Financial Audit
Restatements to the National Science Foundation's Fiscal Year 2003 Financial Statements Gao ID: GAO-06-229R December 22, 2005The Secretary of Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. An issue meriting concern and close scrutiny that emerged during our fiscal year 2004 CFS audit was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. Further, when restatements do occur, it is important that financial statements clearly communicate, and readers of the restated financial statements understand, that the financial statements originally issued by management in the previous year and the opinion thereon should no longer be relied on and instead the restated financial statements and related auditor's opinion should be used. Because of the varying nature and circumstances surrounding the restatements, we are issuing a number of separate reports on the matter. This report communicates our observations regarding the National Science Foundation's (NSF) fiscal year 2003 restatements. Going forward, we hope that the lessons learned from the fiscal year 2003 restatements, together with our recommendations, will help (1) NSF avoid the need for restatements to its future financial statements and (2) ensure that NSF's auditor applies appropriate audit procedures in future audits to test for unrecorded and unbilled licensee fees and related internal controls. We reviewed four key areas with respect to the restatements of NSF's fiscal year 2003 financial statements: (1) the nature and cause of the errors that necessitated the restatements, including planned corrective actions by the agency and its auditors; (2) the timing of communicating the material misstatement to users of the financial statements; (3) the extent of transparency exhibited in disclosing the nature and impact of the material misstatement in the financial statements and the reissued auditor's report; and (4) audit issues that contributed to the failure to detect the errors that necessitated the restatements during the audit of the agency's fiscal year 2003 financial statements.
Failure to properly record the H-1B Nonimmigrant Petitioner Fees (H-1B) account funds for fiscal years 1999 through 2003 led to the material misstatement of about $216 million that necessitated the restatements of NSF's originally issued fiscal year 2003 Balance Sheet and Statement of Changes in Net Position. According to the NSF contracted independent public accountant's (IPA) management letter report dated November 4, 2004, NSF's Division of Financial Management (DFM) did not have adequate internal controls to ensure that it provided accurate financial data, which may have contributed to the recording error that necessitated the restatements. NSF's IPA did not discover the error during its audit of NSF's fiscal year 2003 financial statements. In our view, the IPA did not understand that the H-1B account funds are special funds, which are to be accounted for differently than certain other NSF receipts. In addition, we found that the IPA was not aware of the U.S. Department of the Treasury's Financial Management Service (FMS) guidance relating to the recording of H-1B account funds. Consequently, the IPA did not design or perform adequate audit procedures to detect the accounting errors. We are making a recommendation to NSF's CFO to address the issues we identified with respect to the H-1B account funds recording error that necessitated the fiscal year 2003 restatements. We are also making a recommendation to NSF's Inspector General to work with the IPA so that audit procedures to detect any future material H-1B account funds recording errors are fully and effectively implemented. In commenting on a draft of this report, the NSF's CFO and Inspector General, in separate letters, offered their views regarding the materiality of the errors and the impact of the errors on Net Position. We have clarified our perspective on both points. The report notes that the recording errors in individual years may not have been material, but that the cumulative effect of the errors on the fiscal year 2003 financial statements was deemed material by NSF's IPA. We also note that Total Net Position was unchanged, but that the two distinct components of net position, were misstated. NSF's Inspector General concurred with our recommendation and stated that her office had instituted procedures to ensure that the IPA designed and performed audit steps to detect any future H-1B account fund recording errors.
RecommendationsOur 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.
Director: Team: Phone:GAO-06-229R, Financial Audit: Restatements to the National Science Foundation's Fiscal Year 2003 Financial Statements
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December 22, 2005:
Mr. Thomas N. Cooley:
Chief Financial Officer:
National Science Foundation:
Ms. Christine C. Boesz:
Inspector General:
National Science Foundation:
Subject: Financial Audit: Restatements to the National Science
Foundation's Fiscal Year 2003 Financial Statements:
As you know, the Secretary of the Treasury, in coordination with the
Director of the Office of Management and Budget (OMB), is required to
annually prepare and submit audited financial statements of the U.S.
