National Aeronautics and Space Administration: Significant	 
Actions Needed to Address Long-standing Financial Management	 
Problems (19-MAY-04, GAO-04-754T).				 
                                                                 
Congress asked GAO to testify on the status of the National	 
Aeronautics and Space Administration's (NASA) financial 	 
management reform efforts. NASA faces major challenges that if	 
not addressed, will weaken its ability to manage its highly	 
complex programs. NASA has been on GAO's high-risk list since	 
1990 because of its failure to effectively oversee its contracts 
and contractors, due in part to the agency's lack of accurate and
reliable information on contract spending. GAO's statement	 
focused on (1) how NASA's history of clean audit opinions served 
to mask the true extent of the agency's financial management	 
difficulties; (2) the results of NASA's fiscal year 2003	 
financial statement audit, which are a departure from the fiscal 
year 2002 results; (3) NASA's effort to implement an integrated  
financial management system; and (4) the challenges NASA faces in
reforming its financial management organization. Although GAO	 
does not make specific recommendations in this statement, GAO	 
previously made several recommendations to improve NASA's	 
acquisition and implementation strategy for its financial	 
management system. While NASA ultimately agreed to implement all 
of the recommendations, it disagreed with most of the		 
findings--stating that its acquisition and implementation	 
strategy had already addressed GAO's concerns.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-754T					        
    ACCNO:   A10139						        
  TITLE:     National Aeronautics and Space Administration:	      
Significant Actions Needed to Address Long-standing Financial	 
Management Problems						 
     DATE:   05/19/2004 
  SUBJECT:   Contract administration				 
	     Financial management				 
	     Financial management systems			 
	     Financial statement audits 			 
	     Internal controls					 
	     Program management 				 
	     Reporting requirements				 
	     Systems conversions				 
	     Decision making					 
	     NASA Integrated Financial Management		 
	     Program						 
                                                                 

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GAO-04-754T

United States General Accounting Office

GAO Testimony

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

For Release on Delivery Expected at 2:00 p.m. EDT Wednesday, May 19, 2004

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

    Significant Actions Needed to Address Long-standing Financial Management
                                    Problems

Statement of

Gregory D. Kutz
Director, Financial Management and Assurance

Allen Li
Director, Acquisition and Sourcing Management

                                       a

GAO-04-754T

Highlights of GAO-04-754T, a testimony before the Subcommittee on
Government Efficiency, Financial Management, and Intergovernmental
Relations, Committee on Government Reform, House of Representatives

The Subcommittee asked GAO to testify on the status of the National
Aeronautics and Space Administration's (NASA) financial management reform
efforts. NASA faces major challenges that if not addressed, will weaken
its ability to manage its highly complex programs. NASA has been on GAO's
high-risk list since 1990 because of its failure to effectively oversee
its contracts and contractors, due in part to the agency's lack of
accurate and reliable information on contract spending. GAO's statement
focused on (1) how NASA's history of clean audit opinions served to mask
the true extent of the agency's financial management difficulties; (2) the
results of NASA's fiscal year 2003 financial statement audit, which are a
departure from the fiscal year 2002 results; (3) NASA's effort to
implement an integrated financial management system; and (4) the
challenges NASA faces in reforming its financial management organization.

Although GAO does not make specific recommendations in this statement, GAO
previously made several recommendations to improve NASA's acquisition and
implementation strategy for its financial management system. While NASA
ultimately agreed to implement all of the recommendations, it disagreed
with most of the findings-stating that its acquisition and implementation
strategy had already addressed GAO's concerns.

www.gao.gov/cgi-bin/getrpt? GAO-04-754T.

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].

May 19, 2004

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

Significant Actions Needed to Address Long-standing Financial Management
Problems

NASA faces major challenges in fundamentally reforming its financial
management organization and practices. While some areas needing reform
relate to automated systems, automation alone is not sufficient to
transform NASA's financial management culture. Specifically, NASA needs to
fully integrate its financial management operations with its program
management decision-making process. Until that occurs, NASA risks
addressing the symptoms of its problems without resolving the underlying
causes. These causes include an agency culture that has not fully
acknowledged the nature and extent of its financial management
difficulties and does not link financial management to program
implications. Historically, NASA management has downplayed the severity of
its problems and has viewed the agency's financial operation as a function
designed to produce clean financial audit opinions instead of viewing it
as a tool that supports program managers in making decisions about program
cost and performance.

GAO's work has identified several areas of concern:

o  	Clean financial audit opinions masked serious financial management
problems. Financial audits of NASA during the late 1990s did not provide
an accurate picture of the agency's financial management operations, and
instead masked serious problems that continue to exist today, including
significant internal control weaknesses and systems that do not comply
with federal standards.

o  	The new financial management system did not address all key
stakeholder needs. GAO reported in April 2003 that NASA designed and
implemented the new system's core financial module without involving key
stakeholders, including program managers, cost estimators, and the
Congress.

o  	NASA did not follow key best practices in implementing its new
financial management system. GAO reported in April 2003 and again in
November 2003 that the new system may do less and cost more than NASA
expects because the agency did not follow key best practices for acquiring
and implementing the system. For example, NASA acquired and deployed
system components without an enterprise architecture and lacked discipline
in its cost estimating processes.

o  	The new financial management system did not provide key external
reporting capabilities. GAO reported in November 2003 that the system
would not generate complete and accurate information necessary for
external reporting of NASA property and budgetary data.

