[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
  THE NATIONAL AERONAUTICS AND SPACE ADMINISTRATION: WHAT WENT WRONG?
=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
                        FINANCIAL MANAGEMENT AND
                      INTERGOVERNMENTAL RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 20, 2002

                               __________

                           Serial No. 107-158

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform









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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
------ ------                            (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

    Subcommittee on Government Efficiency, Financial Management and 
                      Intergovernmental Relations

                   STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida                  MAJOR R. OWENS, New York
DOUG OSE, California                 PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida              CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                 Rosa Harris, Professional Staff Member
                        Justin Paulhamus, Clerk
           David McMillen, Minority Professional Staff Member






                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 20, 2002...................................     1
Statement of:
    Kutz, Gregory D., Director, Financial Management and 
      Assurance, U.S. General Accounting Office, accompanied by 
      Allen Li, Director, Acquisition and Sourcing Management, 
      U.S. General Accounting Office.............................     5
    Lamoreaux, Alan J., Assistant Inspector General for Audits, 
      National Aeronautics and Space Administration..............    33
    McNamee, Patrick L., partner, PriceWaterhouseCoopers, LLP....    49
    Pastorek, Paul G., General Counsel, National Aeronautics and 
      Space Administration, accompanied by Stephen J. Varholy, 
      Deputy Chief Financial Officer, National Aeronautics and 
      Space Administration.......................................    20
Letters, statements, etc., submitted for the record by:
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California:
        Information concerning ``Actions Taken by the New 
          Administrator'' and the IFM schedule acceleration......    30
        Prepared statement of....................................     3
    Kutz, Gregory D., Director, Financial Management and 
      Assurance, U.S. General Accounting Office, prepared 
      statement of...............................................     8
    Lamoreaux, Alan J., Assistant Inspector General for Audits, 
      National Aeronautics and Space Administration, prepared 
      statement of...............................................    36
    McNamee, Patrick L., partner, PriceWaterhouseCoopers, LLP:
        Information concerning NASA financial statement reports..    50
        Prepared statement of....................................    65
    Pastorek, Paul G., General Counsel, National Aeronautics and 
      Space Administration, prepared statement of................    23
    Schakowsky, Hon. Janice D., a Representative in Congress from 
      the State of Illinois, prepared statement of...............    74


  THE NATIONAL AERONAUTICS AND SPACE ADMINISTRATION: WHAT WENT WRONG?

                              ----------                              


                       WEDNESDAY, MARCH 20, 2002

                  House of Representatives,
  Subcommittee on Government Efficiency, Financial 
        Management and Intergovernmental Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Schakowsky, and Maloney.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, deputy staff director; Rosa Harris, 
professional staff member, GAO detailee; Darin Chidsey, 
professional staff member; Justin Paulhamus, clerk; David 
McMillen, minority professional staff member; and Jean Gosa, 
minority assistant clerk.
    Mr. Horn. A quorum being present, this hearing of the 
Subcommittee on Government Efficiency, Financial Management and 
Intergovernmental Relations will come to order.
    Today begins the subcommittee's first in a series of 
hearings to examine the progress the executive branch 
departments and agencies in the Federal Government are making 
toward providing timely and useful financial information. The 
results of the fiscal year 2001 financial statement audits 
showed that, while several agencies made marked improvements in 
their financial management systems and processes, others still 
have a long way to go.
    This year the status of two agencies deteriorated. One of 
these agencies is the National Aeronautics and Space 
Administration. For the last 5 consecutive years, NASA had 
received unqualified or clean audit opinions on its financial 
statements. Similarly, for the last 5 consecutive years NASA 
received a grade of A on the subcommittee's score card on 
Federal financial management. For fiscal year 2001, however, 
NASA was unable to provide timely documentation to substantiate 
the accuracy and classification of its obligations, expenses, 
property, plant, and equipment and materials. These problems 
were so severe that NASA's new auditor, PricewaterhouseCoopers, 
was unable to provide an opinion on whether the amounts on the 
fiscal year 2001 financial statements were reasonable. The 
auditors also found that the agency had significant material 
weaknesses in its system of internal controls.
    For the first time since fiscal year 1997, auditors 
reported that NASA's systems were not in compliance with the 
Federal Financial Management Improvement Act of 1996. The GAO, 
the General Accounting Office, had questioned NASA's compliance 
with the act in two reports last year. In addition, the General 
Accounting Office found that NASA could not provide detailed 
support for amounts obligated against the space station or the 
shuttle.
    In another report, the General Accounting Office found that 
NASA could not provide support for amounts on its fiscal year 
1999 statement of budgetary resources. In this same report, the 
General Accounting Office questioned NASA's previous auditor, 
Arthur Andersen's support for an unqualified opinion on this 
statement.
    The status of NASA's financial management has been 
consistently questioned by the General Accounting Office and 
others, yet Arthur Andersen continued for years to give NASA a 
clean bill of health.
    Is NASA a Government Enron? Did the Agency's financial 
management problems begin in fiscal year 2001, or were they 
always present?
    In this hearing we will focus on what went wrong at NASA 
for fiscal year 2001 and what actions are being taken to 
resolve the financial management issues.
    I welcome today's witnesses. I look forward to working with 
each of you in order to ensure Federal financial accountability 
throughout the Federal Government.
    [The prepared statement of Hon. Stephen Horn follows:]
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    Mr. Horn. We will now swear in the panel. We have Mr. Kutz, 
Mr. Li, Mr. Pastorek, Mr. Varholy, Mr. Lamoreaux, and Mr. 
McNamee. Please stand and raise your right hand.
    [Witnesses sworn.]
    Mr. Horn. We have a vote on the floor, so we're going to 
have to go into recess at this point and we will be back in 
about 15 minutes. Thank you very much.
    [Recess.]
    Mr. Horn. The recess is over and the journal is approved 
and our best wishes to Ukraine on their elections.
    Now we get down to serious business, and we now start, as 
we usually do, with the General Accounting Office, and we have 
Gregory Kutz, the Director of Financial Management and 
Assurance, and Allen Li, the Director, Acquisition and Sourcing 
Management.
    Gentlemen, proceed.

