National Aeronautics and Space Administration
Long-standing Financial Management Challenges Threaten the Agency's Ability to Manage Its Programs Gao ID: GAO-06-216T October 27, 2005Congress asked GAO to testify on the status of the National Aeronautics and Space Administration's (NASA) financial management reform efforts. NASA faces major financial management challenges that, if not addressed, will weaken its ability to manage its highly complex programs. NASA has been on GAO's high-risk list since 1990 because of its failure to effectively oversee its contracts, due in part to the agency's lack of accurate and reliable information on contract spending. GAO's statement focuses on (1) NASA's key financial management challenges, (2) how NASA's financial management challenges compare with other federal agencies, (3) GAO's assessment of NASA's progress toward implementing recommendations aimed at improving its financial management system, and (4) the steps NASA must take to reform its financial management organization. In its related report, released today, GAO recommends that NASA develop an integrated enterprise master schedule and milestones--including improvement activities and plans, dates for completion, performance measures, and clear accountability.
NASA's new core financial management system has not addressed many of the agency's most significant management challenges--including improving contract management, producing credible cost estimates, and producing auditable financial statements. Because NASA did not use disciplined acquisition and implementation practices, the new system lacks basic functionality--such as the ability to (1) produce transaction-level support for key account balances, (2) properly identify adjustments or correcting entries, and (3) correctly and consistently post transactions to the right accounts. In addition, NASA did not use the implementation of its new system as an opportunity to transform its operations and instead, automated many of its existing, ineffective processes. Compounding its existing problems, NASA also failed to recognize the importance and need for highly skilled, well-trained financial personnel. Most federal agencies have been able to obtain unqualified audit opinions, while NASA's financial statements remain unauditable. However, the problems experienced by NASA in its effort to reform its financial management organization and implement a modern, integrated financial management system are not uncommon among federal agencies. In fact, many federal financial system modernization efforts have exceeded budgeted cost and scheduled delivery dates without providing the anticipated system functionality. GAO's related report, released today, details NASA's progress toward implementing prior recommendations related to its financial management system. Overall progress has been slow, but in some areas NASA is beginning to take steps toward improvements. To its credit, NASA has recognized the need to enhance the capabilities and improve the functioning of its core financial management system. Strong executive leadership will be critical for ensuring that NASA's financial management organization delivers the kind of analysis and forward-looking information it needs to effectively manage its many complex programs. Such leadership must be combined with effective organizational alignment, strategic human capital management, and end-to-end business process reform.
GAO-06-216T, National Aeronautics and Space Administration: Long-standing Financial Management Challenges Threaten the Agency's Ability to Manage Its Programs
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Testimony:
Before Congressional Requesters:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EST:
Thursday, October 27, 2005:
National Aeronautics and Space Administration:
Long-standing Financial Management Challenges Threaten the Agency's
Ability to Manage Its Programs:
Statement of Gregory D. Kutz, Managing Director:
Forensic Audits and Special Investigations:
Allen Li, Director:
Acquisition and Sourcing Management:
GAO-06-216T:
GAO Highlights:
Highlights of GAO-06-216T, a testimony to congressional requesters:
Why GAO Did This Study:
The Subcommittees asked GAO to testify on the status of the National
Aeronautics and Space Administration‘s (NASA) financial management
reform efforts. NASA faces major financial management challenges that,
if not addressed, will weaken its ability to manage its highly complex
programs. NASA has been on GAO‘s high-risk list since 1990 because of
its failure to effectively oversee its contracts, due in part to the
agency‘s lack of accurate and reliable information on contract
spending. GAO‘s statement focuses on (1) NASA‘s key financial
management challenges, (2) how NASA‘s financial management challenges
compare with other federal agencies, (3) GAO‘s assessment of NASA‘s
progress toward implementing recommendations aimed at improving its
financial management system, and (4) the steps NASA must take to reform
its financial management organization.
In its related report, released today, GAO recommends that NASA develop
an integrated enterprise master schedule and milestones”including
improvement activities and plans, dates for completion, performance
measures, and clear accountability.
What GAO Found:
NASA‘s new core financial management system has not addressed many of
the agency‘s most significant management challenges”including improving
contract management, producing credible cost estimates, and producing
auditable financial statements. Because NASA did not use disciplined
acquisition and implementation practices, the new system lacks basic
functionality”such as the ability to (1) produce transaction-level
support for key account balances, (2) properly identify adjustments or
correcting entries, and (3) correctly and consistently post
transactions to the right accounts. In addition, NASA did not use the
implementation of its new system as an opportunity to transform its
operations and instead, automated many of its existing, ineffective
processes. Compounding its existing problems, NASA also failed to
recognize the importance and need for highly skilled, well-trained
financial personnel.
Most federal agencies have been able to obtain unqualified audit
opinions, while NASA‘s financial statements remain unauditable.
However, the problems experienced by NASA in its effort to reform its
financial management organization and implement a modern, integrated
financial management system are not uncommon among federal agencies. In
fact, many federal financial system modernization efforts have exceeded
budgeted cost and scheduled delivery dates without providing the
anticipated system functionality.
GAO‘s related report, released today, details NASA‘s progress toward
implementing prior recommendations related to its financial management
system. Overall progress has been slow, but in some areas NASA is
beginning to take steps toward improvements.