Finally, if NASA is to reap significant benefits from its new financial
management system, it must transform its financial management organization
into a customer-focused partner in program results. This will require
sustained top leadership attention combined with effective organizational
alignment, strategic human capital management, and end-toend business
process improvement.

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). Since its inception in 1958, NASA has undertaken numerous
programs-involving earth and space science, aerospace technology, human
space flight, and biological and physical research-that have resulted in
significant scientific and technological advances, enhancing the quality
of life on earth. In recent years, NASA has experienced a number of
setbacks with its programs and operations, including massive cost overruns
associated with the International Space Station and, with the Columbia
tragedy, the need for the agency to develop return-to-flight strategies
and mitigate the impact of the loss of the shuttle on the construction of
the space station.

On January 14, 2004, President Bush outlined a bold new vision for U.S.
space exploration that will set a new course for NASA. However, to
successfully execute this new vision, NASA must address a number of
longstanding financial management challenges that threaten NASA's ability
to manage its programs, oversee its contractors, and effectively allocate
its budget across its numerous projects and programs. In fact, since 1990
we have identified NASA's contract management as an area of high risk, in
part because the agency lacked effective systems and processes for
overseeing contract spending and performance. NASA has begun taking action
to address many of these challenges through its effort to implement a new
integrated financial management system; however, many of NASA's financial
management problems are deeply rooted in an agency culture that has not
fully acknowledged the nature and extent of its financial management
difficulties and does not view finance as intrinsic to the agency's
program management decision process.

My testimony today will focus on the results of our recent work related to
NASA's financial management challenges and the agency's efforts to
implement an integrated financial management system. Specifically, I will
discuss (1) how NASA's history of clean audit opinions served to mask the
true extent of the agency's financial management difficulties; (2) the
results of NASA's fiscal year 2003 financial statement audit, which are a
departure from the fiscal year 2002 results; (3) NASA's current effort to
implement an integrated financial management system; and (4) the
challenges NASA faces in reforming its financial management organization.
We have performed work and issued several reports in response to
legislative mandates and at the request of other interested committees. We
also

reviewed the reports of NASA's Office of Inspector General and the
independent public accounting firms that audited NASA's financial
statements for fiscal year 2003 and for several previous years. With the
exception of NASA's financial statements for fiscal year 2002, in which we
performed a limited-scope review of the financial statement audit
performed by NASA's contracted independent public accountant (IPA), we did
not review the IPA's underlying audit work. We performed all work in
accordance with generally accepted government auditing standards. My
statement today is drawn from the findings and conclusions in GAO's,
NASA's Office of Inspector General's, and the independent auditors'
reports.

SummaryNASA has fundamental problems with its financial management
operations that not only affect its ability to externally report reliable
information, but more important, hamper its ability to effectively manage
and oversee its major programs, such as the space station and the shuttle
program. NASA's financial audits during the 1990s masked serious problems
with its financial management operations that continue today.
Specifically, from 1996 through 2000, NASA was one of the few agencies to
be judged by its independent auditor at the time, Arthur Andersen, as
meeting all of the federal financial reporting requirements. However, our
work at NASA during this same period told a different story. During this
period, we issued a wide range of reports that detailed the agency's
difficulties associated with (1) overseeing its contractors and their
financial and program performance, (2) controlling program costs and
producing credible cost estimates, and (3) supporting the amounts that it
had reported to the Congress as obligated against statutory spending
limits for the space station and related space shuttle support. We also
concluded, based on work we performed related to a misstatement in NASA's
fiscal year 1999 financial statements, that Arthur Andersen's work did not
meet professional standards, and we questioned NASA management's and its
auditor's determination that the agency's systems substantially complied
with federal standards.

The results of NASA's fiscal year 2003 financial statement audit confirm
that NASA's financial management problems continue today. NASA's
independent auditor, Pricewaterhouse Coopers (PwC), disclaimed an opinion
on NASA's fiscal year 2003 financial statements; reported material
weaknesses in internal controls; and for the third straight year,
concluded,

just as we reported in November 2003,1 that the agency's new financial
management system did not comply with the requirements of the Federal
Financial Management Improvement Act of 1996 (FFMIA).2 Although NASA
attributed the auditor's disclaimer of opinion to the agency's
implementation of a new financial management system, many of the reported
problems were long-standing issues not related to implementation of the
new system.

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). Through IFMP, NASA has
committed to modernizing its business processes and systems in a way that
if implemented properly, will introduce interoperability and thereby
improve the efficiency and effectiveness of its operations as well as
bring the agency into compliance with federal system requirements. NASA
has also committed to implementing IFMP within specific cost and schedule
constraints. In 2003, we issued five reports3 outlining the considerable
challenges NASA faces in meeting its IFMP commitments and providing NASA
the necessary tools to oversee its contracts and manage its program. For
example, in April 2003, we reported that NASA had deferred addressing the
needs of key system stakeholders,4 including program

1U.S. General Accounting Office, Business Modernization: NASA's Integrated
Financial Management Program Does Not Fully Address Agency's External
Reporting Issues, GAO04-151 (Washington, D.C.: Nov. 21, 2003).

2FFMIA 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. Government Standard General Ledger at
the transaction level.