government to the President and Congress. We are required to audit
these consolidated financial statements (CFS) and report on the results
of our work.[Footnote 1] An issue meriting concern and close scrutiny
that emerged during our fiscal year 2004 CFS audit was the growing
number of Chief Financial Officers (CFO) Act agencies that
restated[Footnote 2] certain of their financial statements for fiscal
year 2003 to correct errors.[Footnote 3] Errors in financial statements
can result from mathematical mistakes, mistakes in the application of
accounting principles, or oversight or misuse of facts that existed at
the time the financial statements were prepared. Frequent restatements
to correct errors can undermine public trust and confidence in both the
entity and all responsible parties. Further, when restatements do
occur, it is important that financial statements clearly communicate,
and readers of the restated financial statements understand, that the
financial statements originally issued by management in the previous
year and the opinion thereon should no longer be relied on and instead
the restated financial statements and related auditor's opinion should
be used.
Eleven of the 23 CFO Act agencies[Footnote 4] restated certain of their
financial statements for fiscal year 2003. Five CFO Act agencies had
restatements in fiscal year 2003 covering their fiscal year 2002
financial statements. Three CFO Act agencies had restatements covering
both years. We noted that the extent of the restatements to CFO Act
agencies' fiscal year 2003 financial statements varied from agency to
agency, ranging from correcting two line items on an agency's balance
sheet to correcting numerous line items on several of another agency's
financial statements. In some cases, the net operating results of the
agency were affected by the restatement. The amounts of the agencies'
restatements ranged from several million dollars to more than $91
billion.
Nine of the 11 agencies that had restatements for fiscal year 2003
received unqualified opinions on their originally issued fiscal year
2003 financial statements. The auditors for 6 of these 9 agencies
issued unqualified opinions on the restated financial statements,
replacing the previous unqualified opinions on the respective agencies'
original fiscal year 2003 financial statements. The auditors for 2 of
these 9 withdrew their unqualified opinions on the fiscal year 2003
financial statements and issued other than unqualified opinions on the
respective agencies' restated fiscal year 2003 financial statements
because they could not determine whether there were any additional
misstatements and the effect of any such misstatements on the restated
fiscal year 2003 financial statements. For the remaining agency, the
principal auditor of the agency's fiscal year 2004 financial statements
was not the principal auditor of the agency's fiscal year 2003
financial statements, and an audit opinion on the agency's restated
fiscal year 2003 financial statements was not issued.
Our review focused on the 9 agencies with restatements for fiscal year
2003 that received unqualified opinions on their originally issued
fiscal year 2003 financial statements.[Footnote 5] These were the
Department of Agriculture, Department of State, Department of Justice,
Department of Transportation, Department of Health and Human Services,
General Services Administration, National Science Foundation (NSF),
Nuclear Regulatory Commission, and Office of Personnel Management.
Because of the varying nature and circumstances surrounding the
restatements, we are issuing a number of separate reports on the
matter. This report communicates our observations regarding NSF's
fiscal year 2003 restatements. Going forward, we hope that the lessons
learned from the fiscal year 2003 restatements, together with our
recommendations, will help NSF and its auditor avoid the need for
restatements to NSF's future financial statements.
We reviewed four key areas with respect to the restatements of NSF's
fiscal year 2003 financial statements: (1) the nature and cause of the
errors that necessitated the restatements, including planned corrective
actions by the agency and its auditors; (2) the timing of communicating
the material misstatement to users of the financial statements; (3) the
extent of transparency[Footnote 6] exhibited in disclosing the nature
and impact of the material misstatement in the financial statements and
the reissued auditor's report; and (4) audit issues that contributed to
the failure to detect the errors that necessitated the restatements
during the audit of the agency's fiscal year 2003 financial statements.