NASA‘s Progress in Implementing GAO‘s Recommendations:
Recommendations related to: System component interoperability and
enterprise architecture;
Closed: 1;
Partially implemented: 6;
Open: 23.
Recommendations related to: Process reengineering and requirements
definition, management, and testing;
Closed: 1;
Partially implemented: 3;
Open: 1.
Recommendations related to: External financial reporting;
Closed: 0;
Partially implemented: 0;
Open: 4.
Recommendations related to: Program life-cycle cost estimates and
funding reserves;
Closed: 1;
Partially implemented: 4;
Open: 1.
Total;
Closed: 3;
Partially implemented: 13;
Open: 29.
Source: GAO.
[End of table]
To its credit, NASA has recognized the need to enhance the capabilities
and improve the functioning of its core financial management system.
Strong executive leadership will be critical for ensuring that NASA‘s
financial management organization delivers the kind of analysis and
forward-looking information it needs to effectively manage its many
complex programs. Such leadership must be combined with effective
organizational alignment, strategic human capital management, and end-
to-end business process reform.
What GAO Recommends:
www.gao.gov/cgi-bin/getrpt?GAO-06-216T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Greg Kutz at (202) 512-
9095 or Allen Li at (202) 512-3600.
[End of section]
Mr. Chairmen and Members of the Subcommittees:
Thank you for the opportunity to discuss the financial management
challenges facing the National Aeronautics and Space Administration
(NASA). Since its inception in 1958, NASA has undertaken numerous
programs--involving earth and space science, aerospace technology,
human space flight, and biological and physical research--that have
resulted in significant scientific and technological advances and
enhanced the quality of life on earth. In recent years, NASA has
experienced a number of setbacks with its programs and operations,
including massive cost overruns associated with the International Space
Station and, with the Columbia tragedy, the need for the agency to
develop return-to-flight strategies and mitigate the impact of the loss
of the shuttle on the construction of the space station. On January 14,
2004, President Bush outlined a bold new vision for U.S. space
exploration that will set a new course for NASA. However, a key to the
successful execution of this new vision is NASA's ability to address a
number of long-standing financial management challenges that threaten
NASA's ability to manage its programs, oversee its contractors, and
effectively allocate its budget across its numerous projects and
programs.
For years, NASA has cited deficiencies within its financial management
systems as a primary reason for not having the data required to oversee
its contractors, accurately account for the full cost of its
operations, and efficiently produce accurate and reliable information
needed for both management decision making and external reporting
purposes. In fact, since 1990 we have identified NASA's contract
management as an area of high risk, in part because the agency lacked
effective systems and processes for overseeing contract spending and
performance. In April 2000, NASA began its third attempt at modernizing
its financial management processes and systems. The first two efforts
were eventually abandoned after a total of 12 years and a reported $180
million investment. NASA expects this current effort, known as the
Integrated Enterprise Management Program (IEMP),[Footnote 1] to produce
an integrated, agencywide financial management system through the
acquisition and incremental implementation of commercial software
packages and related hardware and software components. However, in
April and November 2003--3 years into NASA's IEMP implementation effort
and with significant investment already made in the program--we issued
a series of four reports[Footnote 2] that detailed weaknesses in NASA's
acquisition and implementation strategy for IEMP. As part of the four
reports we issued, we made 45 recommendations aimed at improving NASA's
overall management and implementation of IEMP. Our related
report,[Footnote 3] released today, details our assessment of NASA's
progress toward implementing each of our 45 recommendations.
Our testimony today will focus on the results of our recent work
related to NASA's financial management challenges and the agency's
efforts to implement our recommendations related to IEMP. Specifically,
I will discuss (1) NASA's key financial management challenges, (2) how
NASA's financial management challenges compare with other federal
agencies, (3) our assessment of NASA's progress toward implementing our
recommendations aimed at improving IEMP, and (4) the steps NASA must
take to reform its financial management organization.
We have performed work and issued several reports in response to
legislative mandates and at the request of the House Science Committee.
We also reviewed the reports of NASA's Office of Inspector General and
the independent public accounting (IPA) firms that audited NASA's
financial statements for fiscal year 2004 and for several previous
years. However, we did not review the IPA's underlying audit work. We
performed all work in accordance with U.S. generally accepted
government auditing standards. Our statement today is drawn from the
findings and conclusions in reports issued by GAO, NASA's Office of
Inspector General, and the IPAs.
In summary, NASA currently lacks the systems, processes, and human
capital needed to produce credible cost estimates, oversee its
contractors and their financial and program performance, control
program costs, and produce timely, reliable financial information and
auditable annual financial statements. Although NASA has acknowledged
the need for improved financial management systems, processes, and
human capital and has begun to take steps toward achieving that goal,
progress has been slow. Because NASA did not adopt disciplined
acquisition and implementation practices when implementing its
financial management system, IEMP, it has been forced to take actions
that should have been accomplished prior to implementation--causing the
agency to unnecessarily invest time and resources to rework already
deployed system components in order to produce a system that meets user
requirements. Further, NASA did not use IEMP as an opportunity to
transform the way it does business and instead, automated many of its
existing ineffective business processes. As a result, NASA has yet to
address its most significant program management and external financial
reporting issues--including improving contract management, producing
credible cost estimates, and properly accounting for nearly $38 billion
of reported property, plant, and equipment (PP&E) and material.
