Business Modernization: NASA's Integrated Financial Management	 
Program Does Not Fully Address Agency's External Reporting Issues
(21-NOV-03, GAO-04-151).					 
                                                                 
In April 2000, the National Aeronautics and Space Administration 
(NASA) began its Integrated Financial Management program (IFMP), 
its third attempt at modernizing its financial management	 
processes and systems. In April 2003, GAO reported that NASA's	 
acquisition strategy has increased the risk that the agency will 
implement a system that will cost more and do less than planned. 
This report is one of a series of reviews of NASA's acquisition  
and implementation of IFMP, and focuses on the core financial	 
module's ability to provide the information necessary for	 
external financial reporting.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-151 					        
    ACCNO:   A08914						        
  TITLE:     Business Modernization: NASA's Integrated Financial      
Management Program Does Not Fully Address Agency's External	 
Reporting Issues						 
     DATE:   11/21/2003 
  SUBJECT:   Accounting procedures				 
	     Accounting standards				 
	     ADP procurement					 
	     Computer software verification and 		 
	     validation 					 
                                                                 
	     Cost accounting					 
	     Federal procurement				 
	     Financial disclosure				 
	     Financial management systems			 
	     Procurement practices				 
	     NASA Integrated Financial Management		 
	     Program						 
                                                                 

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GAO-04-151

United States General Accounting Office

GAO	Report to the Committee on Commerce, Science, and Transportation,
United

     States Senate, and the Committee on Science, House of Representatives

November 2003

BUSINESS MODERNIZATION

 NASA's Integrated Financial Management Program Does Not Fully Address Agency's
                           External Reporting Issues

                                       a

GAO-04-151

Highlights of GAO-04-151, a report to the Committee on Commerce, Science,
and Transportation, U.S. Senate, and the Committee on Science, House of
Representatives

In April 2000, the National Aeronautics and Space Administration (NASA)
began its Integrated Financial Management program (IFMP), its third
attempt at modernizing its financial management processes and systems. In
April 2003, GAO reported that NASA's acquisition strategy has increased
the risk that the agency will implement a system that will cost more and
do less than planned. This report is one of a series of reviews of NASA's
acquisition and implementation of IFMP, and focuses on the core financial
module's ability to provide the information necessary for external
financial reporting.

GAO is recommending that NASA (1) identify all areas that are not
compliant with the Federal Financial Management Improvement Act (FFMIA) of
1996 and (2) develop an implementation plan for addressing those areas and
incorporating them into IFMP, including the need for reengineering some
processes, such as the cost and other information that it requires from
contractors. This plan should include time frames and details on how any
changes will be monitored, tested, and documented. NASA disagreed with
GAO's recommendations, saying that the report did not reflect IFMP's most
recent progress. GAO considered recent IFMP progress and reaffirmed its
position.

www.gao.gov GAO-04-151

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gregory D. Kutz at (202)
512-9095 or [email protected].

November 2003

BUSINESS MODERNIZATION

NASA's Integrated Financial Management Program Does Not Fully Address Agency's
External Reporting Issues

The core financial module of IFMP provides NASA its first agencywide
accounting system-a significant improvement over the 10 disparate systems
previously used. However, to meet IFMP's aggressive implementation
schedule, NASA deferred testing and implementation of many key
requirements of the core financial module. Consequently, when NASA
announced, in June 2003, that this module was fully operational at each of
its 10 centers, about two-thirds of the financial events or transaction
types needed to carry out day-to-day operations and produce external
financial reports had not been implemented in the module. NASA officials
acknowledged that, as part of their implementation strategy, they had not
yet converted the module to support full-cost accounting. In addition, we
found that NASA also deferred implementation of other key core financial
module capabilities. Because NASA did not use disciplined processes for
defining, managing, and testing key system requirements, or substantially
reengineer its business processes prior to implementation, the core
financial module, as implemented in June 2003, does not address several
long-standing external reporting issues and has created some new problems.

o  	Long-standing external financial reporting issues have not been
addressed. NASA has not used its implementation of the core financial
module as an opportunity to drive needed changes in its management
practices and business processes. Therefore, the system does little to
address NASA's ability to properly account for $37 billion of reported
property or certain aspects of the agency's $15 billion annual budget.

o  	New financial reporting problems have emerged. NASA went forward with
its aggressive implementation plans even though agency managers knew of
problems with the module's ability to properly process and record certain
transactions. As a result, the module does not appropriately capture
critical information on the cost of NASA's operations, such as certain
accrued costs, accounts payable, and obligation transactions.

In April 2003, GAO reported that the core financial module did not address
key internal management information requirements. Now, GAO has found that
the module cannot reliably provide key financial data needed for external
financial reporting. Although NASA intends to address many of these
issues, its implementation approach raises concerns over its ability to do
so. These deferred external reporting capabilities, combined with the
findings from our April 2003 report, indicate that NASA's June 2003 core
financial module and related systems do not substantially comply with the
requirements of FFMIA. FFMIA addresses the need for agencies' financial
systems to provide value to those who use financial data. NASA must
address these issues if the core financial module and IFMP are to achieve
the objective of providing reliable, timely financial information for both
internal management decision-making and external reporting purposes.

Contents

  Letter

Results in Brief
Background
Schedule-driven Approach Limits Transaction Processing

Capabilities Long-standing External Reporting Issues Not Addressed NASA'S
Implementation of IFMP Has Created New Reporting

Problems Core Financial Module Does Not Substantially Comply

With FFMIA Conclusion Recommendations Agency Comments and Our Evaluation

1 3 5

9 11

15

17 21 22 22

Appendixes

Appendix I: Objective, Scope, and Methodology 30

Appendix II:	Comments From the National Aeronautics and Space
Administration 32

Appendix III:	GAO Contact and Staff Acknowledgments 38 GAO Contact 38
Acknowledgments 38

Abbreviations

FASAB Federal Accounting Standards Advisory Board
FFMIA Federal Financial Management Improvement Act
FFMSR Federal Financial Management System Requirements
IFMP Integrated Financial Management Program
JFMIP Joint Financial Management Improvement Program
NASA National Aeronautics and Space Administration
OMB Office of Management and Budget
PP&E Property, Plant, and Equipment
SFFAC Statement of Federal Financial Accounting Concepts
SFFAS Statement of Federal Financial Accounting Standards
SGL U.S. Government Standard General Ledger

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States General Accounting Office Washington, D.C. 20548

November 21, 2003

The Honorable John McCain

Chairman

The Honorable Ernest F. Hollings

Ranking Minority Member

Committee on Commerce, Science, and Transportation United States Senate

The Honorable Sherwood L. Boehlert
Chairman
The Honorable Ralph M. Hall
Ranking Minority Member
Committee on Science
House of Representatives

For years, the National Aeronautics and Space Administration (NASA) has
cited deficiencies with its financial management systems as a primary
reason for not having the necessary data required to oversee its
contractors, accurately account for the full cost of its operations, and
efficiently produce accurate and reliable information needed for both
management decision-making and external reporting purposes.
Recognizing the importance of successfully implementing an integrated
financial management system, in April 2000, NASA began an effort known
as the Integrated Financial Management Program (IFMP). When
completed, IFMP is planned to consist of nine modules1 that will support a
range of financial, administrative, and functional areas. On June 23,
2003,
NASA announced that the core financial module-considered the
backbone of IFMP-was fully operational at each of NASA's 10 centers.
The core financial module is intended to provide NASA's financial and
program managers with timely, consistent, and reliable cost and
performance information for management decisions and external financial
reporting.

NASA has made two efforts in the recent past to improve its financial
management processes and systems but both of these efforts were

1The nine modules will consist of core financial, resume management,
travel management, position description management, human resources,
Erasmus, budget formulation, contract administration, and asset
management.

eventually abandoned after spending a total of 12 years and a reported
$180 million. Given the importance of NASA's current effort, you asked us
to assess the program. In April 2003, we issued our first report on IFMP
to alert you to concerns we had, based on our work to date. In that
report, we provided you with, among other things, our assessment of the
core financial module's ability to satisfy NASA's internal management
decisionmaking needs.

