National Aeronautics and Space Administration: Leadership and	 
Systems Needed to Effect Financial Management Improvements	 
(20-MAR-02, GAO-02-551T).					 
								 
In fiscal years 1996 to 2000, the National Aeronautics and Space 
Administration (NASA) was one of the few agencies that received  
an unqualified opinion on its financial statements and was in	 
substantial compliance with the Federal Financial Management	 
Improvement Act (FFMIA). This implied that NASA could generate	 
reliable information for annual external financial reporting and 
could provide accurate, reliable information for day-to-day	 
decision-making. In contrast with the unqualified or "clean"	 
audit opinions of its previous auditor, Arthur Andersen, NASA's  
new independent auditor, PricewaterhouseCoopers, disclaimed an	 
opinion on the agency's fiscal year 2001 financial statements	 
because of significant internal control weaknesses.		 
PricewaterhouseCoopers also concluded that NASA's financial	 
management systems do not substantially comply with the 	 
requirements of FFMIA. Modernizing NASA's financial management	 
system is essential to providing accurate, useful information for
external financial reporting as well as internal management	 
decision-making. NASA is working on an integrated financial	 
management system that it expects to have fully operational in	 
fiscal year 2006 at an estimated cost of $475 million. This is	 
NASA's third attempt to implement a new financial management	 
system. The first two efforts were abandoned after 12 years and  
$180 million. Given the high stakes involved, NASA's leadership  
must provide the necessary direction, oversight, and sustained	 
attention to ensure that this project is successful.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-551T					        
    ACCNO:   A02915						        
  TITLE:     National Aeronautics and Space Administration: Leadership
and Systems Needed to Effect Financial Management Improvements	 
     DATE:   03/20/2002 
  SUBJECT:   Financial management				 
	     Financial management systems			 
	     Internal controls					 
	     Reporting requirements				 
	     Strategic planning 				 
	     Financial statement audits 			 
	     Auditors						 
	     Noncompliance					 
	     NASA General Ledger Accounting System		 
	     NASA International Space Station Program		 
	     GAO High Risk Series				 

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GAO-02-551T
     
United States General Accounting Office

GAO Before the Subcommittee on Government Efficiency, Financial Management
and Intergovernmental Relations, Committee on Government Reform, House of
Representatives

For Release on Delivery Expected at 10 a.m. Wednesday, March 20, 2002

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

Leadership and Systems Needed to Effect Financial Management Improvements

Statement of Gregory D. Kutz,
Director, Financial Management and Assurance and
Allen Li, Director Acquisition and Sourcing Management

GAO-02-551T

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to discuss the financial management challenges
facing the National Aeronautics and Space Administration (NASA).

My testimony today will focus on our recent work related to NASA's financial
management difficulties and its attempts to implement an integrated
financial management system. Although we have not performed a comprehensive
review of NASA's financial management systems or information since fiscal
year 1993,1 in response to legislative mandates and requests of other
interested committees we have performed work and issued several reports2
that specifically address the issues included in my testimony today. My
statement today is drawn from the findings and conclusions in those reports,
which include detailed information on our scope and methodology. Also, as
you have requested, my statement will address the results of this year's
financial statement audit for which the auditor's opinion is a marked
departure from the previous 5 years.

For the past 5 years NASA was one of the few agencies to be judged by its
auditors as meeting all of the federal financial reporting requirements-an
unqualified opinion on its financial statements, no material internal
control weaknesses, and financial management systems that are in substantial
compliance the requirements of the Federal Financial Management Improvement
Act (FFMIA). This implied that NASA not only could generate reliable
information once a year for external financial reporting purposes but also
could provide accurate, reliable information for day-to-day decision-making.

In contrast with the unqualified or "clean" audit opinions of its previous
auditor, Arthur Andersen, for fiscal years 1996 through 2000, NASA's new

Summary

1Financial Management: NASA's Financial Reports Are Based on Unreliable Data
(GAO/AFMD-93-3, October 29, 1992) and NASA's FMFIA Assertions and CFO Plan
(GAO/AFMD-93-65R, June 11, 1993).

2NASA: Compliance with Cost Limits Cannot Be Verified (GAO-02-504R, To be
issued), NASA: International Space Station and Shuttle Support Cost Limits
(GAO-01-1000R, August 31, 2001), Financial Management: Misstatement of
NASA's Statement of Budgetary Resources (GAO-01-438, March 30, 2001), and
Major Management Challenges and Program Risks: National Aeronautics and
Space Administration (GAO-01-258, January 2001).

independent auditor, PricewaterhouseCoopers, disclaimed an opinion on the
agency's fiscal year 2001 financial statements because of significant
internal control weaknesses. PricewaterhouseCoopers also concluded that
NASA's financial management systems do not substantially comply with the
requirements of FFMIA.