NASA's Long-standing Financial Management Challenges Threaten the
Agency's Ability to Manage Its Programs and Produce Auditable Financial
Statements:
NASA has fundamental problems with its financial management operations
that not only affect its ability to externally report reliable
information, but more importantly, hamper its ability to effectively
manage and oversee its major programs, such as the space station and
shuttle program. Since 1990, we have identified NASA's contract
management as a high-risk area. This assessment has been based in part
on our repeated finding that NASA does not have good cost-estimating
processes or the financial information needed to develop good cost
estimates for its programs, making it difficult for NASA to oversee its
contracts and control costs. NASA's difficulties are rooted in an
agency culture that has not viewed financial management as an integral
part of the agency's program management decision process. Although NASA
has acknowledged the need for improved financial management information
and has begun to take steps toward achieving that goal, NASA currently
lacks the systems, processes, and human capital needed to produce
credible cost estimates, oversee its contractors and its financial and
program performance, control program costs, and produce auditable
financial statements.
NASA Lacks the Systems, Processes, and Human Capital Needed to
Effectively Manage Its Programs:
As currently designed, NASA's financial management system has not
addressed many of the agency's most significant program management
challenges--including improving contract management and producing
credible cost estimates. Because program managers and cost estimators
were not involved in the initial design and implementation of the core
financial module, the system was not designed to meet their needs and
thus, does not contain the cost data needed to manage NASA's most
complex projects and programs. This, combined with NASA's failure to
reengineer its contractor cost-reporting processes and a lack of
trained financial management personnel, has undermined NASA's recent
efforts to improve its cost-estimating and contract monitoring
capabilities.
As we have reported numerous times, NASA consistently develops
unrealistic cost and schedule estimates, which at least in part,
contributes to the cost growth and schedule increases in many of its
programs. To adequately oversee NASA's largest and most complex
programs and projects and mitigate potential cost growth and schedule
increases, managers need well-defined processes for estimating the cost
of programs and monitoring progress against those estimates. A well-
recognized technique used to monitor progress on contracts, and a long-
time NASA program management requirement, is earned value management
(EVM).[Footnote 4] EVM goes beyond the two-dimensional approach of
comparing budgeted costs to actuals. Instead, it attempts to compare
the value of work accomplished during a given period with the work
scheduled for that period. Recognizing the need to establish a
disciplined cost-estimating process that incorporates the concepts of
EVM, NASA developed a cost-estimating handbook in 2002--the first such
guidance provided to its cost-estimating community and program and
project managers. However, as we reported in April 2003, the
information requirements of program managers and cost estimators, which
were outlined in the cost-estimating handbook, were not considered when
NASA designed and implemented the core financial module--the backbone
of IEMP.
When NASA deployed the core financial module in 2003, NASA's cost-
estimating guidance was inconsistently applied across programs.
However, NASA has recently begun to take steps to institutionalize the
use of more disciplined cost-estimating and contract-management
processes. For this initiative to be successful, as we have previously
recommended, NASA will also need to reengineer its business processes-
-including its contractor cost-reporting requirements--and configure
its financial system to accommodate the information required by program
managers and cost estimators. However, NASA has yet to fully address
weaknesses in its (1) contractor cost-reporting requirements and (2)
financial and technical work-breakdown structure.
* Weaknesses in NASA contractor cost-reporting requirements affect
NASA's ability to manage its programs and monitor contractor
performance. NASA obtains contractor cost data from two primary
sources--monthly contractor financial management reports (i.e., NASA
Form 533), and monthly contractor cost performance reports. Both
reports contain budget and actual cost data, but only contractor cost-
performance reports contain the data needed to perform EVM analysis.
However, NASA did not evaluate the adequacy of its existing contractor
cost-reporting vehicles to determine whether the reports met the
information needs of program managers and cost estimators. Instead,
NASA chose to use NASA Form 533 data to populate the core financial
module without considering the merits of the data contained in the
contractor cost-performance reports. Consequently, the cost data
maintained in the core financial module are not adequate for monitoring
contractor performance for NASA's largest, most complex contracts--
those requiring EVM reporting and analysis. As discussed in our related
report, through an initiative known as Project Management Information
Improvement (PMI2), NASA plans to enhance the core financial module to
provide better project management information for decision-making
purposes. As part of this initiative, NASA plans to evaluate its
contractor cost-reporting policies and processes.
* The core financial module as currently implemented does not capture
cost information at the same level of detail that it is received from
NASA's contractors. Instead of implementing a financial-coding
structure that met the information needs of program managers, NASA
embedded the same financial-coding structure that it used in its legacy
reporting systems in the core financial module. As a result, the
availability of detailed cost data depends on the adequacy of NASA's
legacy-coding structure. Therefore, in some cases, contractor-provided
cost data must be aggregated to a higher, less detailed level before
they are posted against the legacy financial-coding structure. To its
credit, as part of PMI2, NASA is in the process of addressing this
issue. However, NASA is still several years away from reaping the
benefit of these planned improvements.
In addition to ineffective business processes that result in inadequate
management information, we reported in May 2004 that NASA's use of
disciplined cost-estimating practices and EVM analysis was undermined
by a lack or trained staff and ineffective use and placement of cost
analysts across the agency. According to NASA officials, at the time,
resource constraints have prevented the agency from staffing many
project offices with appropriate personnel to fulfill all project
functions. In response to recommendations we made in our May 2004
report, NASA has begun to take action to improve the efficiency and
effectiveness of its cost-estimating and EVM analysis staffs.
