[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
 INDEPENDENT AUDIT OF THE NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

=======================================================================

                             JOINT HEARING

                               BEFORE THE

              SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT

                                AND THE

                 SUBCOMMITTEE ON SPACE AND AERONAUTICS

                  COMMITTEE ON SCIENCE AND TECHNOLOGY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 3, 2009

                               __________

                           Serial No. 111-68

                               __________

     Printed for the use of the Committee on Science and Technology


     Available via the World Wide Web: http://www.science.house.gov


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                                 ______

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                   HON. BART GORDON, Tennessee, Chair
JERRY F. COSTELLO, Illinois          RALPH M. HALL, Texas
EDDIE BERNICE JOHNSON, Texas         F. JAMES SENSENBRENNER JR., 
LYNN C. WOOLSEY, California              Wisconsin
DAVID WU, Oregon                     LAMAR S. SMITH, Texas
BRIAN BAIRD, Washington              DANA ROHRABACHER, California
BRAD MILLER, North Carolina          ROSCOE G. BARTLETT, Maryland
DANIEL LIPINSKI, Illinois            VERNON J. EHLERS, Michigan
GABRIELLE GIFFORDS, Arizona          FRANK D. LUCAS, Oklahoma
DONNA F. EDWARDS, Maryland           JUDY BIGGERT, Illinois
MARCIA L. FUDGE, Ohio                W. TODD AKIN, Missouri
BEN R. LUJAN, New Mexico             RANDY NEUGEBAUER, Texas
PAUL D. TONKO, New York              BOB INGLIS, South Carolina
PARKER GRIFFITH, Alabama             MICHAEL T. MCCAUL, Texas
JOHN GARAMENDI, California           MARIO DIAZ-BALART, Florida
STEVEN R. ROTHMAN, New Jersey        BRIAN P. BILBRAY, California
JIM MATHESON, Utah                   ADRIAN SMITH, Nebraska
LINCOLN DAVIS, Tennessee             PAUL C. BROUN, Georgia
BEN CHANDLER, Kentucky               PETE OLSON, Texas
RUSS CARNAHAN, Missouri
BARON P. HILL, Indiana
HARRY E. MITCHELL, Arizona
CHARLES A. WILSON, Ohio
KATHLEEN DAHLKEMPER, Pennsylvania
ALAN GRAYSON, Florida
SUZANNE M. KOSMAS, Florida
GARY C. PETERS, Michigan
VACANCY
                                 ------                                

              Subcommittee on Investigations and Oversight

                HON. BRAD MILLER, North Carolina, Chair
STEVEN R. ROTHMAN, New Jersey        PAUL C. BROUN, Georgia
LINCOLN DAVIS, Tennessee             BRIAN P. BILBRAY, California
CHARLES A. WILSON, Ohio              VACANCY
KATHY DAHLKEMPER, Pennsylvania         
ALAN GRAYSON, Florida                    
BART GORDON, Tennessee               RALPH M. HALL, Texas
                DAN PEARSON Subcommittee Staff Director
            JAMES PAUL Democratic Professional Staff Member
            TOM HAMMOND Republican Professional Staff Member
                   MOLLY O'ROURKE Research Assistant
                                 ------                                

                 Subcommittee on Space and Aeronautics

                HON. GABRIELLE GIFFORDS, Arizona, Chair
DAVID WU, Oregon                     PETE OLSON, Texas
DONNA F. EDWARDS, Maryland           F. JAMES SENSENBRENNER JR., 
MARCIA L. FUDGE, Ohio                    Wisconsin
PARKER GRIFFITH, Alabama             DANA ROHRABACHER, California
STEVEN R. ROTHMAN, New Jersey        FRANK D. LUCAS, Oklahoma
BARON P. HILL, Indiana               MICHAEL T. MCCAUL, Texas
CHARLES A. WILSON, Ohio                  
ALAN GRAYSON, Florida                    
SUZANNE M. KOSMAS, Florida               
BART GORDON, Tennessee               RALPH M. HALL, Texas
              RICHARD OBERMANN Subcommittee Staff Director
            PAM WHITNEY Democratic Professional Staff Member
             ALLEN LI Democratic Professional Staff Member
            KEN MONROE Republican Professional Staff Member
            ED FEDDEMAN Republican Professional Staff Member
                    DEVIN BRYANT Research Assistant


                            C O N T E N T S

                            December 3, 2009

                                                                   Page
Witness List.....................................................     2

Hearing Charter..................................................     3

                           Opening Statements

Statement by Representative Brad Miller, Chairman, Subcommittee 
  on Investigations and Oversight, Committee on Science and 
  Technology, U.S. House of Representatives......................    23
    Written Statement............................................    24

Statement by Representative Gabrielle Giffords, Chairwoman, 
  Subcommittee on Space and Aeronautics, Committee on Science and 
  Technology, U.S. House of Representatives......................    26
    Written Statement............................................    27

Statement by Representative Paul C. Broun, Ranking Minority 
  Member, Subcommittee on Investigations and Oversight, Committee 
  on Science and Technology, U.S. House of Representatives.......    25
    Written Statement............................................    25

Statement by Representative Pete Olson, Ranking Minority Member, 
  Subcommittee on Space and Aeronautics, Committee on Science and 
  Technology, U.S. House of Representatives......................    27
    Written Statement............................................    28

                               Witnesses:

Hon. Paul K. Martin, Inspector General, National Aeronautics and 
  Space Administration, Accompanied by Tom Howard, Deputy 
  Inspector General, National Aeronautics and Space 
  Administration
    Oral Statement...............................................    30
    Written Statement............................................    31

Daniel J. Murrin, Partner, Assurance and Advisory Business 
  Services, Ernst & Young, LLP
    Oral Statement...............................................    36
    Written Statement............................................    37

Hon. Elizabeth Robinson, Chief Financial Officer, National 
  Aeronautics and Space Administration
    Oral Statement...............................................    47
    Written Statement............................................    49


 INDEPENDENT AUDIT OF THE NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

                              ----------                              


                       THURSDAY, DECEMBER 3, 2009

                  House of Representatives,
    Subcommittee on Investigations & Oversight, and
             Subcommittee on Space and Aeronautics,
                        Committee on Science and Technology
                                                    Washington, DC.

    The Subcommittees met, pursuant to call, at 2:46 p.m., in 
Room 2318 of the Rayburn House Office Building, Hon. Brad 
Miller [Chairman of the Subcommittee on Investigations and 
Oversight] presiding.


                            hearing charter

                     U.S. HOUSE OF REPRESENTATIVES

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

              SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT

                                  AND

                 SUBCOMMITTEE ON SPACE AND AERONAUTICS

                        Independent Audit of the

             National Aeronautics and Space Administration

                       thursday, december 3, 2009
                             2:00-4:00 p.m.
                   2318 rayburn house office building

Purpose

    Each year, federal agencies are required to obtain an audit of 
their consolidated financial statements from independent auditing 
firms. The National Aeronautics and Space Administration (NASA) 
received .the report of Ernst & Young evaluating the Fiscal Year 2009 
(FY09) financial statements on November 13, 2009. Ernst & Young 
determined that ``. . . the scope of our work was not sufficient to 
enable us to express, and we do not express, an opinion on the 
consolidated balance sheets . . ..'' This constitutes a ``disclaimed 
opinion''--one in which the auditing firm finds a material weakness in 
the accounting processes of the agency so severe that they cannot 
reliably verify the agency's financial accounts. The Subcommittees on 
Investigations and Oversight and Space and Aeronautics will hold a 
hearing to determine what NASA needs to do to continue improving its 
financial control and accounting system.

Witnesses

    Hon. Paul Martin 
    Inspector General
    National Aeronautics and Space Administration (NASA)

        accompanied by Hon. Tom Howard, Deputy Inspector General

    Confirmed by the Senate as NASA Inspector General on November 20, 
2009, Mr. Martin served as the Deputy Inspector General at the 
Department of Justice (DOJ) for 6 years. From 2001 to 2003, he served 
as the Counselor to the Inspector General, and previously as Special 
Counsel to the Inspector General from 1998 to 2001. Earlier Martin 
spent 13 years at the U.S. Sentencing Commission, and began his career 
as a reporter with The Greenville News in Greenville, South Carolina.

    Mr. Dan Murrin
    Partner, Assurance and Advisory Business Services
    Ernst & Young LLP

    Mr. Murrin has been the primary Ernst & Young partner managing the 
NASA audit team since the company won the independent audit contract in 
2004. Murrin served as a Professional Accounting Fellow for 2 years at 
the Government Accountability Office (GAO) during passage and initial 
startup of the Chief Financial Officers Act of 1990. He then resumed 
his career at Ernst & Young in October 1992. He has 30 years total 
experience relating to public sector auditing issues.

    Hon. Elizabeth Robinson 
    Chief Financial Officer
    National Aeronautics and Space Administration

    Dr. Robinson assumed her job as NASA's Chief Financial Officer on 
November 9, 2009, following her confirmation by the Senate. In her 
previous position, she served as Assistant Director for Budget at the 
Office of Management and Budget. She had also held the post of Deputy 
Director at the Congressional Budget Office. In her early career, Dr. 
Robinson served on the Science and Technology Committee evaluating 
Department of Energy programs and policies.

Findings in the FY09 Audit: Material Weakness

    Ernst & Young, NASA's auditors, cited the continuing problem of 
valuing NASA's older property, plant and equipment (PP&E)--the Space 
Shuttle and the International Space Station--as a material weakness.\1\ 
This situation has existed for a number of years and is a result of 
misinterpreting guidance on property management accounting during the 
past decade. The auditors credit NASA with a concerted multi-year 
effort to properly classify these assets and describe the agency's 
progress in establishing proper valuations. However, the valuation of 
property In the International Space Station and Space Shuttle programs 
still failed to meet the requirements of the Federal Accounting 
Standards Advisory Board (FASAB) during the period of the audit, 
leading to Ernst & Young's disclaimer of opinion on the financial 
statements.
---------------------------------------------------------------------------
    \1\ ``. . . [A] reasonable possibility that a material misstatement 
of the entity's financial statements will not be prevented, or detected 
and corrected on a timely basis.''
---------------------------------------------------------------------------
    Until October, the Federal accounting standard for PP&E \2\ 
required agencies to use actual cost data for these items listed on its 
balance sheets. NASA, like the Department of Defense (DOD), lacked the 
documentation needed to satisfy this requirement to the satisfaction of 
auditors. In such cases, the standard did provide for agency estimates 
of asset values, but this was to be based on actual cost data. Agencies 
with significant legacy assets attempting to comply with the strict 
interpretation of the standard were spending significant funds to 
locate available documentation and reconstruct the needed data, and in 
the end were not producing measurably better results.
---------------------------------------------------------------------------
    \2\ Statements of Federal Financial Accounting Standards 6.
---------------------------------------------------------------------------
    Responding to DOD's concerns about its inability to meet the 
standard, FASAB developed and issued ``Statement of Federal Financial 
Accounting Standards 35 (SFFAS 35).'' The Board amended the previous 
guidance on PP&E to allow ``reasonable'' estimates of historical costs 
as a means of valuing assets. The standard also offered more detailed 
guidance on the basis for estimates. In doing so, the Board indicated 
that actual data was still preferred and should underlie an agency's 
estimates where possible. Further, agencies using estimates were 
encouraged to develop financial systems that would capture necessary 
information on transactions going forward. Ernst & Young's report notes 
that NASA is working with other agencies to determine appropriate 
methods for implementing SFFAS 35, and that it has updated its internal 
controls on property beginning with contracts effective in Fiscal Year 
2008 (October 1, 2007).
    The auditors made two recommendations relating to this material 
weakness. First, NASA needs to continue evaluating how it develops 
estimates allowed by SFFAS 35, especially when actual data is missing 
or questionable. NASA should also seek to avoid depending on 
contractor-provided estimates, trying instead to match outlays to 
particular property, plant or equipment if possible. The auditors 
encourage additional effort for older contracts lacking newer 
requirements for tracking property, plant and equipment. The second 
recommendation calls for ``robust and rigorous review'' as NASA 
continues to develop estimation techniques and seeks to assure 
completeness of documentation. Special attention to Center internal 
control processes for property is also suggested to insure that 
necessary information on property, plant and equipment is now captured.

Findings in the FY09 Audit: Significant Deficiencies

    The audit report also cited two significant deficiencies: \3\ 1) 
the agency's method for estimating its liabilities for environmental 
cleanup and 2) the financial management system is not in substantial 
compliance with the Federal Financial Managers Integrity Act (FFMIA).
---------------------------------------------------------------------------
    \3\  ``[A] deficiency, or a combination of deficiencies, in 
internal control that is less severe than a material weakness, yet 
important enough to merit attention by those charged with governance.''
---------------------------------------------------------------------------
    According to the audit report, NASA has an estimated $922 million 
in environmental liabilities as of the end of Fiscal Year 2009. While 
the auditors note efforts by the agency to improve these estimates and 
implement recommendations in last year's audit, there were still ``. . 
. weaknesses in NASA's ability to generate an auditable estimate on a 
timely basis of its UEL [unfunded environmental liability] 
environmental cleanup costs and its environmental liabilities 
associated with PP&E.'' These estimates were prepared quickly and NASA 
told Ernst & Young that more training and greater control over the 
development of estimates is needed. Examining the software used for 
estimates of some twenty percent of environmental liabilities, the 
audit questioned whether it was generating reliable outputs.
    The audit also noted that NASA developed an estimation process that 
assumed that NASA would face a particular environmental liability 
during a 30-year window, unless there was available data to demonstrate 
that the agency was responsible for cleanups over a longer period of 
time. By making this assumption, the total environmental liability. was 
reduced by about 25 per cent in Fiscal Year 2009. Ernst & Young 
questioned the process by which this outcome was reached, and 
specifically raised concern that ``[t]he estimate was compiled and 
aggregated by EMD [the Environmental Management Division] with little 
support from the individual project managers, and OCFO [the Office of 
the Chief Financial Officer] was not aware of the process.''
    Relating to the system weaknesses, the auditors state that 
integration between the core financial module and the real property 
module is lacking. They also question whether the tracking of changes 
within the system may be inadequate and that compensating external 
reviews to reconcile transactions and review integrity of data are not 
in place. While the auditors do not believe these control weaknesses 
would result in serious problems with the financial statements, NASA 
might be exposed to ``. . . risks regarding safeguarding of assets.'' 
These items led the auditors to declare that the system falls short of 
FFMIA requirements. The auditors recommend correcting these issues.

Agency response

    NASA's response declared that the agency ``is committed'' to 
resolving the issues relating to legacy PP&E valuation using the 
guidance provided by SFFAS 35. It also stated that the significant 
deficiencies would also be addressed.

Background

    In 1988, NASA made its first attempt to develop an integrated 
financial management system; the NASA Accounting and Financial 
Information System (NAFIS). The program ran into trouble, as GAO noted 
in a report to then--Administrator Richard Truly: the cost estimate had 
jumped from $25.9 million to $45.7 million in just over 2 years.\4\ In 
May 1992, the Subcommittee on Investigations and Oversight held a 
hearing at which GAO detailed a number of major weaknesses in NASA 
financial management, including cases where budgetary obligations were 
made without assuring sufficient resources were available--violations 
of the Anti-Deficiency Act. GAO also noted that noted that NASA's 
systems were ``. . . nonintegrated, nonstandard, not fully automated, 
requiring multiple data entry and lengthy reconciliations . . .'' \5\
---------------------------------------------------------------------------
    \4\  GAO/AFMD-91-74, August 21, 1991; p. 1.
    \5\ Window on Waste: Atrophy in NASA Management, Serial 142, 102nd 
Congress; May 7, 1992; p. 31.
---------------------------------------------------------------------------
    NASA then signed a fixed-price agreement in September 1997 with 
KPMG to use a commercial product to develop a new accounting system. In 
this case the number of changes needed to conform to government 
accounting requirements rapidly brought the program to a halt. Three 
years and $131 million into the contract NASA terminated the effort.\6\
---------------------------------------------------------------------------
    \6\ GAO-01-258, January 2001; p. 12.
---------------------------------------------------------------------------
    During this time, as GAO testified before the Government Reform 
Committee in March 2002, NASA was receiving unqualified--or ``clean''--
opinions from Arthur Andersen, then the independent auditor. It was 
therefore somewhat of a shock to the incoming Administrator, Sean 
O'Keefe, when the agency's newly-hired audit team from 
PriceWaterhouseCoopers submitted a disclaimer on the Fiscal Year 2001 
audit for major internal control weaknesses and declared that the 
financial management systems were not in compliance with FFMIA.\7\ This 
episode badly affected relations between Mr. O'Keefe and Roberta Gross, 
then the NASA Inspector General.\8\ It also led to early termination of 
the PriceWaterhouseCoopers auditing contract.\9\
---------------------------------------------------------------------------
    \7\ GAO-02-551T, March 20, 2002; pp. 1-2.
    \8\ Ms. Gross was removed at the behest of Administrator O'Keefe on 
February 14, 2002. Contemporaneous articles made it clear Ms. Gross did 
not go voluntarily and not for cause [Edward Walsh, ``Inspectors 
General Ousted at 2 Agencies: Moves Raise Concerns for Watchdogs' 
Role,'' Washington Post, April 3, 2002; p. A21; Paul C. Light, ``The 
Last Word: Off With Their Heads,'' Government Executive, May 2002, p. 
66]. The importance of NASA's audit lapse was highlighted by Mr. 
O'Keefe's statement in his first appearance before the Senate 
Appropriation Committee Subcommittee on VA, HUD and Independent 
Agencies that, ``The idea of . . . a disclaimed opinion from 
independent auditors because they couldn't get the data is 
unacceptable. So in my judgment, this will not be a topic of discussion 
next year.'' [Jefferson Morris, ``O'Keefe to Congress,'' Aerospace 
Daily, May 2, 2002; p. 1.] Ms. Gross described the connection between 
her dismissal and the disclaimer of opinion by PriceWaterhouseCoopers 
in a 2007 interview with staff.
    \9\ Competing claims about the PriceWaterhouse Coopers contract's 
end came in allegations against former Inspector General Robert Cobb 
investigated by the Integrity Committee of the President's Council on 
Integrity and Efficiency; in statements by Cobb when interviewed by 
committee staff in 2007, and in a Reuters article reporting that ``. . 
. the audit firm opted out of the contract because it was unhappy with 
the relationship.'' [Arindam Nag and Deborah Zabarenko, ``NASA's 
finances in disarry--auditor departs,'' Reuters May 14, 2004 17:40 
GMT].
---------------------------------------------------------------------------
    Since April 2000, NASA had been working to finish its third attempt 
at a financial management system, the Integrated Enterprise Management 
Program. In this case NASA adopted the R/3 enterprise management 
program developed for U.S. government agencies by the SAP Corporation. 
The core financial module was implemented at the agency field centers 
between October 2002 and June 2003. It was not a smooth transition; as 
noted in the agency's the Fiscal Year 2003 audit, auditors from 
PriceWaterhouseCoopers found in their last report that:

        ``. . . NASA management identified significant errors in its 
        June 30, 2003, financial statements resulting from the 
        implementation of the IFMP [Integrated Financial Management 
        Program] system. NASA management communicated that it would 
        correct these errors in the September 30, 2003, financial 
        statements. When NASA first prepared its September 30, 2003, 
        financial statements, NASA concluded that these financial 
        statements also contained significant errors. NASA's efforts to 
        correct these errors led to significant delays in its 
        completion of the September 30, 2003, financial statements and 
        its compilation of documentation in support of amounts and 
        disclosures in these financial statements, including support 
        for resolution of the June 30, 2003, financial statement 
        errors. The documentation NASA provided in support of its 
        September 30, 2003, financial statements was not adequate to 
        support $565 billion in adjustments to various financial 
        statement accounts, which it identified as being related to the 
        conversion of data to the IFMP system; $2 billion in net 
        adjustments to its Fund Balance with Treasury account, which 
        had the effect of reducing NASA's recorded balance so it 
        equaled Treasury's reported balance; and its corrections of the 
        financial data errors that affected its June 30, 2003, and 
        September 30, 2003, financial statements. Because of the delays 
        in preparation of the September 30, 2003, financial statements, 
        it was not possible to pursue further evidence in support of 
        these transactions and amounts, nor was it possible to complete 
        other planned auditing procedures within the reporting deadline 
        established by Office of Management and Budget (OMB). Thus, we 
        could not complete our audit and were unable to determine 
        whether there were other matters that are required to be 
        reported . . ..''

    In the reports it has issued since becoming the agency's 
independent auditor, Ernst & Young has traced the changes NASA has made 
to correct the four material weaknesses they first identified in their 
Fiscal Year 2004 report.\10\ The Fiscal Year 2005 audit declared the 
improvements in the IFMP control environment ``substantially 
complete.'' In the Fiscal Year 2006 audit, the Fund Balance With 
Treasury material weakness was combined with the broader Financial 
Systems, Analyses and Oversight issue. This year's audit left only the 
Property material weakness discussed earlier. As a small measure of 
NASA's progress it only took Ernst and Young 12 pages in this year's 
audit report compared to the 24 needed for its first report in Fiscal 
Year 2004. The bottom line is that while NASA received a disclaimed 
opinion, the agency has come a long way toward getting out of the woods 
on their accounting. With a solid implementation of SFFAS 35, NASA may 
get a qualified or clean opinion for the FY 2010 audit.
---------------------------------------------------------------------------
    \10\  Financial Systems, Analyses and Oversight; Fund Balance with 
Treasury; Property; and Integrated Financial Management Program (IFMP) 
Systems Control Environment.
---------------------------------------------------------------------------
    Attached for information are the Inspector General's letter to the 
Administrator, the Ernst & Young audit, and NASA's response.

































    Chairman Miller. Good afternoon. I am pleased to call to 
order this session, this joint hearing of the Subcommittee on 
Investigations and Oversight and the Subcommittee on Space and 
Aeronautics. Our purpose today is to examine the fiscal year 
2009 audit of financial operations at the National Aeronautics 
and Space Administration.
    NASA's independent auditors, the firm of Ernst & Young, 
decided not to render an opinion on whether the agency's 
financial documents fairly represented the financial condition 
of the agency in the last fiscal year. Such disclaimed 
opinions, they are called, had been very frequent at NASA in 
the last few years.
    Seventeen years ago, the Subcommittee on Investigations and 
Oversight held a hearing to discuss financial management at 
NASA. Then, NASA had just been placed on the GAO, the 
Government Accountability Office's high-risk list for their 
lack of appropriate financial management system. The bottom 
line was that NASA could not tell you with confidence what 
their bottom line was. At that hearing, the Subcommittee 
learned that NASA apparently obligated to spend money without 
being sure it actually had the money it was spending, which is 
a violation of the Antideficiency Act.
    It took about half as long to get to the moon as it has to 
clean up NASA's financial performance, but after three tries, 
hundreds of millions of dollars and the hard work of many NASA 
employees later, they have shown definite improvement. It is 
hard to take a lot of comfort from a disclaimed opinion. 
Finding comfort in that is like a student who was not promoted 
who took comfort in the fact they came much closer to passing 
the year before, but in all the circumstances, this really is 
improvement compared to where it has been.
    The message is encouraging. The disclaimer of this audit is 
very different from those NASA received earlier in the decade. 
Today we are only discussing one material weakness, not four, 
and is one that is kind of understandable. The significant 
remaining problem is that NASA has been unable to meet 
accounting requirements for setting an asset value on the 
Shuttle and Space Station programs. While any material weakness 
is disappointing and a concern, we have come a long way from 
the days when NASA could not say how they were spending their 
money, what they were spending it on, what they spent, when 
they spent it. We are no longer talking about accountants 
fixing records by moving around a few billion dollars and 
treating that as rounding error to make the books work. We 
really have the best disclaimed opinion an agency could 
possibly hope for. So it really is the case that you almost 
passed your grade this year, and we are fairly confident that 
next year you will be promoted.
    And we have more good news. NASA received guidance in 
October from the Federal Accounting Standards Advisory Board on 
how to value the Shuttle and the Space Station using estimates 
of value. That is a glimmer of hope that NASA can produce a 
valuation that really will pass muster, not be disclaimed by 
their accounting firm next year. It is my strong desire to see 
that happen this fiscal year so that if I see all of you again 
at this time next year, it will be at a holiday party, not at 
an oversight hearing. The difficulties in trying to value 
assets like the Space Shuttle and the Space Station--which 
don't really have a market value--there is nobody who wants to 
buy a used Space Shuttle or a used Space Station, which makes 
it very hard to use market prices for valuation. There really 
was a time when the claim that NASA's books were just a mess is 
no longer really true and that we really do have reason to 
think that next year's audit will be a clear, clean audit.
    There are other matters that challenge NASA's accounting 
operation. I am particularly concerned about the environmental 
liabilities that Ernst & Young spoke of--mentioned in their 
report. But I expect all the parties before us today can work 
together to sustain the progress we have seen in NASA's 
financial management system.
    [The prepared statement of Chairman Miller follows:]

               Prepared Statement of Chairman Brad Miller

    Good afternoon. I am pleased to call to order this joint hearing of 
the Subcommittee on Investigations and Oversight and the Subcommittee 
on Space and Aeronautics. Our purpose is to examine the Fiscal Year 
2009 audit of financial operations at the National Aeronautics and 
Space Administration.
    NASA's independent auditors, the firm of Ernst & Young, decided not 
to render an opinion on whether the agency's financial documents fairly 
represented the financial condition of the agency in the last fiscal 
year. Such ``disclaimed opinions'' have been far too frequent in recent 
years at NASA.
    Seventeen years ago, the Subcommittee on Investigations and 
Oversight held a hearing to discuss financial management at NASA. In 
those days, NASA had just been placed on the Government Accountability 
Office's ``high-risk'' list for their lack of an appropriate financial 
management system. The bottom line was that NASA could not tell you 
with confidence what their bottom line was. At that. hearing, the 
Subcommittee learned that NASA had apparently obligated to spend money 
without being sure it actually had the funds--which constitutes a 
violation of the Anti-Deficiency Act.
    It only took about half as long to get to the moon as it has taken 
to clean up NASA's financial performance, but three tries, hundreds of 
millions of dollars and the hard work of many NASA employees later they 
have shown definite improvement.
    Our message today is encouraging--the disclaimer of this audit is 
very different from those NASA received earlier this decade. Today we 
are only discussing one material weakness, not four. The significant 
remaining problem is that NASA has been unable to meet accounting 
requirements for setting an asset value on the Shuttle and Space 
Station programs. While any material weakness is disappointing, we have 
come a long way from the days when NASA could not say with confidence 
who had spent money on what, when. We are no longer talking about NASA 
accountants fixing records by arbitrarily making adjustments to 
accounts on the order of billions of dollars. In short, this is the 
best disclaimed opinion an agency could hope for.
    And we have more good news: NASA received guidance in October from 
the Federal Accounting Standards Advisory Board on how to value the 
Shuttle and Station using estimates of value. This provides a glimmer 
of hope that NASA can produce a valuation that will pass muster with 
their accounting firm. It is my strong desire to see that happen, this 
fiscal year, so that if I see you the three of you this time next year, 
it will be at a Christmas party not an oversight hearing. The 
difficulties in trying to value assets such as the Space Shuttle and 
Space Station, that have no real market value, leads people to believe 
NASA can't keep its books. There was a time when that claim would have 
been true, but it is not true today and I hope that the auditing done 
next year will make that clear.
    There are other matters that challenge NASA's accounting 
operation--I am particularly concerned about the environmental 
liabilities issues that Ernst and Young mention. However, I expect all 
the parties before us today can work together to sustain the progress 
we have seen in NASA's financial management system.
    At this time, I will thank the witnesses for participating in the 
hearing and now yield to Chairwoman Giffords for her opening statement.

    Chairman Miller. And now at this time, I think we agreed to 
go Chair, Chair, Ranking Member, Ranking Member. I am sorry, 
Chair, Ranking Member, Chair, Ranking Member.
    I now recognize Dr. Broun, the Ranking Member of the 
Investigations and Oversight Subcommittee.
    Mr. Broun. Thank you, Mr. Chairman. Let me welcome our 
witnesses here today and congratulate two of you on your new 
appointments. Mr. Martin and Dr. Robinson, I look forward to 
working with you in the future, and I do congratulate you on 
your new appointments. And both of you have your work cut out 
for you in the future. I would be remiss if I did not mention 
the tremendous progress that your predecessors have made. 
NASA's financial management was in tremendous disarray for many 
years. The agency is still not out of the woods yet, but the 
steps taken by your predecessors should obviously be noted and 
accolades to them.
    I hope that our witnesses today will continue that trend, 
and I look forward to your progress. Problems still remain, 
however. As Mr. Murrin will detail in his testimony, NASA once 
again has received a disclaimed opinion, meaning that the 
independent auditor could not express an opinion on the status 
of NASA's balance sheets. This is certainly not the first time 
this has happened. Hopefully this may be the last, and I sure 
hope so just to reiterate what Chairman Miller said. Our 
Committee, GAO and NASA IG have all followed this issue closely 
for many years. GAO and the NASA IG have issued a litany of 
reports over the last two decades, and this Committee has had 
several hearings to address the topic.
    I am pleased to hear that NASA seems to have been brought 
in, quote unquote, to a single-standards accounting system 
rather than the multiple fiefdoms that were present in the 
past. NASA still faces the daunting task of evaluating 
property, plant and equipment, most notable, the Space Shuttle 
and International Space Station. While this problem may never 
be fixed, it may work itself over time as the Shuttle is 
planned to retire next year, and the Space Station operations 
will eventually end as well. Until then, I hope that solutions 
can be found that both respect appropriate accounting standard 
as well as real-world realities.
    I look forward to monitoring your progress and ensuring 
that NASA handles scarce taxpayer resources in a transparent 
and accountable manner. Thank you, Mr. Chairman, and I yield 
back the balance of my time.
    [The prepared statement of Mr. Broun follows:]

           Prepared Statement of Representative Paul C. Broun

    Thank you Mr. Chairman.
    Let me welcome our witnesses here today, and congratulate two of 
them on their new appointments. Mr. Martin and Dr. Robinson both have 
their work cut out for them, and I look forward to working with both of 
them in the future. I'd be remiss if I did not mention the tremendous 
progress their predecessors made. NASA's financial management was in 
disarray for many years. The agency is still not out of the woods, but 
the steps taken by their predecessors should be noted. I hope that our 
witnesses today will continue this trend, and I look forward to 
following their progress.
    Problems still remain, however. As Mr. Murrin will detail in his 
testimony, NASA once again received a disclaimed opinion--meaning that 
the independent auditor could not express an opinion on the status of 
NASA's balance sheets. This is certainly not the first time this has 
happened. Our Committee, GAO, and NASA IG have all followed this issue 
closely for many years. GAO and the NASA IG have issued a litany of 
reports over the last two decades and this Committee has held several 
hearings to address the topic.
    I'm pleased to hear that NASA seems to have ``bought in'' to a 
single standardized accounting system, rather than the multiple 
fiefdoms of the past. NASA still faces the daunting task of valuing 
Property Plant & Equipment (PP&E)--most notable the Space Shuttle and 
the International Space Station (ISS). While this problem may never be 
fixed, it may work itself out over time as the Shuttle is planned to 
retire next year, and ISS operations will eventually end as well. Until 
then, I hope that solutions can be found that both respect appropriate 
accounting standards, as well as real world realities.
    I look forward to monitoring your progress and ensuring that NASA 
handles scarce taxpayer resources in a transparent and accountable 
manner.
    Thank you Mr. Chairman, I yield back the balance of my time.

    Chairman Miller. Thank you, Dr. Broun. I now recognize the 
Chairwoman of the Subcommittee on Space and Aeronautics, who I 
am sure hopes the financial management at NASA will achieve the 
standards set by the astronauts, the Honorable Gabrielle 
Giffords for her opening statement.
    Ms. Giffords. Thank you, Mr. Miller, Mr. Chairman. I would 
like to as well extend a welcome to our witnesses today.
    I am going to keep my comments as short as possible. I, 
along with other members here of Congress, are very strong 
supporters of NASA. We believe that NASA is truly the crown 
jewel of America's R&D efforts. NASA can inspire, can educate, 
can improve our society throughout a variety of its activities. 
What we ask NASA to do is very, very difficult. So want to be 
careful to make sure that you have the resources that you need. 
But at the same time, there is a very strong responsibility to 
the American taxpayer to make sure that the funds being spent 
by NASA or any other agency is being well spent. We take that 
responsibility seriously. I do as the Chairwoman. I know my 
colleagues do as well, and that is why the Chairman and I have 
called today's hearing.
    As many of you already know, NASA recently received the 
results of its annual independent financial audit. It once 
again received a disclaimed opinion. Of course, that is not 
what any of us want to see from NASA. At the same time, it was 
not totally a surprise, since NASA had been receiving 
disclaimed opinions for most of this decade. Now, that is the 
bad news, and one of the reasons we are holding today's 
hearing.
    We need to know why NASA received a disclaimed opinion, how 
NASA can clean up that opinion, and what NASA intends to do to 
ensure that we are not going to be here next year to get the 
same decision. However, I also wanted to hold this hearing 
because it is clear that there is a lot of very good news 
coming out of NASA. The financial management has definitely 
improved.
    It is clear from the auditor's report and the NASA IG's 
findings have found that NASA has made truly significant 
improvements over its financial management systems and 
practices over the last many year, and in short, after almost a 
decade of serious shortcomings as mentioned by my colleague in 
NASA's approach to financial management, now you are really 
coming very close to closing the books on those problems. So 
congratulations. It is good news.
    Before I close, I would also just like to say that 
solutions like this to problems in our government don't happen 
overnight. They happen because of the hard work of some very 
dedicated government employees. The work that was done under 
the leadership of the former CFO, Honorable Ronald Spoehel, is 
something that is not widely known and recognized. He 
persevered in a thankless but ultimately very significant task, 
and he should take great pride in what he was able to 
accomplish.
    Again, we often overlook the work that has been done by so 
many who work for our government, and Mr. Spoehel and his team 
were tremendous individuals and are owed a debt of gratitude.
    Dr. Robinson, I know that you will continue to build on the 
progress that has been made to date. And as you assume the 
duties of CFO, I know that you will do so with great 
effectiveness and efficiency.
    With that, again I would like to welcome our witnesses, and 
we look forward to your testimony. Thank you.
    [The prepared statement of Chairwoman Giffords follows:]

          Prepared Statement of Chairwoman Gabrielle Giffords

    Good afternoon. I want to join Chairman Miller in welcoming our 
witnesses to this afternoon's hearing. In the interest of getting to 
our witnesses as soon as possible, I will be brief in my opening 
remarks. I am a strong supporter of NASA, because I believe that it is 
one of the ``crown jewels'' of the nation's R&D enterprise. Moreover, 
it can inspire, educate, and improve our society through its 
activities. I want to ensure that NASA receives the resources that it 
will need to carry out the many tasks that we have given it. At the 
same time, I feel the equal responsibility of ensuring that NASA is a 
good steward of those resources--resources which ultimately come from 
the American taxpayers. I take that responsibility seriously, as I know 
my colleagues do. That is why Chairman Miller and I called today's 
hearing.
    As many of you already know, NASA recently received the results of 
its annual independent financial audit. It once again received a 
``disclaimed'' opinion. That is not what we want to see from NASA. At 
the same time, it was not totally a surprise, since NASA has been 
receiving disclaimed opinions for most of this decade. That's the bad 
news, and one of the reasons we are holding today's hearing.
    We need to know why NASA got a disclaimed opinion, how NASA can get 
a clean opinion, and what NASA intends to do to ensure that it won't 
get another disclaimer next year. However, I also wanted to hold this 
hearing because it is clear that there is a lot of good news to report 
on the financial management front at NASA.
    It is clear from the auditor's report and the NASA IG's findings 
that NASA has made truly significant improvements in its financial 
management systems and practices. In short, after almost a decade of 
serious shortcomings in its approach to financial management, NASA is 
now very close to closing the books on those problems. That is very 
good news, and I hope that it will not get lost sight of today as we 
discuss what remains to be done.
    Before I close, I would note that the dramatic improvement we have 
seen in NASA's financial management didn't just happen. It was the 
result of a lot of hard work by a dedicated team under the leadership 
of the former CFO, the Honorable Ronald Spoehel. He persevered in a 
thankless but ultimately very significant task, and he should take 
great pride in what he was able to accomplish. We often overlook the 
important role that individuals can play in making our government work 
better. Mr. Spoehel and his team were such individuals, and we owe them 
our gratitude. Dr. Robinson, I hope that you will build on the progress 
made to date as you assume the duties of CFO, and I am confident that 
you will do so effectively and efficiently.
    With that, I again want to welcome our witnesses and I look forward 
to your testimony.