As agreed, we continued our review of IFMP in three areas to assess: (1)
whether NASA has been acquiring and implementing IFMP in the context of an
enterprise architecture, (2) the extent to which the core financial module
will address NASA's external reporting requirements, and (3) NASA's
life-cycle cost estimate and schedule for IFMP. We are responding to the
first and third issues in separate reports,2 and we have summarized our
findings on all three issues in a summary report.3 This report addresses
the second issue-the extent to which the core financial module, as
completed in June 2003, will satisfy NASA's key external reporting
requirements. Specifically, we assessed whether the core financial module,
as of June 2003, provides the functionality needed to (1) accurately
account for property, plant, and equipment (PP&E) and material, (2)
properly account for the full cost of NASA's projects and programs, (3)
capture and report certain key budgetary information, (4) accurately
record accounts payable, and (5) comply substantially with the
requirements of the Federal Financial Management Improvement Act (FFMIA)
of 1996.4 FFMIA emphasizes the need for agencies to be able to provide
financial management information, including cost information, for
measuring the results of program performance on an ongoing basis. FFMIA
also requires that an agency's independent auditor report on the ability
of agency financial management systems to comply substantially with these
requirements.

2See U.S. General Accounting Office, Business Modernization: Disciplined
Processes Needed to Better Manage NASA's Integrated Financial Management
Program, GAO-04-118 (Washington, D.C.: Nov. 21, 2003). Also, see U.S.
General Accounting Office, Information Technology: Architecture Needed to
Guide NASA's Financial Management Modernization, GAO-04-43 (Washington,
D.C.: Nov. 21, 2003).

3See U.S. General Accounting Office, Business Modernization: NASA
Challenges in Managing Its Integrated Financial Management Program,
GAO-04-255 (Washington, D.C.: Nov. 21, 2003).

431 U.S.C. 3512 note (2000) (Federal Financial Management Improvement).

We performed our work from April 2003 through September 2003 in accordance
with generally accepted government auditing standards. Details on our
objective, scope, and methodology are in appendix I.

Results in Brief 	Although NASA has met its core financial module's
implementation schedule, the system, as implemented in June 2003, does not
provide many key external financial reporting capabilities. In fact, when
NASA announced, in June 2003, that the core financial module was fully
operational at each of its 10 centers, about two-thirds of the financial
events or transaction types needed to carry out day-to-day financial
operations and produce external financial reports had not been
implemented. At that time, NASA officials acknowledged that, as part of
their implementation strategy, they had not yet converted the system to
support full-cost accounting. However, because NASA did not use
disciplined processes for defining, managing, and testing system
requirements or substantially reengineer its business processes prior to
implementation, we found that NASA also deferred implementation of other
key core financial module capabilities. Key core financial module
capabilities deferred for these reasons include (1) capturing, recording,
and accounting for PP&E and material and (2) making adjustments to prior
year obligations. In addition, NASA's implementation approach has created
new problems in recording certain accrued costs, accounts payable, and
obligation transactions. These deferred external reporting capabilities
and new problems, combined with the findings from our April 2003 report,
indicate that NASA's June 2003 core financial module and related systems
do not substantially comply with the requirements of FFMIA.

According to NASA officials, NASA plans to address most of these problems
between now and 2006 when it expects IFMP to be fully implemented. For
example, after the core financial module's implementation in June 2003,
NASA began designing the agency's new cost allocation structure and
expected that by October 1, 2003, the core financial module would have the
ability to capture the full cost of NASA's programs and projects needed
for external financial reporting purposes. In addition, although past
software upgrades, or "patch" releases, have proven to be unsuccessful,
NASA expected a new patch release to resolve the system problems
associated with budgetary accounting by October 1, 2003.

However, even if the agency's cost allocation structure is in place and
the patch release is successful, NASA has not addressed its most
challenging

external reporting issues-accurately capturing, recording, and accounting
for PP&E and materials and ensuring that its system meets the broader
objectives of federal managerial cost accounting standards. Specifically,
NASA has not reengineered the agency's processes for capturing contract
costs associated with PP&E and material and therefore continues to update
the core financial module using periodic summary-level manual entries.
Although NASA plans to implement an integrated asset management module in
2005, this alone will not ensure that NASA uses transaction-level detail
to update the core financial module and thereby provide independent
control over its property.

Further, as we reported in April 2003, the core financial module does not
provide agency managers or the Congress with useful cost and related
information with which to make informed decisions, manage daily
operations, and ensure accountability on an ongoing basis. Consequently,
the system does not meet the broader objectives of federal managerial cost
accounting standards, which address the need to provide relevant and
reliable information to both managers and the Congress.

We are making recommendations that NASA develop and implement a corrective
action plan to ensure that the agency's financial management systems
comply substantially with the requirements of FFMIA. The plan should
provide a means for ensuring that all user requirements are met, including
the need to reengineer key business processes where necessary.

In written comments, which are reprinted in appendix II, NASA disagreed
with all of our conclusions and recommendations in part because we
reviewed the status of the core financial module as of June 23, 2003
instead of September 30, 2003-the date used for FFMIA reporting. We
conducted our audit as of June 2003 because NASA represented that the core
financial module was fully operational at all of its centers at that time,
acknowledging only that they had not yet converted the system to support
full-cost accounting, but not disclosing many other deferred capabilities.

Moreover, NASA's comments assert that for PP&E and budgetary reporting,
the manual processes or workarounds it has developed to produce yearend
balances for the agency's annual financial statements also satisfy the
requirements of FFMIA. We disagree with this assertion. The development of
significant manual workarounds in these areas masks the fact that NASA's
core financial module is not designed to and cannot produce timely and
reliable PP&E and budgetary data with traceability to transactionbased
support. The ability to produce reliable numbers once a year for

financial reporting purposes does not by itself constitute FFMIA
compliance. In its written comments, NASA indicated that it has made
changes to the module since June and that the core financial module as
implemented in October 2003 has many of the capabilities that were lacking
in the June 2003 module. However, with the possible exception of full-cost
accounting, which was planned for October 1, 2003, NASA acknowledges that
the cited changes involve manual workarounds for producing year-end
numbers. FFMIA goes well beyond producing auditable financial statements
once a year; it requires financial systems that ensure accountability and
accurate data for managerial and reporting purposes on an ongoing basis
throughout the year.

Background	From 1996 through 2000, NASA was one of the few agencies to be
judged by its independent auditor at that time, Arthur Andersen, as
meeting all of the federal financial reporting requirements. That is, NASA
was one of the few agencies to receive an unqualified, or "clean," opinion
on its financial statements, with no material internal control weaknesses
noted, and no indications that its financial management systems were not
in substantial compliance with the requirements of FFMIA.5 FFMIA reflects
the need for agencies to have systems that produce reliable, timely, and
accurate financial information needed for day-to-day decision making by
requiring agencies to implement and maintain financial management systems
that substantially comply with (1) federal financial management systems
requirements,6 (2) the U.S. Government Standard General Ledger (SGL) at
the transaction level,7 and (3) applicable federal accounting

5FFMIA requires auditors to report whether agencies' financial management
systems comply with federal financial management systems requirements,
applicable federal accounting standards (U.S. generally accepted
accounting principles), and the U.S. Standard General Ledger at the
transaction level.

6Policies and standards prescribed for executive agencies to follow in
developing, operating, evaluating, and reporting on financial management
systems are defined in the Office of Management and Budget (OMB) Circular
A-127, Financial Management Systems. These system requirements provide the
framework for establishing integrated financial management systems to
support the partnership between program and financial managers, and ensure
the integrity of information for decision making and measuring
performance.

7The SGL was established by an interagency task force under the direction
of OMB and mandated for use by agencies in OMB and Treasury regulations in
1986. The SGL promotes consistency in financial transaction processing and
reporting by providing a uniform chart of accounts and pro forma
transactions used to standardize federal agencies' financial information
accumulation and processing throughout the year.

standards.8 Thus, the auditor's report implied that NASA could not only
generate reliable information once a year for external financial reporting
purposes but also could provide the kind of information needed for
day-today management decision making.