Results in Brief:
Failure to properly record the H-1B Nonimmigrant Petitioner
Fees[Footnote 7] (H-1B) account funds for fiscal years 1999 through
2003 led to the material misstatement of about $216 million that
necessitated the restatements of NSF's originally issued fiscal year
2003 Balance Sheet and Statement of Changes in Net Position. According
to the NSF contracted independent public accountant's (IPA) management
letter report dated November 4, 2004, NSF's Division of Financial
Management (DFM) did not have adequate internal controls to ensure that
it provided accurate financial data, which may have contributed to the
recording error that necessitated the restatements. NSF's IPA did not
discover the error during its audit of NSF's fiscal year 2003 financial
statements. In our view, the IPA did not understand that the H-1B
account funds are special funds, which are to be accounted for
differently than certain other NSF receipts. In addition, we found that
the IPA was not aware of the U.S. Department of the Treasury's
Financial Management Service (FMS) guidance relating to the recording
of H-1B account funds. Consequently, the IPA did not design or perform
adequate audit procedures to detect the accounting errors.
We are making a recommendation to NSF's CFO to address the issues we
identified with respect to the H-1B account funds recording error that
necessitated the fiscal year 2003 restatements. We are also making a
recommendation to NSF's Inspector General to work with the IPA so that
audit procedures to detect any future material H-1B account funds
recording errors are fully and effectively implemented.
In commenting on a draft of this report, the NSF's CFO and Inspector
General, in separate letters, offered their views regarding the
materiality of the errors and the impact of the errors on Net Position.
We have clarified our perspective on both points. The report notes that
the recording errors in individual years may not have been material,
but that the cumulative effect of the errors on the fiscal year 2003
financial statements was deemed material by NSF's IPA. We also note
that Total Net Position was unchanged, but that the two distinct
components of net position, were misstated.
NSF's Inspector General concurred with our recommendation and stated
that her office had instituted procedures to ensure that the IPA
designed and performed audit steps to detect any future H-1B account
fund recording errors.
Background:
In conducting the fiscal year 2004 audit of the CFS, we reviewed the 23
CFO Act agencies' performance and accountability reports for possible
restatements and identified 11 agencies that had restated certain of
their audited fiscal year 2003 financial statements.
The primary intended users of federal agencies' financial reports are
citizens, Congress, federal executives, and federal program
managers.[Footnote 8] Each of these groups may use federal agencies'
financial statements to satisfy their specific needs. Citizens are
interested in many aspects of the federal government, particularly
federal programs that affect their financial well-being. Congress is
interested in monitoring and assessing the efficiency and effectiveness
of federal programs. Federal executives, such as central agency
officials at OMB and the Department of the Treasury (Treasury), are
interested in federal financial statements to assist the President of
the United States. OMB assists the President in overseeing the
preparation of the federal budget by formulating the President's
spending plans, evaluating the effectiveness of agency programs,
assessing competing funding demands among agencies, and setting funding
priorities. Treasury assists the President in managing the finances of
the federal government and prepares the CFS, which is based on audited
financial statements prepared by federal agencies. GAO audits the CFS
and reports on the results of its audit. Finally, federal program
managers use agency financial statements as tools for managing their
operations within the limits of the spending authority granted by
Congress.
The primary accounting and auditing standards that apply to restatement
disclosures by federal entities are the Federal Accounting Standards
Advisory Board's Statement of Federal Financial Accounting Standards
(SFFAS) No. 21, Reporting Corrections of Errors and Changes in
Accounting Principles, and the American Institute of Certified Public
Accountants (AICPA) Codification of Auditing Standards, AU section 561,
Subsequent Discovery of Facts Existing at the Date of the Auditor's
Report.[Footnote 9]
Objective, Scope, and Methodology:
The objective of our review of restatements of NSF's fiscal year 2003
financial statements was to determine the nature and cause of the
errors, the transparency and timing of communicating the material
misstatements, any audit issues relating to such misstatements, and any
actions being taken to help preclude similar errors from occurring in
the future.
We reviewed the nature and causes of the restatements, and we also
examined corrective actions taken by NSF to help preclude similar
errors from occurring in the future. We interviewed the preparers and
auditors of NSF's fiscal year 2003 financial statements, including
staff from the agency's Office of Inspector General (OIG), and we
obtained and reviewed relevant audit documentation. Our work was not
designed to and we did not test the accuracy or appropriateness of the
restatements.
In our review, we considered certain accounting and auditing standards,
including SFFAS No. 21; the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 16, Prior Period
Adjustments; and the AICPA Codification of Auditing Standards, AU
section 420, Consistency of Application of Generally Accepted
Accounting Principles, AU section 508, Reports on Audited Financial
Statements, and AU section 561.