 STATEMENT OF GREGORY D. KUTZ, DIRECTOR, FINANCIAL MANAGEMENT 
 AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY 
 ALLEN LI, DIRECTOR ACQUISITION AND SOURCING MANAGEMENT, U.S. 
                   GENERAL ACCOUNTING OFFICE

    Mr. Kutz. Mr. Chairman, good morning. It is a pleasure to 
be here to discuss NASA's financial management. With me is 
Allen Li, the Director in charge of our NASA program work.
    NASA's technical and scientific excellence has been 
demonstrated consistently over the years; however, this same 
level of excellence is not evident in many of NASA's business 
operations, including its financial management. The bottom line 
of my testimony is that NASA's financial management 
difficulties are not new. NASA's longstanding contract 
management problems have always suggested that NASA does not 
have the financial management information it needs to 
effectively manage its programs.
    My testimony today will focus on the work we have done 
recently related to NASA's financial management. GAO has not 
performed a comprehensive review of NASA's financial management 
systems or information since fiscal year 1993. Our ongoing 
program work at NASA and several recent GAO financial 
management reports are the basis for my testimony.
    For the past 5 years, NASA was one of the very few agencies 
whose auditors reported unqualified audit opinions on the 
financial statements, no material internal control weaknesses, 
and systems that complied with Federal standards. NASA annual 
reports results implied that it not only could generate 
reliable information once a year for external financial 
reporting, but also could provide accurate, reliable 
information for day-to-day decisionmaking. However, in contrast 
with previous Arthur Andersen reports, NASA's new auditor, 
PricewaterhouseCoopers, which I will refer to as PWC, 
disclaimed an opinion on NASA's 2001 financial statements, 
identified significant internal control weaknesses, and found 
that NASA's systems do not comply with Federal standards.
    Although the auditor's report draws attention to the issue, 
NASA's financial management difficulties are not new. For 
example, NASA has been on GAO's high-risk list for contract 
management problems since 1990. The high-risk designation is 
due, in part, to NASA's difficulties implementing a modern, 
integrated financial management system that routinely provides 
reliable information.
    Further, about a 1\1/2\ years ago congressional staff 
members found a $644 million mis-statement in NASA's fiscal 
year 1999 financial statements, an error that NASA management 
and Arthur Andersen had not identified. As we reported in March 
2001, the error resulted because NASA's systems could not 
produce the budgetary data required by Federal accounting 
standards. Instead, NASA relied on an ad hoc year-end data call 
from its ten reporting units and the aggregation of data using 
computer spreadsheets.
    Based in part on this ad hoc process, we questioned NASA's 
and Arthur Andersen's determination that its systems complied 
with Federal standards. We also reported that Arthur Andersen's 
work did not meet professional standards. Evidence in Arthur 
Andersen's working papers was not adequate to support the 
unqualified opinions on NASA's 1999 budgetary financial 
statements.
    Auditing is about independently validating management 
representations; however, we found that Andersen's work was 
characterized by excessive reliance on representations by NASA 
management. This reliance resulted in the absence of any 
independent validation of underlying data for certain key 
balances.
    Recently, additional information on the extent of NASA's 
financial management difficulties has come to light. In 
response to a legislative mandate, we have been attempting for 
more than a year to validate amounts that NASA has reported to 
the Congress as obligated against statutory space station and 
related shuttle cost spending limits.
    After this protracted effort, NASA has finally acknowledged 
that it cannot support amounts reported to the Congress as 
obligated against the spending limits. For 2001, PWC also found 
that NASA could not adequately support obligations and 
expenses. In addition, NASA does not have real-time cost data 
to compare to budget estimates that would provide early warning 
signs of cost overruns. This is important because, from its 
inception, the space station program has been characterized by 
schedule delays, cost overruns, and reduced capabilities.
    Lack of reliable cost data was evident when NASA announced 
in 2001 that it had a $4.8 billion cost overrun for the space 
station. An independent task force reported in late 2001 that 
the space station program lacks the financial management tools 
and cost data necessary for successful completion within 
budget.
    It is clear that modernizing NASA's financial management 
systems is a key element of reform. To its credit, NASA is 
working toward implementing an integrated financial management 
system that is expected to be operational in 2006 at a reported 
cost of $475 million. However, this is NASA's third attempt at 
systems modernization. The first two efforts were abandoned 
after 12 years at a reported cost of $180 million.
    In summary, NASA should fully acknowledge the financial 
management problems it faces and look for lasting solutions. 
The goal should not be a clean opinion; rather, the goal should 
be timely and accurate data that can be used to effectively 
manage NASA's programs.
    We recently met with the new administrator, who represented 
that improving financial management at NASA, including 
implementing the new system, would be one of his top 
priorities. We believe that the administrator's support and 
leadership in this area are key elements for successful reform.
    Mr. Chairman, this ends my statement. Mr. Li and I would be 
happy to answer questions after the others have given their 
statements.
    Mr. Horn. Thank you very much.
    [The prepared statement of Mr. Kutz follows:]
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    Mr. Horn. We now move to Paul G. Pastorek, general counsel, 
National Aeronautics and Space Administration.

   STATEMENT OF PAUL G. PASTOREK, GENERAL COUNSEL, NATIONAL 
AERONAUTICS AND SPACE ADMINISTRATION, ACCOMPANIED BY STEPHEN J. 
 VARHOLY, DEPUTY CHIEF FINANCIAL OFFICER, NATIONAL AERONAUTICS 
                    AND SPACE ADMINISTRATION