Although the auditor's report draws attention to the issue, NASA's financial
management difficulties are not new. NASA has been on GAO's High-Risk list3
for contract management since 1990, in part, because the agency has failed
to successfully implement a modern, integrated financial management system,
which is central to producing accurate and reliable financial information
needed to support contract management.

Further, about a year and a half ago, congressional staff members found a
$644 million misstatement in NASA's fiscal year 1999 financial statements-an
error not previously detected by NASA or its auditor. As we reported in
March 2001, this error resulted because NASA's systems could not produce the
budgetary data required by federal accounting standards; instead, the agency
was relying on an ad hoc, year-end data call from its 10 reporting units and
the aggregation of data using a computer spreadsheet. Based on our work, we
questioned NASA management's and Arthur Andersen's determination that the
agency's systems substantially complied with the requirements of FFMIA.
FFMIA builds on previous financial management reform legislation by
emphasizing the need for agencies to have systems that can generate timely,
accurate, and useful information with which to make informed decisions and
to ensure accountability on an ongoing basis. We also reported that Arthur
Andersen's work did not meet professional audit standards in the area we
reviewed and that the auditors did not perform sufficient work to render
opinions on the fiscal year 1999 NASA budgetary financial statements. Arthur
Andersen and the NASA Inspector General disagreed with our findings and
conclusions.

Our recent work on the International Space Station continues to highlight
NASA's financial management difficulties. In response to a legislative
mandate, we have been attempting for almost a year to validate the amounts
that NASA has reported to the Congress as obligated against statutory space
station and related shuttle support cost spending limits. After a protracted
effort, NASA has acknowledged that it is unable to

3High Risk Series: NASA Contract Management (GAO-HR-93-11, December 1992).

provide the detailed obligation data needed to support amounts reported to
the Congress against the spending limits. This is the same problem that
NASA's current financial auditors, PricewaterhouseCoopers, faced in
attempting to audit NASA's fiscal year 2001 financial statements.
Specifically, according to the auditor's report, NASA was unable to provide
sufficient documentation to support obligation and expense transactions and
certain transaction-level cost allocations that had been selected by the
auditor for testing.

We also found that NASA was not able to provide support for the actual cost
of completed space station components-either in total or by subsystems or
elements. As we reported in August 2001, NASA does not track the actual
costs of completed space station components even though it often estimates
the cost of these components for planning and budgeting purposes. As a
result, NASA cannot examine its cost estimates for validity by comparing
actuals to estimates after costs have been realized. Further, we found that
the $8 billion of capitalized space station equipment reported in NASA's
fiscal year 2000 financial statements was not based on actual costs incurred
but instead was based primarily on cost estimates. Similarly, NASA's fiscal
year 2001 financial statement audit revealed that NASA did not have
sufficient documentary evidence for the auditors to determine the accuracy
and completeness of amounts capitalized as space station costs.

It has become increasingly clear that modernizing NASA's financial
management system is essential to providing accurate, useful financial
information for external financial reporting as well as internal management
decision-making. To its credit, NASA is working toward implementing an
integrated financial management system that it expects to be fully
operational in fiscal year 2006 at an estimated cost of $475 million. This
is NASA's third attempt to implement a new financial management system. The
first two efforts were abandoned after 12 years and after spending $180
million. Given the high stakes involved, it is critical that NASA's
leadership provide the necessary direction, oversight, and sustained
attention to ensure that this project is successful. In this regard, NASA's
new Administrator comes to the position with a strong management background
and expertise in financial management. Based on our discussions with the
Administrator, he has made clear that he plans to make financial management
a top priority.

Financial Audit Results

NASA's Financial Management Difficulties Are Not New

After five years of receiving an unqualified opinion on its financial
statements, on February 22, 2002, NASA's new independent auditor4 disclaimed
an opinion on the agency's fiscal year 2001 financial statements.
Specifically, the audit report states that NASA was unable to provide the
detailed support needed to determine the accuracy of the agency's reported
obligations, expenses, property, plant, and equipment, and materials for
fiscal year 2001. According to the report, each of NASA's 10 centers uses a
different financial management system-each of which has multiple feeder
systems that summarize individual transactions on a daily or monthly basis.
Financial information from the centers may be summarized more than once
before it is uploaded into NASA's General Ledger Accounts System (GLAS). The
successive summarization of data through the various systems impedes NASA's
ability to maintain an audit trail through the summary data to the detailed
transaction-level source documentation. Current OMB and GAO guidance on
internal control requires agencies to maintain transaction-level
documentation and to make the transaction-level documentation readily
available for review. NASA was unable to provide sufficient
transaction-level documentation to support certain obligation and expense
transactions and certain transaction-level cost allocations that the
auditors had selected for testing.