We performed our review of the restatements of NSF's fiscal year 2003
financial statements from December 2004 to July 2005 in accordance with
U.S. generally accepted government auditing standards.
We requested comments on the draft of this report from NSF's CFO and
Inspector General or their designees. Written comments from NSF's CFO
and Inspector General are reprinted in Enclosures I and II,
respectively, and are also discussed in the "Agency Comments and Our
Evaluation" section. We also received technical comments from NSF's
Inspector General which we have incorporated as appropriate but have
not reprinted in Enclosure II.
Issues Related to Restatements of Certain of NSF's Fiscal Year 2003
Financial Statements:
With respect to the restatements of NSF's fiscal year 2003 Balance
Sheet and Statement of Changes in Net Position, we identified the
following two areas that need improvement: (1) accounting for and
reporting of the H-1B account funds; and (2) audit procedures over the
proper recording of H-1B account funds. These issues are discussed in
detail below.
H-1B Account Funds Were Not Properly Recorded:
In fiscal year 2004, NSF restated certain of its originally issued
fiscal year 2003 financial statements to correct for the improper
recording of approximately $216 million of H-1B account funds for
fiscal years 1999 through 2003. Specifically, the H-1B account funds
were incorrectly recorded as Other Appropriations Realized when
received instead of Appropriated Trust or Special Fund Receipts. The
recording errors caused the Unexpended Appropriations and Cumulative
Results of Operations balances on both the originally issued fiscal
year 2003 Balance Sheet and Statement of Changes in Net Position to be
materially overstated and understated, respectively, by $216 million.
Although Total Net Position was unchanged, these two accounts represent
distinct components of net position. In addition, the recording errors
in individual years may not have been material, however, the cumulative
effect of the errors on the fiscal year 2003 financial statements was
deemed material by NSF's IPA.
In February 1999, FMS issued guidance entitled Unavailable Special Fund
Receipt Account Transfers that provided definitions and descriptive
journal entries for recording special funds in accordance with SFFAS
No. 7, Accounting for Revenue and Other Financing Sources and Concepts
for Reconciling Budgetary and Financial Accounting. The H-1B account
funds are NSF's only appropriations that are classified as special
funds. NSF incorrectly recorded the H-1B account funds as Other
Appropriations Realized instead of Appropriated Trust or Special Fund
Receipts because NSF was not aware of the February 1999 FMS guidance,
and as a result, NSF was not aware that such funds were recorded in
error. An NSF official told us that they believed, until fiscal year
2004, that they were appropriately recording the receipt of the H-1B
account funds.
In July 2004, OMB sent an email following up on a March 2004
notification to NSF staff personnel that the H-1B account funds were
incorrectly recorded and that NSF was required to follow the related
FMS guidance.[Footnote 10] NSF staff personnel corrected NSF's error
approximately 8 months after the agency was first notified. However,
according to NSF officials, NSF management did not become aware of the
magnitude of the misstatement until October 2004. Further, the IPA and
OIG stated that they were unaware of the H-1B account funds recording
error until NSF provided them a draft of the fiscal years 2004 and 2003
comparative financial statements in October 2004 that contained the
restatements to the fiscal year 2003 financial statements.
According to the NSF IPA's management letter report dated November 4,
2004, NSF's DFM did not have adequate internal controls to ensure that
it provided accurate financial data. The IPA stated that this may have
contributed to the recording errors that necessitated the restatements.
The IPA's report pointed out that first and second drafts of the
comparative fiscal years 2004 and 2003 financial statements provided by
DFM contained numerous errors.
To resolve this matter, the IPA generally recommended that NSF's Chief
Financial Officer determine the appropriate skills and abilities needed
in the DFM organizational structure to fulfill NSF's responsibilities
for providing accurate financial data, and implement steps to improve
top level supervisory review procedures and practices.
NSF management responded to the IPA's recommendations stating that they
believed that normal supervisory controls were in place and that such
controls provide the review procedures and practices recommended by the
IPA. Nevertheless, NSF management stated that the IPA's recommendations
would be incorporated in NSF's annual performance review process. In
addition, subsequent to the IPA making its recommendations, NSF filled
the office of deputy CFO position which had been vacant for 18 months.