    Mr. Pastorek. Good morning, Mr. Chairman. I have a written 
statement which I'll submit for the record and I'll make a few 
comments, if I may.
    Mr. Horn. All right. We need to get you close to that mic.
    Mr. Pastorek. I'm sorry. Can you hear me now?
    Mr. Horn. Yes. Thank you.
    All of the statements automatically go in the record when 
we call you up, and if you could summarize it, obviously we'd 
appreciate it.
    Mr. Pastorek. Thank you, sir.
    First of all, I was appointed by the President and began 
service with NASA a month ago at the recommendation of Mr. 
O'Keefe, and prior to coming on board I have been a commercial 
lawyer for about 25 years involved in financial and accounting 
issues. Mr. O'Keefe has asked me if I would assist him in this 
interim period while we are awaiting a new CFO and other 
individuals to focus on these financial management issues.
    I would like to make three points. First, we sincerely 
welcome the opportunity to be here today to explain what we are 
doing to address the financial management problems that we have 
at NASA and to hear your concerns and the others' concerns 
about that.
    As you all know, the Commissioner--the Administrator has a 
reputation for correcting problems, particularly financial 
ones. And it is, indeed, important that we have that kind of 
management skill in this case because it is undeniable that 
NASA has financial management problems and a history of being 
unable to implement a much needed integrated financial system.
    The only way to correct a problem is to fully understand 
the nature of it. We've already met with the Office of the 
Inspector General and Pricewaterhouse to understand the full 
measure of their concerns--just recently, about a week-and-a-
half ago.
    We welcome the opportunity to hear the comments today of 
GAO, and we certainly welcome the opportunity to hear further 
from all of these individuals in this regard so that we can 
address these problems adequately and promptly.
    I do want to assure you, as has been pointed out, that 
after safety, which is the first priority of this 
Administrator, from a management perspective, financial 
management is the highest priority.
    I want to review the steps that have been taken by the 
Administrator to address these problems, and I have a one-page 
handout which I have given to you, sir, and go through that 
very briefly.
    No. 1, as I've said, the Administrator has made financial 
management systems and the implementation of the IFMP the 
highest management priority. The Administrator was originally 
advised that the schedule for implementation of financial 
management, the new integrated financial management program, 
would not occur until fiscal year 2007, but after he came on 
board, further work has been done, and that timeline has been 
accelerated to fiscal year 2005, with the core financials to be 
completed in fiscal year 2003. We also have a schedule also 
provided to your staff which outlines that new schedule.
    The Administrator has met personally with the Chief 
Executive Officer and chairman of the Board of SAP, who is the 
contractor for the Integrated Financial Management System, to 
make sure that we have a high level of communication with our 
contractor for the implementation of the program.
    The Administrator has also hired a special assistant 
responsible for financial management, reporting directly to him 
in order to successfully implement the integrated financial 
management program. In fact, he is here today--Mr. Patrick 
Seganar, who comes to us from private industry as a seasoned 
CFO who has successfully overseen implementation of such 
systems in his personal experience. His primary task is to 
assure quick and successful implementation of that, and, again, 
will report directly to the Administrator.
    In addition, the Administrator has directed that there be a 
refocusing of the field center CFO structure to include 
financial analysis, and that it be complete once the Integrated 
Financial Management System is implemented. We are also 
focusing on full cost management, budgeting, and accounting, 
which has been initiated but will not be completed until the 
IFMP is in place.
    Now, with respect to the NASA audit by 
PricewaterhouseCoopers, the Administrator has also undertaken a 
number of steps to address this problem. He has met personally 
with the Chief Executive and chairman of the Board of 
PricewaterhouseCoopers and the Office of the Inspector General 
to fully understand the problem and to develop, again, a high 
level of communication with the company so that we do not have 
this problem again.
    In addition, we have provided that NASA will maintain or 
will change the way it accounts for certain information in 
response to PricewaterhouseCoopers' request.
    Further, the Administrator is requiring NASA's personnel to 
work more closely with PricewaterhouseCoopers to address the 
still-existing problems on fiscal year 2001 audit issues. There 
have already been two meetings in the last 10 days to do so.
    Finally, the Administrator has directed that NASA work more 
closely with Pricewaterhouse to create a better plan for the 
audit for the upcoming 2002 fiscal year. It is hoped that, by 
having a better plan, a high level of coordination between the 
Administrator directly and the top levels of management at 
PricewaterhouseCoopers, we will be able to address this problem 
aggressively and solve it by the time the next audit is in 
place.
    The third point I wanted to make is, unless and until we 
successfully implement the financial management system that we 
have been talking about, we will have to struggle with an 
unduly complex, highly decentralized, and undeniably antiquated 
system of financial accounting which does not lend itself 
easily to solving the financial management needs of the Agency, 
this committee, or the citizens of this country.
    NASA did not get into this situation regarding financial 
management overnight and it will not solve the problem 
overnight, either; however, we will do our best to work with 
what we have to provide the best information we can so that 
proper decisions can be made by NASA and by Congress.
    I want to thank the committee for the opportunity to be 
heard and am prepared to answer your questions.
    Mr. Horn. Thank you, sir.
    [The prepared statement of Mr. Pastorek follows:]
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    Mr. Horn. You are accompanied by----
    Mr. Pastorek. Mr. Steve Varholy, the acting CFO at NASA.
    Mr. Horn. Do you have anything to add to that?
    Mr. Varholy. No, I don't, sir.
    Mr. Horn. All right.
    Now, when did you send this ``Actions Taken by New 
Administrator to Resolve NASA's Financial Management Issues?'' 
When did that come in?
    Mr. Pastorek. I provided that to the committee this 
morning. I refer to a number of these steps in my prepared 
statement that we circulated to the committee earlier this 
week.
    Mr. Horn. Well, we like these a little prior to the 
hearing, but it will be put in the record at this point without 
objection.
    Mr. Pastorek. I appreciate that, sir.
    Mr. Horn. And that also includes the IFM schedule 
acceleration. Would you tell us what ``IFM'' is?
    Mr. Pastorek. That's the Integrated Financial Management 
Program. That's what the acronym is for. And this is the 
schedule for its implementation. There are two pages. The first 
one relates to the overall financial management program that 
will be installed by SAP, and the second page refers to one of 
those items on the first page, to-wit, the core financial 
implementation schedule. It is a detail of the bar chart on the 
first page.
    Mr. Horn. Now, there were--we're going to go on, but just 
at this point the shuttle is what in the status of the 
accountants?
    Mr. Pastorek. The shuttle is? I'm sorry?
    Mr. Horn. The shuttle and the space station.
    Mr. Pastorek. Right now the folks at NASA and 
Pricewaterhouse are working on a protocol to be able to arrive 
at adequate information for Pricewaterhouse's analysis to be 
able to give us and the committee and others a proper 
accounting for those two programs.
    Mr. Horn. The IFM schedule acceleration will be put in the 
record after the ``Actions Taken by the New Administrator,'' so 
it is in one piece and our colleagues can relate to it.
    Mr. Pastorek. Thank you, sir.
    [The ``Actions Taken by the New Administrator'' and the IFM 
schedule acceleration follow:]
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    Mr. Horn. We now go to Mr. Alan Lamoreaux, assistant 
Inspector General for audits, National Aeronautics and Space 
Administration.

STATEMENT OF ALAN J. LAMOREAUX, ASSISTANT INSPECTOR GENERAL FOR 
     AUDITS, NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