However, as we and others have reported, the independent auditor's reports
did not provide an accurate picture of NASA's financial management systems
and, instead, failed to disclose pervasive financial management problems
that existed at NASA. For example, we have identified NASA's contract
management function as an area of high risk since 1990 because of NASA's
inability to (1) oversee its contractors and their financial and program
performance, and (2) implement a modern, integrated financial management
system, which is integral to producing accurate and reliable financial
information needed to support contract management.9 Also, in February
2002, NASA's new independent auditor, PricewaterhouseCoopers, further
confirmed NASA's financial management difficulties and disclaimed an
opinion on the agency's fiscal year 2001 financial statements. The audit
report also identified a number of material internal control
weaknesses-primarily regarding PP&E and materials- and stated that,
contrary to previous financial audit reports, NASA's financial management
systems did not substantially comply with FFMIA.

While NASA received an unqualified opinion for its fiscal year 2002
financial statements, these results were achieved only through heroic
efforts on the part of NASA and its auditor and again, the audit report
identified a number of material internal control weaknesses and stated
that NASA's financial management systems did not substantially comply with
FFMIA. To its credit, in April 2000, NASA began an effort known as IFMP.
The schedule for implementing IFMP was originally planned for fiscal year

8In October 1990, the Secretary of the Treasury, the Director of OMB, and
the Comptroller General established the Federal Accounting Standards
Advisory Board (FASAB) to develop a set of generally accepted accounting
standards for the federal government. FASAB promulgates federal accounting
standards that agency Chief Financial Officers use in developing financial
management systems and preparing financial statements.

9At that time, we began a special effort to review and report on the
federal program areas that our work had identified as high risk because of
vulnerabilities to waste, fraud, abuse, and mismanagement. We first issued
our High-Risk Series in December 1992 and have continued to include NASA's
contract management as an area of high risk since. See U.S. General
Accounting Office, High-Risk Series: NASA Contract Management,
GAO/HR-93-11 (Washington, D.C.: December 1992) and Major Management
Challenges and Program Risks: National Aeronautics and Space
Administration, GAO-03-114 (Washington, D.C.: January 2003).

2008, but after NASA's new Administrator came on board in fiscal year
2002, the timeline was accelerated to fiscal year 2006, with the core
financial module to be completed in fiscal year 2003. NASA's IFMP includes
nine module projects supporting a range of financial, administrative, and
functional areas. According to NASA officials, of the nine module
projects, five are in operation, one is currently in implementation, and
three are future modules. The five modules in operation are resume
management, position description management, travel management, executive
financial management information (called Erasmus), and core financial; the
one project in implementation is budget formulation; and the three future
module projects are human resources, asset management, and contract
administration.

The core financial module, which utilizes the SAP R/3 system,10 is
considered the backbone of IFMP and has become NASA's standard, integrated
accounting system used agencywide. The other IFMP module projects will be
integrated/interfaced with the core financial module, where applicable.
The Joint Financial Management Improvement Program (JFMIP)11 defines a
core financial system (or module) as the backbone of an agency's
integrated financial management system: It should provide common
processing routines, support common data for critical financial management
functions affecting the entire agency, and maintain the required financial
data integrity control over financial transactions, resource balances, and
other financial systems. A core financial system should support an
agency's general ledger, funds management, payment, receivable, and cost
management functions. Also, the system should receive data from other
financial-related systems, such as inventory and property systems, and
from direct user input, and it should provide data for financial statement
preparation and for financial performance measurement and analysis.

The scope of NASA's core financial module includes the general ledger,
budget execution, purchasing, accounts receivable, accounts payable, and

10SAP R/3 is an integrated software solution produced by software vendor
SAP, Inc.

11JFMIP is a joint undertaking of the U.S. Department of the Treasury,
General Accounting Office, Office of Management and Budget, and Office of
Personnel Management, working in cooperation with one another, with other
agencies, and with the private sector, to improve financial management in
the federal government. The program was given statutory authorization in
the Budget and Accounting Procedures Act of 1950 (31 U.S.C. 3511(d)). One
of JFMIP's roles has been to establish detailed requirements for agencies'
financial management systems.

cost management. NASA completed implementation of the core financial
module at all 10 NASA centers in June 2003. The pilot for the core
financial module-conducted at Marshall Space Flight Center-was implemented
in October 2002. NASA then deployed the core financial module at the other
9 NASA centers in three "waves," the last of which was completed in June
2003.

In April 2003, we issued our first report on IFMP in response to your
request.12 At that time, we reported that NASA was not following key best
practices for acquiring and implementing the system, which may affect the
agency's ability to fully benefit from the new system's capabilities.
Specifically, we reported that NASA (1) did not analyze the relationships
among selected and proposed IFMP components, (2) had deferred addressing
the needs of key system stakeholders,13 including program managers and
cost estimators, and (3) did not properly manage and test its system
requirements prior to implementation of the core financial module. As a
result, we reported that:

o 	NASA has increased its risks of implementing a system that will not
optimize mission performance, and will cost more and take longer to
implement than necessary;

o 	the core financial module is not being designed to integrate the cost
and schedule data that program managers need to oversee the work of NASA's
contractors; and

o 	costly rework will likely be required to fix requirement defects not
identified prior to implementation.

12U.S. General Accounting Office, Business Modernization: Improvements
Needed in Management of NASA's Integrated Financial Management Program,
GAO-03-507 (Washington, D.C.: Apr. 30, 2003).

13 NASA defined those in the financial accounting arena as the system's
users who, under NASA's plan, would determine the system's requirements,
guide its implementation, and define and measure its success. Those who
would benefit from the system's new capabilities were identified as
stakeholders. Under NASA's plan, they would be the ultimate beneficiaries
of the system improvements, but would not have a role in setting
requirements or measuring and determining the success of the system's
implementation.

  Schedule-driven Approach Limits Transaction Processing Capabilities

Although NASA has met the core financial management module's
implementation schedule, the system as implemented in June 2003 has
limited external financial reporting capabilities. When NASA announced in
June 2003 that the core financial management module was complete, NASA
officials acknowledged that additional work remained, including the need
to develop and configure a cost-allocation structure within the system so
that it would accumulate the full cost of NASA's programs and projects for
external financial reporting purposes. However, to meet its implementation
schedule, we also found that NASA (1) deferred requirements that require
significant business process reengineering or extensive software
configuration and (2) continues to rely on manual procedures for many
transactions that should be automated in the new system. Consequently,
only about one-third of the transaction types that NASA uses in its
business processes are currently implemented and fully automated in the
core financial module.

    The Full Cost of NASA's Programs Not Yet Available

As part of its implementation strategy, NASA delayed conversion to
fullcost accounting until the core financial module was implemented at all
centers. After completing implementation of the module in June 2003, NASA
began designing the agency's new cost-allocation structure and expected
that full-cost accounting capabilities needed to provide the full cost of
its programs and projects for external financial reporting purposes would
be available through the core financial module by October 1, 2003.
Properly designing, configuring, and testing the cost-allocation structure
is key to capturing the full costs of all direct and indirect resources
and allocating them to NASA's programs and activities. However, on May 30,
2003, NASA's Inspector General reported that NASA had not yet determined
how to allocate space shuttle program costs to programs that benefit from
space shuttle services or how to allocate civil service personnel costs to
benefiting programs and projects.14 Once these issues were resolved, NASA
would then have to configure the core financial module software to
accommodate the new allocation structure and properly test the new
configuration. Consequently, NASA's Inspector General expressed concerns
about NASA's ability to meet its October 1, 2003, target date. In early
October, we inquired about the status of full-cost accounting within

14NASA Office of Inspector General, Integrated Financial Management
Program Core Financial Module Conversion to Full Cost Accounting,
IG-03-015 (Washington, D.C.: May 30, 2003).

the core financial module and IFMP officials told us that this capability
would be fully implemented on October 26, 2003. However, because of the
timing of this report, we did not verify whether this implementation date
was met.