Specifically, NASA has included requirements in its March 2005 update
to NASA's Program and Project Management Processes and Requirements
document that should facilitate efficient and effective use of cost-
estimating EVM analysis staff. Further, according to NASA, it plans to
provide both awareness briefings and in-depth training to project
management and cost-estimating and analysis personnel to ensure
understanding and knowledge of NASA's cost-estimating and program
management policies and procedures. However, because these initiatives
have only recently begun, we cannot determine to what degree these
efforts will enable NASA to provide credible cost estimates.
As discussed in our related report, released today, NASA has recognized
the need to enhance the capabilities of the core financial module in
order to better serve its program management and cost-estimating
communities. As NASA proceeds with its planned improvements, it will be
critical that the agency address weaknesses in its financial management
systems, processes, and human capital in a comprehensive manner.
Anything short of this will continue to put NASA's programs at risk of
cost and schedule overruns.
Ineffective Systems and Processes and Inadequately Trained Financial
Management Personnel Hamper External Financial-Reporting Efforts:
NASA's core financial module--the backbone of IEMP--does not currently
address many of the agency's most challenging external reporting
issues--including problems related to budgetary accounting and property
accounting. NASA's independent financial statement auditors disclaimed
an opinion on NASA's fiscal year 2003 and 2004 financial statements.
The disclaimer resulted from NASA's inability to provide the auditors
with sufficient evidence to support the financial statements throughout
the fiscal year and at year end. Further, material weaknesses were
found in NASA's controls for: (1) financial systems, analysis, and
oversight used to prepare the financial statements; (2) reconciling
differences in Fund Balance with Treasury; (3) assuring that PP&E and
materials are presented fairly; and (4) securing the computing
environment that supports IEMP. Although many of these material
weaknesses and NASA's difficulty in producing auditable financial
statements can be linked to IEMP, weaknesses in NASA's business
processes and human capital management are also factors. Based on our
review of NASA's fiscal year 2005 interim financial statements,
problems associated with NASA's financial management persisted during
fiscal year 2005.
Although NASA has been working to stabilize the core financial module
since it was deployed in June 2003, NASA has yet to produce auditable
interim or annual financial statements. In fact, as part of its report
disclaiming an opinion on NASA's fiscal year 2004 financial statements,
NASA's independent auditor reported that the core financial module was
unable to (1) produce transaction-level detail in support of financial
statement account balances, (2) identify adjustments or correcting
entries, and (3) correctly and consistently post transactions to the
right accounts. These are basic system requirements that are integral
to the effective functioning of a financial management system. For this
and other reasons, for fiscal year 2004, NASA's auditor found that
NASA's financial system did not comply substantially with the
requirements of the Federal Financial Management Improvement Act of
1996 (FFMIA).[Footnote 5] FFMIA stresses the need for agencies to have
systems that can generate timely, accurate, and useful financial
information with which to make informed decisions, manage daily
operations, and ensure accountability on an ongoing basis. NASA's
ongoing inability to meet the basic requirements of FFMIA is central to
our reporting of NASA's contract management as an area of high risk.
Because NASA's core financial module does not meet basic federal
financial management system requirements, NASA was unable to provide
support for certain fiscal year 2004 financial statement balances
including accounts payable and undelivered orders. Additionally, NASA
was unable to provide the auditors with subsidiary listings of cash
receipts and cash disbursements to support its budgetary outlays during
the fiscal year. Finally, according to the auditor's report, NASA
management continues to identify certain transactions that are being
posted incorrectly due to improper configuration of the core financial
module. Based on our review of NASA's fiscal 2005 quarterly financial
statement notes, many of these same problems remain. For example, due
to functionality and configuration issues, the system continues to
create inappropriate transactional postings which result in abnormal
balances and misstatements in unobligated balances and other budgetary
accounts. In addition, due to data integrity issues from fiscal years
2003 and 2004, the opening balances for many budgetary and proprietary
accounts in fiscal year 2005 are misstated.
Similarly, as part of our recent work assessing NASA's controls over
travel and the use of its passenger aircraft,[Footnote 6] NASA was
unable to provide us with timely, reliable data and support for amounts
spent on travel for fiscal year 2004. After 4 months of trying to
extract travel data from the IEMP system, NASA officials provided us
with what they said was a complete population of travel-related
disbursement transactions. However, the data provided were missing
significant travel expense categories. For example, NASA had several
contracts with major hotel chains to provide rooms at discount rates;
however, NASA did not include the charges related to rooms purchased
under these contracts as travel-related expenses. Further, although
agency personnel regularly used NASA-owned passenger aircraft and other
charter aircraft in support of official business travel, the cost
associated with the use of these aircraft was not considered a travel
expense and, therefore, the millions of dollars associated with this
travel were not included in the data provided. In addition to missing
data, the travel data NASA provided contained duplicate transactions
and other data anomalies that made it appear as if NASA were paying the
same bill multiple times, which, for those transactions we tested, was
not the case.