    Mr. Lamoreaux. Mr. Chairman and members of the committee, 
thank you for the opportunity to be here today to discuss 
NASA's financial management issues. I'd like to briefly cover 
the current state of NASA's financial management system and the 
reasons for a disclaimer on its recent financial statements.
    My written statement discusses the IG's work on the 
financial management system currently being implemented and a 
few examples of program decisions that were made without the 
benefit of accurate cost/benefit analyses using complete and 
accurate costs.
    NASA's financial management system is comprised of ten 
decentralized, non-integrated systems established many years 
ago. The systems are not transaction based, standardized, or 
interfaced. Although the systems have been upgraded over the 
years, they remain antiquated and expensive to maintain.
    The financial management systems do not provide NASA 
management with online, up-to-date information designed to 
assist managers in making daily decisions.
    To accomplish the fiscal year 2001 financial statement 
audit, the NASA OIG contracted with PricewaterhouseCoopers, 
PWC. After NASA received unqualified--that is, clean--opinions 
on its financial statements for the last 7 years, 
Pricewaterhouse disclaimed--that is, did not express an 
opinion. The disclaimer resulted primarily from NASA's 
inability to provide in a timely manner detailed transaction 
data and documents to fully substantiate the accuracy and the 
classification of amounts the Agency reported as obligations; 
expenses; plant, property, and equipment; and materials.
    At this point I'd like to cover what changed from last 
year's audit.
    Our contract with PWC required that the auditors place only 
limited reliance on internal controls for the first 2 years. In 
using this approach, which is consistent with the GAO PCIE 
Financial Audit Manual, a more-substantial level of transaction 
testing is required because internal controls were not fully 
relied upon to reduce testing.
    Because of the limited reliance on internal controls, 
Pricewaterhouse selected a large statistical sample covering 11 
locations to test $14.9 billion of obligations and expense 
transactions. In comparison, the previous year's auditor, 
Arthur Andersen, sampled fewer transactions covering three NASA 
centers and obtained the samples from a summary system. Each 
year over the 5-year period, Andersen selected different 
centers. Andersen had a different degree of cumulative audit 
knowledge and experience with NASA's financial systems. In 
contrast, PWC used the transaction-based sampling approach from 
a universe of transactions that rolled-up to the general ledger 
accounts.
    To statistically select a sample of obligations and expense 
transactions, the universe of all transactions had to be 
established. NASA centers were given a few weeks to provide all 
transactions that made up their portions of the overall 
universe. Ultimately, it took until mid-December 2001, 3\1/2\ 
months later, to identify all of the center's transactions 
necessary to select the sample.
    In the ensuing 6-week period, through February 13, 2002, 
NASA's center financial personnel were tasked to send PWC 
supporting documentation for the sampled obligations and 
expenses. Of supporting obligation documents, 24 percent was 
not received by PWC. Of the documents that were received, 30 
percent did not adequately support the transactions. Similarly, 
30 percent of expense transactions documents also were not 
adequately supported. Without adequate documentation, PWC could 
not conclude whether amounts were fairly presented in the 
financial statements.
    The next major areas contributing to the disclaimer were an 
accounting for $1.2 billion in shuttle components and 
accounting for $5.8 billion in space station costs. In 
accordance with accounting principles, property is capitalized 
and depreciated or expensed over the useful life of the asset. 
By contrast, materials are expensed when consumed during normal 
operations. NASA did not provide sufficient documents for PWC 
to determine the appropriateness of these shuttle or space 
station costs relative to property or materials.
    The final area was $4.7 billion in contractor-held 
property. This is property owned by NASA but in the possession 
of contractors. The contractors reported these assets as 
materials under a confusing NASA definition of materials. NASA 
subsequently reclassified the materials as property; however, 
the information NASA provided PWC did not fully substantiate 
the reported amount.
    Even though NASA financial management officials 
consistently stated they would take the necessary steps to 
provide the requested documentation to PWC, better 
communication should have occurred earlier to alert senior 
management levels at both NASA and OMB of potential problems 
with the audit opinion.
    During the audit, monthly then weekly status meetings were 
conducted with PWC, the acting CFO, the IG, and their staffs. 
However, until February 13, 2002, neither the NASA 
Administrator nor OMB knew that the opinion was in jeopardy.
    For the 2002 audit, NASA financial managers are currently 
formulating a corrective action plan. Also, accounts that 
affect the 2002 audit must be analyzed and adequately 
documented by NASA and audited by PWC to establish accurate 
opening balances. In addition, PWC will brief the NASA 
administrator in a timely fashion when milestones are not met 
or major problems are identified. With sufficient management 
attention, documentation and accounting issues should be 
resolved.
    My written testimony provides a history of NASA's 
experience with implementing an integrated financial management 
system. After two failed attempts, as of March 2000, a third 
effort is underway. The integrated financial management 
program, or the IFMP, is a prerequisite for implementation of 
the Agency's full cost initiative. The latest attempt to 
implement the IFMP is scheduled for implementation--or, excuse 
me, for completion in June 2008, at a cost of $835 million.
    NASA plans to fully implement the core financial model by 
June 2003. It is the backbone of the system and it supports the 
Agency's full cost initiative.
    My written testimony also provides details on OIG reviews 
of past IFMP efforts in both ongoing and planned audits of the 
current project. It is vital to have a financial system that 
not only produces auditable financial statements, but provides 
accurate, transaction-based, full-cost data to NASA's leaders, 
program managers, and the Congress.
    I would be happy to answer any questions.
    Mr. Horn. Thank you very much. We'll get to that.
    [The prepared statement of Mr. Lamoreaux follows:]
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    Mr. Horn. Our last presenter is Patrick L. McNamee, and 
he's a partner at PricewaterhouseCoopers.