3U.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); Information Technology:
Architecture Needed to Guide NASA's Financial Management Modernization,
GAO-04-43 (Washington, D.C.: Nov. 21, 2003); Business Modernization:
Disciplined Processes Needed to Better Manage NASA's Integrated Financial
Management Program, GAO-04-118 (Washington, D.C.: Nov.21, 2003); Business
Modernization: NASA's Challenges in Managing Its Integrated Financial
Management Program, GAO-04-255 (Washington, D.C.: Nov. 21, 2003); and
GAO-04-151.

4NASA 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.

managers and cost estimators, and was not following key best practices for
acquiring and implementing the system. We also reported that NASA lacked
the disciplined requirements management and testing processes needed to
reduce the risk associated with its effort to acceptable levels.
Therefore, NASA did not have reasonable assurance that the program would
meet its cost, schedule, and performance objectives. Then, in November
2003, we reported that NASA (1) acquired and deployed IFMP system
components without an enterprise architecture, or agencywide modernization
blueprint, to guide and constrain program investment decisions; (2) did
not use disciplined cost estimating processes or recognized best practices
in preparing its life cycle cost estimates; and (3) had delayed
implementation of many key external reporting capabilities. We made a
number of recommendations in these reports to improve NASA's acquisition
and implementation strategy for IFMP. While NASA ultimately agreed to
implement all of our recommendations, it disagreed with most of our
findings-stating that its acquisition and implementation strategy had
already addressed many of our concerns.

Finally, NASA faces significant challenges in overcoming its financial
management difficulties and reforming its financial management operations.
For example, NASA's independent auditor, PwC, attributed many of the
agency's financial management problems to a lack of understanding by
NASA's staff of federal reporting requirements. In addition, over the past
4 years, we have issued numerous reports highlighting NASA's financial
management difficulties and making recommendations for improvement.
However, NASA management has been slow to implement these recommendations
and in many cases has denied the existence of the problems we and others
have identified- instead attributing the agency's difficulties to the
auditor's sampling methodology or the auditor's lack of understanding of
NASA's overall operations. Until NASA fully acknowledges the nature and
extent of its financial management difficulties and better integrates the
agency's financial management operation with its program management
decision process, NASA will continue to face many of the same financial
management problems discussed in my testimony today.

  Clean Financial Audit Opinions Masked Serious Financial Management Problems

NASA's financial audits during the 1990s masked serious problems with its
financial management operations that continue today. Specifically, from
1996 through 2000, NASA was one of the few agencies to be judged by its
independent auditor, 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 with
financial management systems that were reported to be in substantial
compliance with the requirements of FFMIA. FFMIA, building on previous
financial management reform legislation, stresses that agencies need to
have systems that provide managers with the reliable, timely, and accurate
financial information that they need to ensure accountability on an
ongoing basis, as well as to make informed decisions on investing
resources, managing costs, and overseeing programs. 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-to-day management decision making.
However, as others and we have reported, the independent auditor's reports
did not provide an accurate picture of NASA's financial management systems
and failed to disclose pervasive financial management problems that
existed at NASA then and continue today. Ultimately, these unqualified
opinions and positive reports on NASA's internal controls and systems
served only to mask the serious financial management problems that existed
at NASA throughout this period.

o First in 1990 and then in subsequent years, we identified contract
management as an area at high risk 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.5 During this period, we also issued a wide
range of reports that detailed the agency's

5At 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).

difficulties associated with controlling program costs and producing
credible cost estimates.

o In 2000, 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 independent auditor. As we reported6 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. We
concluded that Arthur Andersen's work did not meet professional standards,
and we questioned NASA management's and its auditor's determination that
the agency's systems substantially complied with the requirements of
FFMIA.

o In 2001 and subsequent years, our work in response to a legislative
mandate revealed that NASA was unable to support the amounts that it had
reported to the Congress as obligated against statutory spending limits
for the space station and related space shuttle support.7 Here again,
NASA's inability to provide this detailed obligation data was linked to
its lack of a modern, integrated financial management system.

o Finally, in February 2002, NASA's new independent auditor, PwC, 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
and stated that contrary to previous financial audit reports, NASA's
financial management systems did not substantially comply with FFMIA.

6U.S. General Accounting Office, Financial Management: Misstatement of
NASA's Statement of Budgetary Resources, GAO-01-438 (Washington, D.C.:
Mar. 30, 2001).

7U.S. General Accounting Office, NASA: International Space Station and
Shuttle Support Cost Limits, GAO-01-1000R (Washington, D.C.: Aug. 31,
2001), and NASA: Compliance with Cost Limits Cannot Be Verified,
GAO-02-504R (Washington, D.C.: Apr. 10, 2002).

o Although NASA received an unqualified opinion on its fiscal year 2002
financial statements,8 NASA's auditor again report material weaknesses in
NASA's internal controls over its Property, Plant, and Equipment (PP&E)
and materials, which make up nearly $37 billion, or 85 percent, of NASA's
assets, and over the agency's processes for preparing its financial
statements and performance and accountability report. According to the
auditor's report, various deficiencies continued to exist within NASA's
financial management operations, including (1) insufficient resources to
address the volume of compilation work required to prepare NASA financial
reports, (2) lack of an integrated financial management system, and (3)
lack of understanding by NASA staff of federal reporting requirements. The
nature and extent of the reported material weaknesses highlighted the
agency's inability to generate reliable data for daily operations and
decision making. Thus, it is not surprising that the auditor again
concluded that NASA's financial management systems did not substantially
comply with the requirements of FFMIA.