NASA's failure to provide reliable data related to its travel
disbursements is significant for three reasons. First, it illustrates
the shortcomings of NASA's financial management system and NASA's
ongoing struggle to provide transaction-level support for key account
balances. Second, it indicates that the budget amounts NASA reports for
travel each year to the Congress are significantly understated. As part
of its budget submission, NASA is required to report estimated and
actual obligations in terms of object classification. Object classes
describe the nature of the service or article for which the obligations
are first incurred. One such object class is object class 21, travel
and transportation of persons. However, because NASA does not properly
classify certain travel expense categories as object class 21--
including business travel on noncommercial aircraft and travel services
procured using a contract--the agency travel budget is significantly
understated. Finally, the problems we found with NASA's travel data
point to weaknesses in NASA's full-cost accounting initiative.
According to NASA, on October 1, 2003, NASA implemented its full-cost
initiative and is currently operating in a total full-cost environment,
which includes managing programs and projects in terms of their total
costs; accounting for all costs as either direct or as general and
administrative; and budgeting for a program or project's full costs.
However, if NASA has failed to capture and properly link travel-related
costs to the appropriate object classification, it raises serious
questions about the agency's ability to properly classify other less
straightforward cost categories.
As discussed previously, NASA did not use IEMP as an opportunity to
transform the way it does business and instead, NASA automated many of
its existing, ineffective business processes--including its process for
recording PP&E and material in its general ledger. As we reported in
November 2003, NASA does not appropriately capture and record PP&E and
material in the core financial module general ledger at the
transactions level. Instead, NASA first expenses its property
acquisitions and then updates the core financial module's general
ledger using periodic summary-level manual entries--for both NASA-held
and contractor-held property.
Recording PP&E and material in the general ledger at the transaction
level or item level at the time NASA makes disbursement for it would
provide independent control over these assets. However, just as it did
with its legacy systems, NASA continues to (1) record the cost of PP&E
and materials as expenses when initially incurred, (2) periodically
determine which of those costs should have been capitalized, and (3)
manually adjust these records at a summary level. Because NASA does not
maintain transaction-level detail, the agency is not able to link the
money it spends on the purchase or construction of its property to
discrete property items, which is needed to provide independent control
over these assets. Although NASA manually records property at the
summary level for both NASA-held and contractor-held property, NASA's
most significant challenge with respect to property accounting stems
from property located at contractor facilities--which accounts for $8.5
billion or about one-fourth of NASA's reported $34.6 billion of PP&E
and materials--because NASA must rely solely on its contractors to
periodically report summary-level information on these assets to NASA.
Until NASA successfully implements a single integrated system for
reporting property, and develops a methodology to identify and record
capital costs as they occur, the agency will continue to experience
difficulties maintaining effective control over PP&E and ensuring that
it is not vulnerable to fraud, waste, and abuse.
In fiscal years 2003 and 2004, NASA's auditor reported that continued
weaknesses in NASA's financial statement preparation processes resulted
in major delays and errors in preparing fiscal year-end financial
statements. According to the auditor's report, NASA personnel were not
consistently utilizing uniform accounting processes that record,
classify, and summarize information for the preparation of financial
statements. Further, because significant weaknesses exist in the core
financial module, NASA management must compensate for the weaknesses by
implementing and strengthening additional controls that will ensure
that errors and irregularities are detected in a timely manner.
However, according to the auditor's report, many of these control
procedures were not adequately performed. As such, the auditor
recommended that NASA provide additional training for financial
personnel to ensure that they understand their role in processing
transactions, performing account analysis and reconciliations, and
maintaining supporting documentation.
While Most Agencies Receive Unqualified Opinions on Their Financial
Statements, Systems Modernization Continues to be a Challenge:
The problems experienced by NASA in its effort to reform its financial
management organization and implement a modern, integrated financial
management system are not uncommon. While the majority of CFO Act
agencies have obtained clean or unqualified audit opinions on their
financial statements, the underlying agency financial systems remain a
serious problem. Agencies still generally lack the capacity to create
the full range of information needed to effectively manage day-to-day
operations. As shown in table 1, for fiscal year 2004, auditors
reported that financial management systems of only 7 of the 23 CFO Act
agencies[Footnote 7] complied substantially with the requirements of
FFMIA.
Table 1: Auditors' Determination of Financial Statement Opinion,
Internal Controls, and FFMIA Compliance for Fiscal Year 2004:
Agencies: Department of Agriculture;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Department of Commerce;
Unqualified opinion: Yes;
FFMIA compliance: Yes;
No material weaknesses: No.
Agencies: Department of Defense;
Unqualified opinion: No;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Department of Education;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Department of Energy;
Unqualified opinion: Yes;
FFMIA compliance: Yes;
No material weaknesses: Yes.
Agencies: Department of Health and Human Services;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Department of Housing and Urban Development;
Unqualified opinion: No;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Department of the Interior;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Department of Justice;
Unqualified opinion: No;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Department of Labor;
Unqualified opinion: Yes;
FFMIA compliance: Yes;
No material weaknesses: Yes.
Agencies: Department of State;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Department of Transportation;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Department of the Treasury;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Department of Veterans Affairs;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Agency for International Development;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Environmental Protection Agency;
Unqualified opinion: Yes;
FFMIA compliance: Yes;
No material weaknesses: No.
Agencies: General Services Administration;
Unqualified opinion: Yes;
FFMIA compliance: Yes;
No material weaknesses: No.
Agencies: National Aeronautics and Space Administration;
Unqualified opinion: No;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: National Science Foundation;
Unqualified opinion: Yes;
FFMIA compliance: Yes;
No material weaknesses: Yes.