In addition, the fiscal year 2001 audit report identifies a number of
significant internal control weaknesses related to accounting for space
station material and equipment and to computer security. The report also
states that NASA's financial management systems do not substantially comply
with federal financial management systems requirements and applicable
federal accounting standards.

While the fiscal year 2001 auditor's report draws attention to the issue,
NASA's financial management difficulties are not new. The weaknesses
discussed in the auditor's report are consistent with the findings discussed
in our previous reports. We have reported on NASA's contract management
problems, misstatement of its Statement of Budgetary Resources, lack of
detailed support for amounts reported against certain cost limits, and lack
of historical cost data for accurately projecting future cost.

4PricewaterhouseCoopers replaced Arthur Andersen LLP as NASA's independent
auditor for its fiscal year 2001 financial statements. NASA received
unqualified opinions on its financial statements for fiscal years 1996
through 2000 from its previous auditor.

Long-standing Problems With Contract Management

We first identified NASA's contract management as an area at high risk in
1990 because of vulnerabilities to waste, fraud, abuse, and mismanagement.
Specifically, we found that NASA lacked effective systems and processes for
overseeing contractor activities and did not emphasize controlling costs.
While NASA has made progress in managing many of its procurement practices,
little progress has been made in correcting the financial system
deficiencies that prevent NASA from effectively managing and overseeing its
procurement dollars. As a result, contract management remains an area of
high risk.

The agency's financial management systems environment is much the same as it
was in 1993, the last time we performed comprehensive audit work in that
area. It is comprised of decentralized, nonintegrated systems with policies,
procedures, and practices that are unique to each of its 10 centers. For the
most part, data formats are not standardized, automated systems are not
interfaced, and on-line financial information is not readily available to
program managers. As a result, NASA cannot ensure that contracts are being
efficiently and effectively implemented and budgets are executed as planned.

Misstatement of NASA's Fiscal Year 1999 Statement of Budgetary Resource

NASA's long-standing problems in developing and implementing integrated
financial management systems contributed to a $644 million misstatement in
NASA's fiscal year 1999 Statement of Budgetary Resources (SBR), which we
discussed in our March 2001 report.5 This error was not detected by NASA
Chief Financial Officer (CFO) personnel or by its auditor, Arthur Andersen.
Instead, the House Committee on Science discovered the discrepancy in
comparing certain line items in the NASA SBR to related figures in the
President's Budget.

NASA used an ad hoc process involving a computer spreadsheet to gather the
information needed for certain SBR line items because the needed data were
not captured by NASA's general ledger systems. Because each of NASA's 10
reporting units maintained different accounting systems, none of which were
designed to meet FFMIA requirements, it was left up to the units to
determine how best to gather the requested data. This cumbersome,
time-consuming process ultimately contributed to the misstatement of NASA's
SBR. The SBR is intended to provide information on an agency's use of
budgetary resources provided by the Congress. If

5GAO-01-438

reliable, the SBR can provide valuable information for management and
oversight purposes to assess the obligations related to prior-year agency
activities and to make decisions about future funding.

Based on this work, we questioned NASA management's and its auditor's
determination that NASA's systems were in substantial compliance with the
requirements of FFMIA. As I mentioned earlier, and it bears repeating, FFMIA
builds on previous financial management reform legislation by emphasizing
the need for agencies to have systems that can generate timely, accurate,
and useful information with which to make informed decisions and to ensure
accountability on an ongoing basis. This is really the end goal of financial
management reforms. In particular, we questioned whether NASA complied with
the federal financial management systems requirements for using integrated
financial management systems.6

NASA Lacks Detailed Support for Amounts Reported Against Cost Limits

NASA's financial management problems were also highlighted in our effort to
verify amounts NASA reported to the Congress against legislatively imposed
spending limits on its International Space Station and Space Shuttle
programs. Since NASA began the current program to build the space station,
the program has been characterized by a series of schedule delays, reduction
in space station content and capabilities, and a substantial development
cost overrun. In February 2001, NASA revealed that the program faced a $4
billion cost overrun that would raise the cost of constructing the space
station to $28 billion to $30 billion, 61 percent to 72 percent above the
original 1993 estimate.

