National Aeronautics and Space Administration
Leadership and Systems Needed to Effect Financial Management Improvements Gao ID: GAO-02-551T March 20, 2002In fiscal years 1996 to 2000, the National Aeronautics and Space Administration (NASA) was one of the few agencies that received an unqualified opinion on its financial statements and was in substantial compliance with the Federal Financial Management Improvement Act (FFMIA). This suggested that NASA could generate reliable information for annual external financial reporting and 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, NASA's new 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. Modernizing NASA's financial management system is essential to providing accurate, useful information for external financial reporting as well as internal management decision-making. NASA is working on an integrated financial management system that it expects to have 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 $180 million. Given the high stakes involved, NASA's top management must provide the necessary direction, oversight, and sustained attention to ensure the project's success.
GAO-02-551T, National Aeronautics and Space Administration: Leadership and Systems Needed to Effect Financial Management Improvements
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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Government Efficiency, Financial Management
and Intergovernmental Relations, Committee on Government Reform, House
of Representatives:
For Release on Delivery:
Expected at 10 a.m.
Wednesday, March 20, 2002:
National Aeronautics And Space Administration:
Leadership and Systems Needed to Effect Financial Management
Improvements:
Statement of Gregory D. Kutz,
Director, Financial Management and Assurance and:
Allen Li, Director Acquisition and Sourcing Management:
GAO-02-551T:
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,[Footnote 1] in response to
legislative mandates and requests of other interested committees we
have performed work and issued several reports[Footnote 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 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 list[Footnote 3] 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 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
[Footnote 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.
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.[Footnote
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
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.[Footnote 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 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 costs.[Footnote 7]
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 state organizations,[Footnote 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 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:
* addressing NASA‘s financial management challenges as part of a
comprehensive, integrated, NASA-wide business process reform;
* providing for sustained leadership by the Administrator to implement
needed financial management reforms;
* establishing clear lines of responsibility, authority, and
accountability for such reform tied to the Administrator;
* incorporating results-oriented performance measures and monitoring
tied to financial management reforms;
* providing appropriate incentives or consequences for action or
inaction;
* establishing an enterprisewide system architecture to guide and
direct financial management modernization investments; and;
* ensuring effective oversight and monitoring.
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.
Mr. Chairman and Members of the Subcommittee, this concludes my
prepared statement. I would be pleased to respond to any questions
that you or other members of the Subcommittee may have.
Contacts and Acknowledgments:
or further information regarding this testimony, please contact
Gregory D. Kutz at (202) 512-9095 or kutzg@gao.gov, or Allen Li at
(202) 512-3600 or lia@gao.gov. Individuals making key contributions to
this testimony included Molly Boyle, Francine DelVecchio, and Diane
Handley.
[End of section]
Footnotes:
[1] Financial Management: NASA‘s Financial Reports Are Based on
Unreliable Data [hyperlink,
http://www.gao.gov/products/GAO/AFMD-93-3], October 29, 1992, and
NASA‘s FMFIA Assertions and CFO Plan [hyperlink,
http://www.gao.gov/products/GAO/AFMD-93-65R], June 11, 1993.
[2] NASA: Compliance with Cost Limits Cannot Be Verified [hyperlink,
http://www.gao.gov/products/GAO-02-504R], To be issued, NASA:
International Space Station and Shuttle Support Cost Limits
[hyperlink, http://www.gao.gov/products/GAO-01-1000R], August 31,
2001, Financial Management: Misstatement of NASA‘s Statement of
Budgetary Resources [hyperlink,
http://www.gao.gov/products/GAO-01-438], March 30, 2001, and Major
Management Challenges and Program Risks: National Aeronautics and
Space Administration [hyperlink,
http://www.gao.gov/products/GAO-01-258], January 2001.
[3] High Risk Series: NASA Contract Management [hyperlink,
http://www.gao.gov/products/GAO-HR-93-11], December 1992.
[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.
[5] [hyperlink, http://www.gao.gov/products/GAO-01-438].
[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.
[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.
[8] U.S. General Accounting Office, Executive Guide: Creating Value
Through World-class Financial Management, [hyperlink,
http://www.gao.gov/products/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.
[End of section]