           STATEMENT OF PATRICK L. MCNAMEE, PARTNER, 
                  PRICEWATERHOUSECOOPERS, LLP

    Mr. McNamee. Good morning Mr. Chairman and members of the 
subcommittee, and thank you for the opportunity to be here. My 
name is Patrick McNamee, and I'm a partner with 
PricewaterhouseCoopers, or PWC. I lead our Federal audit 
practice and serve as the engagement partner on our audit work 
at NASA.
    Before I talk about our work at NASA, I'll give you a 
little of my own background. Since 1995, I have been with PWC 
and its predecessor firm, providing auditing and financial 
management services to agencies across the Federal Government. 
Earlier in my career, I spent 10 years working to set 
professional auditing standards for the private as well as the 
public sectors, including 5 years where I worked with the 
General Accounting Office, where my principal responsibility 
was revising the Government auditing standards which apply to 
audits across the Government.
    In May 2001, after a competitive bidding process, the NASA 
Inspector General contracted with PWC to audit NASA's fiscal 
year 2001 financial statement. On February 27, 2002, we 
delivered to NASA our reports on the results of that work. 
These reports expressed a disclaimer of opinion on NASA's 
fiscal year 2001 financial statements, identified significant 
deficiencies in NASA's internal controls, and reported 
substantial noncompliance with the Federal Financial Management 
Improvement Act.
    I have with me this morning copies of our reports on the 
NASA financial statements and respectfully request that they be 
included in the record of this hearing.
    Mr. Horn. Without objection, it is put at this point in the 
record.
    [The referenced NASA financial statement reports follow:]
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    Mr. McNamee. Before discussing the conditions that led us 
to these conclusions and our recommendations for remedying 
those conditions, I will give some background on the objectives 
of an audit to provide some context for our findings.
    An audit is a systematic evaluation of an agency's records 
to determine whether its financial statements are fairly stated 
in accordance with generally accepted accounting principles. 
The auditor's goal is to see if the agency's records provide 
sufficient information to show that the financial statements 
are fairly stated. If the agency fails to provide sufficient 
documentation and if that failure is significant and affects a 
number of accounts and financial statements, then the auditor 
cannot conclude that the agency's financial statements are 
fairly stated.
    In that situation, professional standards call for the 
auditor to issue a report that disclaims an opinion, which 
means the auditor expresses no opinion on the financial 
statements because the agency does not have sufficient 
competent evidence to support its financial statement.
    Our reports explain why we found this situation at NASA. 
NASA did not provide us sufficient documentary evidence needed 
to support amounts reported as obligations; expenses; property, 
plant, and equipment; and materials in its fiscal year 2001 
financial statement. This lack of evidence resulted from 
deficiencies in controls which we have reported on in our 
report on internal control.
    NASA has informed us that, given more time, it could in the 
future provide the necessary documentation; however, the Office 
of Management and Budget, OMB, requires audits to be completed 
by February 27, 2002, so we could not delay our report. 
Moreover, based on our findings, we were not confident at the 
time that NASA could provide the necessary documentation to 
support its financial statements at a specific time in the near 
future.
    In August 2001, we had met with NASA to discuss the 
documentation of obligation and expense transactions required 
from NASA's centers. Our plan was to select statistical samples 
of individual transactions from all ten of NASA's centers. NASA 
was to provide us data from all the centers by September so 
that we could select a sample of transactions that we would 
test; however, NASA did not provide all this data to us until 
December 2001, delaying the selection of our sample by 3 
months.
    In January and February 2002, NASA centers worked to 
provide documentation in support of the transactions selected 
in our sample, but by February 13th we concluded that the gap 
between the documentation we needed to complete our testing in 
accordance with professional standards and the documentation we 
had been provided was too great to close by OMB's February 27th 
deadline for completing the audit, and so we informed NASA.
    NASA centers use a variety of financial management systems 
which were designed and implemented before the current OMB and 
FASAB requirements became effective. A number of these systems 
summarize data from other systems that feed into them. The 
successive summarization of data through various systems 
impedes NASA's ability to maintain an audit trail through the 
summary data back to the detailed source-level documentation. 
It is this source documentation that we must examine in order 
to express an opinion.
    NASA is implementing a new agency-wide financial management 
system. We have recommended that, until that new system becomes 
operational, it work to maintain documentation trails in the 
summary level data recorded in its current financial management 
systems to detailed source documents.
    Let me just mention briefly the other major issues 
reflected in our reports to NASA. NASA capitalized 
approximately 5.8 billion in cost for the international space 
station during fiscal year 2001. It also recorded in its fiscal 
year 2001 financial statements a prior period adjustment, 
increasing the amount of cost capitalized to the space station 
by $636 million for space shuttle launches made during fiscal 
year 2000. However, NASA did not provide sufficient documentary 
evidence to determine the accuracy and completeness of these 
capitalized costs.
    During our audit, we noted weaknesses in their controls 
over the validity and completeness of amounts capitalized to 
the ISS during fiscal year 2001. In response to these findings, 
we made a number of recommendations, which are summarized in 
the written statement I submitted earlier to this subcommittee.
    As of September 30, 2001, NASA reported in its consolidated 
balance sheet approximately $4.7 billion of NASA-owned 
materials being held by contractors. We found that NASA needs 
to improve the controls surrounding contractor-held property 
and the contractor reporting process to reasonably assure the 
accuracy of data reported by contractors and that data's 
consistency with generally accepted accounting principles. We 
have also made a number of recommendations in that regard, 
which are summarized in my written statement.
    In addition to the matters previously discussed, a report 
on NASA's financial statements stated our disagreement with 
NASA's treatment of capital expenditures and depreciation 
expense in the statement of net cost.
    Our report on internal controls identified significant 
deficiencies in controls over the estimation of environmental 
cleanup liability and over NASA's financial information 
systems.
    The matters reported in our disclaimer of opinion and 
report on internal controls led us also to report noncompliance 
with the Federal Financial Management Improvement Act.
    I hope my testimony has been helpful to this subcommittee. 
I would be happy to answer any questions the subcommittee 
members may have.
    Mr. Horn. We are very pleased with your succinctness of 
this particular situation, because there's a lot of things 
we'll get into in the questioning.
    [The prepared statement of Mr. McNamee follows:]
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    Mr. Horn. Now I want to yield to Ms. Schakowsky, the 
ranking member, to give her opening statement.
    Ms. Schakowsky. Mr. Chairman, once again I want to thank 
you for shedding light on these important financial matters and 
to the GAO for helping us to get to the bottom of some of the 
problems, or at least expose the problems if not provide the 
solutions.
    Most of my generation grew up with NASA responding to 
President Kennedy's challenge to put a man on the moon. Many of 
us also fondly remember Neil Armstrong's, ``One small step for 
man, one giant leap for mankind,'' and we've watched with awe 
as scientists and engineers and test pilots like Senator John 
Glenn accomplished what was fantasy in the first half of the 
20th century.
    It is an understatement to say that the accomplishments of 
this Agency are amazing, and therefore I expect that all of you 
share my dismay when GAO comes before us to tell us that the 
Agency can't keep its books straight.
    The scientists and engineers at NASA stretch their 
creativity to improve the systems necessary to bring Apollo 13 
home, but the financial managers at NASA can't tell us where 
the money has gone.
    There is another story here today, and it is even more 
troubling than the failure to keep the books straight. As the 
chairman pointed out in his statement, for the past 5 years 
Arthur Andersen has given NASA accountants high marks, then 
PricewaterhouseCoopers comes in and tells us the supporting 
documentation for those accounts either doesn't exist or is too 
confusing to make sense.
    GAO warned us of this in 1999. GAO pointed out that the 
accountants from Arthur Andersen were relying on what the 
managers at NASA told them, rather than performing an 
independent analysis. Greg Kutz, who is here today and 
testified, told reporters at that time that the work by Arthur 