According to the IPA, this action will provide better oversight of
NSF's financial reporting process.
Audit Procedures were Not Adequately Designed to Detect the Improper
Recording of H-1B Account Funds:
The above noted material error was not discovered during the audit of
NSF's fiscal year 2003 financial statements. In our view, the IPA did
not understand that the H-1B account funds are special funds, which are
to be accounted for differently than certain other NSF receipts. In
addition, we found that the IPA was not aware of the 1999 FMS guidance
relating to the recording of H-1B account funds. Consequently, the IPA
did not design or perform adequate audit procedures to detect the
errors.
According to the Financial Audit Manual (FAM),[Footnote 11] the auditor
should perform audit procedures to test for all significant
assertions[Footnote 12] in significant financial statement line items
and accounts. The FAM states that an assertion is significant if
misstatements in the assertion could exceed test materiality for the
related line item, account, or disclosure. Based on the materiality of
NSF's H-1B account funds recording error, the auditor should have
identified the presentation and disclosure assertion as significant and
performed audit procedures to determine whether NSF's receipts,
annually and in the aggregate, were properly reported in the financial
statements. To test for presentation and disclosure, the auditor should
perform audit procedures to determine whether (1) accounts are properly
classified and described in the financial statements, (2) the financial
statements are prepared in conformance with generally accepted
accounting principles, and (3) footnotes contain all information
required to be disclosed. The IPA performed certain audit procedures
during fiscal year 2003 to test budget accounts. However, because the
IPA (1) did not understand that the H-1B account funds are special
funds, which are to be accounted for differently than certain other NSF
receipts, and (2) was not aware of the 1999 FMS guidance relating to
the recording of H-1B account funds, the IPA did not design or perform
audit procedures to adequately test for the presentation and disclosure
assertion as it related to the H-1B account funds.
According to NSF's IPA, it has now obtained and reviewed the February
1999 FMS guidance. The IPA also stated that, beginning with fiscal year
2005, audit procedures will be designed and performed to detect any
future H-1B account funds recording errors.
Conclusions:
NSF restated certain of its originally issued fiscal year 2003
financial statements and disclosed the material error in the notes to
the restated financial statements. Going forward, the key will be for
NSF to fully and effectively implement policies and procedures to help
ensure that H-1B account funds are properly recorded. It will also be
important for NSF's auditor to fully and effectively implement audit
procedures to detect any H-1B account funds recording errors that occur
in the future.
Recommendations for Executive Action:
We recommend that NSF's Chief Financial Officer ensure that NSF fully
and effectively implements policies and procedures to properly record H-
1B account funds.
We recommend that NSF's Inspector General work with NSF's IPA so that
audit procedures to detect any future material H-1B account funds
recording errors are fully and effectively implemented.
Agency Comments and Our Evaluation:
In commenting on a draft of this report, NSF's CFO and Inspector
General, in separate letters, offered their views regarding the
materiality of the errors and the impact of the errors on Net Position.
We have clarified our perspective on both points. Our report makes
clear that there was no effect on NSF's Total Net Position and that the
cumulative effect of the continuing recording errors for fiscal years
1999 through 2003 caused the Unexpended Appropriations and Cumulative
Results of Operations balances on both the originally issued fiscal
year 2003 Balance Sheet and Statement of Changes in Net Position to be
materially overstated and understated, respectively. The component
accounts making up the Statement of Changes in Net Position became
increasingly overstated and understated each year until the accounting
treatment was corrected for the entire 5-year period in the restated
fiscal year 2003 financial statements. To provide more context for this
improper accounting and subsequent restatements, we have added language
to our report stating that in any 1 year, the recording error of H-1B
account fund receipts may not have been material, but that the
cumulative effect of the errors on the fiscal year 2003 Balance Sheet
and Statement of Changes in Net Position was deemed material by NSF's
IPA.
NSF's CFO also stated that OMB's March 2004 notification of the
accounting error and need to follow the previously issued 1999 FMS
guidance was communicated at the staff level and not formally through
the CFO or the deputy CFO, which caused management delays in ensuring
the appropriate level of attention to the issue. In our view, agency
financial managers should have been aware of and implemented the new
accounting guidance in 1999 when it was first issued by FMS, which
would have avoided the need for the fiscal year 2003 restatements.