    Chairman Miller. Thank you, Ms. Giffords. The Chair now 
recognizes Mr. Olson from Texas, the Ranking Member of the 
Space and Aeronautics Subcommittee for his opening statement, 
the last of the four.
    Mr. Olson. I would like to thank the chairs, Chairman 
Miller, Chairwoman Giffords, and Chairman Broun, for hosting 
this hearing today. Thank you to the witnesses for being here, 
taking the time to be here and may I offer a welcome 
particularly to Mr. Martin and Dr. Robinson. You have extremely 
critical positions at NASA, and I wish you the best in your new 
posts. I hope you know that you have folks on these Committees 
and in this Congress who are willing to stand up to make sure 
that the agency is on the right track to achieve the--missions 
it has and will undertake.
    Along those lines, I would like to say in regard to this 
hearing today that the diligent efforts by NASA over the last 
several years to get their financial house in order are bearing 
fruit, and the agency should be commended for the hard work it 
has done to get us to where we are today.
    I would like to especially recognize the work of Ron 
Spoehel and commend him for his services at NASA as a CFO at 
this time as well.
    I am a strong proponent of giving NASA the resources it 
needs to achieve its goals. While the agency is in desperate 
need of funds, we cannot and frankly should not advocate for 
increased taxpayer money unless we are confident that those 
funds are being spent efficiently, wisely and with 
accountability. An agency that is not adequately accountable 
for taxpayer resources should not be awarded with increased 
funding. That is why we are here, talking about this important 
initiative in any circumstance but particularly at this time in 
the agency's history.
    Thank you for what you have done and what we will do 
together on behalf of the Nation's space flight program.
    I yield back my time.
    [The prepared statement of Mr. Olson follows:]

            Prepared Statement of Representative Pete Olson

    I'd like to thank the Chairs, Reps. Giffords and Miller, and 
Ranking Member Broun for holding this important hearing today. Thank 
you to the witnesses for taking the time to be here, and may I offer a 
welcome particularly to Mr. Martin and Ms. Robinson. You have extremely 
critical positions at NASA and I wish you the best in your new posts. I 
hope you know you have folks on this committee and in this Congress who 
stand willing to help make sure the agency is on the right track to 
achieve the worthy missions it has and will undertake.
    Along those lines, I'd like to say in regard to this hearing today 
that the efforts performed to get NASA's financial house in order are 
seeing fruit, and the team should be commended for the hard work it has 
done to get us where we are today. I'd like to recognize the work of 
Ron Spoehel and thank him for his service at NASA as CFO at this time 
as well.
    I am a strong proponent of giving NASA the resources it needs to 
achieve its goals. While the agency is in desperate need for funds, we 
cannot, and frankly should not, advocate for increased taxpayer money 
if those already entrusted to it aren't spent wisely, efficiently, and 
correctly. An agency that is not adequately accountable of government 
resources should not be entrusted with more of them. That is why what 
we are here talking about it important under any circumstance, but 
particularly at this time in the Agency's history.
    Thank you for what you have done, and what we will do together on 
behalf of our nation's space program.

    Chairman Miller. Thank you, Mr. Olson. I ask unanimous 
consent for all additional opening statements submitted by any 
member of either Subcommittee be included in the record. 
Without objection, so ordered.
    It is now my pleasure to introduce our witnesses. Members 
will be interested to know that Mr. Martin and Dr. Robinson are 
making their first appearance before our Committee or any 
Subcommittee of our Committee. In between them they have 1 
month in their new positions.
    Mr. Paul Martin is the new Inspector General of NASA. I am 
very pleased to say new Inspector General of NASA. He was 
confirmed by the Senate as a NASA Inspector General on November 
20 and previously served as a Deputy Inspector General at the 
Department of Justice. For 6 years from 2001 to 2003, he was a 
counselor to the Inspector General and previously was the 
Special Counsel to the Inspector General from 1998 to 2001. 
Earlier, he spent 13 years at the U.S. Sentencing Commission 
and began his career as a reporter with the Greenville News in 
Greenville, South Carolina.
    Accompanying Mr. Martin is Mr. Tom Howard who has served as 
Deputy Inspector General at NASA since 2002. He previously 
worked at the Department of Transportation in the Government 
Accountability Office.
    Mr. Dan Murrin is partner in the Assurance and Advisory 
Business Services division at Ernst & Young. Mr. Murrin has 
been the primary Ernst & Young partner managing the NASA audit 
team since the company won the independent audit contract in 
2004. He served as a Professional Accounting Fellow for 2 years 
for the Government Accountability Office during passage and 
initial start-up of the Chief Financial Officers Act of 1990. 
He then resumed his career at Ernst & Young in October 1992. He 
has 30 years' total experience relating to public sector 
auditing issues.
    And finally, Dr. Elizabeth Robinson is NASA's chief 
financial officer and was confirmed by the Senate on November 9 
of this year. In her previous position, she was Assistant 
Deputy for Budget at the Office of Management and Budget. She 
has also held the post of Deputy Director at the Congressional 
Budget Office, and early in her career, Dr. Robinson served 
here on the staff of the Science and Technology Committee 
evaluating the Department of Energy programs and policies. Dr. 
Robinson, I would have mentioned that you were a former staff 
member of this Committee, even if I had written these 
introductions myself.
    As our witnesses should know, you each have 5 minutes for 
your spoken testimony. Your written testimony will be included 
in the record for the hearing. When you all have completed your 
spoken testimony, we will begin with questions. Each member 
will have 5 minutes to question the panel. It is the practice 
of this Subcommittee, our Subcommittee, Investigations and 
Oversight, to receive testimony under oath. Do any of you have 
any objection to taking an oath? The record should reflect that 
all the witnesses nodded in the affirmative that they have no 
objection.
    You also have the right to be represented by counsel. Do 
any of you have counsel here with you? The witnesses all again 
nodded in the affirmative.
    Please stand and raise your right hand. Do you swear to 
tell the truth and nothing but the truth? All the witnesses 
have now taken the oath. And now I assume that being advised of 
all of your rights you feel relaxed and prepared to talk to us. 
Let the record show that all these witnesses have taken the 
oath, and we will start with the first witness, Inspector 
General Martin. Mr. Martin, you are recognized for 5 minutes.

 STATEMENT OF HON. PAUL K. MARTIN, INSPECTOR GENERAL, NATIONAL 
   AERONAUTICS AND SPACE ADMINISTRATION, ACCOMPANIED BY TOM 
  HOWARD, DEPUTY INSPECTOR GENERAL, NATIONAL AERONAUTICS AND 
                      SPACE ADMINISTRATION

    Mr. Martin. Thank you, Chairman Miller, Chairwoman Giffords 
and Ranking Members of the Committee. At the outset, I would 
like to thank you for your warm words of welcome. I can think 
of no better way to end my fourth day on the job than up here 
in front of the Committee.
    Thank you for the opportunity to allow us to discuss the 
fiscal year 2009 audit of NASA's financial statements. With me 
today is Tom Howard, the Deputy Inspector General at NASA and 
the key supervisor at the OIG who has worked this issue over 
the last few years.
    As requested, our written statement that we submitted to 
the Committees addresses three main issues: first, the Office 
of Inspector General's views of the issues identified by Ernst 
& Young, the independent public accounting firm that conducted 
the audit under contract with the OIG; second, NASA's progress 
in remediating its financial management problems; and third, 
Ernst & Young's recommendations to address ongoing issues.
    By way of background, for most of the past decade, the OIG 
has identified NASA's need to improve its financial management 
as one of the agency's most serious performance and management 
challenges; and to its credit, over the years NASA has focused 
considerable effort on resolving longstanding weaknesses in its 
financial management processes and systems. While the agency 
has made significant improvements, several key challenges 
remain as evidenced by the fact that Ernst & Young disclaimed 
an opinion on NASA's financial statements again in fiscal year 
2009.
    As was discussed, this disclaimer is based on the auditor's 
inability to obtain sufficient evidentiary support for the 
amounts presented in the agency's financial statements. The 
primary reason for this was NASA's continued inability to 
accurately value its legacy assets, specifically the Space 
Shuttle and the International Space Station. Although we 
recognize that NASA has made significant progress in improving 
its financial processes and system, the 2009 audit report 
identified three significant deficiencies in internal controls, 
one of which is considered a material weakness. Specifically, 
Ernst & Young reported a material weakness in NASA's controls 
for ensuring that the value of legacy property, plant and 
equipment presented in the financial statement is fairly 
stated. This means there was a reasonable possibility that 
internal controls over NASA's legacy assets were insufficient 
to prevent a material misstatement in the agency's financial 
statements. The other two internal control deficiencies cited 
by Ernst & Young involve NASA's process for estimating its 
environmental liabilities and its compliance with the Federal 
Financial Management Improvement Act of 1996.
    To help NASA leadership correct these weaknesses, the audit 
contains a series of recommendations, including that NASA focus 
on improving its implementation of recent guidance permitting 
the use of estimates in establishing the value of legacy 
assets.
    Through its own initiatives and through discussions with 
the OIG and Ernst & Young, NASA's Office of the Chief Financial 
Officer is pursuing a series of actions to improve the agency's 
financial management and address existing weaknesses in 
internal controls. Most notably, the agency has revised and 
improved its continuous monitoring program which helps NASA 
managers assess on an ongoing basis its financial management 
process and internal controls. This program also helps ensure 
that balances and activities reported in the agency's financial 
statements are accurate and complete.
    As we look to the 2010 fiscal year, NASA is also working to 
address the valuation of its legacy assets, improve its process 
for estimating environmental liabilities and ensure compliance 
with FFMIA.
    In closing, we believe that NASA, through effective 
implementation of the recommendations contained in the 2009 
audit report, together with a continued focus on is ongoing 
monitoring and remediation efforts, should be able to correct 
the existing weaknesses in its financial management processes 
and systems during fiscal year 2010.
    This concludes our oral statement. We would be pleased to 
answer your questions.
    [The prepared statement of Mr. Martin follows:]

               Prepared Statement of Hon. Paul K. Martin

    Chairman Miller and Chairwoman Giffords, Ranking Members, and 
Members of the Subcommittees:
    Thank you for the opportunity to discuss the fiscal year (FY) 2009 
audit of the National Aeronautics and Space Administration's (NASA) 
financial statements. The independent public accounting firm Ernst & 
Young LLP (E&Y) conducted the audit under a contract with the Office of 
Inspector General (OIG).
    As requested, this statement describes the OIG's views of the 
issues identified by E&Y, NASA's progress in remediating its financial 
management problems, and E&Y's recommendations to address continuing 
issues.
    The OIG has identified the need to improve financial management at 
NASA as one of the most serious performance and management challenges 
facing Agency leadership for most of this decade. Over the years, NASA 
implemented a variety of corrective actions to address longstanding 
weaknesses in its financial management processes and systems. While the 
Agency has made significant improvements, several challenges remain to 
be addressed.
    For example, in its most recent report, E&Y disclaimed an opinion 
on NASA's financial statements for FY 2009. The disclaimer indicates 
that E&Y was unable to obtain sufficient evidentiary support for the 
amounts presented in the Agency's financial statements and resulted 
primarily because of continued weaknesses in NASA's internal controls 
over accounting for legacy assets--specifically, the Space Shuttle and 
International Space Station (ISS). Although the auditor's report 
recognizes that the Agency has made significant progress in improving 
its financial processes and systems, the report identified three 
significant deficiencies \1\ in internal controls with one considered a 
material weakness.
---------------------------------------------------------------------------
    \1\ During the reporting period of the FY 2009 audit, the American 
Institute of Certified Public Accountants standards defined a 
``significant deficiency'' as a deficiency or a combination of 
deficiencies in internal control that is less severe than a material 
weakness, yet important enough to merit attention by those charged with 
governance.
---------------------------------------------------------------------------
    Specifically, E&Y reported a material weakness in NASA's controls 
for assuring that the value of legacy property, plant, and equipment 
(PP&E) and materials presented in the financial statements is fairly 
stated. E&Y's identification of internal controls over legacy assets as 
a material weakness means there was a reasonable possibility that the 
controls were not sufficient to prevent a material misstatement in the 
financial statements. The other two internal control deficiencies cited 
by E&Y involved NASA's processes for estimating environmental 
liabilities and its compliance with the Federal Financial Management 
Improvement Act of 1996 (FFMIA).
    E&Y's report contains specific recommendations to assist the Agency 
in remediating existing weaknesses during FY 2010. For example, E&Y 
identified areas for particular focus in improving the Agency's 
implementation of recent guidance permitting the use of estimates in 
establishing the value of legacy assets.
    Through its own initiatives and as a result of discussions with our 
office and E&Y, NASA's Office of the Chief Financial Officer is 
pursuing actions intended to improve financial management and address 
specific weaknesses in internal controls. Most notably, the Agency made 
improvements to and revised its Continuous Monitoring Program, which 
assesses financial management processes and internal controls for 
compliance with generally accepted accounting principles (GAAP) and 
ensures that balances and activities reported in the financial 
statements are accurate and complete. The Agency is also conducting 
specific remediation efforts to address the valuation of legacy assets, 
improve the process for estimating environmental liabilities, and 
ensure compliance with FFMIA.
    Through effective implementation of E&Y's most recent 
recommendations and a continued focus on its ongoing monitoring and 
remediation efforts, the Agency should be able to correct existing 
weaknesses in financial management during FY 2010.

NASA's Weaknesses in Financial Management Are Longstanding

    In FY 2002, NASA initiated a 7-year, Agency-wide effort to provide 
a single, integrated suite of financial, project, contract, and human 
capital tools. This new integrated financial management system was 
envisioned to help NASA manage its programs and prepare financial 
information on a timely basis.
    During FY 2003, NASA implemented the Core Financial module as part 
of its single, integrated financial management system. The Core 
Financial module replaced 10 disparate Center-level accounting systems 
and the NASA Headquarters accounting system, along with approximately 
120 ancillary subsystems in operation for the past 2 decades. The 
conversion of legacy accounting data into the Core Financial module 
posed a greater-than-expected challenge for the Agency because of the 
volume of data and the cumbersome techniques utilized to convert it 
from the legacy systems to the new system. The conversion had a 
significant impact on the quality and timeliness of the Agency's 
financial information and necessitated complex, time-consuming data 
cleanup efforts that were not well defined or easily accomplished.
    In January 2004, the independent auditor at the time--
PricewaterhouseCoopers--determined that it could not render an opinion 
on NASA's financial statements for FY 2003 because of the data 
integrity issues resulting from the conversion. During its audit 
testing and review of the year-end financial statements, the auditor 
noted significant adjustments and discrepancies that the Agency could 
not explain. For example, the auditor found that in preparing the 
financial statements, NASA posted numerous manual adjustments outside 
of the Core Financial module.
    In its review of these adjustments and discrepancies, 
PricewaterhouseCoopers noted that the value of 87 adjustments was 
approximately $582 billion. Of the $582 billion in adjustments, nearly 
$565 billion related to data conversion errors and nearly $2 billion 
related to net adjustments to the Agency's Fund Balance with Treasury 
account. NASA could not provide documentary evidence to support the 
purpose and the validity of the adjustments.
    Also in its report on the FY 2003 financial statement audit, 
PricewaterhouseCoopers cited five reportable conditions,\2\ including 
four that it considered material weaknesses: \3\
---------------------------------------------------------------------------
    \2\ During the reporting period of the FY 2003 audit, the American 
Institute of Certified Public Accountants (AICPA) standards defined 
``reportable condition'' as significant deficiencies in the design or 
operation of internal control that in the auditor's judgment could 
adversely affect the entity's ability to record, process, summarize, 
and report financial data consistent with the assertions of management 
in the financial statements.
    \3\ During the reporting period of the FY 2003 audit, AICPA 
standards defined ``material weakness'' as a reportable condition in 
which the design or operation of one or more of the internal control 
components does not reduce to a relatively low level the risk that 
misstatements caused by error or fraud in amounts that would be 
material in relation to the financial statements being audited may 
occur and not be detected within a timely period by employees in the 
normal course of performing their assigned functions.