  NASA's Auditor Disclaims an Opinion on Fiscal Year 2003 Financial Statements

NASA's financial management problems and internal control weaknesses
continue to exist today. NASA's auditor, PwC, disclaimed an opinion on
NASA's fiscal year 2003 financial statements. According to the auditor's
report, NASA was unable to provide PwC sufficient evidence to support the
financial statements and complete the audit within the time frames
established by the Office of Management and Budget. In addition, for the
third straight year, NASA's independent auditor concluded, just as we

8We conducted a limited scope review of NASA's fiscal year 2002 financial
statement audit performed by NASA's IPA, PwC, to assist in planning future
audits of the U.S. government's consolidated financial statements. Based
on our review of PwC's supporting audit evidence, we would not have been
able to rely on its work for the purpose of fulfilling our
responsibilities related to the audit of the U.S. government's
consolidated financial statements. We reported in March of 2004 to the
NASA Inspector General that our review of PwC's supporting audit evidence
revealed deficiencies in audit documentation, audit planning, and testing.
Specifically, adequate audit tests were not performed for major balance
sheet line items such as Fund Balance with Treasury; property, plant, and
equipment (PP&E); and materials. It was not our intent to determine
whether the audit opinion rendered was appropriate or to reperform any of
the auditor's work. Our procedures consisted of an evaluation of evidence
obtained from the auditor's fiscal year 2002 audit documentation and
discussions with audit personnel. We did not independently test,
reperform, or make supplemental tests of any of the account balances.

reported in November 2003,9 that the agency's new financial management
system did not comply with the requirements of FFMIA. Although NASA
attributed the auditor's disclaimer of opinion to the agency's
implementation of a new financial management system, many of the reported
problems were long-standing issues not related to implementation of the
new system. The auditor reported material weaknesses that existed
throughout NASA's financial management operations.

o First, NASA was unable to provide reliable documentation and an audit
trail to support the financial statements. NASA's auditor reported that in
an effort to populate its new financial management system, NASA summarized
the previous 7 years of transaction-level detail from its legacy systems
and entered the cumulative amount into the new system as if the
transactions were current-year activity. As a result, many of the accounts
supporting the financial statements were overstated by billions of
dollars. In an effort to correct these errors and balance the accounts to
the general ledger, NASA made net adjustments totaling $565 billion but
was not able to provide documentation supporting the adjustments.

o Second, NASA's internal controls over its reconciliation of fund balance
with Treasury accounts were ineffective. Specifically, NASA failed to
reconcile its fund balance with Treasury accounts during the year and
resolve all differences. At year-end, NASA's general ledger account for
fund balance with Treasury was materially overstated and did not reconcile
to the balance reported by Treasury at year-end. To correct the
overstatement, NASA made $2 billion in unsupported net adjustments to its
Fund Balance with Treasury account, which had the effect of reducing
NASA's recorded balance so it equaled Treasury's reported balance. This
type of adjustment is similar to forcing the balance recorded in your
checkbook at the end of the month to reconcile with your bank statement.
Instead of trying to determine the reason for the error and resolve the
difference you, simply "plug" the difference to your checkbook balance.
NASA's failure to perform reconciliation procedures throughout the year is
a fundamental breakdown in basic internal controls and illustrates the
human capital challenges NASA faces in overcoming its financial management
problems.

9GAO-04-151.

o Third, NASA's processes for preparing its financial statements continue
to be ineffective. The continued weaknesses in NASA's financial statement
preparation processes resulted in major delays and errors in preparing
fiscal year-end financial statements. For example, NASA's auditor reported
inconsistencies, such as the significant differences between the agency's
Fund Balance with Treasury and Treasury's balance that should have been
identified and corrected by NASA as part of the agency's internal quality
control review process. In addition, NASA's financial statements were not
prepared in accordance with federal accounting standards. As we reported
in November 2003, the core financial module did not appropriately capture
accrued contract costs and accounts payable information in accordance with
federal accounting standards. Instead, in instances where costs and the
corresponding liabilities were greater than the associated obligations,
the differences were transferred outside of the general ledger and held in
suspense until additional funds were obligated, thus understating NASA's
reported program costs and liabilities. Although NASA officials stated
that as of October 1, 2003, they no longer post costs in excess of
obligations in a suspense account, their current solution still does not
appropriately capture accrued cost and accounts payable in accordance with
federal accounting standards.

o Finally, NASA continues to lack effective internal controls over PP&E
and materials. Although NASA reported that a corrective action plan had
been implemented to address the deficiencies identified in the previous
year's audit report, subsequent testing identified major errors in
contractor-held PP&E and materials.

  NASA's Effort to Implement New Integrated Financial Management System

NASA's new financial management system falls short in addressing the
long-standing financial management issues that have prevented the agency
from effectively monitoring over 90 percent of its annual budget and
managing costly and complex programs, such as the International Space
Station. For years, NASA has cited deficiencies within its financial
management systems as a primary reason for not having the 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 its IFMP
effort. When completed, IFMP is planned to consist of nine

modules10 that will support a range of financial, administrative, and
functional areas. This is NASA's third attempt at modernizing its
financial management systems and processes. The first two efforts were
eventually abandoned after a total of 12 years and a reported $180
million. The schedule for implementing IFMP was originally planned for
fiscal year 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. As of June
30, 2003, NASA reported that it had fully implemented the core financial
module at all of its 10 operating locations.