If NASA is successful in implementing full-cost accounting, the new system
should link all of NASA's direct and indirect costs to specific programs
and projects, and for the first time shed light on the full cost of these
programs for external financial reporting purposes. As explained later,
managerial cost accounting goes beyond providing the full cost of programs
and projects and producing external financial reports, and is also
critical for producing the type of cost information needed to effectively
manage and oversee NASA's programs.

    Deferred Requirements Include Transactions Critical to NASA's Business
    Operations

NASA did not adequately test key requirements or configure the core
financial module software to satisfy these requirements prior to
implementing the module. Adequately testing and configuring a system prior
to implementation helps assure the integrity and effectiveness of
transactions that will be processed through the system, thereby reducing
the likelihood of rejected transactions, labor-intensive manual
workarounds, and inaccurate data. However, prior to implementation, NASA
tested only 120, or 53 percent, of the 225 unique financial events or
transaction types identified by NASA as critical for carrying out
day-to-day operations and producing external financial reports. NASA
deferred implementation of the remaining 105 transaction types until after
June 23, 2003, when the system would be implemented at all centers.

Ideally, all transactions should be thoroughly tested prior to
implementing a system. However, to meet the agency's implementation
schedule, NASA identified and deferred implementation of transactions that
it determined would not have a significant or immediate impact on
operations. For example, 29 of the deferred transactions were related to
year-end closing procedures that would not be needed until September 30,
2003. However, other deferred transactions do have a significant and
immediate impact on NASA's operations throughout the year. For example, 40
transaction types were related to upward and downward adjustments to prior
year data, many of which affected NASA's ability to properly capture
adjustments to obligations. Because NASA deferred implementing this
capability, the agency has continued to rely on ad hoc, manual processes
and "workarounds." As discussed later, these are the same cumbersome

manual processes that resulted in a $644 million error in NASA's fiscal
year 1999 financial statements.

NASA hoped to implement most of these deferred transactions by October
2003. In mid-October, NASA officials told us that 75 of the 105 deferred
transaction types had been implemented, and the remaining 30 transaction
types would be implemented later in fiscal year 2004. Until the remaining
transaction types are implemented, however, NASA must continue to process
them outside of the module using manual procedures.

    Core Financial Module Relies Heavily on Manual Procedures

In addition to the 105 transaction types that NASA has deferred, NASA also
uses manual accounting entries to record 43, or 36 percent, of the 120
unique transaction types NASA considers implemented. NASA considers these
43 transaction types implemented because NASA has no current plans to
automate them in the core financial module. Although manual accounting
entries are sometimes necessary to record unusual or infrequent events,
many of NASA's manual entries are made to record routine events that
should be processed electronically. For example, NASA uses summary-level
manual processes to record all transactions occurring throughout the year
related to its reported $37 billion of property. Such a large proportion
of manual procedures runs contrary to the purpose of an automated system
and makes the agency more vulnerable to processing errors and delays. In
fact, prior to implementation, NASA's consultant responsible for
performing an independent compliance review of the core financial module
raised concerns about the excessive number of transactions processed with
manual journal voucher entries. Despite these concerns, NASA did not alter
its implementation plan for the module.

  Long-standing External Reporting Issues Not Addressed

The core financial module may provide some improvements to NASA's current
accounting system environment by reducing the extensive amount of time and
resources currently required to consolidate NASA's 10 different reporting
entities and close the books each accounting period. However, NASA did not
thoroughly test or implement key requirements prior to implementation and
has not used the new system as an opportunity to drive needed changes in
its management practices and business processes. Therefore, the core
financial module, as implemented in June 2003, does not (1) properly
capture, record, and account for PP&E and materials balances or (2)
provide key system requirements needed to prepare the agency's Statement
of Budgetary Resources.

    NASA Has Not Reengineered Processes to Properly Account for PP&E and
    Materials

The core financial module, as implemented in June 2003, does not
appropriately capture and record PP&E and material in the module's general
ledger at the transaction level. According to SGL requirements and NASA's
own accounting policy, recording PP&E and material in the general ledger
at the transaction or item level provides independent control over these
assets. However, NASA currently updates the core financial module's
general ledger using periodic summary-level manual entries. Although NASA
plans to implement an integrated asset management module in 2005, this
alone will not ensure that transaction-level detail is used to update the
core financial module.

NASA's PP&E and materials are physically located at many locations
throughout the world, including NASA centers, contractor facilities, other
private or government run facilities, and in space. NASA's most
significant challenge, with respect to property accounting, stems from
property located at contractor facilities, which accounts for almost $11
billion, or about one-third, of NASA's reported $37 billion of PP&E and
materials and consists primarily of equipment being constructed for NASA
or items built or purchased for use in the construction process. NASA has
not reengineered the agency's processes for capturing contract costs
associated with PP&E and material, though, and therefore, does not record
these property costs in the general ledger at the transaction level.
Instead, according to NASA officials, the agency plans to continue to (1)
record the cost of PP&E and materials as expenses when initially incurred,
(2) periodically determine which of those costs should have been
capitalized, and (3) manually correct these records at a summary level.

To illustrate, NASA's contractors provide NASA with monthly contractor
cost reports, which contain accrued cost information for any work
performed during the month. However, these reports do not contain enough
information for NASA to determine what portion of the reported cost
pertains to the construction or acquisition of property and therefore,
NASA initially records all costs reported by its contractors as an
expense. Then, on a quarterly or annual basis,15 NASA receives a property
report from its contractors that provides summary-level information on the
amount of property constructed or purchased and currently in the

15NASA has typically required its contractors to report information about
property in their possession on an annual basis. However, NASA began
requiring quarterly reports for its 55 largest contracts as of June 30,
2003, and plans to incrementally establish quarterly reporting for all
relevant contracts in the next couple of years.

contractor's possession. Based on these reports, NASA records the cost of
contractor-held assets in its general ledger and reverses the expense
previously recorded from the contractor cost reports. The problem with
NASA's current process for capturing, recording, and accounting for
property in the possession of contractors is that it provides no way for
NASA to ensure that the money it spends on the construction of its
property is actually recorded as discrete property items.

Although NASA plans to implement an integrated asset management module in
2005, the new system will not change the way NASA captures, records, and
accounts for property in the possession of contractors. As noted above,
because this problem stems from NASA's inability to link accrued costs
reported by its contractors with specific equipment items being
constructed, the problem will not be alleviated when physical custody of
the equipment is ultimately transferred to NASA and recorded in NASA's
property records.

    Key Requirements Deferred for Statement of Budgetary Resources

The core financial module does not capture and report certain key
budgetary information needed to prepare the agency's Statement of
Budgetary Resources. Although the software that NASA purchased for the
core financial module was certified by JFMIP as meeting all mandatory
system requirements, NASA may have relied too heavily on the JFMIP
certification. JFMIP has made it clear that its certification, by itself,
does not automatically ensure compliance with the goals of FFMIA. Other
important factors that affect compliance with Federal Financial Management
System Requirements (FFMSR) include how well the software has been
configured to work in the agency's environment and the quality of
transaction data in the agency's feeder systems. When NASA later tested
specific requirements related to adjustments to prior year obligations,
the core financial module failed the test. Consequently, NASA deferred
implementation of those requirements and opted to rely on manual
compilations, system queries, or other workarounds to compensate for the
system's inadequacies. These workarounds are known to have caused
reporting problems in the past.