In part to address concerns regarding the escalating space station costs,
section 202 of the National Aeronautics and Space Administration
Authorization Act for Fiscal Year 2000 (P.L. 106-391), establishes general
cost limitations on the International Space Station and Space Shuttle
programs. The act requires that NASA, as part of its annual budget request,
update the Congress on its progress by (1) accounting for and reporting
amounts obligated against the limitations to date, (2) identifying the

6According to OMB Circular A-127, Financial Management Systems, each agency
must establish and maintain a single, integrated financial management system
that is a unified set of financial systems that are planned for and managed
together, operated in an integrated fashion, and linked together
electronically in an efficient and effective manner to provide agencywide
financial system support necessary to carry out an agency's mission and
support its financial management needs.

amount of budget authority requested for the future development and
completion of the space station, and (3) arranging for the General
Accounting Office to verify the accounting submitted to the Congress

It was our intention to verify NASA's accounting for the space station and
shuttle limits by testing the propriety of charges to various agency
programs to ensure that all obligations charged to the space station and
shuttle programs were appropriate and that no space station or shuttle
obligations were wrongly charged to other programs. However, NASA was unable
to provide the detailed obligation data needed to support amounts reported
to the Congress against the space station and shuttle program cost limits.
NASA's inability to provide detailed data for amounts obligated against the
limits is again due to its lack of a modern, integrated financial management
system. As I mentioned earlier, NASA's 10 centers operate with
decentralized, nonintegrated systems and with policies, procedures, and
practices that are unique to each center. Consequently, the systems have
differing capabilities with respect to providing detailed obligation data.
According to NASA officials, only 5 of its 10 centers are able to provide
complete, detailed support for amounts obligated during fiscal years 1994
though 2001-the period in which NASA incurred obligations related to the
limits. In fact, at one center, detailed obligation data are not available
for even current-year obligations.

Historical Cost Data Needed to Accurately Project Future Costs

As part of our effort to verify NASA accounting for the space station and
shuttle cost limits, we also found that NASA was not able to provide support
for the actual cost of completed space station components- either in total
or by subsystems or elements. For example, NASA cannot identify the actual
costs of individual space station components such as Unity (Node 1) or
Destiny (U.S. Lab). Although in its audited fiscal year 2000 financial
statements, NASA capitalized the cost of Unity, Destiny, and other items in
orbit or awaiting launch at about $8 billion, according to

NASA officials, these amounts are based primarily on cost estimates, not
actual costs.7

NASA officials stated that its accounting systems were designed prior to the
implementation of current federal cost accounting standards and financial
systems standards that require agencies to track and maintain cost data
needed for management activities, such as estimating and controlling costs,
performance measurement, and making economic trade-off decisions. As a
result, NASA's systems do not track the cost of individual space station
subsystems or elements. According to NASA officials, the agency manages and
tracks space station costs by contract and does not need to know the cost of
individual subsystems or elements to effectively manage the program. To the
contrary, we found that NASA estimates potential and probable future program
costs to determine the impact of canceling, deferring, or adding space
station content. These cost estimates often identify the cost of specific
space station subsystems. However, because NASA does not attempt to track
costs by element or subsystems, the agency does not know the actual cost of
completed space station components and is not able to reexamine its cost
estimates for validity once costs have been realized. We continue to believe
that NASA needs to collect, maintain, and report the full cost of individual
subsystems and hardware so that NASA can make valid comparisons between
estimates and final costs and so that the Congress can hold NASA accountable
for differences between budgeted and actual costs.

Transformation of the Finance Organization Needed To Reap the Full Benefit
of New System

Modernizing NASA's financial management system is essential to providing
timely, relevant, and reliable information needed to manage cost, measure
performance, make program-funding decisions, and analyze outsourcing or
privatization options. However, technology alone will not solve NASA's
financial management problems. The key to transforming NASA's financial
management organization into a customer-focused partner in program results
hinges on the sustained leadership of NASA's top executives. As we found in
our study of leading private sector and

7Expenditures that are expected to benefit more than one accounting period
are considered capital expenditures and are to be reported on the statement
of financial position as capital assets. NASA capitalized $2.5 billion for
completed space station assets orbiting the earth and $5.4 billion for
completed contractor-held assets that are at the launch site, for a total of
$8 billion. Completed assets at the launch site are reported in NASA's
financial statements as contractor-held work in process. However, NASA was
not able to categorize the $5.4 billion by space station versus other
programs. Therefore, $8 billion represents the maximum amount attributable
to the space station.