---------------------------------------------------------------------------
          Property, Plant, and Equipment (Material Weakness)

          Financial Statement Preparation Process (Material 
        Weakness)

          Audit Trail and Documentation to Support the 
        Financial Statements (Material Weakness)

          Fund Balance with Treasury (Material Weakness)

          General Information Technology (IT) Controls 
        (Reportable Condition)

    From FY 2003 through FY 2009, unresolved data integrity problems, 
material weaknesses in internal controls over assets, and ineffective 
report development processes continued to impair the Agency's ability 
to prepare financial statements that were accurate and complete.

NASA Has Made Significant Progress in Remediating Financial Management 
                    Weaknesses

    In the years that followed the conversion to the Core Financial 
module, NASA focused significant efforts on identifying and resolving 
long-standing systemic and financial management issues. As part of 
these efforts, NASA reorganized its financial management structure, 
reorganized its business processes to align with the financial 
management system, upgraded its system, developed new guidance, and 
provided training to its personnel to address these issues.
    As shown in the following table, NASA has made significant progress 
in remediating the majority of its material weaknesses in internal 
controls.




General IT Controls

    In FY 2005, NASA completed corrective actions to substantially 
remediate weaknesses noted in the control environment of the integrated 
financial management system. NASA improved upon its entity-wide 
security program controls, its application software development and 
program change controls, and its system software controls that limit 
and monitor access to powerful programs and sensitive files that 
control computer hardware and secure applications supported by the 
system.

Fund Balance with Treasury

    In FY 2006, NASA substantially remediated its material weakness 
concerning Fund Balance with Treasury reconciliations. An agency's Fund 
Balance with Treasury represents monies an agency can spend for 
authorized transactions; these monies are based on budget spending 
authorizations and are made available through Treasury warrants. In the 
FY 2003 audit report, PricewaterhouseCoopers noted that to correct cash 
imbalances between NASA and Treasury, NASA made adjustments of nearly 
$2 billion, net, to its Fund Balance with Treasury account to agree 
with Treasury's reported balance on September 30, 2003, but could not 
provide sufficient documentary evidence to explain the adjustments.
    Over the next few years, NASA expended significant effort in 
analyzing discrepancies related to the conversion and refining its 
procedures to ensure it was performing reconciliations properly to 
allow differences to be resolved in a timely manner. E&Y's review of 
the FY 2006 reconciliations identified progress in the preparation and 
more timely identification and resolution of differences arising from 
current-period transactions, thus eliminating the issue as a stand-
alone material weakness for FY 2006 reporting.

Financial Systems, Analyses, and Oversight

    The material weakness in financial systems, analyses, and oversight 
identified by E&Y in FY 2004 encompassed the underlying findings noted 
by PricewaterhouseCoopers in FY 2003 relating to NASA's financial 
statement preparation process and its audit trail supporting the 
financial statements. In FY 2008, NASA developed the Comprehensive 
Compliance Strategy to help focus the Agency on ensuring compliance 
with GAAP and other financial reporting requirements. NASA also further 
developed its Continuous Monitoring Program (CMP) by requiring the 
Centers to perform a set of control activities to assess internal 
controls and compliance with GAAP to ensure that the evidence to 
support the balances and activity reported in NASA's financial 
statements are accurate and complete.
    Throughout FY 2009, NASA continued to improve its internal controls 
over financial reporting by implementing and improving CMP. Ultimately, 
CMP operated as designed-by identifying exceptions through the 
execution of the control activities and then tracking the resolution of 
the exceptions in a timely manner. Successful implementation of the CMP 
was the major contributing factor in resolving the long-standing 
material weakness over financial systems, analyses, and oversight.

Property, Plant, and Equipment

    To help address the material weakness in property, plant, and 
equipment (PP&E), NASA implemented new PP&E capitalization policy and 
procedures for assets procured on or after October 1, 2007. Successful 
implementation of the policy and procedures were intended to ensure 
that the value and completeness of capitalized assets procured after 
that date, whether Government-held or contractor-held, will be 
accurate.
    For contracts with effective dates on or after October 1, 2007, 
contractors are required to report the cost of each capitalized asset 
as a separate item on required contractor cost reports. NASA also 
designed a process to reconcile the monthly contractor cost reports and 
the capitalized PP&E amounts recorded in NASA's Contractor-Held Asset 
Tracking System and the Core Financial module. Although E&Y recognized 
that NASA's new policy and procedures represent significant progress in 
improving its internal controls over PP&E, the independent public 
accountant could not test the effectiveness of the controls because the 
Agency did not have any new contracts that fell into this category 
during FY 2008 or FY 2009.

E&Y's Recommendations Can Help NASA Remediate Remaining Weaknesses in 
        FY 2010

    As noted, NASA has made significant progress in developing 
policies, procedures, and controls to improve its financial processes 
and systems; nevertheless, challenges remain. Specifically, during FY 
2009 both NASA and E&Y continued to identify deficiencies in the 
Agency's system of internal control that impair its ability to timely 
report accurate and complete financial information. However, E&Y's 
Report on Internal Control contains specific recommendations to assist 
the Agency in remediating the three identified deficiencies during FY 
2010.
    Through its own initiatives and as a result of discussions with our 
office and E&Y, NASA's Office of the Chief Financial Officer is 
pursuing actions intended to improve financial management and address 
specific weaknesses in internal controls. As noted, the Agency's 
Continuous Monitoring Program was the major contributing factor in 
resolving the long-standing material weakness over financial systems, 
analyses, and oversight. Moving forward, continuing specific 
remediation efforts need to address the valuation of legacy assets, 
improve the process for estimating environmental liabilities, and 
ensure FFMIA compliance.

Legacy PP&E

    The weakness in controls over PP&E discussed in E&Y's FY 2009 
report focuses primarily on controls over legacy assets that flow from 
contracts executed prior to October 1, 2007. For several years, audits 
of these legacy assets have identified serious weaknesses in internal 
controls over the completeness and accuracy of the value of the assets.
    In early FY 2010, the Federal Accounting Standards Advisory Board 
issued the Statement of Federal Financial Accounting Standards (SFFAS) 
No. 35, Estimating the Historical Cost of G-PP&E. The standard 
reaffirms that Federal entities should report their general PP&E based 
on historical cost in accordance with the asset recognition and 
measurement provisions of the earlier property accounting standards. 
However, the standard clarifies that it is acceptable to use reasonable 
estimates of historical costs to value general PP&E assets. The proper 
and effective implementation of this accounting standard will be an 
important step for NASA in remediating the material weakness in 
internal controls over legacy assets in FY 2010.
    During FY 2009, in preparation for the issuance of SFFAS No. 35, 
NASA performed an analysis of costs that were capitalized for major 
components of the International Space Station (ISS) and the Space 
Shuttle. During this analysis, NASA changed its capitalization-policy 
for Integration and Operations costs associated with the ISS, which was 
placed into service on September 30, 2001, and also changed its policy 
for capitalizing Shuttle launch service costs associated with the ISS. 
Because these policy changes affected costs that had been capitalized 
since 2001, they resulted in the reclassification of approximately $11 
billion of ISS costs; and because many of the adjustments affected 
prior periods, they represent a correction of an error in the financial 
statements.
    The Agency's ongoing efforts to develop a robust and rigorous 
review process that both validates and challenges the adequacy of 
estimation techniques and the sufficiency of supporting documentation 
will serve the Agency well in preparing for the audit of these 
estimates in FY 2010 and future years.

Environmental Liability Estimation

    Over the years, NASA has addressed challenges associated with 
estimating its unfunded environmental liability (UEL). The current 
challenge identified in the FY 2009 audit focuses on establishing and 
implementing an Agency-wide policy to capture cleanup costs for 
removing, containing, and/or disposing of hazardous waste from property 
or material associated with the permanent or temporary shutdown of a 
program.
    SFFAS No. 6, Accounting for Property, Plant, and Equipment, 
requires agencies to capture this information when placing applicable 
property into service. The standard has been in effect since FY 1998; 
however, NASA made its first attempt to implement the standard in 
September 2009. Because the timing of this effort came so late in the 
fiscal year, it placed the Agency under severe time constraints, which 
compromised the effectiveness of the process for estimating and 
disclosing the costs in the financial statements. As a result, NASA 
needs to take additional steps to enhance and formalize the process for 
estimating environmental cleanup costs under SFFAS No. 6.
    In addition, during FY 2009 NASA changed the timeframe it uses to 
estimate its environmental liability to clean up contaminated sites. 
NASA now limits the length of the remediation period included in the 
UEL accrual estimates to 30 years as of the Balance Sheet date. 
According to NASA, beyond a 30-year horizon UEL estimates have not 
proven to be reliable for presentation in the financial statements. 
While NASA's guidance regarding UEL estimates is under continued 
revision, NASA has articulated that it will consider reliable 
engineering estimates beyond the 30-year period while developing the 
accrual estimates.
    To overcome the challenges associated with estimating its UEL, NASA 
needs to implement controls that are designed to coordinate changes in 
accounting policy related to environmental liabilities so as to ensure 
these policies comply with GAAP and are implemented appropriately.

Compliance with the Federal Financial Management Improvement Act of 
        1996

    Substantial compliance with FFMIA has been elusive for the Agency. 
Under FFMIA, E&Y is required to report whether NASA's financial 
management systems substantially comply with Federal financial 
management systems requirements, applicable Federal accounting 
standards, and the United States Standard General Ledger at the 
transaction level. E&Y noted certain instances, described below, in 
which NASA's financial management systems did not substantially comply 
with Federal system and Federal accounting standard requirements:

          The real property system is not integrated with the 
        Core Financial module.

          IT audits note issues related to access and change 
        management.

          NASA was unable to meet certain requirements to 
        ensure compliance with Federal accounting standards for legacy 
        assets.

    NASA should move forward with its plans in FY 2010 to integrate 
Government-held real property transactions into the Asset Accounting 
module of its integrated financial management system and to improve 
implementation of SFFAS No. 35, Estimating the Historical Cost of G-
PP&E.

Closing

    That concludes our prepared remarks. We would be happy to answer 
any questions you might have.

    Chairman Miller. Thank you, Mr. Martin. I understand Mr. 
Howard is not going to give opening testimony but yours is his 
as well and is here to answer questions. Mr. Howard can tell 
you, if you don't know already, that not all NASA's inspector 
generals have been warmly received by this Committee. So we 
look forward to continuing to receive you warmly.
    I now recognize Mr. Murrin for 5 minutes. Turn your 
microphone on, please.

STATEMENT OF DANIEL J. MURRIN, PARTNER, ASSURANCE AND ADVISORY 
             BUSINESS SERVICES, ERNST & YOUNG, LLP

    Mr. Murrin. Good afternoon, Chairman Miller and Giffords 
and members of the Subcommittees. My name is Daniel Murrin. 
Thank you for the opportunity to testify before the Committee 
and answer any questions you may have. I am a partner in Ernst 
& Young LLP, a public accounting firm, and I have been in 
public accounting for over 30 years with a specialty in public 
sector auditing for the Federal Government.
    We have been asked to share with the Subcommittees the 
results of the fiscal year 2009 audit including the issues 
identified and our recommendations to correct them. This is our 
sixth audit of NASA for which I am the engagement partner. The 
NASA Office of Inspector General engaged Ernst & Young to 
conduct the audits of NASA's financial statements for fiscal 
years 2004 through 2009. Our testimony today will focus on our 
fiscal year 2009 audit.
    As you are aware, Ernst & Young issued a disclaimed opinion 
with respect to NASA's September 30, 2009, financial 
statements. Concurrent with the issuance of our audit report, 
we issued a Report on Internal Controls which detailed one 
material weakness and two significant deficiencies with eight 
recommendations to assist NASA in addressing internal control 
deficiencies.
    We also issued a report on compliance with laws and 
regulations and cited non-compliance with the Federal Financial 
Management Improvement Act. In my oral testimony today, I will 
give a brief overview of each report with a particular focus on 
the disclaimed opinion and the related recommendations. My 
written testimony goes into greater detail for your reference.
    Let me first discuss the Report of Independent Auditors. 
The reasons to disclaim on these financial statements for 
fiscal year 2009 really flow from the property, plant and 
equipment, PP&E, and the related which really have been a 
longstanding concern for NASA and relate principally to assets 
that are capitalized in prior years which were not susceptible 
to audit. Those matters are reported as a material weakness in 
our Report on Internal Control.
    Progress has been made by NASA by revising its policies, 
and NASA has gained a deeper understanding of the components 
and its costs of capitalized assets. The adoption in fiscal 
year 2010 of the Statement of Federal Financial Accounting 
Standards No. 35 regarding estimating the historical cost of 
governmental PP&E provides a unique opportunity for NASA to 
address the legacy valuation issues which have impaired its 
ability to prepare auditable financial statements.
    In our Report on Internal Controls, we made two 
recommendations. The first recommendation is that NASA continue 
to improve implementation of the new standard. Areas for 
particular focus included the appropriate approaches in 
critically assessing prior recorded amounts for legacy assets 
when the initial documentation to support those amounts is not 
available and the extent to which the entity must associate 
ongoing outlays with individual items of PP&E versus recording 
amounts based on contractor-provided estimates in bulk.
    The second recommendation is really that NASA develop an 
overarching key control activity that provides for a robust an 
rigorous review that both validates and challenges the adequacy 
of the estimation techniques used and the sufficiency of the 
documentation supporting those conclusions.
    The Shuttle program is currently scheduled for 
decommissioning in fiscal year 2010. The ISS is also nearing 
the end of its initially estimated useful life. The gradual 
reduction and the relative materiality of those assets combined 
with the flexibility provided for the new standard are expected 
by management to help resolve the longstanding issues and 
barriers to the clean opinion.
    Ernst & Young issued a Report on Internal Control 
documenting one material weakness discussed above and also two 
significant deficiencies. The first significant deficiency 
relates to NASA's environmental liability and the need to 
continue the enhancement of that area, and I would be pleased 
to discuss that further as appropriate. And the second 
significant deficiency which, again, is a modified repeat 
condition related to NASA's financial systems not being 
substantially compliant with FFMIA.
    While I have been asked to really address the issues and 
recommendations in my testimony today, I would like to take a 
minute to note that substantial improvements have been made in 
managing the business of NASA. Since our audit of 2004 and 
certainly the financial management issues that have been worked 
through systemically by prior groups of CFOs and OIGs have made 
progress, and we do note that progress.
    Thank you, and I would be pleased to answer any questions 
you may have.
    [The prepared statement of Mr. Murrin follows:]

                 Prepared Statement of Daniel J. Murrin

Introduction

    My name is Daniel J. Murrin. I am a Partner and Americas Director 
of Government and Public Sector Services for Ernst & Young LLP, a 
public accounting firm. 1 have been in public accounting for over 30 
years, with a specialty in public sector auditing for the Federal 
Government. We have been asked to share with the Subcommittees the 
result of the fiscal year 2009 audit, as it relates to the decision by 
Ernst & Young to disclaim an opinion. In addition the Committee has 
requested that we share our recommendations to correct the deficiencies 
we have noted. This is our sixth audit of National Aeronautics and 
Space Administration (NASA), for which I am and have been the 
Engagement Partner. The NASA, Office of Inspector General, engaged 
Ernst & Young to conduct the audits of NASAs financial statements for 
the fiscal years ended September 30; 2004--September 30, 2009. Our 
testimony today will focus on our fiscal year 2009 audit.
    I will first make general comments on the scope of our contract 
with the Office of Inspector General, provide an overview of our audit 
and discuss in more detail the three reports issued as a result of an 
audit (1) Report of Independent Auditors; (2) Report on Internal 
Control; and (3) Report of Compliance with Laws and Regulations. I will 
then provide the results of our fiscal year 2009 audit as outlined in 
the three reports issued.
Scope of Ernst & Young's Contract With The Office of Inspector General
    The Office of Inspector General engaged Ernst & Young LLP, (EY) to 
conduct the audit of the fiscal year 2009 financial statements for the 
purpose of satisfying the requirements of the Government Management 
Reform Act (GMRA) of 1994. The following reports are required for a 
financial statement audit of the Federal agency: Report of Independent 
Auditors,\1\ Report on Internal Control,\2\ and a Report of Compliance 
with Laws and Regulations.\3\
---------------------------------------------------------------------------
    \1\ Report of Independent Auditors--Determine and report on whether 
the financial statements and related notes present fairly, in all 
material respects, the assets, liabilities, and net position; net 
costs; changes in net position; and budgetary resources; in conformity 
with the accounting principles generally accepted in the United States.

    The audit is to render an opinion on these statements, which could 
result in a: (1) unqualified or clean opinion; (2) qualified opinion; 
(3) adverse opinion; or (4) a disclaimer of an opinion.