Through IFMP, NASA has committed to modernizing its business processes and
systems in a way that if implemented properly, will introduce
interoperability and thereby improve the efficiency and effectiveness of
its operations as well as bring the agency into compliance with federal
financial management systems requirements. NASA has also committed to
implementing IFMP within specific cost and schedule constraints. In 2003,
we issued five reports11 outlining the considerable challenges NASA faces
in meeting its IFMP commitments and providing NASA the necessary tools to
oversee its contracts and manage its program. For example, in April 2003,
we reported that NASA had deferred addressing the needs of key system
stakeholders,12 including program managers and cost estimators, and was
not following key best practices for acquiring and implementing the
system. Then, in November 2003, we reported that NASA (1) acquired and
deployed system components of IFMP without an enterprise architecture, or
agencywide modernization blueprint, to guide and constrain program
investment decisions; (2) did not use disciplined cost estimating
processes or recognized best practices in preparing its life cycle cost
estimates; and (3) had delayed implementation of many key external
reporting capabilities.

10The nine modules are core financial, resume management, travel
management, position description management, human resource management,
payroll, budget formulation, contract administration, and asset
management.

11GAO-03-507, GAO-04-43, GAO-04-151, GAO-04-118, and GAO-04-255.

12NASA 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.

    IFMP Core Financial Module Will Not Fully Address the Needs of Key
    Stakeholders

Based on our review of NASA's three largest space flight programs-the
space station, the space shuttle, and the Space Launch Initiative,13 in
April 2003 we reported that the core financial module, as currently
implemented, did not fully address the information requirements of
stakeholders such as program managers, cost estimators, or the Congress.
While NASA considers these officials to be the ultimate beneficiaries of
the system's improvements, they were not involved in defining or
implementing the system requirements and will not have a formal role in
defining or measuring its success. As a result, NASA has neither
reengineered its core business processes nor established adequate
requirements for the system to address many of its most significant
management challenges, including improving contract management; producing
credible cost estimates; and providing the Congress with appropriate
visibility over NASA's large, complex programs. Specific issues for key
stakeholders include the following:

o Program managers. To adequately oversee NASA's largest contracts,
program managers need reliable contract cost data-both budgeted and
actual-and the ability to integrate these data with contract schedule14
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 the cost and schedule data that they need. As a
result, program managers told us that they would not use the core

13During the time of our review, NASA was pursuing a program-known as the
Space Launch Initiative-to build a new generation of space vehicles to
replace its aging space shuttle. This was part of NASA's broader plan for
the future of space travel-known as NASA's Integrated Space Transportation
Plan. On October 21, 2002, NASA postponed further implementation of the
program to focus on defining the Department of Defense's role, determining
future requirements of the International Space Station, and establishing
the agency's future space transportation needs. In November 2002, the
administration submitted to the Congress an amendment to NASA's fiscal
year 2003 budget request to implement a new Integrated Space
Transportation Plan. The plan made investments to extend the space
shuttle's operational life and refocused the Space Launch Initiative
program on developing an orbital space plane-which provides crew transfer
capability to and from the space station-and next generation launch
technology. The President's vision on space exploration, announced in
January 2004, may alter that plan.

14The term "schedule" incorporates both the concept of status of work and
whether a project or task is being completed within planned time frames.
Depending on the nature of the work being performed, the method of
measuring work progress varies. Work is measured in terms of tasks when a
specific end product or result is produced. But when work does not produce
a specific end product or result, level-of-effort or a more timeoriented
method of measurement is used.

financial module to manage programs such as the space station and space
shuttle and instead would continue to rely on hard copy reports,
electronic spreadsheets, or other means to monitor contractor performance.

o Cost estimators. In order to estimate the costs of programs, cost
estimators need reliable contract cost data at a level of detail greater
than what the core financial module maintains. Although this module is
technologically capable of maintaining the detail they need, cost
estimators were not involved in defining the system requirements or
reengineering business processes. Reengineering is critical here because a
driving factor in determining what information cost estimators receive
from contractors is what level of detail the contractors are required to
provide, based on the contracts that they have negotiated with NASA. As a
result, NASA has not determined the most cost-effective way to satisfy the
information needs of its cost estimators. Because the core financial
module will not contain the sufficiently detailed historical cost data
necessary for projecting future costs, cost estimators will continue to
rely on labor-intensive data collection efforts after a program is
completed.

o The Congress. Based on our discussions with congressional staffs from
NASA's authorizing committees, the agency did not consult with them
regarding their information needs. Consequently, NASA cannot be sure that
it is implementing a system that will provide the Congress with the
information it needs for oversight.

According to IFMP officials, they chose to forgo certain system
capabilities to expedite implementation of the core financial module.
Thus, while the core financial module software is technologically capable
of meeting key stakeholders' needs, it has not been configured to do so.
IFMP officials have stated that these capabilities can be added at a later
date. We made several recommendations related to engaging stakeholders,
including cost estimators and program managers, in developing a complete
and accurate set of requirements. Although NASA officials concurred with
our recommendations, they disagreed with our finding-stating that they had
already effectively engaged key stakeholders.