Andersen ``did not meet professional standards.''
    This is not unlike what Arthur Andersen did at Enron, as 
the press has repeatedly pointed out. The Inspector General at 
NASA has never explained why the auditing contract with Arthur 
Andersen was not renewed. Unfortunately, it is impossible to 
get an answer to that question that is not tainted by current 
events. It would have been helpful if the Inspector General had 
been more forthcoming at the time the contract was changed.
    NASA has been an exceptional government agency. We don't 
often think of our Federal agencies as sparking the imagination 
and challenging our expectations. Even today, every space 
mission is featured on the nightly news and broadcast live on 
cable. That is why we are so disappointed in the failures 
before us today.
    So I appreciate the testimony and just want to say in the 
end that you have in your hands the public trust and respect, 
and if you squander public funds you also squander that 
reputation.
    Thank you, Mr. Chairman.
    Mr. Horn. We thank you for that fine statement.
    [The prepared statement of Hon. Janice D. Schakowsky 
follows:]
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    Mr. Horn. I am now going to start 10 minutes in a round. 
I'll start, as chairman, with 10 minutes, and then Ms. 
Schakowsky will have 10 minutes.
    Let me ask Mr. Kutz of the General Accounting Office--the 
General Accounting Office attempted for nearly a year to audit 
the supporting data for NASA's fiscal year 2002 budget 
submission relating to costs charged to the international space 
station and related shuttle costs. In your experience, can 
other large agencies provide transaction-based support for 
amounts reported to Congress?
    Mr. Kutz. Yes, Mr. Chairman. You may recall that back 
several years ago I did the IRS audit for GAO for several 
years, and even IRS, with hits old master files that go back, 
as Commissioner Rizotti has testified before you, the 1950's or 
1960's technology, is able to support the $2 trillion that run 
the Government in tax revenue, getting detailed transaction 
support for GAO to audit from the system. So yes, people like 
IRS--DOD, who we are going to talk about this afternoon, is not 
able to do that, and they have many of the same problems you've 
heard about today, where you can't reconcile populations, you 
can't draw statistical samples of detailed, transaction-based 
support to validate numbers that the Department of Defense 
reports to the Congress. So I would say that, in a much smaller 
way, NASA has some of the same issues the that Department of 
Defense has and IRS, for that matter. IRS is just able to jury-
rig their system to get information once a year to do a 
financial audit, versus NASA is struggling now to do so.
    Mr. Horn. If NASA had an integrated financial management 
system that complied with the Federal standards, should NASA be 
able to easily support amounts reported to Congress?
    Mr. Kutz. Yes. If their systems complied, our judgment 
would be that they would be able to routinely provide this 
information. The information we've tried to audit for the 
Science Committees on the space station, we have been trying to 
get that information for a year. I think it is safe to say that 
a year is not routinely being able to get reliable information.
    So certainly this is something they should be able to come 
up with on a fairly routine basis, and the system should be 
able to track back to transaction-based support if, indeed, it 
complied.
    Mr. Horn. Well, some would say that Russia might not have 
the accounting standards we have, and that's a joint endeavor. 
Is that one of the problems?
    Mr. Kutz. I don't believe that is.
    Mr. Li.
    Mr. Li. No. The problems that are associated with the 
international space station and our partners from Russia have 
been that they have not been able to meet our schedule of 
construction for the space station and, as a result, they were 
unable to provide important parts and components of the space 
station, like the service module.
    Mr. Horn. Based on the work that the General Accounting 
Office has performed at NASA related to the space station and 
the related costs we're talking about here, do you believe 
NASA's inability to provide supporting documentation during 
your audits is a systems issue or what?
    Mr. Kutz. I guess it would have to do--I think that the 
other members of the panel here have talked about the lack of 
integrated systems, about the summarization or re-summarization 
of data, so that would be a safe assumption, I would believe.
    Mr. Li. I would have to say that also some of the 
contributing factors to the problems associated with the space 
station have to do with NASA not having properly implemented 
some basic principles in terms of systems engineering and 
project management that have been impediments of them being 
able to estimate how much some of these components were going 
to cost, and, as a result, it came as a surprise to them when 
cost growth occurred.
    Mr. Horn. Well, Mr. Li, as I remember, you have been 
auditing NASA's programs for years. You've also reported NASA's 
contracting as a General Accounting Office high-risk area since 
1990, and you have that series, which is a very good one, for 
all Members of Congress when a new Congress comes. In 1990 it 
was including its inability to implement a new financial 
management system. Now, what's the relationship between an 
integrated financial management system and sound contract 
management?
    Mr. Li. That's a good question, and let me try to perhaps 
draw that relationship.
    The relationship is, in order to do contract management and 
to do it well, you need information. You need information on 
your contracts. But that information is only provided--can only 
be provided with an accurate, integrated financial management 
system. In NASA, Mr. Chairman, what has happened is that, 
because you have all these individual centers, they have been 
brought up to have their own systems, and, as a result, when 
they need information--and obviously in these days everybody is 
involved in such things as the space station--they are unable 
to get that information very quickly and they need to do it 
manually.
    From that respect--and that's the largest contract. The 
contract with Boeing for the prime contract is the largest 
example, but there are many other types of examples that we 
have seen in terms of building component that rely on having 
accurate information, and that's not available. So I think that 
is that relationship that we're referring to.
    Mr. Horn. Well, I thank you on that. I want to move to the 
General Counsel. Paul Pastorek is new to NASA.
    Does the Administrator believe that the 
PricewaterhouseCoopers audit accurately reflects the condition 
of financial management at NASA, or did Arthur Andersen's audit 
better reflect the financial condition of NASA?
    Mr. Pastorek. I think it is safe to say at this point in 
time that, with respect to financial management, 
Pricewaterhouse has called it correctly. I think we acknowledge 
that there is a financial management problem in the Agency.
    I think that the methodology that has been used by 
Pricewaterhouse is a more-comprehensive methodology for 
assessing the accuracy of the data and held a higher standard 
than apparently had been before, and, as a consequence, we 
weren't able to meet that standard.
    I do think that the challenge that we are faced with these 
multiple accounting systems is trying to create an adequate 
universe of information so that Pricewaterhouse can do this, 
and I'm very hopeful that we will be able to do this on a 
going-forward basis.
    Mr. Kutz. Mr. Chairman, the standards that Arthur Andersen 
and Pricewaterhouse used were this yellow book here that Mr. 
McNamee pointed out in his statement that he actually authored, 
but, I mean, the only thing that has changed here is really the 
auditors. The standards that they applied, both the Arthur 
Andersen audit, which we said did not meet professional 
standards, and the Pricewaterhouse audit were purported to be 
done in accordance with this yellow book, which is generally 
accepted Government auditing standards. So, you know, our view 
would be that the only thing that has changed here is the 
auditor.
    I think that the work we saw in 1999 of Arthur Andersen did 
not meet professional standards, they did not go back and look 
at underlying data, and standards do call for them to do so. So 
to say it is a change in methodology without saying that 
there's something to do with professional standards I think is 
incorrect. I do believe that it has to do with the standards 
that they used, which we said in 1999 were not meeting 
professional standards in the yellow book.
    Mr. Pastorek. Perhaps I mis-spoke, sir. I should have used 
the word ``protocol.'' It was a different protocol used by 
Pricewaterhouse. I'm not qualified really to speak to the 
standards issue, and I'd defer to Mr. Kutz on that.
    Mr. Horn. Well, what is the difference, to put it in a 
nutshell, in terms of that protocol approach?
    Mr. Pastorek. From my perspective--and, Mr. Kutz, I'd be 
happy for you to comment on it, or Mr. McNamee--but, as I 
understand it, there was a different sampling methodology and a 
requirement by Pricewaterhouse to get a larger universe of 
samples to be able to make a decision on, and we could not 
deliver that. And that was different. They required a larger 
universe of samples, if I understand correctly.
    Mr. Lamoreaux. That's true. When we wrote the new contract, 
we used the financial audit manual that is put out by the PCIE 
and GAO, and we asked----
    Mr. Horn. Spell PCIE. Nobody in the audience knows what 
