH contributions for reimbursement as overhead costs on government contracts they held, a practice that indirectly boosts the federal government's overall outlay for SEMATECH's research and development activities. One of these companies has changed its accounting practices so that its SEMATECH contributions are now primarily expensed against profits from its commercial business. SEMATECH retains larger on-hand balances of government funds than it needs to meet normal operating expenses, reimbursing interest earned on these cash balances to the U.S. Treasury. If DOD continues to fund SEMATECH activities or participate in other joint industry-government consortia, it should disperse funds through a letter of credit rather than by advance payments to the consortium.

GAO found that the accounting firm: (1) stated that the SEMATECH financial statements were fairly presented in all material respects in conformance with generally accepted accounting principles; (2) did not disclose in its review any material internal control weaknesses or noncompliance with the applicable laws and regulations; and (3) issued a management letter making several recommendations to improve SEMATECH management efficiency and enhance its internal control structure. GAO also found that: (1) there was no indication that the accounting firm's opinion could not be relied upon; (2) in response to the GAO review of its 1989 statements, SEMATECH corrected immaterial overstatements in depreciation accounts and clarified depreciation policies and practices in its 1990 statements; (3) SEMATECH did not incorporate in its financial statements a previous suggestion that it disclose postemployment payments it made to a former operating officer; (4) one of two member firms who had included a portion of prior-year contributions as overhead costs changed its accounting practices; (5) during 1990, SEMATECH had an average daily balance of $30 million in unexpended federal grant funds to meet its projected expenses, while daily expenditures averaged about $280,000; and (6) SEMATECH reimbursed the Treasury the $2.5 million interest it earned on surplus government funds in 1990. GAO believes that SEMATECH has an unnecessarily large amount of on-hand funds.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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