    NASA Was Not Following Key Best Practices for Acquiring and Implementing
    IFMP

We reported in April 2003 that NASA's approach to implementing its new
system did not optimize the system's performance and would likely cost
more and take longer to implement than necessary. Specifically, 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. First, NASA did not analyze the relationships
among selected and proposed IFMP components to understand the logical and
physical relationships among the components it acquired. By acquiring
these IFMP components without first understanding system component
relationships, NASA increased its risks of implementing a system that will
not optimize mission performance and will cost more and take longer to
implement than necessary. Second, although industry best practices and
NASA's own system planning documents indicate that detailed requirements
are needed as the basis for effective system testing, NASA did not require
documentation of detailed system requirements prior to system
implementation and testing. NASA's approach instead relied on certain
subject matter experts' knowledge of the detailed requirements necessary
to evaluate the functionality actually provided.

We made several recommendations to focus near-term efforts on stabilizing
the operational effectiveness of deployed IFMP components. While NASA
officials concurred with our recommendations, they disagreed with our
findings-stating that they had already implemented effective processes
related to performing dependency analysis and requirements and testing.

    IFMP Components Deployed without an Enterprise Architecture

We reported in November 2003 that NASA had acquired and deployed system
components of IFMP without an enterprise architecture, or agencywide
modernization blueprint, to guide and constrain program investment
decisions-actions that increased the chances that these system components
will require additional time and resources to be modified and to operate
effectively and efficiently. During the course of our review of IFMP, NASA
implemented some of these key architecture management capabilities, such
as having an enterprise architecture program office; designating a chief
architect; and using an architecture development methodology, framework,
and automated tools. However, at the time, NASA had not yet established
other key architecture management capabilities, such as designating an
accountable corporate entity to lead the architecture effort, having an
approved policy for developing and maintaining the architecture, and
implementing an independent verification and validation function to
provide needed assurance that

architecture products and architecture management processes are effective.

As NASA proceeds with its enterprise architecture effort, it is critical
that it employs rigorous and disciplined management practices. Such
practices form the basis of our architecture management maturity
framework,15 which specifies by stages the key architecture management
controls that are embodied in federal guidance and best practices,
provides an explicit benchmark for gauging the effectiveness of
architecture management, and provides a road map for making improvements.
GAO made several recommendations to ensure that NASA had the necessary
agencywide context within which to make informed IFMP and other systems
modernization decisions. NASA agreed that improvements were needed and
reported that it had efforts under way, consistent with our
recommendations, to develop an architecture and ensure that IFMP proceeded
within the context of the architecture. We have not evaluated NASA's
progress on these commitments.

    IFMP Further Challenged by Questionable Cost Estimates and an Optimistic
    Schedule

Questionable cost estimates, an optimistic schedule, and insufficient
processes for ensuring adequate funding reserves have put IFMP at an even
greater risk of not meeting program objectives. In preparing its life
cycle cost estimates for IFMP,16 NASA did not use disciplined cost
estimating processes as required by its standards and recognized best
practices. For example, NASA's current IFMP life cycle cost estimate-which
totals $982.7 million and is 14 percent, or $121.8 million, over the
previous IFMP life cycle cost estimate-was not prepared on a full-cost
basis. The estimate included IFMP direct program costs, NASA enterprise
support, and civil service salaries and benefits, but it did not include
the cost of retiring the system, enterprise travel costs, the cost of
nonleased NASA facilities for housing IFMP, and other direct and indirect
costs likely to be incurred during the life of the program. In addition,
NASA did not consistently use breakdowns of work in preparing the cost
estimate, although NASA guidance calls for breaking down work into smaller
units to facilitate cost estimating and project and contract management as
well as

15U.S. General Accounting Office, Information Technology: A Framework for
Assessing and Improving Enterprise Architecture Management (Version 1.1),
GAO-03-584G (Washington, D.C.: April 2003).

16Fiscal years 2001 through 2010.

to help ensure that relevant costs are not omitted. In cases where work
breakdowns were used, the agency did not always show the connection
between the work breakdown estimates and the official program cost
estimate. This has been a weakness since the inception of the program.
Without a reliable life cycle cost estimate, NASA will have difficulty
controlling program costs.

In addition, NASA's schedule may not be sufficient to address program
challenges, such as personnel shortages. To address personnel shortages
during the implementation of the core financial module, NASA paid nearly
$400,000 for extra hours worked by center employees and avoided a slip in
IFMP's compressed schedule. However, the schedule for implementing the
budget formulation module has slipped because IFMP implemented this module
simultaneously with the core financial module-an action advised against by
a contractor conducting a lessons-learned study-placing heavy demand on
already scarce resources.

Finally, the program did not consistently perform in-depth analyses of the
potential cost impact of risks and unknowns specific to IFMP, as required
by NASA guidance. Instead, the program established funding reserves on the
basis of reserve levels set by other high-risk NASA programs. As a result,
reserve funding for IFMP contingencies may be insufficient-which is
particularly problematic, given the program's questionable cost estimates
and optimistic schedule. As we were completing our audit work, one
module-budget formulation-was already experiencing shortfalls in its
reserves, and project officials expressed concern that the module's
functionality may have to be reduced. Moreover, the program did not
quantify the cost of high criticality risks-risks that have a high
likelihood of occurrence and a high magnitude of impact-or link these
risks to funding reserves to help IFMP develop realistic budget estimates.
We made recommendations to provide NASA the necessary tools to accurately
estimate program cost and predict the impact of program challenges.
Although NASA concurred with our recommendations for corrective action,
NASA indicated that its current processes were adequate for preparing work
breakdown structure cost estimates, estimating life-cycle costs, and
establishing reserves based on IFMP-specific risks.

