Financial Audit: Review of the Audit of SEMATECH's Financial Statements
for 1995 (Letter Report, 09/30/96, GAO/AIMD-96-163).

Pursuant to a legislative requirement, GAO reviewed the financial audit
statements of SEMATECH, Inc., for the year ending December 31, 1995.

GAO found that: (1) the SEMATECH 1995 financial statements conformed
with generally accepted accounting principles; (2) there were no
material internal control weaknesses or noncompliance with laws and
regulations; (3) there was no indication that the auditor's opinion
could not be relied upon; and (4) SEMATECH enhanced its disclosure of
government agency funding and investments in notes to its 1995 financial
statements.

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

 REPORTNUM:  AIMD-96-163
     TITLE:  Financial Audit: Review of the Audit of SEMATECH's 
             Financial Statements for 1995
      DATE:  09/30/96
   SUBJECT:  Financial statement audits
             Internal controls
             Advance funding
             Defense industry
             Information disclosure
             Auditing standards
             Accounting procedures
             Non-government enterprises
             Financial records

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


Report to Congressional Committees

September 1996

FINANCIAL AUDIT - REVIEW OF THE
AUDIT OF SEMATECH'S FINANCIAL
STATEMENTS FOR 1995

GAO/AIMD-96-163

SEMATECH Financial Audit for 1995

(918858)


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

  GAO - xx
  SEMATECH - xx

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


B-274419

September 30, 1996

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, our eighth 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, 1995. 


--------------------
\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, 1996, stated that
SEMATECH's 1995 financial statements are fairly presented in all
material respects in conformance 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 did not issue a management letter, as it had no issues to
report. 

We found no indication during our review that Price Waterhouse's
opinion on SEMATECH's 1995 financial statements, its report on
internal control structure, or its report on compliance with laws and
regulations cannot be relied upon. 

We noted that SEMATECH enhanced its disclosure of government agency
funding and investments in notes to its 1995 financial statements,
which we provided for their consideration in last year's review.\2
The notes indicate that $39 million was appropriated by the Congress
to SEMATECH for 1996.  However, funds are appropriated to the
Department of Defense in a lump sum that is available for grants to
SEMATECH.  Subsequent to the preparation of SEMATECH's financial
statements, Defense made $84.6\3 million available to SEMATECH from
its appropriated funds for the fiscal year ended September 30, 1996. 

Our suggestion for enhanced disclosure concerning the effect that
advance notices of resignation by several consortium members may have
on funding was mitigated during 1995 by (1) a member rescinding its
2-year notice of intent to resign and (2) a member reaffirming its
intent to remain a consortium member. 

Price Waterhouse also evaluated our suggestion from last year's
review that it discuss as a matter of emphasis the potential effects
on SEMATECH's operations and financial condition of a loss of funding
resulting from (1) SEMATECH's intent not to seek government funding
after December 31, 1996, and (2) several members' notices of intent
to resign.  During 1995, SEMATECH finalized its 5-year plan to
continue operations without government funding through higher levels
of member funding and lower levels of expenditures.  The plan, which
was approved by its membership board of directors, included personnel
reductions from 750 to 600 by March 31, 1996.  These events, coupled
with the changes in member advance notices of intent to resign as
discussed above, mitigated the need for a matter of emphasis
paragraph in the report on SEMATECH's 1995 financial statements. 


--------------------
\2 Financial Audit:  Review of the Audit of SEMATECH's Financial
Statements for 1994 (GAO/AIMD-95-168, Aug.  8, 1995). 

\3 An additional $4.4 million was withheld for administrative costs
by the Advanced Research Project Agency. 


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

SEMATECH was incorporated in Delaware in August 1987 as a nonprofit
membership 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.  In April 1988, the Secretary of Defense
delegated responsibility for overseeing SEMATECH to the Advanced
Research Project Agency, which granted SEMATECH about $90 million
annually for fiscal years 1994 through 1996, and about $100 million
annually from fiscal years 1988 through 1993. 

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. 

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 funding match, we examined SEMATECH's 1995
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 auditor used, (3)
     whether a review was conducted of SEMATECH's internal control
     structure, (4) whether the auditor tested 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
1995 financial statements in May 1996 in accordance with generally
accepted government auditing standards.  We discussed the results of
our review with cognizant Price Waterhouse, SEMATECH, and Defense
officials.  This report does not include a copy of SEMATECH's 1995
financial statements because they contain proprietary information. 


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

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. 

Lisa G.  Jacobson
Director, Defense Financial Audits

RELATED GAO PRODUCTS

Financial Audit:  Review of the Audit of SEMATECH's Financial
Statements for 1994 (GAO/AIMD-95-168, Aug.  8, 1995). 

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. ***