    As further discussed below, our Report of Independent Auditors for 
fiscal year 2009, disclaimed an opinion on the NASA financial 
statements.
    \2\ Report on Internal Controls--Report based on the work performed 
in our audit findings regarding whether NASA's internal control provide 
reasonable assurance of achieving the internal control objectives 
described in OMB Bulletin No. 07-04, Audit' Requirements for Federal 
Financial Statements'' Internal controls are important to assure 
programs achieve intended results and that programs and resources are 
protected from waste, fraud, and mismanagement.
    \3\ Report of Compliance with Laws and Regulations--Report on 
whether NASA complied with applicable Federal laws and regulations 
which could have had a direst and material effect on the principal 
financial statements. Reports matters noted based upon the work 
performed in connection with our procedures.
---------------------------------------------------------------------------
    The engagement to audit was to be performed in accordance with 
Government Auditing Standards, issued by the Comptroller General of the 
United States, Office of Management and Budget (OMB) Bulletin No. 07-04 
\4\ as amended, Audit Requirements for Federal Financial Statements, 
and generally accepted auditing standards issued by the American 
Institute of Certified Public Accountants (AICPA).
---------------------------------------------------------------------------
    \4\ OMB Bulletin No. 07-04 sets forth the audit requirements for 
Federal Financial Statements. The Bulletin is designed to provide the 
necessary audit guidance in connection with the implementation of the 
Chief Financial Officers (CFO) Act, as expanded by the Government 
Management Reform Act (GMRA) of 1994, and provides formal definitions 
for a number of technical terms and requirement used throughout the 
Bulletin and formalizes a number of significant CFO Act requirements 
including:

---------------------------------------------------------------------------
       GDefines audit scope

       GProvides agency Inspector General's (IG) with 
      primary responsibility for the execution of audits; allows 
      the 1G to provide for the execution of the audit by 
      independent external auditors, and provides for audits to 
      be performed by the Comptroller General of the United 
      States (in consultation with the IG)

       GProvides guidance on the IGs role, such as to:

         GEnsure that audits are performed and audit reports 
      completed in a timely manner and in accordance with the 
      requirement of this Bulletin. This responsibility pertains 
      to audits conducted directly by IG staff and audits 
      conducted by independent auditors under contract.

         GProvide technical advice and liaison to agency 
      officials and independent external auditors.

         GObtain or make quality control reviews of audits made 
      by independent external auditors and provide the results, 
      when appropriate, to other interested organizations.

Overview of Fiscal Year 2009 Audit Reports
    Ernst & Young LLP issued a disclaimed opinion in the Report of 
Independent Auditors with respect to NASA's September 30, 2009 
financial statements. Concurrent with the issuance of our Auditors 
Report, we issued a Report on Internal Controls which detailed one 
material weakness \5\ and two significant deficiencies,\6\ with eight 
recommendations to assist NASA in addressing its internal control 
deficiencies. We also issued a Report on Compliance with Laws and 
Regulations and cited noncompliance with the Federal Financial 
Management Improvement Act. As we will note, the Fiscal Year 2009 
result was an improvement over Fiscal Year 2008, but efforts to improve 
the NASA Financial Management are ongoing.
---------------------------------------------------------------------------
    \5\ A material weakness is a deficiency, or a combination of 
deficiencies, in internal control such that there is a reasonable 
possibility that a material misstatement of the entity's financial 
statements will not be prevented, or detected and corrected on a timely 
basis.
    \6\ A significant deficiency is a deficiency or a combination of 
deficiencies in internal control that is less severe than a material 
weakness, yet important enough to merit attention by those charged with 
governance.

Report of Independent Auditors and Obstacles to a Clean Opinion
    EY disclaimed an opinion with respect to the: (1) Consolidated 
Balance Sheet; (2) Consolidated Statement of Net Cost; (3) Consolidated 
Statement of Changes in Net Position; and (4) Combined Statement of 
Budgetary Resources for the year ended September 30, 2009.
    The reasons to disclaim our opinion on the statements mentioned 
above for fiscal year 2009 flow from property, plant and equipment 
(PP&E) related issues which have been a long standing concern for NASA. 
As noted in our Report of Independent Auditors, during fiscal year 
2009, NASA continued its focused efforts to resolve long-term issues 
identified in its financial management processes and systems. Although 
significant progress has been made, NASA management and our work 
continue to identify issues related to internal control in its property 
accounting, principally relating to assets capitalized in prior years. 
Legacy financial and property management systems for NASA were 
developed and implemented in an era before certain such equipment was 
required to be capitalized and accounted for in NASA's periodic 
financial reports. Systems and processes which were developed to 
support processing of contract actions and payments were not initially 
as intently focused on developing information needed to assess when 
property transactions were being executed and ensuring that such 
actions were appropriately accounted for under accrual accounting 
concepts embedded in applicable accounting standards. Those standards, 
developed by the Federal Accounting Standards Advisory Board (FASAB) 
have also evolved over time.
    Over the last several years, NASA has recorded a series of 
adjustments to reduce PP&E totaling approximately $20 billion which, 
when combined with the impact of periodic amortization for 
depreciation, offset in part by new acquisitions. have reduced the net 
recorded value for NASA's PP&E from $33.2 billion as of September 30, 
2006 to $11.6 billion at September 30, 2009. An additional 
approximately $3 billion in inventors and related property are also 
reflected in NASA's financial statements throughout this period 
utilizing similar systems and processes. The internal control issues 
noted, continuation of such adjustments, and the relative significance 
of the aggregate amounts in relation to total NASA assets and net costs 
in the range of $23 billion in the last several years precluded us from 
forming an opinion on the NASA financial statements.
    Progress has been made in revising NASA's policies and NASA has 
gained a deeper understanding of the components of its capitalized 
assets. The adoption of Statement of Federal Financial Accounting 
Standards (SFFAS) No. 35, Estimating the Historical Cost of G-PP&E, in 
FY 2010 provides a unique opportunity for NASA to address the legacy 
valuation issues which have impaired its ability to prepare auditable 
financial statements.
    SFFAS No. 35 provides additional flexibility to NASA in recreating 
and establishing reasonable estimates of its PP&E activity and costs. 
This flexibility is expected to aid NASA in supporting its recorded 
balances and subjecting them to audit.
    As noted above, issues regarding whether broad components of PP&E 
should be recorded have arisen and been addressed over the last several 
years, in each case calling into question the reliability of prior 
processes and reported amounts. In connection with critically assessing 
management's reported amounts for PP&E in FY 2010 and subsequent years, 
as valuation issues are addressed utilizing the ongoing flexibility in 
the new FASAB guidance, the need to ensure that property records are 
complete and property items can be associated with estimates of their 
original acquisition costs consistent with the guidance in SFFAS No. 35 
will loom larger. Subjecting such processes to rigorous self-assessment 
under management's internal control review process under OMB Circular 
A-123, Management's Responsibility for Internal Control, Appendix A--
Internal Control over Financial Reporting, and robust assessments of 
the legacy property records for completeness and accuracy, perhaps in 
conjunction with ongoing monitoring activities, will serve NASA well in 
ensuring that reported amounts are complete and reliable.
    NASA is currently participating in work groups intended to assist 
agencies in exploring supportable approaches to developing valuation 
estimates and supporting such amounts to the extent needed to withstand 
audit processes, with an initial particular focus on contractor-held 
property. These deliberations may impact NASA and third-party 
assessments of whether the initial processes developed by NASA in an 
effort to address anticipated changes in the FASAB literature conform 
to the financial management community's implementation guidelines for 
SFFAS No. 35. Going forward, internal controls, which have been revised 
to account for acquisitions of property under contracts with effective 
dates after October 1, 2007, hold promise in addressing new 
acquisitions; however, the effectiveness of such controls cannot 
currently be assessed pending issuance of new contracts that would be 
impacted by this policy.
    In our Report on Internal Controls, we recommended that NASA:

         1. Continue to actively improve implementation of SFFAS No. 
        35. Areas for particular focus include: (1) appropriate 
        approaches in critically assessing prior recorded amounts for 
        legacy assets when the initial documentation to support 
        recorded amounts is not available, and the extent to which such 
        initial recorded amounts, perhaps in conjunction with budgetary 
        or other collaborative information, can be viewed as reasonable 
        estimates; and (2) the extent to which the entity must 
        associate ongoing outlays with individual items of PP&E versus 
        recording amounts based on contractor-provided estimates in 
        bulk, particularly for legacy contracts which do not contain 
        current NASA requirements intending to aid in identifying when 
        PP&E is being acquired, and NASA's responsibilities to verify 
        reported amounts.

         2. Develop an overarching key control activity that provides 
        for a robust and rigorous review that both validates and 
        challenges the adequacy of estimation techniques used and the 
        sufficiency of documentation supporting those conclusions. This 
        type of ongoing control activity is crucial for NASA as it 
        implements and sustains any estimation modeling for valuing 
        components of its PP&E. In addition, management should utilize 
        existing monitoring activities and internal control assessments 
        with a particular emphasis at the Center level in demonstrating 
        that a comprehensive control process has been used to verify 
        that detail property records are complete and reflect all PP&E, 
        are reconciled to the recorded amounts in the general ledger, 
        constitute NASA's best estimates consistent with SFFAS No. 35 
        of the historical costs of such items and that available 
        information to aid in collaborating such amounts has been 
        validated and appropriately considered.

    The Space Shuttle program is currently scheduled for 
decommissioning in fiscal year 2010, and the International Space 
Shuttle (ISS), which is also being depreciated, is also nearing the end 
of its initially estimated useful life. The gradual reduction in the 
relative materiality of these legacy assets which have had intractable 
cost estimation issues, combined with the flexibility embedded in SFFAS 
35, are expected by management to help resolve the large standing 
barriers to a clean opinion.

Report on Internal Control
    Ernst & Young issued a Report on Internal Control documenting one 
material weakness and two significant deficiencies as noted in 
Attachment B, and in our Independent Auditors Report. The FY 2009 
result reflects progress NASA has made in addressing issues raised in 
prior years, and reflects a reduction in aggregate significant comments 
from two material weaknesses in FY 2008 to one material weakness in FY 
2009. The following is the material weakness and significant 
deficiencies issued in FY 2009:

          Enhancements Needed for Controls over Legacy PP&E and 
        Materials Contracts, But SFFAS No. 35 Adoption May Aid In 
        Resolving This Longstanding Issue (Modified Repeat Condition 
        classified as a material weakness, further discussed above)

          Processes in Estimating NASA's Environmental 
        Liability Continue to Require Enhancement (Modified Repeat 
        Condition)

          Financial Management Systems Not in Substantial 
        Compliance with FFMIA (Modified Repeat Condition)

Report on Compliance with Laws and Regulations
    The Report on Compliance with Laws and Regulations noted that NASA 
had not complied with the Federal Financial Management Improvement Act 
(FFMIA) of 1996. The principal components of such non compliance 
related to ongoing efforts to integrate property information with the 
financial management system. A key indication of FFMIA compliance also 
flows from the inability to obtain an unqualified audit opinion. The 
Report on Internal Control includes information related to the 
financial management systems that were found not to comply with the 
requirements, and presents relevant facts pertaining to the 
noncompliance and our recommendations related to the specific issues.

Improvements have been made in managing the business of NASA
    While legacy property issues continue to challenge NASA, progress 
was made in fiscal year 2009 in addressing issues noted in fiscal year 
2008 and prior audits. As NASA's system implementation was matured, 
financial management issues have been systematically addressed. For 
example, NASA:

          In FY 2009, NASA management continued to refine the 
        Continuous Monitoring Program--a monthly process performed at 
        the Centers and forwarded to Headquarters that is designed to 
        identify issues impacting the integrity of the Centers' 
        financial management information and provide a means for 
        communicating and tracking of the issues centrally within the 
        Headquarters-through training and improved guidance to allow 
        for reliance on this entity-wide control process.

          Routine reconciliations and analysis of financial 
        statements and non-property related accounts were being 
        performed with significant differences being reconciled on a 
        timely basis.

    While our testimony today largely focuses on fiscal year 2009, we 
note that these efforts built on strides made since our initial audit 
in fiscal year 2004 to leverage investment in a new management 
information system and build out of financial management oversight 
capabilities. The three matters noted in our fiscal year 2009 Report on 
Internal Controls are briefly summarized below, and further discussed 
in Attachments A and B.

Enhancements Needed for Controls over Legacy PP&E and Materials 
                    Contracts, But SFFAS No. 35 Adoption May Aid In 
                    Resolving This Longstanding Issue

    Prior-year audit reviews of legacy PP&E identified serious 
weaknesses in the design of internal controls over the completeness and 
accuracy of legacy assets which prevented material misstatements from 
being detected and corrected in a timely manner by NASA. Certain legacy 
issues noted in prior-year audit reports continue to challenge the 
Agency, particularly in relation to the International Space Station 
(ISS) and Space Shuttles. During FY 2009, NASA management undertook a 
systematic process to address the valuation and completeness issues 
related to the ISS and Space Shuttle assets in anticipation of an FY 
2009 release of the Federal Accounting Standards Advisory Board (FASAB) 
Statement of Federal Financial Accounting Standards (SFFAS) No. 35, 
Estimating the Historical Cost of G-PP&E, which was ultimately released 
in FY 2010. This standard is expected to substantially improve NASA's 
ability to account for these assets in accordance with generally 
accepted accounting principles in FY 2010. Note that Space Shuttle 
assets will be fully depreciated in FY 2010 as they will have reached 
the end of their useful lives and this timing coincides with the Space 
Shuttle Transition program. Adoption of changes in the internal control 
profess associated with. new contracts also holds promise in resolving 
these issues over time.
    During the past several years, NASA has continued to revise and 
correct its records for legacy assets to address these legacy issues. 
These legacy issues fundamentally flowed from the lack of a robust 
control structure whereby NASA did not determine at the point of budget 
formulation, obligation recognition, contract development, accounts 
payable recognition or disbursement the amounts of property it expects 
to bud; has contracted for or has purchased.
    Further information regarding this matter is provided earlier in 
connection with our discussion of Obstacles to a Clean Opinion.

Processes in Estimating NASA's Environmental Liability Continue to 
                    Require Enhancement

    NASA's environmental liability is estimated at $922 million as of 
September 30, 2009, including the estimated environmental cleanup cost 
associated with PP&E. We noted that the NASA Office of the Chief 
Financial Officer (OCFO) and the Environmental Management Division 
(EMD) invested resources to resolve our prior-year finding related to 
the internal controls for the unfunded environmental liability (UEL) 
estimation process. NASA developed an estimate in September 2009 of the 
anticipated environmental cleanup costs associated with PP&E, 
implementing our prior recommendation to develop such estimate in 
accordance with SFFAS No. 6, Accounting for Properly, Plant, and 
Equipment. The joint review process, a key control NASA implemented to 
enhance its estimation processes, began to mature in FY 2009 and added 
additional consistency to the UEL estimation process. While NASA 
continues to make year-to-year progress, we noted weaknesses in NASA's 
ability to generate an auditable estimate on a timely basis of its UEL 
environmental cleanup costs and its environmental liabilities 
associated with PP&E.

Financial Management Systems Not in Substantial Compliance with FFMIA

    NASA's financial management systems are not substantially compliant 
with the Federal Financial Management Improvement Act of 1996 (FFMIA). 
During FY 2009, NASA management took actions to address its 
noncompliance with the FFMIA. Although these steps corrected certain 
weaknesses noted during the past five years, other weaknesses continue 
to exist. Our discussions with NASA management indicated that its 
corrective action plans, related to environmental liabilities, PP&E, 
property system integration and systems security, are scheduled to have 
certain issues resolved during FY 2010.

                              Attachment A

                      Summary of Fiscal Year 2009 
                      Report of Internal Controls

    The chart below summarizes the current status of the prior year 
weaknesses, as well as any new weaknesses identified during the fiscal 
year 2009 audit. Details for fiscal year 2009 comments are included in 
Attachment B.




    A material weakness is a deficiency, or a combination of 
deficiencies, in internal control such that there is a reasonable 
possibility that a material misstatement of the entity's financial 
statements will not be prevented, or detected and corrected on a timely 
basis.
    A significant deficiency is a deficiency or a combination of 
deficiencies in internal control that is less severe than a material 
weakness, yet important enough to merit attention by those charged with 
governance.
                              Attachment B

Detail of Material Weakness and Significant Deficiencies (Extracted 
                    from page F-52--F-58 of the NASA FY 2009 
                    Performance and Accountability Report)

                           Material Weakness

Enhancements Needed for Controls over Legacy PP&E and Materials 
                    Contracts, But SFFAS No. 35 Adoption May Aid In 
                    Resolving This Longstanding Issue (Modified Repeat 
                    Condition)

    Prior-year audit reviews of legacy PP&E identified serious 
weaknesses in the design of internal controls over the completeness and 
accuracy of legacy assets which prevented material misstatements from 
being detected and corrected in a timely manner by NASA. Certain legacy 
issues noted in prior-year audit reports continue to challenge the 
Agency, particularly in relation to the International Space Station 
(ISS) and Space Shuttles. During FY 2009, NASA management undertook a 
systematic process to address the valuation and completeness issues 
related to the ISS and Space Shuttle assets in anticipation of an FY 
2009 release of the Federal Accounting Standards Advisory Board (FASAB) 
Statement of Federal Financial Accounting Standards (SFFAS) No. 35, 
Estimating the Historical Cost of G-PP&E, which was ultimately released 
in FY 2010. This standard is expected to substantially improve NASA's 
ability to account for these assets in accordance with generally 
accepted accounting principles in FY 2010. Note that Space Shuttle 
assets will be fully depreciated in FY 2010 as they will have reached 
the end of their useful lives and this timing coincides with the Space 
Shuttle Transition program. Adoption of changes in the internal control 
process associated with new contracts also holds promise in resolving 
these issues over time.
    During the past several years, NASA has continued to revise and 
correct its records for legacy assets to address these legacy issues. 
These legacy issues fundamentally flowed from the lack of a robust 
control structure whereby NASA did not determine at the point of budget 
formulation, obligation recognition, contract development, accounts 
payable recognition or disbursement the amounts of property it expects 
to buy, has contracted for or has purchased. For example:

          In FY 2007, NASA recorded a $12.7 billion adjustment 
        to write off the net book value (NBV) of legacy assets 
        (previously reported as ``theme assets'') which it believed 
        were inappropriately capitalized since NASA's implementation of 
        SFFAS No. 6, Accounting for Property Plant and Equipment, in FY 
        1998. NASA recorded this adjustment as a change in accounting 
        principle based upon a technical release issued by the 
        Accounting and Auditing Policy Committee of the FASAB. Prior to 
        this cumulative effect adjustment, the NBV of NASA's PP&E was 
        $33.3 billion as of September 30, 2006.

