National Aeronautics and Space Administration: Long-standing
Financial Management Challenges Threaten the Agency's Ability to
Manage Its Programs (27-OCT-05, GAO-06-216T).
Congress asked GAO to testify on the status of the National
Aeronautics and Space Administration's (NASA) financial
management reform efforts. NASA faces major financial management
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, due in part to the agency's lack of
accurate and reliable information on contract spending. GAO's
statement focuses on (1) NASA's key financial management
challenges, (2) how NASA's financial management challenges
compare with other federal agencies, (3) GAO's assessment of
NASA's progress toward implementing recommendations aimed at
improving its financial management system, and (4) the steps NASA
must take to reform its financial management organization. In its
related report, released today, GAO recommends that NASA develop
an integrated enterprise master schedule and
milestones--including improvement activities and plans, dates for
completion, performance measures, and clear accountability.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-216T
ACCNO: A40438
TITLE: National Aeronautics and Space Administration:
Long-standing Financial Management Challenges Threaten the
Agency's Ability to Manage Its Programs
DATE: 10/27/2005
SUBJECT: Contract administration
Cost analysis
Cost control
Financial management
Financial management systems
Financial statement audits
Internal controls
Program evaluation
Program management
Strategic planning
Cost estimates
NASA Integrated Enterprise Management
Program
******************************************************************
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GAO-06-216T
United States Government Accountability Office
GAO Testimony Before Congressional Requesters
For Release on Delivery Expected at 10:00 a.m. EST
Thursday, October 27, 2005 NATIONAL AERONAUTICS AND SPACE
ADMINISTRATION
Long-standing Financial Management Challenges Threaten the Agency's Ability to
Manage Its Programs
Statement of Gregory D. Kutz, Managing Director
Forensic Audits and Special Investigations
Allen Li, Director
Acquisition and Sourcing Management
GAO-06-216T
[IMG]
October 27, 2005
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
Long-standing Financial Management Challenges Threaten NASA's Ability to Manage
Its Programs
What GAO Found
NASA's new core financial management system has not addressed many of the
agency's most significant management challenges-including improving
contract management, producing credible cost estimates, and producing
auditable financial statements. Because NASA did not use disciplined
acquisition and implementation practices, the new system lacks basic
functionality-such as the ability to (1) produce transaction-level support
for key account balances, (2) properly identify adjustments or correcting
entries, and (3) correctly and consistently post transactions to the right
accounts. In addition, NASA did not use the implementation of its new
system as an opportunity to transform its operations and instead,
automated many of its existing, ineffective processes. Compounding its
existing problems, NASA also failed to recognize the importance and need
for highly skilled, well-trained financial personnel.
Most federal agencies have been able to obtain unqualified audit opinions,
while NASA's financial statements remain unauditable. However, the
problems experienced by NASA in its effort to reform its financial
management organization and implement a modern, integrated financial
management system are not uncommon among federal agencies. In fact, many
federal financial system modernization efforts have exceeded budgeted cost
and scheduled delivery dates without providing the anticipated system
functionality.
GAO's related report, released today, details NASA's progress toward
implementing prior recommendations related to its financial management
system. Overall progress has been slow, but in some areas NASA is
beginning to take steps toward improvements.
NASA's Progress in Implementing GAO's Recommendations
System component interoperability and enterprise
architecture 1 6 23
Process reengineering and requirements definition,
management, and testing 1 3 1
External financial reporting 0 0 4
Program life-cycle cost estimates and funding reserves 1 4 1
Total 3 13 29
Source: GAO.
To its credit, NASA has recognized the need to enhance the capabilities
and improve the functioning of its core financial management system.
Strong executive leadership will be critical for ensuring that NASA's
financial management organization delivers the kind of analysis and
forward-looking information it needs to effectively manage its many
complex programs. Such leadership must be combined with effective
organizational alignment, strategic human capital management, and
end-to-end business process reform.
United States Government Accountability Office
Mr. Chairmen and Members of the Subcommittees:
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 and enhanced 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, a key to the successful execution of this new vision is NASA's
ability to address a number of long-standing 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.