Agencies: Nuclear Regulatory Commission;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Office of Personnel Management;
Unqualified opinion: Yes;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Small Business Administration;
Unqualified opinion: No;
FFMIA compliance: No;
No material weaknesses: No.
Agencies: Social Security Administration;
Unqualified opinion: Yes;
FFMIA compliance: Yes;
No material weaknesses: Yes.
Total;
Unqualified opinion: 18;
FFMIA compliance: 7;
No material weaknesses: 4.
Source: GAO analysis.
[End of table]
Similarly, as shown in table 1, auditors reported that only four
agencies had no material internal control weaknesses. A material
weakness is a condition that precludes the entity's internal control
from providing reasonable assurance that misstatements, losses, or
noncompliance material in relation to the financial statements or to
stewardship information would be prevented or detected on a timely
basis.
NASA's problems implementing IEMP are similar to those of other
agencies we have audited. Modernizing financial management systems is
critical to instituting strong financial management so that the
systematic measurement of performance, the development of cost
information, and the integration of program, budget, and financial
information for management reporting can be achieved. The federal
government has spent billions of dollars developing and implementing
financial management systems throughout federal agencies. However, many
of these efforts have exceeded budgeted cost and scheduled delivery
dates without providing the anticipated system functionality.
Although the implementation of any major system is not risk free,
organizations that follow and effectively implement disciplined
processes, along with effective human capital and IT management
practices, can reduce these risks to acceptable levels. We have issued
numerous reports highlighting the problems associated with the
inability to effectively implement disciplined processes in the areas
of requirements management, testing, data conversion and system
interfaces, risk management, and project management. For example, ill-
defined or incomplete requirements have been identified by many experts
as a root cause of system failure. As a case in point, we recently
reported[Footnote 8] that the Army has encountered problems
implementing a new system intended to improve depot operations. One
reason that users had not been provided with the intended systems
capabilities was because of the breakdown in the requirements
management process. As a consequence, the Army implemented error-prone,
time-consuming manual workarounds to minimize disruption to critical
operations, and the financial management operations continued to be
affected by systems problems.
Similarly, many of NASA's financial management problems outlined in our
testimony are the result of an undisciplined, ineffective requirements
management process--including the failure of NASA's financial
management system to (1) post transactions to the right accounts, (2)
properly identify adjustment or correcting entries, and (3) provide the
information program managers and cost estimators need to monitor
contractor performance and produce credible cost estimates. To its
credit, as discussed in our related report released today, NASA
officials acknowledged that the requirements management and testing
methodology and tools used to implement the core financial module did
not result in requirements that were consistent, verifiable, and
traceable, or that contained the necessary specificity to minimize the
requirement-related defects. NASA has recently implemented a new
requirements management and testing methodology. However, NASA does not
plan to use its improved requirements management process to properly
define and document system requirements for already deployed IEMP
modules until October 2006--when NASA plans to redefine the core
financial module requirements as part of the core financial module
system upgrade.
NASA Has Begun Taking Steps to Implement Some of Our Recommendations
for IEMP, but Progress Is Slow:
Our related report, released today, details our assessment of NASA's
progress toward implementing our prior recommendations related to IEMP.
Overall, progress has been slow, particularly with respect to
developing a well-defined enterprise architecture, which is critical
for guiding and constraining NASA's investment in IEMP. However, in
some other areas--such as NASA's initiative to enhance the core
financial module to provide better project management information--NASA
is beginning to make progress. Of the 45 recommendations we made, NASA
has closed 3 and partially implemented 13; however, 29 recommendations
remain open.
In 2003, we issued four reports outlining the considerable challenges
NASA faces in meeting its IEMP commitments and providing NASA with the
necessary tools to oversee its contracts and manage its programs. For
example, in April 2003, we reported that NASA had deferred addressing
the needs of key system stakeholders, including program managers and
cost estimators, and was not following key best practices for acquiring
and implementing the system. Then, in November 2003, we reported that
NASA (1) acquired and deployed system components of IEMP without an
enterprise architecture, or agencywide modernization blueprint, to
guide and constrain program investment decisions; (2) did not use
disciplined cost-estimating processes or recognized best practices in
preparing its life-cycle cost estimates; and (3) had delayed
implementation of many key external reporting capabilities.
As part of the four reports we issued on IEMP, we made 45
recommendations in the following areas: commercial system component
integration; enterprise architecture development and use; risk
mitigation; system requirements definition, management, and testing;
external financial reporting; and program cost and schedule control.
Since that time, NASA's effort has been focused primarily on trying to
stabilize the core financial module, the backbone of IEMP. However, in
our report being released today, we recognize that NASA has begun
taking steps to implement a number of our recommendations. Table 2
summarizes our assessment of the extent to which NASA has implemented
our recommendations.
Table 2: NASA's Progress Toward Implementing GAO's Recommendations:
Recommendations: Recommendations to improve NASA's acquisition
management practices. GAO-03-507;
Closed: 0;
Partially implemented: 2;
Open: 0;
Comments: Key elements of dependency analysis methodology still
lacking; Suitability of already acquired components not evaluated
before acquiring additional components.
