Financial Audit: Review of the Audit of SEMATECH's Financial Statements
for 1993 (Letter Report, 08/29/94, GAO/AIMD-94-163).

In Price Waterhouse's opinion, SEMATECH's 1993 financial statements are
fairly presented in all material respects in conformance with generally
accepted accounting principles.  Also, Price Waterhouse reported no
material internal control weaknesses or noncompliance with laws and
regulations.  Price Waterhouse also issued a management letter making
recommendations that, although not material to the financial statements,
were intended to improve SEMATECH's management efficiency and enhance
its internal control structure. GAO found no indication during its
review that Price Waterhouse's opinion on SEMATECH's 1993 financial
statements, its report on internal control structure, or its report on
compliance with laws and regulations cannot be relied upon.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-94-163
     TITLE:  Financial Audit: Review of the Audit of SEMATECH's 
             Financial Statements for 1993
      DATE:  08/29/94
   SUBJECT:  Advance funding
             Defense industry
             Auditing procedures
             Auditing standards
             Financial statement audits
             Internal controls
             Compliance
             Accounting procedures
             Non-government enterprises
             Financial records

             
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Cover
================================================================ COVER


Report to Congressional Committees

August 1994

FINANCIAL AUDIT - REVIEW OF THE
AUDIT OF SEMATECH'S FINANCIAL
STATEMENTS FOR 1993

GAO/AIMD-94-163

SEMATECH Financial Audit for 1993


Abbreviations
=============================================================== ABBREV

  SEMATECH -

Letter
=============================================================== LETTER


B-236668

August 29, 1994

The Honorable Sam Nunn
Chairman, Committee on
 Armed Services
United States Senate

The Honorable Ronald V.  Dellums
Chairman, Committee on
 Armed Services
House of Representatives

The National Defense Authorization Act for Fiscal Years 1988 and 1989
(Public Law 100-180) requires that we review the annual audits of the
financial statements of SEMATECH, Inc., a consortium of U.S. 
semiconductor manufacturers and the Department of Defense, and
provide comments to you on the statements' accuracy and completeness. 
This report, the sixth in response to the legislative requirement,\1
presents the results of our review of the audit conducted by Price
Waterhouse, an independent public accountant, of SEMATECH's financial
statements for the year ending December 31, 1993. 


--------------------
\1 See list of related GAO products at the end of this report. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Price Waterhouse's opinion, dated January 25, 1994, stated that
SEMATECH's 1993 financial statements are fairly presented in all
material respects in conformance with generally accepted accounting
principles.  Also, in conformity with generally accepted government
auditing standards, Price Waterhouse issued reports on SEMATECH's
internal control structure and its compliance with laws and
regulations.  These reports disclosed no material internal control
weaknesses or noncompliance with laws and regulations.  Price
Waterhouse also issued a management letter making recommendations
that, although not material to the financial statements, were
intended to improve SEMATECH's management efficiency and enhance its
internal control structure. 

We found no indication during our review that Price Waterhouse's
opinion on SEMATECH's 1993 financial statements, its report on
internal control structure, or its report on compliance with laws and
regulations cannot be relied upon. 


   BACKGROUND
------------------------------------------------------------ Letter :2

SEMATECH was incorporated in Delaware in August 1987 as a nonprofit
research and development corporation with the objective of advancing
semiconductor manufacturing technology.  The National Defense
Authorization Act for Fiscal Years 1988 and 1989, enacted in December
1987, authorized the Secretary of Defense to make grants to SEMATECH
to defray research and development expenses.  For these purposes, the
Congress has made available about $100 million annually for
SEMATECH's use since fiscal year 1988. 

The act also required the Secretary of Defense to enter into a
memorandum of understanding with SEMATECH.  The memorandum provided
that the total amount of funds made available to SEMATECH by federal,
state, and local government agencies for any fiscal year for the
support of research and development activities may not exceed 50
percent of the total cost of such activities.  Additionally, an
independent, commercial auditor must submit annual reports to the
Secretary of Defense, SEMATECH, and the Comptroller General.  This
report focuses on the extent to which SEMATECH's use of funds made
available by the United States is consistent with the purposes of the
act and SEMATECH's charter and annual operating plan. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To determine the accuracy and completeness of the Price Waterhouse
audit, we

  reviewed the auditor's approach and planning of the audit;

  evaluated the qualifications and independence of the audit staff;

  reviewed the financial statements and auditor's reports to evaluate
     compliance with generally accepted accounting principles and
     generally accepted government auditing standards; and

  reviewed the auditor's working papers to determine (1) the nature,
     timing, and extent of audit work performed, (2) the extent of
     audit quality control methods the auditors used, (3) whether a
     review was conducted of SEMATECH's internal control structure,
     (4) whether the auditors tested transactions for compliance with
     applicable laws and regulations, and (5) whether evidence in the
     working papers supported the auditor's opinion on the financial
     statements and internal control structure and compliance
     reports. 

We conducted our review of the Price Waterhouse audit of SEMATECH's
1993 financial statements in July 1994 in accordance with generally
accepted government auditing standards.  We discussed this report
with cognizant Price Waterhouse, SEMATECH, and Defense officials. 
The report does not include a copy of the 1993 financial statements
because they contain proprietary information. 


---------------------------------------------------------- Letter :3.1

As agreed with your offices, we are sending copies of this report to
the Secretary of Defense, the Chairman of the Board of Directors of
SEMATECH, representatives of Price Waterhouse, and other interested
parties.  Copies will be made available to others upon request. 
Please call me or Roger Stoltz, Assistant Director, at (202) 512-9095
if you or your staffs have any questions. 

David M.  Connor
Director, Defense Financial Audits

RELATED GAO PRODUCTS

Federal Research:  Assessment of the Financial Audit for SEMATECH's
Activities in 1992 (GAO/RCED-94-17, Oct.  13, 1993). 

Federal Research:  Assessment of the Financial Audit for SEMATECH's
Activities in 1991 (GAO/RCED-93-50, Dec.  11, 1992). 

Federal Research:  Lessons Learned From SEMATECH (GAO/RCED-92-283,
Sept.  29, 1992). 

Federal Research:  SEMATECH's Technological Progress and Proposed R&D
Program (GAO/RCED-92-223BR, July 16, 1992). 

Federal Research:  Assessment of the Financial Audit for SEMATECH's
Activities in 1990 (GAO/RCED-92-97, Apr.  9, 1992). 

Federal Research:  SEMATECH's Efforts to Develop and Transfer
Manufacturing Technology (GAO/RCED-91-139FS, May 10, 1991). 

Federal Research:  Assessment of the Financial Audit for SEMATECH's
Activities in 1989 (GAO/RCED-91-74, Apr.  30, 1991). 

Federal Research:  SEMATECH's Efforts to Strengthen the U.S. 
Semiconductor Industry (GAO/RCED-90-236, Sept.  13, 1990). 

Federal Research:  Assessment of the Financial Audit for SEMATECH's
Activities in 1988 (GAO/RCED-90-35, Feb.  16, 1990). 

The SEMATECH Consortium's Start-up Activities (GAO/T-RCED-90-11, Nov. 
8, 1989). 

Federal Research:  The SEMATECH Consortium's Start-up Activities
(GAO/RCED-90-37, Nov.  3, 1989).