Core Financial Module Does The core financial module, as currently
implemented, also does not address Not Address Long-standing many of the
agency's most challenging external reporting issues. External Reporting
Issues Specifically, the core financial module does not address NASA's
past

external reporting problems related to property accounting and budgetary

accounting. Such shortcomings limit the ability of the Congress and other
interested parties to evaluate NASA's performance on an ongoing basis
because NASA's financial management systems do not provide a complete
accounting of its assets and how funds were spent. If these issues are not
addressed, NASA will continue to face risks in its ability to adequately
oversee its programs, manage their costs, and provide meaningful
information to external parties, such as the Congress.

o Property accounting. The core financial module has not addressed the
problems I discussed previously related to material weaknesses in NASA's
internal controls over PP&E and materials. NASA's PP&E and materials are
physically located throughout the world, at locations 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,
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. Because NASA does not maintain transaction-level detail,
the agency is not able to link the money it spends on construction of its
property to discrete property items and therefore must instead rely solely
on its contractors to periodically report summary-level information on
these assets to NASA.

o Budgetary accounting. The software NASA selected, and is now using, for
its core financial module does not capture and report certain key
budgetary information needed to prepare its Statement of Budgetary
Resources. As a result, NASA continues to rely on manual compilations and
system queries to extract the data needed to prepare the Statement of
Budgetary Resources-just as it did using its legacy general ledger system.
According to NASA officials, a "patch" release or software upgrade in
October 2003 has addressed the issues we identified related to budgetary
accounting. However, we have not verified NASA's assertion and previously
reported that NASA had implemented similar

"patch" releases that did not fully address this issue. 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. Although the software that NASA purchased for the
core financial module was certified by the Joint Financial Management
Improvement Program (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
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. As I mentioned previously, NASA did not use the disciplined
requirements management and testing processes necessary to reduce the
risks associated with its implementation efforts to acceptable levels.
Therefore, it is not surprising that NASA found that the system was not
providing the desired functionality or performing as expected.

    Core FinancialModule Does Not Comply with FFMIA

As I mentioned previously, in November 2003,17 we reported that NASA's new
core financial module did not comply substantially with the requirements
of FFMIA. At the time, NASA disagreed with our conclusions and
recommendations regarding its financial management systems and stated that
many of the problems we identified as of June 30, 2003, had been resolved
by September 30, 2003. However, in February 2004, after NASA's independent
auditor also concluded that NASA's financial management system, at
September 30, 2003, did not substantially comply with the requirements of
FFMIA, NASA reversed its position and concurred with all of our
recommendations. Specifically, NASA agreed to implement a corrective
action plan that will engage key stakeholders in developing a complete and
accurate set of user requirements, reengineering its acquisition
management processes, and bringing its systems into compliance with FFMIA.

FFMIA stresses the need for agencies to have systems that can generate
timely, accurate, and useful financial information with which to make

17GAO-04-151.

informed decisions, manage daily operations, and ensure accountability on
an ongoing basis. Compliance with FFMIA goes far beyond receiving a
"clean" opinion on financial statements. Instead, FFMIA provides agencies
with the building blocks needed to reform their financial management
organization and practices, and to support program managers in making wise
decisions about program cost and performance. However, as we reported in
April 2003 and in November 2003, NASA's core financial module did 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, such as the
International Space Station. NASA's continuing inability to provide its
managers with timely, relevant data on contract spending and performance
is a key reason that we continue 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
generalpurpose financial reports and another that is used by program
managers to run NASA's projects and programs.

  NASA Faces Significant Challenges in Reforming Its Financial Management
  Operations

Many of NASA's financial management problems are deeply rooted in an
agency culture that has not fully acknowledged the nature and extent of
its financial management difficulties and does not see finance as
intrinsic to the agency's program management decision process. Over the
past 4 years, we have issued numerous reports highlighting NASA's
financial management difficulties and making recommendations for
improvement. However, NASA management has been slow to implement these
recommendations and in many cases has denied the existence of the problems
we and others have identified-instead attributing the agency's
difficulties to the auditor's sampling methodology or the auditor's lack
of understanding of NASA's operations. For example:

o In response to our August 2001 and April 2002 reports on NASA's
compliance with the International Space Station and shuttle support cost
limits, NASA management disagreed with our finding that NASA was unable to
support the amounts that it had reported to the Congress as obligated
against the statutory spending limits for the space station and related
space shuttle support costs. At the time, NASA asserted that the
obligations were verifiable and that our audit methodology was the
problem. We planned to use statistical sampling, which is a standard,

widely used methodology that enables auditors to draw conclusions about
large populations of transactions by testing a relatively small number of
those transactions. In order for a statistical sample to be valid, the
complete population of items of interest must be subject to selection and
every transaction must have a chance to be selected for testing. However,
after nearly a year, NASA was not able to provide us with a complete
population of transactions from which to draw our sample. Consequently, we
were unable to verify the accuracy of the amount NASA reported against the
cost limits.