Recommendations: Recommendations regarding development and use of
enterprise architecture. GAO-04-43;
Closed: 1;
Partially implemented: 4;
Open: 17;
Comments: Architecture still missing important content and key
architecture management processes not yet established; Already
implemented system components not mapped to architecture.
Recommendations: Recommendations to mitigate risk associated with
relying on already deployed components. GAO-03-507;
Closed: 0;
Partially implemented: 0;
Open: 6;
Comments: NASA did not develop a formal corrective action plan to
mitigate risks.
Recommendations: Recommendations regarding defining program management
needs and reengineering business processes. GAO-03-507;
Closed: 1;
Partially implemented: 0;
Open: 1;
Comments: Stakeholders engaged to define program management needs;
Plans to reengineer contractor cost- reporting processes still several
years away.
Recommendations: Recommendations to improve NASA's requirements
management and testing processes. GAO-03-507;
Closed: 0;
Partially implemented: 3;
Open: 0;
Comments: New requirements management methodology and tools acquired
for future modules but core financial module requirements not yet fully
defined.
Recommendations: Recommendations to improve external financial
reporting. GAO-04-151;
Closed: 0;
Partially implemented: 0;
Open: 4;
Comments: Little progress made in developing a detailed plan for
delivering a financial system that substantially complies with federal
standards.
Recommendations: Recommendations regarding IEMP program life-cycle cost
estimates and funding reserves. GAO-04-118;
Closed: 1;
Partially implemented: 4;
Open: 1;
Comments: Significant progress made in preparing life-cycle cost
estimates but consistency and support for estimates still lacking.
Recommendations: Total;
Closed: 3;
Partially implemented: 13;
Open: 29.
Source: GAO analysis.
[End of table]
In its written comments on our draft report, NASA raised concerns that
our characterization of certain recommendations as "open" did not
appropriately recognize the full extent of the agency's effort and
suggested that we use instead "partially implemented" or, whenever
appropriate, "closed." We disagree with NASA's assessment.
We considered a recommendation closed when NASA provided us with
documentation that demonstrated it had fully addressed the concerns we
raised in our prior reports. Recognizing that many of our
recommendations may take considerable time and effort to fully
implement, we considered the recommendation to be partially implemented
if the documentation provided indicated that NASA had made significant
progress addressing our concerns. For recommendations we consider open,
NASA's documentation indicated that the agency was either in the very
early planning stages or had not yet begun to implement the
recommendation.
NASA Faces Significant Challenges in Reforming Its Financial Management
Operations:
Successfully stabilizing and enhancing NASA's financial management
system are essential to enabling the agency to provide its managers
with the kind of timely, relevant, and reliable information that they
need to manage cost, measure performance, and make program-funding
decisions. However, NASA cannot rely on technology alone to solve its
financial management problems. Rather, NASA must transform its
financial management organization into a customer-focused partner in
program results, but its ability to do this hinges on the sustained
leadership of NASA's top executives.
Clear, strong executive leadership will be critical for ensuring that
NASA's financial management organization delivers the kind of analysis
and forward-looking information that the agency needs to effectively
manage its many complex programs. To be effective, such leadership must
also combine with effective organizational alignment, strategic human
capital management, and end-to-end business process improvement. This
goes far beyond merely obtaining an unqualified audit opinion and
requires that agency financial managers focus on their overall
operations in a strategic way and not be content with an automated
system that helps the agency get a "clean" audit opinion once a year
without providing additional value to the program managers and cost
estimators who use its financial data.
The challenges that NASA faces in reforming its financial management
operations are daunting, but not insurmountable. However, 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;
* developing and using an enterprisewide system architecture to guide
and direct financial management modernization investments;
and:
* ensuring effective oversight and monitoring.
Conclusion:
As NASA embarks upon the new course set by the President in 2004, a key
to successfully implementing the vision of expanded U.S. space
exploration is NASA's ability to address a number of long-standing
financial management challenges. The lack of reliable, day-to-day
information continues to threaten NASA's ability to manage its
programs, oversee its contractors, and effectively allocate its budget
across its numerous projects and programs. Although NASA has
acknowledged the need for improved financial management systems,
business processes, and human capital management and has begun to take
steps toward achieving those goals, progress has been slow. By
expeditiously implementing each of the recommendations contained in our
related report, NASA has the opportunity to minimize the impact of past
mistakes and begin to reap the benefits of operating with an integrated
financial management system. Further, clear, strong executive
leadership will be critical for ensuring that NASA's financial
management organization delivers the kind of analysis and forward-
looking information needed to effectively manage its many complex
programs.
In closing, we commend the Subcommittees for holding this hearing as a
catalyst for improving NASA's financial management and business
processes. Continued oversight will be critical to ensuring that NASA
achieves its goals for improved financial management and reformed
business processes. Mr. Chairmen, this concludes our prepared
statement. We would be pleased to respond to any questions that you or
other members of the subcommittees may have.
Contacts and Acknowledgments:
For further information regarding this testimony, please contact
Gregory D. Kutz at (202) 512-9095 or kutzg@gao.gov, Allen Li at (202)
512-3600 or lia@gao.gov, Randolph C. Hite at (202) 512-3439 or
hiter@gao.gov, or Keith Rhodes at (202) 512-6412 or rhodesk@gao.gov.
Individuals making key contributions to this testimony included Fannie
Bivins, Francine DelVecchio, Diane Handley, and Chris Martin.