          In FY 2008, NASA recorded an adjustment of $2.9 
        billion to expense costs previously capitalized as launch costs 
        during the year as these costs were associated with taking 
        foreign-owned components, rather than government-owned 
        components, to the ISS. Prior to this year-end adjustment, the 
        NBV of NASA's PP&E would have been $24.5 billion as of 
        September 30, 2008. The process to correct this item in FY 2008 
        was an indicator of the effectiveness of some of the financial 
        management review processes which NASA had been developing, but 
        also highlighted the need for the development of consistent 
        controls regarding capitalization approaches, with 
        appropriately vetted position papers and notification for 
        pending areas of review to ensure that no significant year-end 
        adjustments are needed. As noted below, launch cost 
        calculations were revisited in FY 2009, and additional errors 
        were noted.

          In FY 2009, NASA recorded a series of adjustments 
        during the third and fourth quarters to correct for additional 
        errors in the valuation of legacy assets related to the 
        accounting for launch costs and integration and operational 
        costs capitalized as part of the ISS. During NASA's analysis of 
        the accounting for launch costs, management concluded that 
        prior methodologies and amounts recorded were inaccurate since 
        FY 1998, when the first component of the ISS was carried by the 
        Space Shuttle. Management recorded a $5.2 billion adjustment to 
        write off the NBV of previously capitalized launch costs. 
        Management revised its methodology during FY 2009 and, based 
        upon its new estimates, it recorded an adjustment of $84 
        million to capitalize the NBV of launch costs. In our initial 
        reviews of management's revised methodology, developed in 
        anticipation of the release of SFFAS No. 35, and estimation for 
        capitalized launch costs, we noted that estimates were not 
        fully supported by prior historical cost data, but management 
        believes it has sufficient information to support reasonable 
        estimates of such costs consistent with SFFAS No. 35 which will 
        be effective in FY 2010.

          Ongoing efforts by NASA management to develop a 
        robust and rigorous review process that both validates and 
        challenges the adequacy of estimation techniques used and the 
        sufficiency of documentation supporting those conclusions will 
        serve NASA management well in preparing for the audit of these 
        estimates. This type of ongoing control activity is crucial for 
        the Agency as it implements and sustains any estimation 
        modeling for valuing components of its PP&E. For the 
        integration and operational costs, NASA noted that it had been 
        capitalizing Integration and Operations (I&O) costs associated 
        with the ISS after the ISS was placed into service on September 
        30, 2001. According to NASA's inquiries of an ISS specialist, 
        these costs included ground and flight support, maintenance and 
        repairs and NASA's current financial management team concluded 
        these costs should have been expensed as operation costs and 
        not capitalized. Management recorded a $1.4 billion adjustment 
        to write off the NBV of previously capitalized I&O costs. Prior 
        to these FY 2009 recorded adjustments, the NBV of NASA's PP&E 
        would have been $18.1 billion as of September 30, 2009.

    Progress has been made in revising NASA's policies and NASA has 
gained a deeper understanding of the components of its capitalized 
assets. The adoption of SFFAS No. 35, Estimating the Historical Cost of 
G-PP&E, in FY 2010 provides a unique opportunity for NASA to address 
the legacy valuation issues which have impaired its ability to prepare 
auditable financial statements. As noted above, issues regarding 
whether broad components of PP&E should be recorded have arisen and 
been addressed over the last several years, in each case calling into 
question the reliability of prior processes and reported amounts. In 
connection with critically assessing management's reported amounts for 
PP&E in FY 2010 and subsequent years, as valuation issues are addressed 
utilizing the ongoing flexibility in the new FASAB guidance, the need 
to ensure that property records are complete and property items can be 
associated with estimates of their original acquisition costs 
consistent with the guidance in SFFAS No. 35 will loom larger. 
Subjecting such processes to rigorous self assessment under 
management's internal control review process under OMB Circular A-123, 
Managements Responsibility for Internal Control, Appendix A--Internal 
Control over Financial Reporting, and robust assessments of the legacy 
property records for completeness and accuracy, perhaps in conjunction 
with ongoing monitoring activities, will serve NASA well in ensuring 
that reported amounts are complete and reliable. NASA is currently 
participating in work groups intended to assist agencies in exploring 
supportable approaches to developing valuation estimates and supporting 
such amounts to the extent needed to withstand audit processes, with an 
initial particular focus on contractor-held property. These 
deliberations may impact NASA and third-party assessments of whether 
the initial processes developed by NASA in an effort to address 
anticipated changes in the FASAB literature conform to the financial 
management community's implementation guidelines for SFFAS No. 35. 
Going forward, internal controls, which have been revised to account 
for acquisitions of property under contracts with effective dates after 
October 1, 2007, hold promise in addressing new acquisitions; however, 
the effectiveness of such controls cannot currently be assessed pending 
issuance of new contracts that would be impacted by this policy.

Recommendation
    We recommend that NASA:

         1. Continue to actively improve implementation of SFFAS No. 
        35. Areas for particular focus include: (1) appropriate 
        approaches in critically assessing prior recorded amounts for 
        legacy assets when the initial documentation to support 
        recorded amounts is not available, and the extent to which such 
        initial recorded amounts, perhaps in conjunction with budgetary 
        or other collaborative information, can be viewed as reasonable 
        estimates; and (2) the extent to which the entity must 
        associate ongoing outlays with individual items of PP&E versus 
        recording amounts based on contractor-provided estimates in 
        bulk, particularly for legacy contracts which do not contain 
        current NASA requirements intending to aid in identifying when 
        PP&E is being acquired, and NASA's responsibilities to verify 
        reported amounts.

         2. Develop an overarching key control activity that provides 
        for a robust and rigorous review that both validates and 
        challenges the adequacy of estimation techniques used and the 
        sufficiency of documentation supporting those conclusions. This 
        type of ongoing control activity is crucial for NASA as it 
        implements and sustains any estimation modeling for valuing 
        components of its PP&E. In addition, management should utilize 
        existing monitoring activities and internal control assessments 
        with a particular emphasis at the Center level in demonstrating 
        that a comprehensive control process has been used to verify 
        that detail property records are complete and reflect all PP&E, 
        are reconciled to the recorded amounts in the general ledger, 
        constitute NASA's best estimates consistent with SFFAS No. 35 
        of the historical costs of such items and that available 
        information to aid in collaborating such amounts has been 
        validated and appropriately considered.

                        Significant Deficiencies

Processes in Estimating NASA's Environmental Liability Continue to 
                    Require Enhancement (Modified Repeat Condition)

    NASA's environmental liability is estimated at $922 million as of 
September 30, 2009, including the estimated environmental cleanup cost 
associated with PP&E. We noted that the NASA Office of the Chief 
Financial Officer (OCFO) and the Environmental Management Division 
(EMD) invested resources to resolve our prior-year finding related to 
the internal controls for the unfunded environmental liability (UEL) 
estimation process. NASA developed an estimate in September 2009 of the 
anticipated environmental cleanup costs associated with PP&E, 
implementing our prior recommendation to develop such estimate in 
accordance with SFFAS No. 6, Accounting for Property, Plant, and 
Equipment. The joint review process, a key control NASA implemented to 
enhance its estimation processes, began to mature in FY 2009 and added 
additional consistency to the UEL estimation process. While NASA 
continues to make year-to-year progress, we noted weaknesses in NASA's 
ability to generate an auditable estimate on a timely basis of its UEL 
environmental cleanup costs and its environmental liabilities 
associated with PP&E. Specifically:

          While the estimates for environmental costs 
        associated with PP&E were not provided with sufficient time to 
        support the audit process, NASA has acknowledged a need to 
        develop training and controls supporting the development of the 
        estimates, and noted that the estimates were initially 
        developed under severe time constraints and resource 
        limitations. To the extent further such resources and adequate 
        time are devoted to this process, changes in the estimates may 
        emerge. This includes but is not limited to the 
        reclassification of SFFAS No. 5 liabilities to SFFAS No. 6.

          Approximately $170 million, or 17% of the UEL 
        estimate, is developed using the parametric models within 
        NASA's Integrated Data Evaluation & Analysis Library (IDEAL) 
        estimating software. NASA has not completed the design and 
        implementation of its general and application controls for this 
        model. Examples include: NASA-prepared security plans for 
        IDEAL, in which it indicated that actions to mitigate security 
        risks need to be resolved. NASA finalized its Configuration 
        Management Plan and verification reports for five centers in 
        October 2009. A preliminary assessment noted that the 
        Configuration Management Plan did not address system audits or 
        reporting. We noted that preliminary analysis of the 
        verification reports revealed certain unit costs embedded in 
        IDEAL indicate that such factors may be overstated by 100% and 
        300%, but NASA has not yet fully assessed how, if at all, to 
        change the models for this finding, or completed an analysis of 
        other such inputs. In addition, NASA has had large year-to-year 
        changes in environmental estimates, due in part to varying 
        interpretations of certain markup definitions in the software 
        and, as discussed below, revisions to its process used in 
        assessing the number of years for which sufficiently reliable 
        cost estimates can be developed.

          During FY 2009, NASA revised its estimation process 
        to reflect that in general UEL estimates for the first 30 years 
        of a project's lifespan will be recorded as a liability in the 
        NASA financial statements. While the guidance is under 
        continued revision, it is our understanding that if a 
        sufficiently reliable engineering estimate has been developed 
        beyond this 30-year period, such estimate will be considered in 
        developing the accrual. This revision in the estimation process 
        resulted in an approximate 25% reduction in the accrual for the 
        related estimates. The process to develop this revision in 
        NASA's procedures called into question the extent of 
        coordination between OCFO and EMD, with aspects of the policy 
        as initially articulated not conforming to GAAP. In addition, 
        no formalized process for calculating and aggregating the SFFAS 
        No. 5 reasonably possible estimate has been established. In FY 
        2009, an initial reasonably possible estimate was intended in 
        part to capture the portion of long-term UEL estimates which 
        exceeded 30 years and by definition, under NASA's policy, was 
        judged not to be sufficiently reliable to record in the 
        accrual, calling into question the reliability of the 
        information for disclosure purposes as well. The estimate was 
        compiled and aggregated by EMD with little support from the 
        individual project managers, and OCFO was not aware of the 
        process.

Recommendation
    As it relates to the estimation of environmental liabilities, we 
recommend that NASA:

         1. Enhance and formalize the process it has developed to 
        estimate environmental cleanup costs under SFFAS No. 6, 
        Accounting for Property, Plant, and Equipment, including 
        dedicating additional resources to ensure compliance with the 
        requirements, implementing internal controls and developing 
        training. To the extent a portion of the previously reported 
        environmental liability estimates subsume closure costs more 
        appropriately recognized under SFFAS No. 6, NASA financial 
        reporting can be enhanced by reclassification of footnote 
        disclosures for such costs.

         2. Complete the development and implementation of general and 
        application controls as they relate to IDEAL. The initial focus 
        should be on demonstrating the accuracy of both the parametric 
        model and aggregation output. An alternative recommendation is 
        to use a commercially available software tool that already 
        meets these conditions.

         3. Recode IDEAL to simplify markup inputs. For example, at 
        present, the prime contractor markup is comprised of two 
        embedded components to capture markup for the prime contractor 
        and subcontractor, which should be revised to only allow input 
        for one NASA component at a time. Re-emphasize in the annual 
        training provided to NASA's center EMD and OCFO personnel the 
        explanations of these entries.

         4. Implement preventative actions (i.e., controls) to address 
        change management for accounting policy alterations to 
        environmental liabilities and implement rigorous quality 
        control efforts regarding associated footnote disclosures of 
        reasonably possible and recorded amounts, including explicit 
        discussion and conclusion on these items in the joint review 
        process. Assign roles and responsibilities for implementation 
        and for proper communication throughout the organization.

Financial Management Systems Not in Substantial Compliance with FFMIA 
                    (Modified Repeat Condition)

    NASA's financial management systems are not substantially compliant 
with the Federal Financial Management Improvement Act of 1996 (FFMIA). 
During FY 2009, as discussed above, NASA management took action to 
address its noncompliance with the FFMIA. Although these steps 
corrected certain weaknesses noted during the past five years, other 
weaknesses continue to exist. Specific weaknesses noted include the 
following:

          The real property system is not integrated with the 
        Core Financial Module.

          Issues related to access and change management were 
        noted as a result of information technology (IT) audit 
        procedures. The level of risk associated with these IT issues 
        depends in part upon the extent to which financial-related 
        compensating controls (such as reconciliations and data 
        integrity reviews of output) are in place and operating 
        effectively throughout the audit period. Certain of these 
        controls designed to detect errors or inappropriate processing 
        may also not be executed in a manner which can be expected to 
        identify errors, which, while perhaps not material to the 
        financial statements as a whole, may subject NASA to risks 
        regarding safeguarding of assets. Although NASA has made 
        progress in addressing and resolving prior-year IT findings, 
        these IT-related issues, along with issues noted by Ernst & 
        Young, the Government Accountability Office (GAO) and the NASA 
        Office of Inspector General (OIG) in their reviews through the 
        year, merit continued management focus.

          NASA was unable to meet certain requirements to 
        ensure compliance with federal accounting standards, as 
        discussed in various sections within this report.

Recommendation
    We recommend that NASA:

         1. Move forward to integrate government-held real property 
        transactions into the Asset Accounting Module of SAP in 
        February 2010 and continue efforts to integrate recording of 
        PP&E transactions contemporaneous with their occurrence,

         2. Resolve issues identified during our IT procedures in our 
        audit related to access and change management surrounding its 
        financial management systems.

    Chairman Miller. Thank you, Mr. Murrin. Dr. Robinson is 
recognized for 5 minutes.

STATEMENT OF HON. ELIZABETH ROBINSON, CFO, NATIONAL AERONAUTICS 
                    AND SPACE ADMINISTRATION

    Ms. Robinson. Thank you. Chairs Miller and Giffords and 
Ranking Members Broun and Olson and members of the 
Subcommittees, good afternoon, and thanks for the opportunity 
to appear today.
    Before I begin my remarks, I would like to recognize two of 
the leaders from the CFO office who, along with many at NASA, 
have been doing all the hard work that has been recognized 
today and produced all the good results, Deputy CFO, Terry 
Bowie, and the Associate Deputy CFO, Bruce Ward. And there are 
many others, too. It has been a group effort.
    Today I would like to briefly outline three points, many of 
which have already been discussed but the first one is the 
progress that NASA has made and what we have done over the last 
several years to explain the one main material weakness and 
then to describe NASA's path forward.
    As everyone here today has noted, NASA has made significant 
progress in improving its financial processes and systems. 
There is a chart in my written testimony, but it shows that the 
last time we had a clean opinion was back in 2002. But then in 
2003, NASA took the bold step of trying to consolidate all of 
the financial systems of its 10 centers and headquarters into 
one. But then systems and data issues caused some serious 
problems and resulted in the first of what had now been seven 
disclaimed opinions.
    Since that time, though, systems improvements, data cleanup 
initiatives, policies and process changes, a lot of staff 
training and development, have helped to eliminate all of the 
material weaknesses except for one related to legacy property, 
plant and equipment or what people in the business call PP&E.
    You have also heard that we have two significant 
deficiencies, not material ones but significant ones, related 
to NASA's environmental liability and compliance with the 
Federal Financial Management Improvement Act. For both items, 
NASA has plans in place to remediate the deficiencies. And 
before turning back to why the remaining material weakness 
continues to challenge the agency, I do want to assure the 
Committee that today, using current systems and processes, NASA 
is able to track and control its funds, account for the cost 
related to individual programs and projects, and manage the 
agency's day-to-day operations.
    While accounting for the agency's legacy PP&E is an 
important financial statement issue, it does not impact the 
day-to-day and year-to-year operational decision-making at 
NASA.
    Now to the second point explaining the material weakness. 
NASA's legacy PP&E, particularly in relation to the Space 
Station and Shuttles has been a challenge for the agency back 
to when the Federal Accounting Standards for Space Exploration 
Equipment were established in 1996. At that time, Federal 
standards required that such equipment be fully expensed in the 
year where the costs were incurred, and NASA complied with 
those requirements. Then in 1998, the standards were 
significantly changed to require that costs for such equipment 
and for NASA, the Shuttle and Station, be tracked as individual 
assets and not expensed when incurred as program costs and that 
those costs be depreciated or expensed over a specified number 
of years.
    Now, NASA's processes and contracts were designed to comply 
with annual expense accounting requirements, not the new 
requirement for asset depreciation accounting, and 
consequently, NASA does not have the historical records 
necessary to support individual asset balances for the ISS and 
Shuttles.
    Since 2002, when NASA received its last unqualified 
opinion, the agency has implemented significant changes to meet 
the revised accounting standards on a going-forward basis, but 
none of those efforts can recreate records that did not exist 
prior to 2003.
    The Station and Shuttle had together a total net book value 
of approximately $9 billion at the end of the fiscal year 
comprising about 77 percent of the total PP&E and 38 percent of 
total assets. Due to the size of the balances, the auditors 
have determined that NASA's lack of support for these asset 
balances resulted insufficient evidential support for them to 
complete their audit and hence, the disclaimed opinion.
    It is important to note as has been stated before that the 
Space Station and Shuttle are scheduled for retirement in 
coming years, and continued depreciation of these assets is 
bringing the net asset balances on the balance sheet to levels 
that will become immaterial to financial statements. While the 
International Space Station depreciation schedule naturally 
leads to 2016 as an outside date for resolving all these 
issues, NASA has been working to achieve a timelier yet still 
cost-efficient and effective solution.
    And so to the final point. What is the prognosis going 
forward? As the Chair mentioned, the FASAB, Financial 
Accounting Standards Advisory Board, on October 14 published a 
new standard, for the kinds of assets like the Shuttle and ISS. 
The standard amends the existing accounting standards to 
clarify the reasonable methods of estimating historical cost 
and accumulated depreciation may be used to value general PP&E. 
This is important to NASA because it provides a way forward. 
And as FASAB notes in the standard, the use of estimates is a 
more cost-effective means of valuing certain assets than 
reconstructing the history.
    As recommended by the auditor, NASA will adopt the amended 
standards, but because the new standard does not provide a 
single specific method, implementation will require some 
collaboration among all of us to implement and implement 
correctly.
    And so in closing, I would like to re-emphasize that NASA 
takes seriously the need to resolve its financial weakness and 
to continue to take the necessary steps to do so. We recognize 
the need to work with everyone at this table and others. But I 
also want to emphasize that NASA's financial systems are on a 
day-to-day basis and an annual basis very strong and can track 
all of the needed financial data for the agency's important 
decision making.
    So thank you, and I look forward to hearing your questions. 
Thanks.
    [The prepared statement of Ms. Robinson follows:]