NSF's CFO further stated that the IPA's management letter findings that
we reported had no actual bearing on the facts of the restatements and
that NSF's management response to the IPA findings should be reflected
for proper balance and context. As we noted in this report, NSF's IPA
reported in a finding dealing with financial management practices that
NSF did not have adequate internal controls to ensure that it provided
accurate financial data which may have contributed to the recording
error that necessitated the restatements. To resolve this matter, the
IPA generally recommended that NSF's Chief Financial Officer determine
the appropriate skills and abilities needed in the DFM organizational
structure to fulfill NSF's responsibilities for providing accurate
financial data and implement steps to improve top level supervisory
review procedures and practices. NSF management responded to the IPA's
recommendations stating that they believed that normal supervisory
controls were in place and that such controls provide the review
procedures and practices recommended by the IPA. Nevertheless, NSF
management stated that the IPA's recommendations would be incorporated
in NSF's annual performance review process. It should be noted that, in
providing its perspective on the IPA-identified issue and management's
response, the OIG said the errors in NSF's financial statements and the
untimely notification of the need to restate NSF's fiscal year 2003
financial statements demonstrated that management's controls over
financial reporting were not adequate or appropriate.
Finally, NSF's Inspector General concurred with our recommendation and
stated that her office had instituted procedures to ensure that the IPA
designed and performed audit steps to detect any H-1B account fund
recording errors. We also received technical comments from NSF's
Inspector General which we have incorporated as appropriate.
Within 60 days of the date of this report, we would appreciate
receiving a written statement on actions taken to address these
recommendations.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Homeland Security and
Governmental Affairs; the Subcommittee on Federal Financial Management,
Government Information, and International Security, Senate Committee on
Homeland Security and Governmental Affairs; the House Committee on
Government Reform; and the Subcommittee on Government Management,
Finance and Accountability, House Committee on Government Reform. In
addition, we are sending copies to the Fiscal Assistant Secretary of
the Treasury and the Controller of OMB. This report is also available
at no charge on GAO's Web site at www.gao.gov.
We appreciate the courtesy and cooperation extended to us by your staff
throughout our work. We look forward to continuing to work with your
offices to help improve financial management in the federal government.
If you have any questions about the contents of this report, please
contact me at (202) 512-3406 or engelg@gao.gov.
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
Enclosure I: Comments from the Chief Financial Officer, National
Science Foundation:
NATIONAL SCIENCE FOUNDATION:
4201 WILSON BOULEVARD:
ARLINGTON, VIRGINIA 22230:
NOV 30 2005:
Mr. Gary T. Engel:
Director:
Financial Management and Assurance:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Engel:
The National Science Foundation (NSF) received your draft report
entitled Financial Audit: Restatements to the National Science
Foundation's Fiscal Year 2003 Financial Statements dated November 3,
2005, and is providing our comments for your consideration. NSF
appreciated the extension provided from November 18 to November 30 to
provide an appropriate response.
In reviewing the draft, NSF believes the report should include
additional information that will allow the reader to put the
restatement in perspective and provide more balanced reporting. The
restatement was due to the receipt of clarifying guidance on a long-
standing accounting treatment of our unique H-1 B Nonimmigrant
Petitioner Fees funds as follows:
* Since inception, in 1999, of NSF's receipt of H-1B account funds NSF
had recorded the funds as other appropriations realized. This
accounting treatment was due to the funds being provided via a warrant
and associated guidance related to recording warrants. NSF believed,
until 2005, we were appropriately recording the receipt of the H-1 B
account funds. We received no information from our reporting oversight
agencies until notified that the 1999 FMS guidance should be applied to
our unique H-1 B account funds.
* Clarifying guidance was communicated at the staff level and not
formally through the CFO or the DCFO, which caused management delays in
ensuring the appropriate level of attention to the issue.
* This was a one time accounting change to our H-1B funds that resulted
in a reclassification and had no net effect on NSF's net position. The
report should address that the change was not material to NSF's
financial statements, and does not reflect an area that needs
improvements or recommendations going forward as noted.