state organizations,8 clear, strong executive leadership-combined with
factors such as effective organizational alignment, strategic human capital
management, and end-to-end business process improvement-will be critical for
ensuring that NASA's financial management organization delivers the kind of
analysis and forward-looking information needed to effectively manage NASA's
many complex space programs. Specifically, as discussed in the executive
guide, to reap the full benefit of a modern, integrated financial management
system, NASA must go beyond obtaining an unqualified audit opinion toward
(1) routinely generating reliable cost and performance information and
analysis, (2) undertaking other value-added activities that support
strategic decision-making and mission performance, and (3) building a
finance team that supports the agency's mission and goals.

An independent task force created by NASA to review and assess space station
costs, budget, and management reached a similar conclusion. In its November
1, 2001, report the International Space Station (ISS) Management and Cost
Evaluation (IMCE) Task Force found that the space station program office
does not collect the historical cost data needed to accurately project
future costs and thus perform major program-level financial forecasting and
strategic planning. The task force also reported that NASA's ability to
forecast and plan is weakened by diverse and often incompatible center level
accounting systems and uneven and non-standard cost reporting capabilities.
The IMCE also concluded that the current weaknesses in financial reporting
are a symptom, not a cause, of the problem and that enhanced reporting
capabilities, by way of a new integrated financial management system, will
not thoroughly solve the problem. The root of the problem, according to the
task force, is that finance is not viewed as intrinsic to NASA's program
management decision process. The taskforce concluded that under the current
organizational structure, the financial management function is centered upon
tracking and documenting what "took place" rather than what "could and
should take place" from an analytical cost planning standpoint.

NASA has cited deficiencies with its financial management system as a
primary reason for not having the necessary data required for both internal

8U.S. General Accounting Office, Executive Guide: Creating Value Through
World-class Financial Management, GAO/AIMD-00-134 (Washington, D.C.: Apr.
2000). Our executive guide was based on practices used by nine leading
organizations-Boeing, Chase Manhattan Bank, General Electric, Pfizer,
Hewlett-Packard, Owens Corning, and the states of Massachusetts, Texas and
Virginia.

management and external reporting purposes. To its credit, NASA recognizes
the urgency of successfully implementing an integrated financial management
system. The stakes are particularly high, considering this is NASA's third
attempt since 1988 to implement a new system. The first two attempts were
abandoned after 12 years and after spending about $180 million. NASA expects
to complete the current systems effort by 2006 at a cost of $475 million.

The President's Management Agenda includes improved financial management
performance as one of his five governmentwide management goals. In addition,
in August 2001, the Principals of the Joint Financial Management Improvement
Program-the Secretary of the Treasury, the Director of the Office of
Management and Budget, the Director of the Office of Personnel Management,
and the Comptroller General-began a series of quarterly meetings that marked
the first time all four of the Principals had gathered together in over 10
years. To date, these sessions have resulted in substantive deliberations
and agreements focused on key issues such as better defining measures for
financial management success. These measures include being able to routinely
provide timely, reliable, and useful financial information and having no
material internal control weaknesses.

Our experience has shown that improvements in several key elements are
needed for NASA to effectively address the underlying causes of its
financial management challenges. These elements, which will be key to any
successful approach to financial management reform, include:

* addressing NASA's financial management challenges as part of a
comprehensive, integrated, NASA-wide business process reform;

* providing for sustained leadership by the Administrator to implement
needed financial management reforms;

* establishing clear lines of responsibility, authority, and accountability
for such reform tied to the Administrator;

* incorporating results-oriented performance measures and monitoring tied to
financial management reforms;

* providing appropriate incentives or consequences for action or inaction;

* establishing an enterprisewide system architecture to guide and direct
financial management modernization investments; and

* ensuring effective oversight and monitoring.

In this regard, NASA's new Administrator comes to the position with a strong
management background and expertise in financial management.

Based on  our discussions with the Administrator, he  has made clear that he
plans to make financial management a top priority.

Mr. Chairman and Members of the Subcommittee, this concludes my prepared
statement. I would be pleased to respond to any questions that you or other
members of the Subcommittee may have.

Contacts and For further information regarding this testimony, please
contact Gregory D. Kutz at (202) 512-9095 or [email protected], or Allen Li at
(202) 512-3600 Acknowledgments or [email protected]. Individuals making key
contributions to this testimony included Molly Boyle, Francine DelVecchio,
and Diane Handley.
*** End of document. ***