that is.
    Mr. Lamoreaux. I'm sorry, sir. The President's Council on 
Integrity and Efficiency, sort of the group of IG's under OMB.
    But the document refers to using a moderate reliance on 
internal controls instead of a full reliance, and with a 
moderate reliance on internal controls, or some reliance, as I 
stated in my statement, written statement, requires a larger 
sample, requires more transaction testing, so where we had 
Arthur Andersen taking a much smaller sample, Pricewaterhouse, 
because of the moderate reliance instead of full reliance, had 
to take a much larger sample, and then we got into the 
documentation problems.
    Mr. Kutz. Mr. Chairman, I think some of the samples that 
we're talking about here, based on the review we did in 1999, 
the sample size Arthur Andersen used was zero. For undelivered 
orders, for example, on the statement of budgetary resources, 
which was $2.2 billion, there was no testing of underlying 
data. There was a simple--what they did was there was a one-
page document that represented that in their working papers 
that said they asked management if the numbers were right, 
management said they were, and that was it. I mean, that is 
going more than just a different sampling methodology. You're 
talking about no substantive audit work for major balances on 
the 1999 financial statements.
    Mr. Horn. Well, how about it, Inspector General.
    Mr. Lamoreaux. I'm referring to the samples that were taken 
from obligations and expenses--Pricewaterhouse took a sample of 
79, for example, last year--excuse me, Arthur Andersen took a 
sample of 79 obligation transactions and 84 expense 
transactions. By contrast, Pricewaterhouse took 268 obligations 
and 200-plus expense transactions. That's the level of testing 
that I'm talking about.
    Mr. Horn. Let me move on this question to Steven Varholy, 
the NASA deputy chief financial officer.
    For the past several years you have held NASA out as a 
model of good financial management. Now, according to the 
General Accounting Office and PricewaterhouseCoopers, NASA has 
problems with its financial management and it is in non-
compliance with the Federal Financial Management Improvement 
Act, and that is obviously with the system standards and the 
standard of the general ledger.
    Now, could you elaborate on this, and do you believe that 
the General Accounting Office and the PricewaterhouseCoopers 
audit results are an accurate reflection of NASA's financial 
management condition, or did Arthur Andersen's reports better 
reflect NASA's financial management condition?
    Mr. Varholy. You may recall, Mr. Chairman, a couple of 
years ago when we were here testifying, dealing with the issue 
of compliance with the Federal Financial Management Improvement 
Act. Our then CFO, Mr. Holt, pointed out that one of the 
problems that we had in NASA was the outdated, antiquated 
systems that we have and the difficulty of dealing with them 
and the necessary manual procedures and so forth that we needed 
to be able to put financial statements together, and I think a 
fair assessment would be, with the additional audit procedures 
and the timing issues, those weaknesses in the systems 
basically did us in. I think that would probably be the fairest 
way to describe it. We were not able in the timeframe that we 
had to basically recover, to be able to pull the necessary 
documentation and so forth.
    So I think we have a situation where both conclusions, in 
essence, were correct, but from a practical standpoint we have 
definite problems that we need to continue to deal with 
specifically. They are very difficult systems to work with. 
There's no other way around it.
    Mr. Horn. Mr. Lamoreaux, speaking for the Inspector 
General's office, did the change of auditors for fiscal year 
2001 impact the audit opinion received?
    Mr. Lamoreaux. The methodology that was used to try to pull 
the samples that I talked about earlier for obligations and 
expenses impacted the financial opinion that was rendered by 
PWC because they simply ran out of time. Documents were not 
forthcoming.
    If the documents were forthcoming, then those balances 
would have been attested to and we also, of course, had 
problems with the change in accounting for station and shuttle, 
which was a difference from when Arthur Andersen did the audit.
    So the answer is yes, PWC looked at more--at a larger 
sample, they went deeper because we asked them to. We paid 
attention to what the GAO people said when they were critical 
of Arthur Andersen using too much reliance on management 
representation, and so we wrote into the contract that, ``We 
wanted to use a moderate reliance,'' and that drove larger 
sample sizes and drove them to look deeper at the various 
accounts. So yes.
    Mr. Horn. Besides that, what went wrong at NASA for fiscal 
year 2001 compared to prior years' audits? Was it just the 
sample?
    Mr. Lamoreaux. It was basically coming up with the 
supporting documentation for the large sample of obligations 
and costs, but it was also how the accounting for shuttle 
components and accounting for space station costs and 
accounting for contractor property were handled.
    Mr. Horn. Using the Office of Inspector General, to what 
extent are you involved in monitoring or reviewing the work of 
the independent auditor responsible for NASA's financial 
statement audits?
    Mr. Lamoreaux. We have a contractor tech rep--COTR, they 
call them--that spends 100 percent of his time looking at 
Pricewaterhouse and he also looked at Arthur Andersen. He did a 
limited review of work papers to ensure that the terms of the 
contract are being adhered to.
    This year under Pricewaterhouse we also have about another 
half of a full-time equivalent person dedicated to the effort.
    Mr. Horn. If the Inspector General is responsible for the 
audits, were you aware of any issues raised in prior years' 
audits related to NASA's inability to provide supporting 
documentation for financial statement amounts?
    Mr. Lamoreaux. In prior years I think it is fair to say 
that they had trouble coming up with documents to support 
obligations and costs, as well, but the way the universe was 
constructed by Arthur Andersen and the way the universe was 
constructed by Pricewaterhouse resulted in a 3\1/2\ month 
difference of time. We lost 3\1/2\ months to try to get the 
documents to support those obligations and expenses.
    So when you take 3\1/2\ months out and you have difficulty 
getting documents from the centers, as Arthur Andersen also, I 
think it is fair to say, had difficulty getting documents--they 
had more time to get the documents.
    Mr. Horn. Was anybody shredding them?
    Mr. Lamoreaux. No, sir.
    Mr. Horn. Just out of curiosity.
    Mr. Lamoreaux. No, sir. Not to my knowledge.
    Mr. Horn. OK. And if they were, who was it? [Laughter.]
    Does the Inspector General agree with the results of the 
PricewaterhouseCoopers audit?
    Mr. Lamoreaux. Yes, sir, we do.
    Mr. Horn. OK. In your testimony you stated that NASA's 
prior year's audit, Arthur Andersen, was in the 5th year of a 
5-year contract and had a different degree of cumulative audit 
knowledge and experience with NASA's financial systems. Could 
you elaborate on this statement? And what does the statement 
mean in terms of the audit work that was performed?
    Mr. Lamoreaux. Arthur Andersen started their audit back in 
1996 they were on the audit for 5 years. In the first 2 years 
of Arthur Andersen's audit, it is my understanding they spent 
enormous amounts of time doing transaction testing and internal 
control reviews. By contrast, Pricewaterhouse is in the first 
year of the audit using a moderate reliance on internal 
controls, and they would have to spend more time and go deeper 
to understand the systems.
    The difference referred to is this cumulative audit 
knowledge and experience of one CPA firm at the end of their 
contract, at the end of 5 years having 5 years' worth of 
experience, compared to a new CPA firm coming in, as 
Pricewaterhouse did, in its first year.
    Mr. Horn. In your testimony you stated that the core 
financial module of the integrated financial management project 
will not be completed until June 2003, and that it will support 
NASA's preparation and audit of its financial statements. What 
are the timeframes of the Inspector General's audit of this 
module? Does it appear that the core financial module will 
support the preparation and audit of NASA's financial 
statements?
    Mr. Lamoreaux. Our audit of the core financial system 
module is ongoing at this point. We have done work already to 
conclude that the procurement documentation and procurement 
actions were proper. We see that the core module is within 
budget and on schedule as of January 2002, and we are 
continuing with our audit work.
    This audit began September 18, 2001, so we're not too 
terribly far in, but we are continuing with our audit work to 
see whether or not the system will support the full cost 
initiative.
    Mr. Horn. I'll move now to Mr. McNamee. Patrick L. McNamee 
is partner with PricewaterhouseCoopers, and let me ask you--
your predecessor auditor gave NASA a clean audit opinion on its 
financial statements for 5 consecutive years. Did you meet with 
Arthur Andersen at the beginning of the audit or review their 
work papers? If so, in your opinion, how adequate were the work 
papers?
    Mr. McNamee. Mr. Chairman, as required by professional 
standards, whenever there is a change in auditors the successor 
auditor meets with the predecessor auditor to look at their 
work papers.
    The purpose of the work paper review is to help us begin to 
gain our understanding of the composition of NASA's accounts, 