* NSF management is requesting that references to our management letter
on pages 5, 10, 11 be removed from this report. The management letter
finding referenced by the independent public accounting firm, KPMG, has
no actual bearing on the facts of the restatement. However, if these
references are retained we request that NSF's management response is
also reflected for proper balance and context.
NSF previously provided this information to your staff in
communications in May 2005. My staff also relayed our decision process
and our resolution actions completed. We view this restatement as a
simple clarification of a long-standing accounting treatment. NSF has a
history of financial management excellence and we are proud of our
track record as a recognized leader in financial reporting.
We appreciate the cooperation provided by your staff and the
opportunity to respond to the draft report. We respectfully request
your consideration of our comments.
If you have any questions concerning our response, please contact me at
(703) 292-8200 or John Lynskey at (703) 292-8280.
Sincerely,
Signed by:
Thomas N. Cooley:
Chief Financial Officer:
The following are GAO's comments on the November 30, 2005, letter from
the National Science Foundation's, Chief Financial Officer.
GAO Comments:
See "Agency Comments and Our Evaluation" section.
It would be inappropriate to categorize the correction for a material
error in NSF's financial statements as merely a reclassification.
Although Total Net Position was unchanged, these two accounts represent
distinct components of net position. Specifically, according to
Statements of Federal Financial Accounting Concepts No. 2, Entity and
Display, Cumulative Results of Operations generally includes the
amounts accumulated over the years by an entity from its financing
sources less its expenses and losses, while Unexpended Appropriations
represents appropriations not yet obligated or expended, including
undelivered orders.
Further, IPA officials told us that they considered the error to be
material and concluded that NSF needed to restate the fiscal year 2003
financial statements and disclose in the comparative fiscal years 2004
and 2003 financial statements that certain fiscal year 2003 balances
have been restated. The IPA's audit report states that NSF's fiscal
year 2003 Balance Sheet and Statement of Changes in Net Position were
restated. In addition, the notes to NSF's comparative fiscal years 2004
and 2003 financial statements includes a note disclosure titled
"Restatement" that discusses the restatements.
[End of section]
Enclosure II: Comments from the Inspector General, National Science
Foundation:
NATIONAL SCIENCE FOUNDATION:
OFFICE OF INSPECTOR GENERAL:
4201 Wilson Boulevard:
ARLINGTON, VIRGINIA 22230:
November 30, 2005:
Mr. Gary T. Engel:
Director:
Financial Management and Assurance:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Mr. Engel,
Thank you for the opportunity to comment on your draft report entitled
Financial Audit: Restatements to the National Science Foundation's
Fiscal Year 2003 Financial Statements.
In your draft report you recommended that "NSF's Inspector General work
with NSF's IPA so that audit procedures to detect any future material H-
1B Nonimmigrant Petitioner Fees (H-113) account funds recording errors
are fully and effectively implemented." We agree with the GAO report
recommendation and that the II-113 fees were incorrectly reported in
NSF's financial statements for fiscal years 1999 to 2003. For the most
recent fiscal year 2005 financial statements, we instituted procedures
to ensure that the IPA designed and performed audit steps to detect any
H-1B account funds recording errors. However, we believe the report
should include additional information that will allow the user to put
the finding in perspective and provide more balanced reporting.
Specifically:
1. The fact that the special fund receipts are not material to NSF's
overall financing sources needs to be disclosed in the report. The
report indicates that the $216 million represents the cumulative amount
received by NSF from 1999 through to 2003. However, in any one year,
the special fund receipts were less than 2% - 5% of total funds
received (1.2% of total appropriations received in fiscal year 2003).
2. The report should state that there was no effect on Net Position and
that this error was a reclassification between components of Net
Position. The funds were clearly accounted for in a responsible
fashion, but were in the incorrect category of Net Position. There were
adequate controls over these funds and total resources were fairly
stated. The Cumulative Results of Operations ending balance for fiscal
year 2003 increased by $216 million (which includes S 186.2 million
related to the beginning balance) and the Unexpended Appropriations
decreased by the same amount.