According to FFMSR, an agency's core financial module should automatically
classify and record upward and downward adjustments of prior year
obligations to the appropriate general ledger accounts. However, NASA's
core financial module, as implemented in June 2003, does not provide this
capability. For example, if an upward adjustment is required because an
invoice includes costs not previously included on the

purchase order, such as shipping costs, the system erroneously posts the
upward adjustment to a prior year obligation instead of a current year
obligation. Because the system does not properly capture and report these
adjustments, NASA must rely on manual compilations and system queries to
extract the data needed to prepare the agency's Statement of Budgetary
Resources-just as it did using its legacy general ledger systems. As we
reported in March 2001, this cumbersome, labor-intensive effort to gather
the information needed at the end of each fiscal year was the underlying
cause of a $644 million misstatement in NASA's fiscal year 1999 Statement
of Budgetary Resources.16

During its initial test of system requirements but prior to implementation
at Marshall Space Flight Center and Glenn Research Center in October 2002,
NASA became aware of the software's limitations regarding upward and
downward adjustments to prior year obligations. In order to meet its
schedule, NASA IFMP officials deferred further system modifications to
meet these requirements and opted to rely on a manual workaround to
satisfy the federal requirement for upward and downward adjustments.
NASA's consultant responsible for performing an independent compliance
review of the core financial module raised concerns about this approach.
Despite these concerns, NASA went forward with its plans. At the time,
NASA had hoped that a "patch" release or future software upgrade would
remedy the problem and then NASA could incorporate the fix into the phased
agency rollout of the core financial module. However, the upgrades
incorporated after the initial implementation at Marshall and Glenn did
not resolve all of the issues related to upward and downward adjustments.
As a result, NASA continued to face significant problems in this area.
According to NASA officials, the agency continued to work with the
software vendor to reconfigure the software as necessary to accommodate
adjustments to prior year obligations. NASA expected a new software patch
to resolve any remaining problems by October 1, 2003. However, in
mid-October, NASA officials acknowledged that it might be some time before
this issue would be resolved completely. Until then, NASA will continue to
rely on manual workarounds.

16U.S. General Accounting Office, Financial Management: Misstatement of
NASA's Statement of Budgetary Resources, GAO-01-438 (Washington, D.C.:
Mar. 30, 2001).

NASA'S NASA's implementation of the core financial module has also created
new

reporting issues. Specifically, the core financial module does
notImplementation of appropriately capture accrued costs and record the
correspondingIFMP Has Created New liabilities as accounts payable. In
addition, the core financial module Reporting Problems records obligations
to the general ledger before the obligations are legally

binding. Although NASA knew about these problems prior to implementation,
the agency went forward with its implementation plans.

    Accrued Costs and Accounts Payable Not Appropriately Captured and Reported

The core financial module, as implemented in June 2003, does not
appropriately capture and record accrued contract costs and accounts
payable information in accordance with federal accounting standards and
NASA's own financial management manual. Specifically, the core financial
module does not capture accrued costs or record accounts payable if
cumulative costs are in excess of obligations for a given contract. As of
June 30, 2003, NASA had not processed approximately $245 million in costs
that exceeded obligations, nor recorded the corresponding accounts
payable, even though this amount represented a legitimate liability for
NASA. Instead, these transactions are held outside of the general ledger
in suspense until additional funds can be obligated. Thus, any report
containing information on NASA's costs or liabilities would likely be
understated by the amount of costs held in suspense at the time of the
report.

Federal accounting standards and NASA's own financial management manual
require costs to be accrued in the period in which they are incurred and
any corresponding liability recorded as an account payable, regardless of
amounts obligated. Further, federal standards require that agencies must
disclose unfunded accrued costs-or costs in excess of obligations.
However, NASA has designed the core financial module such that it will not
post costs to the general ledger if they exceed the amount obligated.
According to NASA officials, this is intended to be a "red flag" or
internal control that alerts agency managers to potential cost overruns.

While we agree that NASA could benefit from information that provides an
early warning sign of possible cost or schedule problems, we disagree with
NASA's approach. Appropriately posting costs and accounts payable to the
general ledger does not preclude NASA from monitoring unfunded accrued
costs. Further, as we reported in April 2003, to adequately oversee NASA's
contracts, program managers need reliable contract cost data-both budgeted
and actual-and the ability to integrate this data with contract

schedule information to monitor progress on the contract. However, because
program managers were not involved in defining system requirements or
reengineering business processes, the core financial module is not being
designed to integrate cost and schedule data needed by program managers.

    Core Financial Software Posts Obligations to the General Ledger Before They
    Are Binding

The core financial module was intended to streamline many of NASA's
processes and eliminate the need for many paper documents. However, in
some areas, the new system has actually increased NASA's workload.
Specifically, because the core financial software allows obligations to be
posted to the general ledger before a binding agreement exists, NASA must
process purchase orders and contract documents outside the system until
they are signed, or otherwise legally binding. At that point, NASA
initiates the procurement action in the system and repeats the steps that
were manually performed outside the system previously.

Federal law requires that no amount be recorded as an obligation unless it
is supported by documentary evidence of, among other things, a binding
agreement.17 However, the processes that are embedded in the core
financial module for processing purchase orders and contract documents do
not accommodate this requirement. To illustrate, authorized users create
electronic purchase requests in the system and release or forward the
request to the appropriate approving official for electronic signature.
Once signed, the purchase request is forwarded electronically to the
purchasing department where purchasing staff create an electronic purchase
order, secure a vendor, and place the order. According to federal
appropriations law, a purchase order constitutes an obligation when the
order is placed and when all relevant parties sign the purchase order.
However, if a purchase order is entered into the system before it is
finalized, the module automatically records the obligation. Similarly, if
a contract or contract modification is entered into the module before it
is signed and legally binding, the module automatically records the
obligation. According to NASA officials, they are working with the
software vendor to develop a solution and expect that the new software
upgrade to be released on October 1, 2004, will alleviate this problem. In
the meantime, they will manually process documents outside of the system

1731 U.S.C. 1501 (a) (1) (2000).

and monitor any documents that have been recorded without signatures to
ensure that obligations are not overstated at month-end.

  Core Financial Module Does Not Substantially Comply With FFMIA

The system limitations discussed previously related to full-cost
accounting, property accounting, budgetary accounting, accrued costs, and
accounts payable-combined with the findings from our April 2003
report-indicate that NASA's new core financial module and related systems,
as implemented in June 2003, do not substantially comply with the
requirements of FFMIA. This act provides agencies a blueprint for building
fully integrated financial management systems that routinely provide
decision makers with timely, reliable, and useful financial information.
FFMIA requires agencies to implement and maintain financial management
systems that substantially comply with (1) FFMSR, (2) the SGL at the
transaction level, and (3) applicable federal accounting standards.
Although NASA has made progress in addressing some of its financial
management system weaknesses, the agency's core financial module does not
yet provide all the building blocks needed to achieve the ultimate goal of
FFMIA.

    Noncompliance with FFMSR

The core financial module, as implemented in June 2003, does not comply
substantially with FFMSR. To ensure that automated federal financial
management systems comply with this standard and provide the critical
information needed for decision making, JFMIP issued specific functional
requirements that core financial systems must meet in order to
substantially comply with FFMIA. Compliance with this standard, at a
minimum, means the core financial module must be configured to (1) ensure
consistent and accurate processing, reporting, and tracking of program
expenditures and budgetary resources, and (2) ensure that transactions are
processed and recorded in accordance with laws and regulations, and
federal accounting standards. However, the core financial module-although
it uses software certified by JFMIP-does not perform all mandatory
functions. Specifically, the module:

o 	does not capture and record upward and downward adjustments of
obligations incurred in prior fiscal years, and

o  posts obligations to the general ledger prior to approval.

Among other things, FFMSR requires federal financial management systems to
produce accurate and reliable information for budgetary reports, including
the Statement of Budgetary Resources18 and the Report on Budget Execution
and Budgetary Resources (Standard Form 133).19 As previously discussed,
the core financial module does not capture and record upward and downward
adjustments of obligations incurred in prior fiscal years, which is
essential for producing both the Statement of Budgetary Resources and
Standard Form 133 reports. In addition, FFMSR requires federal financial
management systems to process transactions in accordance with federal
appropriations law, which states that no amount may be recorded as an
obligation unless it has been approved and is supported by documentary
evidence. As a result of system limitations we have discussed, the core
financial module erroneously posts obligations to the general ledger prior
to approval.

Noncompliance with SGL	The core financial module, as implemented in June
2003, does not substantially comply with the SGL at the transaction level.
The SGL requirements ensure consistency in financial transaction
processing and external reporting. Compliance with this standard, at a
minimum, means that the core financial module must be configured such that
(1) reports produced by the systems containing financial information can
be traced directly to general ledger accounts, (2) transaction details
supporting general ledger account balances are available and can be
directly traced to specific general ledger accounts, and (3) the criteria
(e.g., timing, processing rules/conditions) for recording financial events
are consistent with accounting transaction definitions and processing
rules defined in the SGL.