o In a March 20, 2002, statement before this subcommittee NASA management
attributed its failure to obtain an unqualified opinion on the agency's
fiscal year 2001 financial statements to its auditor's newly required
protocol for sampling. However, the only thing new about the sampling
protocol was that NASA's previous auditor, Arthur Andersen, had not
employed a similar approach. In fact, to test amounts reported on NASA's
fiscal year 2001 financial statements, NASA's new financial statement
auditor, PwC, attempted to use standard transaction-based statistical
sampling similar to the methods we had attempted in our effort to audit
the underlying support for amounts charged to the spending limits. In its
audit report, PwC noted that successive summarization of data through
NASA's various financial systems impeded NASA's ability to maintain an
audit trail down to the detailed transaction-level source documentation.
For this and other reasons, PwC concluded that it was unable to audit
NASA's financial statements.

o In response to our April 2003 report on the status of NASA's
implementation of IFMP, NASA management disagreed with all of our
findings, including our concerns that NASA program managers and cost
estimators were not adequately involved in defining system requirements
and, therefore the system did not fully address their information needs.
In its written comments, NASA dismissed these concerns and stated that the
problem was a lack of understanding not a lack of information, and that it
was incumbent upon program managers and cost estimators to learn and
understand the capabilities of the new system and take advantage of them
for their specific purposes.

o Finally, in response to our November 2003 report on IFMP's external
reporting capabilities, NASA management disagreed with all of our
conclusions and recommendations, including our conclusion that the core
financial module, as implemented in June 2003, did not comply
substantially with FFMIA. In its written comments, dated October 31,

2003, NASA asserted that many of the problems we identified in June 2003
were resolved by September 30, 2003. However, NASA's assertions did not
prove to be accurate. In January 2004, NASA's independent financial
statement auditor confirmed that the problems we identified in June 2003
related to NASA's accrued costs, budgetary accounting, and property
accounting still existed at September 30, 2003, and that the system was
not in compliance with FFMIA requirements. NASA reversed its position in
February 2004 and concurred with our recommendations that it implement a
corrective action plan that will engage key stakeholders in developing a
complete and accurate set of user requirements, reengineering its
acquisition management processes, and bringing its systems into compliance
with FFMIA.

The challenges that NASA faces in reforming its financial management
operations are significant, but not insurmountable. As our prior work18
shows, clear, strong leadership will be critical for ensuring that NASA's
financial management organization delivers the kind of analysis and
forward-looking information needed to effectively manage its many complex
space programs. Further, in order to reap the full benefit of a modern,
integrated financial management system, NASA must (1) routinely generate
reliable cost and performance information and analysis, (2) undertake
other value-added activities that support strategic decision making and
mission performance, and (3) build a finance team that supports the
agency's mission and goals.

ConclusionUntil NASA fully acknowledges the nature and extent of its
financial management difficulties and better integrates its financial
management operations with its program management decision process, it
will continue to face many of the same financial management problems I
have discussed today. While modernizing NASA's financial management system
is essential to enabling the agency to provide its managers with the kind
of timely, relevant, and reliable information that they need to manage
cost, measure performance, make program funding decisions, and analyze
outsourcing or privatization options, NASA cannot rely on technology

18U.S. General Accounting Office, Executive Guide: Creating Value Through
World-class Financial Management, GAO/AIMD-00-134 (Washington, D.C.: April
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.

alone to solve its financial management problems. Rather, transforming
NASA's financial management organization will also require sustained top
leadership attention combined with effective organizational alignment,
strategic human capital management, and end-to-end business process
reengineering. This goes far beyond obtaining an unqualified audit opinion
and requires that agency financial managers focus on their overall
operations in a strategic way and not be content with an automated system
that helps the agency get a "clean" audit opinion once a year without
providing additional value to the program managers and cost estimators who
use its financial data.

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

Contacts andFor further information regarding this testimony, please
contact Gregory D. Kutz at (202) 512-9095 or [email protected] or Allen Li at
(202) 512-3600 or

[email protected] or Diane Handley at (404) 679-1986 or
[email protected]. Individuals making key contributions to this testimony
included Fannie Bivins and Francine DelVecchio.

Related GAO Products

Business Modernization: Disciplined Processes Needed to Better Manage
NASA's Integrated Financial Management Program. GAO-04-118. Washington,
D.C.: November 21, 2003.

Business Modernization: NASA's Integrated Financial Management Program
Does Not Fully Address External Reporting Issues. GAO-04-151. Washington,
D.C.: November 21, 2003.

Information Technology: Architecture Needed to Guide NASA's Financial
Management Modernization. GAO-04-43. Washington, D.C.: November 21, 2003.

Business Modernization: Improvements Needed in Management of NASA's
Integrated Financial Management Program. GAO-03-507. Washington D.C.:
April 30, 2003.

Major Management Challenges and Program Risks: National Aeronautics and
Space Administration. GAO-03-114. Washington, D.C.: January 2003.

NASA: Compliance With Cost Limits Cannot Be Verified.
GAO-02504R.Washington, D.C.: April 10, 2002.

NASA: Leadership and Systems Needed to Effect Financial Management
Improvements. GAO-02-551T. Washington, D.C.: March 20, 2002.

NASA: International Space Station and Shuttle Support Cost
Limits.GAO-01-1000R. Washington, D.C.: August 31, 2001.

Financial Management: Misstatement of NASA's Statement of Budgetary
Resources. GAO-01-438. Washington, D.C.: March 30, 2001.

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