             Prepared Statement of Hon. Elizabeth Robinson

    Chairman Miller, Chairwoman Giffords, and Members of the 
Subcommittees, thank you for the opportunity to appear today to discuss 
the NASA FY 2009 audit report and the Agency's plan for correcting the 
longstanding material weakness identified in the auditor's disclaimed 
opinion on the Agency's financial statements. As the independent 
auditors and Inspector General have noted in their reports, NASA has 
made significant progress in improving its financial processes and 
systems. In fact, in FY 2009 NASA eliminated a longstanding material 
weakness related to financial systems, analyses, and oversight. 
However, while progress has been made, the Agency's financial 
management challenges have not yet been fully resolved.
    The FY 2009 disclaimed audit opinion is the 7th consecutive 
disclaimed opinion NASA has received. NASA received its last 
unqualified opinion in FY 2002, when the Agency's independent auditors, 
PricewaterhouseCoopers, identified two material weaknesses; one related 
to controls over the Agency Property, Plant, and Equipment (PP&E) and 
the other related to controls over processes used to prepare financial 
statements and the Performance and Accountability Report. In FY 2002, 
NASA operated with 10 separate and unique center-based accounting 
systems. Information from these systems was integrated through 
electronic spreadsheets at the Agency level and consolidated into one 
Agency financial statement. In 2003, in line with Federal guidance, 
NASA implemented a new Agency-wide financial system that replaced the 
financial systems at its 10 centers and required the conversion and 
integration of data from those legacy systems.
    This new integrated system was intended to improve access to 
information by decision makers across the Agency, standardize and speed 
reporting, and reduce costs. While NASA has since realized many of its 
initial goals and expectations, at the time, the Agency's Inspector 
General noted in testimony of May 2004 before the House Subcommittee on 
Government Efficiency and Financial Management, that ``Many of the 
weaknesses the audit disclosed resulted from a lack of effective 
internal control procedures and problems with NASA's conversion during 
FY 2003 from 10 separate systems to a new single integrated financial 
management program (IFMP).'' In 2003, the Agency received a disclaimed 
opinion.
    NASA has been working to resolve those auditor-reported weaknesses 
over the past six years through systems improvements, data cleanup 
initiatives, policy and process changes, and staff training and 
development. As displayed in the attached chart, ``Summary of Material 
Weaknesses During the Past Eight Years,'' the Agency's efforts have 
reduced the four material weaknesses in FY 2003 to one material 
weakness in FY 2009.
    As of September 30, 2009, NASA's one outstanding material weakness 
was related to internal controls over legacy PP&E and materials 
contracts. The legacy PP&E weakness is related to internal control 
weaknesses in the Agency's space exploration PP&E, particularly the 
International Space Station (ISS) and the Space Shuttle. NASA's space 
exploration assets had a total net book value of $8.9 billion as of 
September 30, 2009, comprising 77 percent of total PP&E ($11.6 billion) 
and 38 percent of total assets ($23.7 billion). The independent 
auditor's Report on Internal Control also identified two significant 
deficiencies. The first is related to processes used to estimate NASA's 
Environmental Liability. The auditors noted that while NASA continues 
to make year-to-year progress, the Agency also continues to have 
weaknesses in its ability to generate auditable Environmental Liability 
estimates on a timely basis. The second deficiency is related to a lack 
of substantial compliance with the Federal Financial Management 
Improvement Act of 1996 (FFMIA), including a lack of integration 
between NASA's real property system and its core financial system. The 
independent auditors and the NASA Inspector General noted that this 
year's disclaimed opinion resulted from the continued weaknesses in 
internal controls over accounting for legacy PP&E.

Background: Weaknesses in Controls Over Legacy PP&E and Materials 
                    Contracts

    The Federal accounting standards related to space exploration 
property have changed over the years, with serious impacts on NASA's 
financial statements.
    When the Federal accounting standard for Property, Plant, and 
Equipment (Statement of Federal Financial Accounting Standards [SFFAS] 
No. 6, Accounting for Property, Plant, and Equipment) was introduced in 
1996, space exploration equipment (including the ISS and Space Shuttle) 
was placed into a category called Federal Mission PP&E. SFFAS No. 6 
contained explicit requirements for the costs of space exploration 
property to be expensed in the year incurred; no asset balances were to 
be maintained or reported for space exploration PP&E on the Agency's 
balance sheet. A separate category of PP&E, called General PP&E, was 
established at this time to address accounting requirements for more 
traditional PP&E (including buildings and land). Unlike Federal Mission 
PP&E, General PP&E are recognized as assets and are reported on an 
entity's balance sheet. Determining a balance for General PP&E assets 
requires tracking costs at the individual asset level and expensing 
(depreciating) those costs over a specified period of years. Consistent 
with these standards, NASA expensed all space exploration equipment in 
the year that costs were incurred.
    The Federal Financial Accounting Standards Advisory Board (FASAB) 
reversed this guidance in 1998 through SFFAS No. 11, Amendments to 
Accounting for Property, plant, and Equipment: Definitions, which also 
replaced the definition of Federal Mission Property with ``National 
Defense (ND) PP&E.'' SFFAS No. 11 changed the existing accounting 
guidance for space exploration equipment, and now required NASA to meet 
the SFFAS No. 6 General PP&E standards for tracking, recording and 
depreciating historical costs for each individual asset. However, 
NASA's processes and long-standing contracts for acquiring ISS and 
Space Shuttle assets were established to comply with Federal Mission 
PP&E requirements, not General PP&E. These practices rely on 
contractors to report the balances of contractor-held property, in 
accordance with guidelines set forth in the NASA FAR Supplement.
    NASA has introduced compensating controls, introduced new 
accounting policies, revised accounting processes, increased the 
frequency and improved the quality of contractor property reporting, 
and implemented new property accounting systems to improve its 
accounting for the Agency's PP&E and to provide program management with 
the necessary information to support programmatic decision making. 
However, since NASA does not have the documentation required to support 
its space exploration asset balances under General PP&E standards and 
since there are no comparable assets with which to establish a 
reasonable balance, the auditors have continued to report a material 
weakness related to controls over legacy PP&E and disclaimed audit 
opinions.
    Both the ISS and Space Shuttle are scheduled for retirement in this 
decade. Continuing depreciation of these space exploration assets is 
bringing the net asset balances on the balance sheet to levels that 
will become immaterial to the financial statements. The Shuttle assets 
are being depreciated through their expected useful life based on their 
current schedule for retirement in 2010, and the International Space 
Station is being depreciated based upon a 15-year specification life, 
through 2016, which would not change, in accordance with accounting 
requirements, if the ISS is extended beyond this period. While the 
International Space Station depreciation schedule naturally leads to 
2016 as an outside date for resolution of this PP&E issue, NASA has 
been working to achieve a timelier, albeit still cost efficient and 
effective, solution for this issue.

Legacy PP&E Improvements

    In FY 2007, NASA obtained guidance from the FASAB's Accounting and 
Auditing Policy Committee (AAPC) to reclassify certain space 
exploration assets as research and development expenses, per Financial 
Accounting Standard No. 2, Accounting for Research and Development 
Cost. In addition to more appropriately classifying the costs for these 
assets, this also focused the legacy property issue to primarily the 
ISS and Space Shuttle assets.
    Also in 2007, NASA implemented a new policy and related procedures 
for identifying the cost of individual assets throughout such assets' 
acquisition lifecycle, consistent with SFFAS No. 6. The procedural 
changes facilitate the identification, verification and reconciliation 
of asset values for assets created or developed under contracts awarded 
after implementation of the revised policy and to certain large pre-
existing contracts.
    Additionally, during FY 2008, the Agency implemented a new asset 
management module within its core financial management system. This 
module integrates personal property equipment data with the core 
financial accounting system, addressing a key part of the prior year's 
material weakness and a noted noncompliance with FFMIA. This module 
provides: (1) more accurate, timely recording and valuation of PP&E 
(2) improved valuation, capitalization, and depreciation processes; (3) 
improved audit trail of capitalized PP&E (4) greater standardization 
of property management processes; and (5) elimination of many manual 
processes.
    In FY 2009, NASA performed a review of the processes used to track, 
validate and record costs for the ISS and Space Shuttle. This review 
resulted in changes to NASA's capitalization policies for Space Shuttle 
launch costs and for ISS Integration and Operations costs. Following 
this review, NASA recorded a subsequent downward adjustment to the net 
book value of the ISS.
    The review also supported NASA's preparation for the release of 
SFFAS No. 35, Estimating the Historical Cost of General Property, 
Plant, & Equipment: Amending Statements of Federal Financial Accounting 
Standards 6 and 23 on October 14, 2009. This standard is intended to 
provide entities, like NASA, who have significant investments in assets 
but, at the time these assets were acquired, did not have adequate 
controls or systems in place to capture historical PP&E costs, with a 
cost effective method for complying with Federal property accounting 
standards.

NASA Planned Corrective Actions

         1. As recommended by the independent auditor, NASA will adopt 
        SFFAS No. 35 to establish auditable values for those legacy 
        assets--including NASA's space exploration PP&E, particularly 
        the ISS and Space Shuttle--for which the Agency does not have 
        the necessary historical cost records or for which it would not 
        be cost effective to recreate such records. SFFAS No. 35 amends 
        existing accounting standards to clarify that reasonable 
        methods of estimating historical cost and accumulated 
        depreciation may be used to value general property, plant, and 
        equipment. As FASAB notes in the standard, use of estimates is 
        a more cost-effective means of valuing certain assets than 
        reconstructing actual historical amounts based on inadequate or 
        nonexistent accounting records.

         The adoption of SFFAS No. 35 requires NASA management to 
        identify and adopt a basis for determining reasonable estimates 
        of historical cost information. Implementation of the standard 
        will require collaboration between the Agency and its auditor 
        on the basis for the reasonable estimate, the approach for 
        implementing that basis, the information required to support 
        the resulting estimates, and the timeframe within which the 
        estimates can be generated. Working through a process for 
        implementing SFFAS No. 35 is a challenge for. the Agency that 
        may impact NASA's approach and timeline for resolving the 
        legacy PP&E weakness. SFFAS No. 35 provides NASA with a way 
        forward, but it is not a pre-defined solution to the Agency's 
        one remaining material weakness.

         2. NASA will also continue to identify key PP&E control 
        activities as a part of the Agency's ongoing Continuous 
        Monitoring Program (CMP). The CMP is a monthly process that 
        provides for robust and rigorous reviews to validate the 
        quality and sufficiency of information for key accounts and 
        accounting transactions. Changes in key processes, like those 
        associated with the valuation of legacy PP&E, will be 
        accompanied by reviews and, if required, improvements in the 
        related CMP control activities.

         3. Additionally, NASA will integrate its real property assets, 
        which comprise 8 percent of NASA's total asset value, into the 
        core financial system's asset management module in FY 2010. 
        This will improve overall PP&E accounting, and will address a 
        specific FFMIA weakness identified in the auditor's Report on 
        Internal Control.

Conclusion

    In closing, NASA has taken clear and positive steps toward 
resolving its financial management weaknesses. Today, using current 
systems and processes, NASA is able to track and control its funds, 
account for the costs related to individual programs and projects, and 
manage the Agency's day-to-day operations. The Agency remains committed 
to resolving the legacy property weaknesses, particularly through the 
guidance contained in the recently released SFFAS No. 35. Combined with 
the Agency's rigorous on-going control reviews and the introduction of 
additional system capabilities, we expect our efforts will result in a 
more acceptable audit outcome and opinion.
    Chairman Miller and Chairwoman Giffords, I would be pleased to 
respond to any questions that you or the other Members of the 
Subcommittees may have.