As discussed previously, the core financial module does not accumulate
transaction-based support for adjustments to prior year obligations, which
is essential for producing the Statement of Budgetary Resources and
Standard Form 133 reports. Instead, NASA must rely on estimates, manual
compilations, and system queries to extract the data needed to prepare
these required budgetary reports. As a result, key budgetary information

18The Statement of Budgetary Resources provides information on the
availability and use of budgetary resources, as well as the status of
budgetary resources at the end of the period.

19The Standard Form 133 is prepared quarterly and is the principal source
of information for Statement of Budgetary Resources. It also fulfills the
requirement that the President review federal expenditures at least four
times a year.

reported on the Statement of Budgetary Resources and Standard Form 133
cannot be traced directly to NASA's general ledger accounts. NASA also
does not properly record PP&E and materials as assets when they are first
acquired. Instead, NASA initially records these items as expenses and then
later corrects these records using manual procedures. Although this manual
process provides NASA a vehicle for reporting PP&E and material costs for
financial statement reporting, it is not sufficient for compliance with
the SGL. Finally, NASA does not maintain transaction-level detail for its
contractor-held property. Instead, it relies solely on its contractors to
maintain such records and to periodically report summary-level information
on these assets to NASA. This situation has resulted in material
weaknesses over this property, as previously reported by NASA's current
independent auditor.

    Noncompliance with Federal Accounting Standards

The core financial module and related systems, as implemented in June
2003, do not substantially comply with federal accounting standards.
Compliance with these standards is essential to providing useful and
reliable financial information to external and internal users. Federal
accounting standards20 are the authoritative requirements that guide
agencies in developing financial management systems, as well as preparing
financial statements. However, as discussed previously, the core financial
module did not, as of June 2003, process and report financial information
in accordance with federal accounting standards.

The major reasons for the module's noncompliance with federal accounting
standards are as follows.

o 	The core financial module does not comply with SFFAS No. 1, Accounting
for Selected Assets and Liabilities. This standard states that a liability
should be recognized and recorded as an account payable when contractors
construct facilities or equipment for the government. The liability should
be based on an estimate of work completed. However, the core financial
module does not capture accrued costs or

20FASAB promulgates Federal Accounting Standards. Currently, there are 25
Statements of Federal Financial Accounting Standards (SFFAS) and 4
statements of federal financial accounting concepts (SFFAC). The
accounting standards are authoritative statements of how particular types
of transactions and other events should be reflected in financial
statements. SFFACs explain the objectives and ideas upon which FASAB
develops the standards. The concepts and standards provide the
authoritative references for developing systems, financial statement
reporting, and maintaining day-to-day financial records.

record accounts payable when the cumulative costs for a given contract
exceed obligations. Instead, these transactions are held outside the
general ledger, in suspense, until additional funds are obligated, thus
understating NASA's reported program costs and liabilities.

o 	The core financial module does not yet provide full-cost accounting
capabilities in accordance with SFFAS No. 4, Managerial Cost Accounting
Standards. This standard requires agencies to report the full cost of
their programs in their general-purpose financial reports. However, as
previously discussed, NASA, as of June 2003, had not defined, configured,
or tested the appropriate cost pools and cost allocation structure, which
are critical to implementing full-cost accounting.

o 	The core financial module does not comply with the broader objective of
SFFAS No. 4, Managerial Cost Accounting Standards. The concepts and
standards included in SFFAS No. 4 are aimed at achieving three general
objectives: (1) providing program managers with relevant and reliable
information relating costs to program outputs, (2) providing relevant and
reliable cost information to assist the Congress and executives in making
decisions about allocating federal resources and evaluating program
performance, and (3) ensuring consistency between costs reported in
general purpose financial reports and costs reported to program managers.
However, as we reported in April 2003, the core financial module does not
provide program managers, cost estimators, or the Congress with
managerially relevant cost information that they need to effectively
manage and oversee NASA's contracts and programs. As a result, NASA's
continuing inability to provide its managers with timely, relevant data on
the cost, schedule, and performance of its programs is a key reason that
GAO continues to report NASA's contract management as an area of high
risk. Because this information is not available through the core financial
module, program managers will continue to rely on hard copy reports,
electronic spreadsheets, or other means to monitor contractor performance.
Consequently, NASA risks operating with two sets of books-one that is used
to report information in the agency's general-purpose financial reports
and another that is used by program managers to run NASA's projects and
programs.

Compliance with federal accounting standards goes far beyond receiving a
"clean" opinion on financial statements. A key indicator that an agency's
financial management systems do not substantially comply with federal
accounting standards is the existence of material

weaknesses in the agency's internal controls. As noted earlier, NASA has
not addressed material weaknesses in its internal controls and processes
over PP&E and materials, which make up nearly 85 percent, or $37 billion,
of NASA's assets. Instead, NASA plans to rely on existing legacy systems
and processes-including the extensive use of manual accounting
entries-that the agency's independent auditor has found to be inadequate
for property accounting. As a result, NASA faces serious challenges in
complying with these standards.

Although NASA plans to implement an integrated asset management module in
2005, most of NASA's issues related to property accounting have little to
do with the lack of an integrated system. Instead, NASA faces two key
challenges with respect to property accounting: (1) reengineering its
processes for capturing and recording transaction-level detail in the core
financial module's general ledger and (2) addressing material weaknesses
in its internal controls over property previously identified by NASA's
independent auditors. To date, NASA has yet to define specific
requirements for its asset management module or determine how it plans to
overcome the previously identified material weaknesses in NASA's internal
controls over PP&E and material.

Conclusion	If NASA continues on its current track, the core financial
module and IFMP will fail to achieve the agency's stated objective of
providing reliable, timely financial information for both internal
management decision-making and external reporting purposes. Thus far, NASA
has focused on deploying the system on its established schedule, rather
than ensuring that it satisfies the agency's internal management and
external reporting requirements. To meet its schedule, NASA has put off
addressing user requirements that would necessitate significant business
process reengineering or extensive software configuration. While NASA is
meeting its implementation milestones, it is only able to do so because
the agency has deferred critical system capabilities, such as the ability
to properly capture, record, and account for its PP&E and material;
process budgetary accounting entries; and provide managerially relevant
cost information. Until, and unless, the agency deals with these issues,
NASA risks making a substantial investment in a system that will fall far
short of its stated goal of providing meaningful information for both
internal management and external reporting purposes.

Recommendations	Based on the findings from this review, in conjunction
with our April 2003 report, we reiterate our April 2003 recommendation
that NASA:

o 	engage stakeholders-including program managers, cost estimators, and
the Congress-in developing a complete and correct set of user
requirements; and

o 	reengineer its acquisition management processes, particularly with
respect to the consistency and detail of budget and actual cost and
schedule data provided by contractors.

We also recommend that the NASA Administrator direct the Program Executive
Officer for IFMP to implement a corrective action plan in coordination
with NASA's Chief Financial Officer that will produce financial management
systems that comply substantially with the requirements of FFMIA,
including capabilities to produce timely, reliable, and useful financial
information related to:

o  property, plant, equipment, and materials;

o  budgetary information including adjustments to prior year obligations;

o  accounts payable and accrued costs; and

o  the full cost of programs for financial reporting purposes.

This plan should include time frames and details on how any changes will
be monitored, tested, and documented.

  Agency Comments and Our Evaluation

In written comments, reprinted in appendix II, NASA disagreed with all of
our conclusions and recommendations in part because we reviewed the status
of the core financial module as of June 23, 2003, instead of September 30,
2003-the date used for FFMIA reporting. Although NASA takes issue with the
date of our review, it is important to note that we selected June 2003
because NASA represented that the core financial module was fully
operational at all of its centers at that time. In making that
representation, NASA officials acknowledged that, as part of their
implementation strategy, they had not yet converted the system to support
full-cost accounting. However, they did not disclose any other deferred
capabilities.

