Financial Audit: Review of the Audit of SEMATECH's Financial Statements
for 1994 (Letter Report, 08/08/95, GAO/AIMD-95-168).

In the view of Price Waterhouse, SEMATECH's 1994 financial statement
were fairly presented in all material respects and there were no
material internal control weaknesses or noncompliance with law and
regulations.  Price Waterhouse did recommend that SEMATECH improve
documentation over off-site assets.  GAO found no indications during its
reviews that the opinion of Price Waterhouse could not be relied upon.
However, GAO did note the need for enhanced disclosure in the financial
statements with respect to government agency funding, member company
funding, and investments.  GAO believes that SEMATECH should have
disclosed in a July 1994 public announcement, its intent not to seek
government funding after December 31, 1996, and the effect that this
major funding reduction would have on its operations and financial
condition.  Also, more details should have been provided on the effect
that advance notices of resignation by several consortium members may
have on member company funding. Finally, further details should have
been provided on the amounts and composition of funding provided and
planned for investments.  GAO suggests the Price Waterhouse discuss
these matters in its opinion on SEMATECH's 1995 financial statements.

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

 REPORTNUM:  AIMD-95-168
     TITLE:  Financial Audit: Review of the Audit of SEMATECH's 
             Financial Statements for 1994
      DATE:  08/08/95
   SUBJECT:  Financial statement audits
             Internal controls
             Advance funding
             Defense industry
             Auditing standards
             Accounting procedures
             Financial records
             Electronic equipment industry

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


Report to Congressional Committees

August 1995

FINANCIAL AUDIT - REVIEW OF THE
AUDIT OF SEMATECH'S FINANCIAL
STATEMENTS FOR 1994

GAO/AIMD-95-168

Sematech Financial Audit for 1994


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


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


B-261197

August 8, 1995

The Honorable Strom Thurmond
Chairman
The Honorable Sam Nunn
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Floyd Spence
Chairman
The Honorable Ronald V.  Dellums
Ranking Minority Member
Committee on National Security
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 seventh 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,
1994. 


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


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

Price Waterhouse's opinion, dated January 26, 1995, stated that
SEMATECH's 1994 financial statements are fairly presented in all
material respects in conformity with generally accepted accounting
principles.  Also, as required by 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 to SEMATECH making a
recommendation to improve documentation over off-site assets.  This
issue, although not material with respect to the 1994 financial
statements, was 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 1994 financial statements, its report on
internal control structure, or its report on compliance with laws and
regulations cannot be relied upon.  However, based on our review we
noted the need for enhanced disclosure in the financial statements
with respect to matters pertaining to (1) government agency funding,
(2) member company funding, and (3) investments. 

Specifically, we believe that SEMATECH should have disclosed its July
15, 1994, public announcement of its intent not to seek government
funding after December 31, 1996, and the effect that this significant
funding reduction would have on its operations and financial
condition.  We also believe that more details should have been
provided on the effect that advance notices of resignation by several
consortium members may have on member company funding.  Finally, we
believe that further details should have been provided on the amounts
and composition of funding provided and planned for investments. 

We suggest that Price Waterhouse discuss as a matter of emphasis in
its opinion on SEMATECH's 1995 financial statements the potential
effects that the loss of funding resulting from (1) the intent not to
seek government funding after December 31, 1996, and (2) several
consortium members' notice of intent to resign will have on
SEMATECH's operations and financial condition. 

We have provided SEMATECH's Chief Financial Officer and Price
Waterhouse with letters containing more detailed discussion of the
above matters for enhanced disclosure in notes to SEMATECH's future
financial statements (See GAO/AIMD-95-164R). 


   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, through appropriations made to the Advanced Research
Projects Agency, has granted SEMATECH about $90 million annually for
fiscal years 1994 and 1995, and about $100 million annually for
fiscal years 1988 through 1993. 

The act also required the Secretary of Defense to enter into a
memorandum of understanding with SEMATECH.  As required by the act,
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. 

Our review considered (1) the extent to which SEMATECH has ensured
that member company funding was not less than 50 percent of the cost
of research and development activities and (2) the accuracy and
completeness of the financial audit conducted by the independent,
commercial auditor. 


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

To determine the extent of the funding match, we examined SEMATECH's
1994 financial statements and related notes and compared the amounts
funded by the consortium members, plus interest earned and less any
unallowable costs, to amounts funded by federal and state
governments. 

To determine the accuracy and completeness of the independent,
commercial audit conducted by Price Waterhouse, 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 auditors' opinion on the financial
     statements and internal control structure and compliance
     reports. 

We conducted our review of the Price Waterhouse audit of SEMATECH's
1994 financial statements in April 1995 in accordance with generally
accepted government auditing standards.  This report does not include
a copy of the 1994 financial statements because they contain
proprietary information. 


   ENTITY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :4

A draft of this report was discussed with SEMATECH's Chief Financial
Officer and the Price Waterhouse Engagement Partner on the 1994
SEMATECH audit.  They agreed to consider the applicability of our
suggestions for enhanced disclosure when preparing SEMATECH's 1995
financial statements and during the subsequent audit of those
statements.  We believe that this agreement is responsive to our
comments. 


---------------------------------------------------------- Letter :4.1

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

Financial Audit:  Review of the Audit of SEMATECH's Financial
Statements for 1993 (GAO/AIMD-94-163, Aug.  29, 1994). 

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). 


*** End of document. ***