3. The report should clearly indicate that total net position was
$7.045 billion for fiscal year 2003, of which the special fund receipts
represented 3.1 percent.
4. The statement that the IPA "..did not understand the proper
accounting for these type of funds" is not accurate. Once these funds
were identified, the IPA knew the appropriate accounting for the H-1B
funds.
We have attached suggested changes to the report in order to address
these issues.
We appreciate your consideration of our comments and if you have any
questions, please contact me or Deborah Cureton, Associate Inspector
General for Audit, on (703) 292-7100.
Sincerely,
Signed by:
Dr. Christine C. Boesz:
Inspector General:
Attachment:
The following are GAO's comments on the November 30, 2005, letter from
the National Science Foundation's Inspector General.
GAO Comments:
See "Agency Comments and Our Evaluation" section.
See GAO comment 2 in Enclosure I.
We have clarified this point in our report by modifying the language to
state that in our view, the IPA did not understand that the H-1B
account funds are special funds, which are to be accounted for
differently than certain other NSF receipts.
[End of section]
(198399):
FOOTNOTES
[1] The Government Management Reform Act of 1994 has required such
reporting, covering the executive branch of government, beginning with
financial statements prepared for fiscal year 1997. 31 U.S.C. § 331
(e). The federal government has elected to include certain financial
information on the legislative and judicial branches in the CFS as
well.
[2] A financial statement restatement occurs when an entity either
voluntarily or prompted by its auditors or regulators revises public
financial information that has previously been reported.
[3] According to Federal Accounting Standards Advisory Board, Statement
of Federal Financial Accounting Standards No. 21, Reporting Corrections
of Errors and Changes in Accounting Principles, prior period financial
statements presented should be restated only to correct errors that
caused such statements to be materially misstated.
[4] The Federal Emergency Management Agency (FEMA) was transferred to
the Department of Homeland Security (DHS) effective March 1, 2003. With
this transfer, FEMA was no longer required to prepare and have audited
stand-alone financial statements under the CFO Act, leaving 23 CFO Act
agencies for the remainder of fiscal year 2003 and 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,
increasing the number of CFO Act agencies again to 24 beginning in
fiscal year 2005.
[5] The 2 agencies that had restatements for fiscal year 2003 but did
not receive unqualified opinions on their originally issued fiscal year
2003 financial statements were the Department of Defense and the Small
Business Administration.
[6] Transparency is the full, accurate, and timely disclosure of
information.
[7] H-1B account funds are fees collected by the U.S. Treasury from
employers that employ highly skilled aliens in specialty occupations.
The American Competitiveness and Workforce Improvement Act of 1998,
Title IV, states that the federal government shall impose a fee on an
employer filing a petition relating to granting an alien nonimmigrant
status. Fees collected shall be deposited with the Department of the
Treasury in a separate account, which shall be known as the H-1B
Nonimmigrant Petitioner Account, and disseminated for a variety of uses
- such as job training, low-income scholarship program, educational
grants, systemic reform activities, duties relating to petitions, and
application processing and enforcement.
[8] Federal Accounting Standards Advisory Board, Statement of Federal
Financial Accounting Concepts No. 1, Objectives of Federal Financial
Reporting.
[9] Generally accepted government auditing standards incorporate AICPA
reporting standards and Statements on Auditing Standards unless the
Comptroller General of the United States excludes them by formal
announcement.
[10] According to OMB's e-mail correspondence dated July 6, 2004, to
NSF staff personnel, if the error was not corrected, then the special
and trust fund budget authority recorded in NSF's H-1B account funds
will not crosswalk into the agency's actual columns of the Program and
Financing Schedule in the fiscal year 2006 [President's] Budget.
[11] GAO/President's Council on Integrity and Efficiency, Financial
Audit Manual, GAO-01-765G (Washington, D.C.: July 2001), updated by GAO-
04-1015G and GAO-04-942G (July 2004).
[12] Financial statement assertions are management representations that
are embodied in financial statement components. The assertions can be
either explicit or implicit and can be classified into the following
categories: (1) existence or occurrence, (2) completeness, (3) rights
and obligations, (4) valuation or allocation, and (5) presentation and
disclosure.