Moreover, NASA's comments assert that for PP&E and budgetary reporting,
the manual processes or workarounds it has developed to produce yearend
balances for the agency's annual financial statements also satisfy the
requirements of FFMIA. We disagree with this assertion. The development of
significant manual workarounds in these areas masks the fact that NASA's
core financial module is not designed to, and cannot, produce timely and
reliable PP&E and budgetary data with traceability to transaction-based
support. The ability to produce reliable numbers once a year for financial
reporting purposes does not by itself constitute FFMIA compliance. In its
written comments, NASA indicated that it has made changes to the module
since June and that the core financial module as implemented in October
2003 has many of the capabilities that were lacking in the June 2003
module. Although we requested status updates between June and October to
track NASA's progress, we did not reassess the module's capabilities as of
October 2003. However, with the possible exception of full-cost
accounting, which was planned for October 1, 2003, the changes NASA has
cited still involve manual workarounds for producing year-end numbers.
FFMIA goes beyond producing auditable financial statements once a year and
requires financial systems that ensure accountability on an ongoing basis
throughout the year.

Engaging Stakeholders	In its response to our April 2003 recommendation,
which we have restated in this report, to engage stakeholders in
developing a complete and correct set of user requirements, NASA stated
that it did engage stakeholders in the design of requirements for the core
financial module. We disagree with NASA's assertion. As we reported in
April 2003, the program management staff we spoke with from NASA's three
largest space flight programs viewed the core financial module as an
"accounting system" that would be used by the accountants but was not
necessarily going to change the way they managed. With this understanding,
it is not surprising that the core financial module does not meet the
needs of program managers. Although the IFMP implementation team made an
effort to include resource management staff from program management
offices in various process teams, they did not effectively utilize program
staff to help drive the improvement effort. Consequently, the information
requirements of program managers and cost estimators were not fully
addressed. Implementing an integrated financial management system that is
intended to change the way an organization does business is extremely
complex and involves cultural, organizational, and process improvements.
It also means making financial management an agencywide priority. Our work
at leading public and private sector organizations has shown that
implementing a financial management system that meets the organization's

business needs takes more than merely placing business or line management
representation on the implementation team.21 Instead, at best practice
organizations, business managers had a vested interest in the success of
the project and were actively involved in leading the improvement effort.

Although NASA disagreed with our assessment of key stakeholder
involvement, the agency has indicated that it is in the process of
addressing, or plans to address, a number of our concerns by more actively
engaging key stakeholders. For example, NASA stated that to develop
standard, agencywide internal management reports, it is using an
enterprise-or program-led team to define the critical "decision-support"
financial information that is needed by managers. The success of this
effort is critical to ensure that NASA program managers use IFMP rather
than other stovepiped systems or manually developed data that may or may
not reconcile to the IFMP and core financial module.

    Reengineering Acquisition Management

In response to our April 2003 recommendation, which we have restated in
this report, to reengineer its acquisition management processes,
particularly with respect to the consistency and detail of budgeted and
actual cost and schedule data provided by contractors, NASA indicated that
it is in the process of addressing a number of our concerns. Specifically,
NASA stated that it (1) has extended the data structure embedded in the
core financial module to capture more detailed cost data, (2) is currently
assessing its contractor reporting requirements, and (3) is evaluating the
possibility of accommodating contract cost and schedule data in an
integrated environment. While it is too early to assess the significance
or impact of NASA's current effort, we are encouraged that NASA is
considering the possibility of reengineering its acquisition management
processes. This would be an important first step toward ensuring that
NASA's contractors provide the appropriate level and type of cost data
needed for both internal management and external reporting purposes and
that the core financial module is properly configured to support the
agency's information needs. However, we continue to believe it would have
been more effective and efficient if NASA had conducted its assessment of
contractor reporting requirements as part of a larger reengineering effort
prior to configuration of the core financial module.

21U.S. General Accounting Office, Executive Guide: Creating Value Through
World-class Financial Management, GAO/AIMD-00-134 (Washington, D.C.: Apr.
1, 2000).

Further, any effort that falls short of end-to-end business process
reengineering will likely not result in a system that substantially
improves the data available for contract oversight or ensures consistency
between costs reported in general purpose financial reports and costs
reported to program mangers.

In its written comments, NASA also emphasized that the core financial
module alone cannot meet all of the functional requirements needed to
manage a program or to prepare cost estimates and asserts that
applications such as Erasmus, an executive-level program performance
reporting tool, will enable NASA to meet the full depth and breadth of
user requirements. We agree that the core financial module alone cannot
meet all of NASA's information needs and that an executive-level reporting
tool such as Erasmus may provide NASA executives with greater visibility
over program performance. However, Erasmus does little to help program
managers oversee contractor performance, and like the core financial
module, may contain cost data that are not consistent or reconcilable with
cost data used by program managers to manage contracts. The underlying
problem, as we reported in April 2003, is that NASA uses one set of
contractor-reported cost data to update the core financial module while
program managers use a separate set of contractor-reported cost data that
resides outside the system to monitor contractor performance.
Consequently, the cost data maintained in the core financial module and
reported in NASA's external financial reports are not consistent or
reconcilable with cost data used by program managers to manage contracts.

Finally, NASA stated that the asset management module, scheduled for
implementation in 2005, will make a significant contribution to its
program management and cost estimating activities. This module is
primarily intended to maintain detailed property records for NASA-held
property. Thus, we do not believe an asset management module would have
any impact on the cost, schedule, and performance data needed for program
management and cost estimating.

PP&E and Materials	NASA disagreed with our recommendation related to
IFMP's ability to produce timely, reliable, and useful information for
PP&E and materials in accordance with FFMIA requirements. NASA represented
that its current processes for capturing and recording property for
financial statement reporting purposes also meet the requirements of FFMIA
because it has begun requiring more frequent and detailed property
reporting by its 55

largest contractors. We disagree with NASA's assertion. Because NASA's
current contractor cost-reporting processes do not provide the information
needed to distinguish between capital and non-capital expenditures, NASA
currently records as expenses all contractor costs as they are incurred
and then manually adjusts previous entries to record assets based on
periodic summary-level contractor property reports. While this process may
satisfy NASA financial statement reporting needs, the development of
significant manual workarounds in this area masks the fact that NASA's
core module is not designed to and cannot produce timely and reliable PP&E
data with traceability to transaction-based support. The ability to
produce reliable numbers once a year for financial reporting purposes does
not equate to FFMIA compliance.

In accordance with FFMSR, federal accounting standards, and the SGL, when
an agency incurs costs for the purchase or construction of PP&E and
material, those costs should be recorded in both the agency's asset
management system and its core financial management systems' general
ledger. The only difference for contractor-held property is that the asset
management system belongs to the contractor. The asset management system,
whether NASA's or its contractors', would maintain the agency's detailed
logistical property records for PP&E and materials-including information
related to asset location, date of purchase, useful life, quantity, cost,
and condition-and the core financial module's general ledger would
maintain a cumulative balance of all purchased or constructed property
based on the cost incurred for individual items. The ability to reconcile
detailed transactions in the asset management system with amounts recorded
in the general ledger provides an efficient way to maintain independent
general ledger control over these assets. As mentioned above, NASA first
expenses all PP&E in the core financial module, and then later, makes
adjustments to record the costs of PP&E as assets at a summary level.
There is currently no traceability from the core financial module general
ledger to the detailed logistical property records of PP&E and materials.

NASA also stated that one of the objectives of the asset management
module, now in formulation, is to significantly improve reporting for
contractor-held property. While it is our understanding that NASA's new
asset management module, as planned, will maintain detailed property
records for NASA-held property and be integrated with other IFMP modules,
including the core financial module, we know of no plans to add
contractor-held property to this system. In fact, the Federal Acquisition
Regulation requires contractors to maintain the logistical property
records

for government property in their possession and prohibits government
agencies from maintaining duplicate property records. Under these
circumstances, as part of an overall effort to reengineer its acquisition
management process, we believe that NASA must capture the cost and other
information it needs from its contractors and develop traceability to
contractor logistical records to ensure accountability over its
contractorheld property on an ongoing basis.