[End of section]
Related GAO Products:
NASA: Compliance with Cost Limits. GAO-05-492R. Washington, D.C.: April
8, 2005.
National Aeronautics and Space Administration: Significant Actions
Needed to Address Long-standing Financial Management Problems. GAO-04-
754T. Washington, D.C.: May 19, 2004.
NASA: Compliance with Cost Limits. GAO-04-648R. Washington, D.C.: April
2, 2004.
Space Shuttle: Further Improvements Needed in NASA's Modernization
Efforts. GAO-04-203. Washington, D.C.: January 15, 2004.
Business Modernization: Disciplined Processes Needed to Better Manage
NASA's Integrated Financial Management Program. GAO-04-118. Washington,
D.C.: November 21, 2003.
Business Modernization: NASA's Integrated Financial Management Program
Does Not Fully Address Agency's External Reporting Issues. GAO-04-151.
Washington, D.C.: November 21, 2003.
Business Modernization: NASA's Challenges in Managing Its Integrated
Financial Management Program. GAO-04-255. Washington, D.C.: November
21, 2003.
Information Technology: Architecture Needed to Guide NASA's Financial
Management Modernization. GAO-04-43. Washington, D.C.: November 21,
2003.
NASA: Major Management Challenges and Program Risks. GAO-03-849T.
Washington, D.C.: June 12, 2003.
Business Modernization: Improvements Needed in Management of NASA's
Integrated Financial Management Program. GAO-03-507. Washington D.C.:
April 30, 2003.
Major Management Challenges and Program Risks: National Aeronautics and
Space Administration. GAO-03-114. Washington, D.C.: January 2003.
NASA: Compliance With Cost Limits Cannot Be Verified. GAO-02-504R.
Washington, D.C.: April 10, 2002.
NASA: Leadership and Systems Needed to Effect Financial Management
Improvements. GAO-02-551T. Washington, D.C.: March 20, 2002.
NASA: International Space Station and Shuttle Support Cost Limits.GAO-
01-1000R. Washington, D.C.: August 31, 2001.
Financial Management: Misstatement of NASA's Statement of Budgetary
Resources. GAO-01-438. Washington, D.C.: March 30, 2001.
FOOTNOTES
[1] The effort was formerly known as the Integrated Financial
Management Program (IFMP). According to NASA, IFMP was renamed to
reflect the addition of program management and labor distribution.
[2] GAO, Business Modernization: Improvements Needed in Management of
NASA's Integrated Financial Management Program, GAO-03-507 (Washington,
D.C.: Apr. 30, 2003); Business Modernization: NASA's Integrated
Financial Management Program Does Not Fully Address Agency's External
Reporting Issues, GAO-04-151 (Washington, D.C.: Nov. 21, 2003);
Information Technology: Architecture Needed to Guide NASA's Financial
Management Modernization, GAO-04-43 (Washington, D.C.: Nov. 21, 2003);
and Business Modernization: Disciplined Processes Needed to Better
Manage NASA's Integrated Financial Management Program, GAO-04-118
(Washington, D.C.: Nov. 21, 2003).
[3] GAO, Business Modernization: Some Progress Made toward Implementing
GAO Recommendations Related to NASA's Integrated Financial Management
Program (IFMP), GAO-05-799R (Washington, D.C.: Sept. 9, 2005).
[4] NASA requires EVM reporting and analysis for research and
development contracts with a total anticipated final value of $70
million or more, and for production contracts with a total anticipated
final value of $300 million or more.
[5] Pub. L. No. 104-208, div. A., § 101(f), title VIII, 110 Stat. 3009,
3009-389 (Sept. 30, 1996). FFMIA requires CFO Act agencies to implement
and maintain financial management systems that comply substantially
with federal financial management system requirements, applicable
federal accounting standards, and the U.S. Government Standard General
Ledger at the transaction level. FFMIA also requires the auditors of
agencies' financial statements to report on such compliance.
[6] GAO, NASA Travel: Passenger Aircraft Services Annually Cost
Taxpayers Millions More Than Commercial Airlines, GAO-05-818
(Washington, D.C.: Aug. 26, 2005).
[7] There were initially 24 CFO Act agencies. See Pub. L. No. 101-576,
§205, 104 Stat. 2838, 2842-2843 (1990). The Federal Emergency
Management Agency (FEMA), one of the 24 CFO Act agencies, was
subsequently transferred to the Department of Homeland Security (DHS)
effective March 1, 2003. With this transfer, FEMA is no longer required
to prepare and have audited financial statements under the CFO Act,
leaving 23 CFO Act agencies for fiscal year 2004. For fiscal years 2003
and 2004, DHS was required to prepare audited financial statements
under the Accountability of Tax Dollars Act of 2002 (Pub. L. No. 107-
289, 116 Stat. 2049 (Nov. 7, 2002)). Because DHS was not a CFO Act
agency, it was not subject to FFMIA for fiscal year 2004. The DHS
Financial Accountability Act, Pub. L. No. 108-330, 118 Stat. 1275 (Oct.
16, 2004), added DHS to the list of CFO Act agencies and deleted FEMA,
increasing the number of CFO Act agencies again to 24 for fiscal year
2005.
[8] GAO, Army Depot Maintenance: Ineffective Oversight of Depot
Maintenance Operations and System Implementation Efforts, GAO-05-441
(Washington, D.C.: June 30, 2005).