    Chairman Miller. Thank you, Dr. Robinson. We will now have 
questions, the first round and maybe our only round. I now 
recognize myself for 5 minutes.
    Mr. Murrin and Dr. Robinson mentioned that FASAB has now 
issued guidance for how to value legacy assets. Obviously NASA 
is not the only agency that has a problem like this. The 
Defense Department is the other obvious example, although there 
might be willing buyers for some of what the Defense Department 
has. They are not necessarily anyone that we want to sell that 
stuff to. Have you looked at those standards? Do they seem 
workable? Would they get NASA in compliance?
    Mr. Murrin. Well, the standards themselves are really quite 
brief and provide really a summary of how to do it. It is 
really the devil is going to be in the details of how NASA, DoD 
and the other agencies work together to come up with what 
reasonable approaches are. I think that Dr. Robinson had the 
right track of just saying the agencies and their auditors are 
going to need to work together to really cooperate to really 
figure out what is enough. We don't want to over-expend 
resources in pursuit of this and getting down to minute detail, 
particularly since FASAB has spoken on this issue. But there is 
not a cookbook as yet to implement the standard. The standard 
really became effective in October. So we don't have a series 
of agencies that have actually implemented it as yet.
    Chairman Miller. Have you taken even a preliminary look at, 
or do you have the data, the information, upon which to take a 
preliminary look at how the FASAB standards--what valuation 
they might lead to with respect to the Space Shuttle and the 
Space Station?
    Mr. Murrin. Well, the agency actually has done that. They 
have a series of materials that were pulled together in the 
summer of 2009 that were intended to develop an estimate under 
that new standard were the standard applicable in 2009. We have 
begun our process along with the Office of Inspector General to 
look at that information and how it might apply for 2010.
    Chairman Miller. Okay. Mr. Martin, obviously all of you 
have a great desire to get this worked out and you want to 
maintain the independence of your auditor, but it does appear 
that one approach to the immediate problem might be to ask the 
auditor to kind of revise or take a second look at this year's 
valuations based on the new FASAB standards. Have you 
considered doing that? Is that something you might do?
    Mr. Martin. I would have to actually speak with Dan and 
with Tom, but I think we have just kicked off the fiscal year 
2010 audit review, and I am not sure if they have gotten to 
that level of detail yet. That is certainly one approach that 
we can look into at the outset.
    Chairman Miller. Okay. Mr. Murrin, with the benefit now of 
the FASAB guidance for legacy assets, do you feel reasonably 
confident that next year's audit will not have a qualification 
to it, will not have an asterisk? It will be a clean audit, or 
can it be?
    Mr. Murrin. Yes, somewhat regrettably I get that kind of a 
question just about every year from every client at one point 
or another, and we really can't prejudge what the outcome of a 
particular year's audit process is. I would say that the 
situation here, where FASAB has developed a document that 
should be helpful to NASA in assisting and resolving this, and 
FASAB developed that document at least with NASA and DoD and 
some of these other entities in mind as they developed the 
standard certainly is a helpful thing that should help in this 
process. But I can't prejudge the answer for it.
    Chairman Miller. Okay. Perhaps you should have--you missed 
your calling. Perhaps you should have become a lawyer. Your 
answer I think was, it depends. But perhaps that is an 
accountant's ultimate answer for everything as well.
    But with respect with these specific problems, assuming 
that there are no new problems, does applying the new FASAB 
guidance with presumed cooperation, does that give you 
confidence that whatever new problems may arise, that problem 
can be solved?
    Mr. Murrin. The two recommendations we have which were 
reasonably specific in providing a roadmap on how one might 
apply the FASAB 35 guidance in addressing some of the 
contractor-held property issues, you know, those 
recommendations I think do provide a roadmap. And if NASA, 
cooperatively working together with us sort of talks through 
what we have in mind there, I think there are certainly 
opportunities for them to have an improved outcome.
    Chairman Miller. Okay. So the answer is, it still depends. 
My time is expired. I now recognize Dr. Broun for 5 minutes.
    Mr. Broun. Thank you, Mr. Chairman. I would like to ask the 
panel, are there any risks to using estimates or any 
impediments to using estimates instead of real numbers for 
determining legacy asset value? We will start with Mr. Murrin 
and then Dr. Robinson and anybody else that wants to pipe in.
    Mr. Murrin. Yeah, I think in the context of NASA's 
operations and the items that we are principally speaking 
about, legacy assets, the Shuttle and the Space Station, 
relatively less risks involved in that. Do we really need to 
know exactly what the invoiced amounts were versus having, you 
know, range of estimates that is a reasonable estimate for 
those assets? Depending on the assets that you have, I think 
there may be more of a risk involved in developing and using 
estimates, but certainly for the two particular assets that are 
most of the focus of this, relatively less.
    Mr. Broun. Impediments to making an estimate, reasons, 
picking a number, et cetera? Just try to get something that Dr. 
Robinson can work with and that you can work with in the 
future?
    Mr. Murrin. Probably the principal impediment is that the 
first shot at the estimate is going to be the recorded amounts 
because those are the amounts that were recorded in the records 
over the years. But unfortunately, the records to support the 
amounts that went into the estimates are not available anymore, 
either. So is the estimate based on a number that was not 
supported any better than the number that was not originally 
supported just because now you can call it an estimate. So that 
would be the impediment. So I think that is where if you look 
at our recommendation, we are really looking for whether there 
are things that can corroborate the amount that has been 
recorded, whether it is the amount that was budgeted in each of 
those years that can somehow get compared to what got 
capitalized or some other second item that can help corroborate 
it so that we are not just saying, well, now it is an estimate. 
We don't really have to audit it because that is not really 
what happens. We do still have to audit it.
    Mr. Broun. So from what I am gathering from what you are 
telling us is that basically there is no other way to truly 
clear this up until we retire the assets, is that correct?
    Mr. Murrin. Well, I don't think so, I think the estimation 
process does hold some promise and certainly FASAB speaking on 
this matter and reinforcing that estimates are acceptable, you 
know, gives some comfort to say that FASAB is not looking for 
an exact number here for these assets. Certainly retiring them 
would definitively resolve it, but short of that, you know, it 
is possible to get some corroborating evidence to say that the 
amounts that are there are reasonable.
    Mr. Broun. Dr. Robinson?
    Ms. Robinson. I agree with what Mr. Murrin said. The one 
thing I would add here is that in the course of this long trial 
on constructing the station and trying to record the costs, we 
also had a change in auditor. And so one of the numbers that we 
are talking about was actually approved in our previous audit, 
the one where we had a clean opinion. And so they did do an 
evaluation and came up with a number, and we have been relying 
on that as our previous auditors.
    But as Mr. Murrin points out, a lot of the documentation 
and other things were with them, and now they are no longer our 
auditors. So this tale has gone for so many years that there 
are so many twists and turns that it is really hard to nail 
down every single one.
    On the other hand, the Shuttle and Station are things. We 
are trying to value an asset. It may not have a market value, 
but the components are identifiable and recognizable. And so 
there certainly is an ability to be sure that we have it about 
right. And so I think it is not just that we look at the 
invoice cost but we can also look at what has been built and 
make sure that we are in the right ballpark.
    Mr. Broun. All right. Mr. Chairman, my time is about 
expired, so I will yield back. Thank you, sir.
    Chairman Miller. Thank you. I now recognize the other 
Chair, Ms. Giffords, for 5 minutes.
    Ms. Giffords. Thank you, Mr. Chairman. Dr. Robinson and Mr. 
Martin, obviously a financial management system should tell us 
how much money NASA has, it should tell us where the money is 
flowing in and how the money is being spent. With the system 
right now, can we get those answers and can we trust them?
    Ms. Robinson. Yes.
    Ms. Giffords. Mr. Martin?
    Mr. Martin. I believe so on a day-to-day basis, yes.
    Ms. Giffords. Mr. Howard?
    Mr. Howard. Yes, ma'am, you can.
    Ms. Giffords. And Mr. Murrin, do you believe that NASA's in 
a position now that is able to answer those questions?
    Mr. Murrin. You know, unfortunately, I get to do the 
lawyerly thing. We do end up having to speak as a firm through 
our reports and the public documents, and to the extent that we 
are disclaiming opinion that is because under the professional 
standards given the size of the PP&E matter, we are not in a 
position to give a piecemeal opinion and opine on the rest of 
the financial statements. And therefore, really, I am not in a 
position to answer that definitively.
    Ms. Giffords. Thank you. You know, the past is the past, 
and we have obviously spent some time talking about where the 
agency has come from and where we are today. We have spent some 
years trying to get some answers to the value of Space Shuttle 
and the International Space Station, and a lot of it goes back 
to the accounting system of the 1970's and the 1980's and how 
it didn't exactly capture the actual cost information called 
for by government accounting rules.
    Are we in better shape to meet those accounting 
requirements for the assets that NASA has today and is 
currently developing?
    Ms. Robinson. I think so. It is now standard practice in 
our contracts to require the accounting information that we 
need, and we don't anticipate problems going forward, beyond 
the fact that many of these systems are very large and are just 
difficult to value in terms of the entire numbers. But we will 
have the data in order to do it.
    Ms. Giffords. Dr. Robinson, what assurances can you give to 
Members of Congress that this is actually going to take place 
and that we can know that--we can take this information and be 
very satisfied that we are getting the correct information?
    Ms. Robinson. I think that NASA, even over the last couple 
of years, has demonstrated that it can produce auditable 
financial transactions, can appreciate assets and expense its 
contracts and grants according to guidance. We do not believe 
that there are large problems, and I think our contractors 
would agree with that. They have felt the burden of giving us 
all of the data and have worked very closely with us to make 
sure it is the right data and what we need. So the proof will 
always be in the pudding. We are going to be audited every 
year, so we will see. But we feel like we are on a strong 
footing.
    Ms. Giffords. And are there benchmarks that we should look 
for here in the Congress?
    Ms. Robinson. When you look at the financial data, when you 
talk about money at NASA, you talk about the financial reports, 
but you are also talking about the budgetary estimates and you 
are talking about the program cost and schedule estimates. And 
all of that data goes into real confidence about whether or not 
an entity has control of its day-to-day operations. It is not 
just the financial transactions.
    And so I think there has been a lot of work that has been 
done by the IG's office and by others and very much so within 
NASA to try to beef up all of those parts of the financial 
enterprise, in particular to improve our joint cost and 
schedule estimates to baseline programs and hold them 
accountable for that. And so I think we have seen improvements 
that have been across the board on all aspects of money at 
NASA.
    Ms. Giffords. Mr. Martin, would you care to comment?
    Mr. Martin. To your specific point on assets, at the 
beginning of fiscal year 2008, NASA implemented a new system 
for all other assets that it is acquiring besides the Shuttle 
and the Station. We have taken a look at that, Ernst & Young 
has taken a look at it. We think it positions the agency to be 
able to accurately report the value of assets going forward.
    Ms. Giffords. Thank you. Mr. Chairman, I see I am almost 
out of time. I appreciate the time. Thank you.
    Chairman Miller. Thank you. Ms. Giffords yields back. Mr. 
Olson is recognized for 5 minutes.
    Mr. Olson. Well, thank you very much, Mr. Chairman, and I 
would like to talk a little bit and ask questions about legacy 
systems, probably directed to Mr. Martin and Dr. Robinson. But 
anybody, if you want to chime in and give an answer, feel free 
to do so.
    With regard to the material weaknesses in NASA's controls 
for assuring that the value of legacy property, plant and 
equipment, notably the Space Shuttle and the ISS, is fairly 
stated, all of you have testified that the upcoming retirement 
of the Shuttle and the write-off of the Space Station will 
largely resolve the problem. Are there other, albeit smaller, 
legacy issues that are still haunting NASA, and if so, how can 
they be dealt with. Dr. Robinson?
    Ms. Robinson. Well, I am going to plead a little ignorance 
here since I have only been on the job for 3 weeks, but I have 
asked those questions about what are the kinds of things coming 
down the road. And really, in terms of our portfolio of assets, 
the Shuttle and Station are even different among that very 
unique set. We have a lot of highly specialized research 
satellites and other things which don't trigger these kinds of 
requirements. They are much more simple from an accounting 
perspective.
    And so I don't see it, but on the other hand, I have only 
been here 3 weeks. So I haven't learned everything.
    Mr. Olson. Mr. Howard, I don't want to take your--kind of 
read something into your actions there, Mr. Martin. It looks 
like, Mr. Howard, you want to say something?
    Mr. Martin. My legacy goes back 3 days, so I am going to 
look to Tom.
    Mr. Olson. Thank you. Mr. Howard?
    Mr. Howard. The two assets that we talked about are the 
principal ones, and there may be some others that are 
associated with the contractors who are building things and 
some of the property that has happened. But for the most part, 
the focus is on the Shuttle and the International Space 
Station. And if the agency can get those resolved, that is the 
bulk of the problem.
    Mr. Olson. Thank you very much for that answer. And another 
question just involving the costs to NASA of compliance. The 
past 20 years, how much money has NASA spent to bring it into 
compliance with Federal accounting standards? Is that you, Mr. 
Howard, again?
    Mr. Howard. I would have to defer to the agency for an 
accurate answer on that.
    Ms. Robinson. We will take that question for the record, 
but I will tell you, it is a not-insignificant sum, and that 
would be true for all agencies as they have built financial 
systems.
    Mr. Olson. Thanks for that answer. You kind of read my mind 
there, and I appreciate a statement for the record.
    Looking ahead, what is your assessment about the cost curve 
for NASA to sustain this effort? Do you think the agency needs 
to continue heavily investing or is it at a point now where 
growth in spending on financial management systems and 
personnel can begin to flatten out?
    Mr. Howard. From our perspective, I would say it is the 
latter, that the agency has been implementing this current 
system for 7 years now, and it is at the point where it is 
working effectively. So we should be at a point where it can 
begin to flatten out.
    Ms. Robinson. I would say that we have some milestones 
coming up where we will be integrating our real property 
systems. So we still have a number of things, but albeit in the 
near future, not the long future. And then of course, then we 
have to maintain quite a lot of vigilance. No system is going 
to produce great numbers. People have to create great numbers 
to put in the system. So we will have to continue that.
    Mr. Olson. Dr. Robinson, thank you for that answer. Mr. 
Howard, thank you. Mr. Martin, thank you for your time. Mr. 
Murrin, thank you. I greatly appreciate everything, and I know 
coming up here after a couple, 3 weeks and 4 days, I really, 
really appreciate you coming here and testifying today. Thank 
you very much. I yield back my time.
    Chairman Miller. Thank you, Ms. Olson. By far the most 
conscientious member of the I&O Subcommittee, Ms. Dahlkemper is 
recognized for 5 minutes.
    Ms. Dahlkemper. Well, thank you for that endorsement, Mr. 
Chairman. Thank you, our witnesses, for being here today.
    Chairman Miller in the beginning said that we don't want to 
return next year with the same material weakness, and I would 
just like to extend his remarks by saying that I don't want to 
come back here next year and find we have new material 
weakness.
    Mr. Murrin, you noted in a report that NASA wasn't able to 
provide its estimates for environmental liability costs with 
sufficient time to support the audit process. Am I right in 
reading this to say that we don't have the same depth of 
understanding on this problem that we do on material weakness 
we have been discussing?
    Mr. Murrin. I actually do think that the record for last 
year shows some progress by the agency and their environmental 
liabilities. To some extent it was work that was done at the 
last minute to get a comment behind them. So a lot of things 
were done in, you know, July, August, September, literally 
getting some things to us the last week in September to be able 
to say, well, we have a balance now. Here it is. Unfortunately, 
in a multi-billon dollar entity, getting a number on the last 
day of the year is not sufficient time in which to actually go 
in and have the firm develop the work that we would need to do 
to stand behind that number as well and opine on that number. 
So it is a situation in which we think that if they work 
through the four recommendations we have there, they should be 
able to make continued progress as well and get to the point 
where we are not talking about those numbers being materially 
misstated and are in a position to think anyway that if not a 
material weakness, perhaps no longer a significant deficiency, 
that they certainly constituted a significant deficiency this 
year.
    Ms. Dahlkemper. Thank you for that. Given the severe time 
constraints and resource limitations, you mentioned in your 
testimony, should our committee be confident that $922 million 
is a well-grounded estimate of NASA's environmental 
liabilities?
    Mr. Murrin. Well, we don't as a firm opinion on individual 
elements of the financial statements, but the comment that we 
are making about the significant deficiency for environmental 
liability is an indicator that we think that more work by the 
agency can be done around its environmental liabilities, and it 
wouldn't be entirely surprising to have that number move as the 
agency further refines its process for estimating environmental 
liabilities. And we do our audit work around those estimates to 
verify whether they are appropriate or not.
    Ms. Dahlkemper. Okay. Dr. Robinson, your testimony doesn't 
describe steps to deal with the incomplete training for staff 
working on the liability estimates or the fixes needed in 
estimating software described in their Ernst & Young reports. 
Can you describe for us what kind of corrective actions you 
will be pursuing on that?
    Ms. Robinson. Well, incorporation with the Environmental 
Management Office at NASA, I think there is a real commitment 
there to train the staff, to improve their estimates. If you 
look across government at agencies trying to deal with 
environmental liabilities, there are a few who have very 
different liabilities than others. DoE and NASA particularly 
have nuclear liabilities. We have DoD and we have a lot that 
are associated with fuel and operating systems. And so I think 
there has just been a lot of effort over the last 10 years to 
try to develop acceptable methodologies and models to do that. 
This is not just work that is going on at NASA. It is going on 
everywhere to try to perfect these estimates. And so I do think 
our Environmental Management Office is very keen in producing 
the best ones possible.
    And then in the Federal Government, you report it many 
times. You report for the budget, you report for financial 
report for all that, and getting every office in a large agency 
like NASA to produce numbers at the right time, it is a big 
effort. And so I do think the Environmental Management Office 
and NASA as a whole is there now, and we do expect to get much 
more timely information from them.
    Ms. Dahlkemper. So you expect that you will be able to do 
that, you will be able to get the corrective actions done that 
you need to?
    Ms. Robinson. Um-hum. Definitely.
    Ms. Dahlkemper. Okay. Well, I just want to close by 
reiterating, you know, what Chairman Miller has said, and I 
just hope that NASA gets its financial accounting system into 
the best shape possible, that we want transparency. And I look 
forward to not having to have this discussion next year. So 
thank you very much for your time. I yield back.
    Chairman Miller. Thank you, Ms. Dahlkemper. That ends the 
questioning. I don't think we will have a second round, but the 
staff points out I needed a clearer answer to one of my earlier 
questions. I think one extension of southern politeness has a 
tendency toward indirection. We also have the highest murder 
rate in the Nation, so sometimes it doesn't work as well.
    Mr. Martin, will you ask Ernst & Young, your auditor, to 
apply the new FASAB guidance for valuing legacy assets for 2009 
for the Space Shuttle and the Space Station, the significant 
assets that calls the qualified the not-clean audit? It is 
obviously work you are going to have to do again next year. I 
understand Mr. Murrin doesn't want to commit to what kind of 
audit he will give, what kind of report he will give next year. 
But will you ask them to look at those assets again and work 
with all the folks that you need to work with to apply the new 
guidance to try to come up with an acceptable valuation for 
those assets?
    Mr. Martin. We will certainly work hand-in-glove with NASA 
and with Ernst & Young. But Tom, correct me if I am wrong, I 
think the burden is on Dr. Robinson in her shop to do the 
initial estimations, again, working with the accounting firm 
and with the OIG.
    Chairman Miller. Okay.
    Mr. Martin. We certainly pledge to work together toward 
that end.
    Chairman Miller. Well, it is not entirely clear exactly who 
has got to ask who to do what. But Mr. Howard, Mr. Martin, will 
you tell Ms. Robinson what she needs to know? Ms. Robinson, 
will you commit----
    Ms. Robinson. Again, before I got there, the agency I think 
did yeoman's work to try to make all the adjustments in the 
2009. So we believe we have done it, and we are ready to be 
evaluated.
    Chairman Miller. For 2009?
    Ms. Robinson. We are ready to be evaluated for the new 
estimation methodology, and all the adjustments have been made 
already to the legacy assets. And so we could start now to 
value them under the new FASAB standard and work on that in the 
next couple months.
    Chairman Miller. Will everyone here commit to do that? Mr. 
Martin? Mr. Howard?
    Mr. Howard. Yes, sir. We have, and as Dr. Robinson said, 
the agency began the process last year. Ernst & Young is going 
to take a look at that as part of the 2010 audit. The Office of 
Inspector General is going to take a look at it as part of the 
2010 audit. We are not asking them to go back and revisit the 
2009. The standard was approved in October of 2009. It is not 
retroactive to fiscal year 2009. So we are applying it to 
fiscal year 2010.
    Chairman Miller. But you didn't pass your grade. You got 
held back.
    Mr. Howard. Right.
    Chairman Miller. Think of this as summer school. Will you 
ask them--provide all the information necessary, ask them to 
value the assets based upon the FASAB guidance that you now 
have, even though the books are now closed. That is obviously 
work you will have to do again for the 2010 audit. I know the 
books are closed. I know that the audit is in, but do it 
anyway. Will you do it anyway?
    Mr. Howard. No, sir, not for 2009. We are focused on 2010 
now and going forward.
    Chairman Miller. Ms. Robinson?
    Ms. Robinson. I think the distinction here is that these 
are legacy assets. And so the valuations and the corrections to 
them are--they don't change every year. And so I think the 
issue here is--what I think the Chairman is asking is can we 
get an early read so that we don't wait until the end of the 
audit so that in the next couple of months we get a read on 
whether or not we have made all the appropriate adjustments so 
that--and if we haven't, we can then work on it, but we are not 
going to wait until next fall to know whether or not we have to 
come back up here.
    Chairman Miller. What she said.
    Mr. Howard. Yes, we have already talked, Mr. Murrin and 
myself, and Dr. Robinson's Deputy, Mr. Bowie, have talked about 
doing exactly that, sitting down, looking at what the agency 
has done to date, having a good discussion about what is good 
about it and what can be improved about it and making specific 
recommendations so that the adjustments can be made timely if 
there needs to be additional adjustments.
    Chairman Miller. Okay. That sounds like as close a 
commitment as we are going to get. And with that, before 
bringing the hearing to a close, I want to thank all of our 
witnesses for testifying before our Subcommittee today. Under 
the rules of the Committee, the record will remain open for 2 
weeks for additional statements from the members for answers to 
any follow-up questions the Subcommittees may have for the 
witnesses. The witnesses are excused. The hearing is now 
adjourned.
    [Whereupon, at 3:50 p.m., the Subcommittees were 
adjourned.]

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