Budgetary Information	NASA disagreed with our recommendation regarding its
ability to produce reliable, timely, and useful budgetary information,
including adjustments to prior year obligations. NASA stated that although
it identified certain transactional reporting limitations in its initial
deployment of the core financial module, it developed alternative or
"workaround" procedures to ensure the accurate and timely reporting of the
identified transactions. However, as stated previously, we do not believe
that the manual processes or workarounds NASA uses to produce year-end
balances for the agency's annual financial statements satisfy the
requirements of FFMIA. While NASA's written comments indicate that many of
these deferred capabilities were largely enabled by September 30, 2003,
they also indicate that more time will be required before the module can
process adjustments to prior year obligations. As a result, NASA must use
manual workarounds to process these transactions related to fiscal year
2003 activity. We note that these are the same manual procedures used to
compensate for deficiencies in NASA's legacy systems that resulted in the
$644 million error in NASA's fiscal year 1999 Statement of Budgetary
Resources.22

    Accrued Costs and Accounts Payable

NASA disagreed with our conclusion that its overall financial management
system does not properly capture and report all accrued costs and accounts
payable. However, we did not report that the information was not contained
within the system; rather, we reported that it was not posted to the
general ledger. We recognize that NASA records costs that exceed current
obligations in the IFMP business warehouse until additional funds are
obligated and in order to highlight or detect potential program cost
overruns. While we encourage NASA's effort to monitor costs in excess of
obligations, we do not believe its method for doing so is appropriate. We
continue to believe that these costs should be properly recorded in the

22GAO-01-438.

general ledger in the period in which they are incurred. The risk in
NASA's method is that when costs and liabilities are not properly recorded
in the general ledger, these balances are likely to be understated in any
financial reports produced during the year, as well as at year-end.

It is also important to note that comparing costs with obligations will
not necessarily detect a cost overrun. For example, this strategy would
not have alerted NASA to its largest cost overrun in recent years-the $5
billion cost growth in the International Space Station program reported in
2001. This overrun was not the result of incurring more costs than the
funds obligated. Instead, it was due to the cost growth projected to occur
in the future-i.e., growth in the estimated costs to complete the program.
This cost overrun went undetected for a long period of time because of
NASA's deeply-rooted culture of managing programs based on current year
budgets rather than total costs. As we reported in 2002,23 for NASA to
manage its program costs properly, it needs to focus on the total costs of
a program rather than just annual budgets. Thus, NASA's plan to hold costs
in suspense when they exceed obligations will not make such cost overruns
any easier to detect or manage. Instead, as we reported in April 2003, to
adequately oversee NASA's contracts, program managers need reliable
contract cost data-both budgeted and actual-and the ability to integrate
these data with contract schedule information to monitor progress on the
contract. However, because program managers were not involved in defining
system requirements or reengineering business processes, the core
financial module was not designed to integrate cost and schedule data
needed by program managers.

Full-Cost Accounting	NASA also disagreed with our recommendation
concerning its system's ability to account for the full cost of its
programs and asserted that it completed implementation of its full-cost
accounting capability within IFMP as of October 1, 2003. However, IFMP
management told us in early October that this capability would not become
operational until October 26, 2003, after NASA completed its year-end
closing procedures. Because of our reporting time frame, we did not
conduct the detailed procedures that would have been necessary to
determine whether or not this function had begun operating.

23U.S. General Accounting Office, Space Station: Actions Under-way to
Manage Cost, But Significant Challenges Remain, GAO-02-735 (Washington,
D.C.: July 17, 2002).

As agreed with your offices, unless you announce its contents earlier, we
will not distribute this report further until 30 days from its date. At
that
time, we will send copies to interested congressional committees, the
NASA Administrator, and the Director of the Office of Management and
Budget. We will make copies available to others upon request. In addition,
the report will be available at no charge on the GAO Web site at
http://www.gao.gov.

If you or your staffs have any questions concerning this report, please
contact me at (202) 512-9505 or [email protected], Keith Rhodes at (202) 512
6412 or [email protected], or Diane Handley at (404) 679-1986 or
[email protected]. Key contributors to this report are acknowledged in
appendix III.

Gregory D. Kutz
Director
Financial Management and Assurance

Keith A. Rhodes
Chief Technologist
Applied Research and Methods

Appendix II

Comments From the National Aeronautics and Space Administration

Appendix II
Comments From the National Aeronautics
and Space Administration

Appendix II
Comments From the National Aeronautics
and Space Administration

Appendix II
Comments From the National Aeronautics
and Space Administration

Appendix II
Comments From the National Aeronautics
and Space Administration

Appendix II
Comments From the National Aeronautics
and Space Administration

Appendix I

                       Objective, Scope, and Methodology

The objective of this report was to assess whether the National
Aeronautics and Space Administration (NASA) Integrated Financial
Management Program's (IFMP) core financial module, as implemented on June
2003, would satisfy NASA's external reporting requirements, such as
reliable and auditable financial statements, congressional information
needs, and other reporting requirements. Specifically, we assessed whether
the core financial module (1) accurately accounts for Property, Plant, and
Equipment (PP&E) and materials and supplies, (2) properly accounts for the
full cost of NASA's projects and programs, (3) captures and reports
certain key budgetary information, (4) accurately records accounts
payable, and (5) complies substantially with the requirements of the
Federal Financial Management Improvement Act (FFMIA) of 1996. We did not
assess other aspects of the core financial module's capabilities.

We interviewed officials from NASA's financial management division and the
NASA Office of Inspector General to identify various reporting
requirements and weaknesses in meeting these requirements, and to
determine how the core financial module will provide the data needed to
meet these requirements. We evaluated fiscal year 2002 internal control
weaknesses reported by PricewaterhouseCoopers, NASA's independent
auditors, related to PP&E, material and supplies, and financial reporting.
However, for the purposes of this report we did not review the auditors'
underlying work paper support. We also reviewed NASA's process for
preparing the Statement of Budgetary Resources and reporting accounts
payable, and any related issues identified by auditors.

We reviewed applicable Treasury, Office of Management and Budget, and NASA
guidance, and related federal accounting standards as well as federal
financial management system requirements promulgated by the Joint
Financial Management Improvement Program.

At two NASA centers, we observed how transactions are recorded in the
general ledger within the core financial module and discussed these
processes with users of the system. We reviewed nonrepresentative
selections of transactions for PP&E, materials, accounts payable, and
budgetary transactions. We traced selected transactions to their source
documents, and also traced selected source documents to the general
ledger. We assessed whether transactions were recorded consistently with
the Treasury Financial Manual. We also observed and discussed how
information on contractor cost reports is recorded in the core financial
module.

Appendix I Objective, Scope, and Methodology

We interviewed various officials from IFMP and its core financial project
design and implementation teams, including the IFMP Deputy Program
Director, the Core Financial Project Manager, and the Core Financial
Deputy Project Manager to clarify our understanding of the core financial
module's functions and obtain the most recent information on the status of
various implementation issues as of June 2003. We also reviewed relevant
audit reports from the NASA IG and the results of an independent
compliance review on the core financial module performed by NASA's
consultant.

We performed our work primarily at NASA headquarters in Washington, D.C.
and the two NASA centers-Marshall Space Center in Huntsville, Alabama and
Glenn Research Center in Cleveland, Ohio-where the core financial module
was implemented first. Our work was performed from April 2003 through
September 2003 in accordance with generally accepted government auditing
standards.

We requested comments on a draft of this report from the NASA
Administrator or his designee. Written comments from the NASA Deputy
Administrator are presented and evaluated in the "Agency Comments and Our
Evaluation" section of this report and are reprinted in appendix II.

Appendix III

                     GAO Contact and Staff Acknowledgments

                    GAO Contact Diane Handley (404) 679-1986

Acknowledgments	Staff members who made key contributions to this report
were Shawkat Ahmed, Fannie Bivins, Kristi Karls, Chris Martin, and Maria
Storts.

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