what its financial systems and processes do, rather than be a 
qualitative assessment of the scope and execution of the 
predecessor's auditor.
    Mr. Horn. And you didn't find anything accurate or 
inaccurate, or do you look for that?
    Mr. McNamee. Again, our objective was to help gain an 
understanding of NASA and how it works----
    Mr. Horn. Yes.
    Mr. McNamee [continuing]. Rather than to gauge the accuracy 
or inaccuracy of what other work had been done before us.
    Mr. Horn. Well, was there any change in the management 
approaches of NASA over that 5-year period that might have 
changed with you doing the work? What do we see from that? If 
they've got 5 years of working papers and you've got 1 year--
and, by the way, do you have a 5-year contract also?
    Mr. McNamee. Yes, sir, we do.
    Mr. Horn. OK. And was there anything that you saw in this 
last year about the management of NASA versus the management at 
NASA in the predecessor? You seem to follow it this time based 
on similar ways of dealing with it by the various forces of the 
General Accounting Office, the IGs, and all their various 
committees, so forth. But is it--would you think, going back, 
that if they had used your methodology that, if nothing much 
happened over management--which I can't--really don't know one 
way or the other, but to that degree would those previous 5 
years really not have a clean audit? What can you say on that?
    Mr. McNamee. Again, since our focus was to look on the 
current state and the current readiness of records and controls 
in fiscal year 2001 and what our testing could tell us about 
those controls, and not benchmarking them back to what records 
were like in prior years, what controls were in place, what 
personnel were in place to support audits in prior years, we're 
not in a position that we could speculate on how this 
methodology--what result might have been achieved from it if it 
were applied in earlier periods.
    Mr. Horn. Well, I suspect that professional standards are 
that you don't lob one across the ocean into your previous 
audit, and I'm simply interested in: were those working 
papers--did they make sense when you went back over them of 
your predecessor, that would be--were there any differences you 
saw in the working papers that would have made it differently, 
not necessarily arguing about the sample, but just what were 
the working papers and did it look like the working papers 
reflected it accurately over the sum of the 5-years.
    Mr. McNamee. Again, in our review of the working papers, we 
focused on the working papers of the most recent audit, which 
was fiscal year 2001, which would give us the most up-to-date 
insight into the state of what comprises NASA's balances, 
what's the state of their accounting system, how do their 
transaction flows work, and we believe that gave us a good 
starting point for our understanding for fiscal year 2001.
    Mr. Horn. There has been a discussion from both Mr. 
Lamoreaux and Mr. Pastorek that the timeliness of the 
supporting documentation was more the issue during fiscal year 
2001 audit than the lack of supporting documentation. Do you 
believe that, time permitting, NASA could have provided 
supporting documentation for the amounts in question on the 
financial statement?
    Mr. McNamee. One of the things that we are working with 
NASA on going forward is pulling together a lot of the 
documentation again that we needed for particularly space 
station and space shuttle launch costs and items that are going 
to continue to roll over into fiscal year 2002. And we are 
hopeful that we can establish effective protocols to get that 
information, but until we see it--and we have to see what the 
timeline will be to conclude when that can be provided.
    Mr. Horn. When you look NASA, which has scientists and all 
sorts of different, very complex research, does that--do the 
existing regulations of the various groups that get into this 
thing, which would be OMB, General Accounting Offices, 
Comptroller General of the United States, so forth--are there 
any changes that you see in this or other agencies you have 
been involved with? Are we missing somewhere in terms of the 
protocols that should be done? Is there something that hasn't 
been done that should have been done in terms of what the 
standards are in all of the agencies, but this one in 
particular, except for maybe National Science Foundation or 
Agriculture that have a lot of research? But do you find it is 
very difficult in such a complex operation that NASA is? What 
happens to you when you move into HHS? They have research, of 
course, and you have HUD that has different types of things 
that aren't research, and so is anything missing that ought to 
be in the protocols and ought to be in the feelings of GAO and 
OMB in terms of its accounting and what you're supposed to do 
and expected to do?
    Mr. McNamee. I think the standards, if you look across the 
Office of Management and Budget, starting with the audit 
bulletins, the form and content bulletins, standards that 
define how agencies account for their transactions, and then 
the financial management systems requirement, those provide a 
strong framework.
    You mentioned there's scientists and research and lots of 
complex activities going on, but in the end they're all driven 
by the starting point, the Federal budget process, and here is 
the money that has been appropriated, and controlling the funds 
and the flow of the funds is the central element that needs to 
be there.
    I think the framework of standards is appropriate for that. 
You asked sort of my experience across other agencies, and what 
I've seen is that, where financial management is most 
successful and most effective is when it is not just the 
purview of the CFO but when it has strong support from the 
agency head, and in that regard the commitment, the strong 
statements of commitment that the new administrator have made I 
think are very heartening for NASA's prospects.
    Mr. Horn. Well, I agree with you on that.
    Mr. Kutz, what about the General Accounting Office? Are 
there any holes that we need to get in the various protocols so 
in the next round those can be made very clear?
    Mr. Kutz. I agree with Mr. McNamee that the framework is 
there for financial management reporting and auditing. NASA is 
not unlike many other Federal agencies from the standpoint that 
they have a lot of the same challenges.
    In the private sector you have entities that can close 
their books in a matter of days. They've got information to 
manage on the day-to-day basis. What you've seen with all the 
series of financial management hearings you've had here over 
the years is that in the Federal Government we do not have that 
same quality and timeliness of information. We're probably 
several decades behind the private sector. So really what the 
Federal Government needs to do is continue to have oversight 
hearings like this and agencies need to continue to put focus 
on this, because we really need to have that kind of 
information to ensure that we are effectively and efficiently 
operating all of the Government agencies.
    There are very few real models out there right now. The one 
that I can point to probably is the Social Security 
Administration, who, for the last several years, is able to get 
their audit done in November. You may know that Secretary 
O'Neil and OMB Director Daniels and Comptroller Walker are 
pushing to have the deadlines moved back for preparation of 
financial statements, which will effectively force the agencies 
to fix their systems so that they can get this information on a 
more routine basis.
    The ultimate deadline of financial audits is now going to 
be November several years down the road, and so it is going to 
be very difficult for agencies that don't have systems that can 
routinely produce good information to get their audits done by 
November. That would be more closer to the private sector, 
where most of the entities that have December 31st year end you 
see their annual reports coming out in January.
    Mr. Horn. And I praise all three of those gentlemen that 
meet rather regularly. That hasn't happened since about 1921.
    Mr. Kutz. Yes. The principals actually do meet now.
    Mr. Horn. Yes. They do meet.
    Mr. Kutz. Yes, the principals, including OPM.
    Mr. Horn. Yes.
    Mr. Kutz. The head of OPM meets also with them.
    Mr. Horn. I didn't realize that.
    Mr. Kutz. Yes.
    Mr. Horn. That's fine.
    Well, I thank you all for coming. I want to thank the staff 
on both majority and minority. The majority staff: Russell 
George is the staff director and chief counsel. I think it is 
imperative that NASA and every Federal agency utilize the 
financial management laws as the tools created by Congress to 
ensure that the important functions they perform are done 
efficiently, effectively, for the benefit of the American 
taxpayers. We have good people here that are working on this, 
and we have Rosa Harris, the professional staff person on the 
left. She is a detailee from General Accounting Office. See, 
they're everywhere, so you've got to do the right thing. And 
Bonnie Heald, deputy staff director, is there; and Darin 
Chidsey, the professional staff somewhere around there; and our 
clerk that makes sure you talk into the microphones and does a 
great job, Justin Paulhamus; and minority staff, Dave McMillen, 
he's up there and professional staff; and Jean Gosa, minority 
clerk; and our court reporter, Joan Trumps. Thank you very much 
all.
    We are adjourned.
    [Whereupon, at 11:45 a.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]

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