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. 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. In April 2000, NASA
began its third attempt at modernizing its financial management processes
and systems. The first two efforts were eventually abandoned after a total
of 12 years and a reported $180 million investment. NASA expects this
current effort, known as the Integrated Enterprise Management Program
(IEMP),1 to produce an integrated, agencywide financial management system
through the acquisition and incremental implementation of commercial
software packages and related hardware and software components. However,
in April and November 2003-3 years
1 The effort was formerly known as the Integrated Financial Management
Program (IFMP). According to NASA, IFMP was renamed to reflect the
addition of program management and labor distribution.
into NASA's IEMP implementation effort and with significant investment
already made in the program-we issued a series of four reports2 that
detailed weaknesses in NASA's acquisition and implementation strategy for
IEMP. As part of the four reports we issued, we made 45 recommendations
aimed at improving NASA's overall management and implementation of IEMP.
Our related report,3 released today, details our assessment of NASA's
progress toward implementing each of our 45 recommendations.
Our 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 our recommendations related to IEMP. Specifically, I will
discuss (1) NASA's key financial management challenges, (2) how NASA's
financial management challenges compare with other federal agencies, (3)
our assessment of NASA's progress toward implementing our recommendations
aimed at improving IEMP, and (4) the steps NASA must take to reform its
financial management organization.
We have performed work and issued several reports in response to
legislative mandates and at the request of the House Science Committee. We
also reviewed the reports of NASA's Office of Inspector General and the
independent public accounting (IPA) firms that audited NASA's financial
statements for fiscal year 2004 and for several previous years. However,
we did not review the IPA's underlying audit work. We performed all work
in accordance with U.S. generally accepted government auditing standards.
Our statement today is drawn from the findings and conclusions in reports
issued by GAO, NASA's Office of Inspector General, and the IPAs.
In summary, NASA currently lacks the systems, processes, and human capital
needed to produce credible cost estimates, oversee its contractors
2 GAO, Business Modernization: Improvements Needed in Management of NASA's
Integrated Financial Management Program, GAO-03-507 (Washington, D.C.:
Apr. 30, 2003); Business Modernization: NASA's Integrated Financial
Management Program Does Not Fully Address Agency's External Reporting
Issues, GAO-04-151 (Washington, D.C.: Nov. 21, 2003); Information
Technology: Architecture Needed to Guide NASA's Financial Management
Modernization, GAO-04-43 (Washington, D.C.: Nov. 21, 2003); and Business
Modernization: Disciplined Processes Needed to Better Manage NASA's
Integrated Financial Management Program, GAO-04-118 (Washington, D.C.:
Nov. 21, 2003).
3 GAO, Business Modernization: Some Progress Made toward Implementing GAO
Recommendations Related to NASA's Integrated Financial Management Program
(IFMP), GAO-05-799R (Washington, D.C.: Sept. 9, 2005).
and their financial and program performance, control program costs, and
produce timely, reliable financial information and auditable annual
financial statements. Although NASA has acknowledged the need for improved
financial management systems, processes, and human capital and has begun
to take steps toward achieving that goal, progress has been slow. Because
NASA did not adopt disciplined acquisition and implementation practices
when implementing its financial management system, IEMP, it has been
forced to take actions that should have been accomplished prior to
implementation-causing the agency to unnecessarily invest time and
resources to rework already deployed system components in order to produce
a system that meets user requirements. Further, NASA did not use IEMP as
an opportunity to transform the way it does business and instead,
automated many of its existing ineffective business processes. As a
result, NASA has yet to address its most significant program management
and external financial reporting issues-including improving contract
management, producing credible cost estimates, and properly accounting for
nearly $38 billion of reported property, plant, and equipment (PP&E) and
material.
NASA's Long-standing Financial Management Challenges Threaten the Agency's
Ability to Manage Its Programs and Produce Auditable Financial Statements
NASA has fundamental problems with its financial management operations
that not only affect its ability to externally report reliable
information, but more importantly, hamper its ability to effectively
manage and oversee its major programs, such as the space station and
shuttle program. Since 1990, we have identified NASA's contract management
as a high-risk area. This assessment has been based in part on our
repeated finding that NASA does not have good cost-estimating processes or
the financial information needed to develop good cost estimates for its
programs, making it difficult for NASA to oversee its contracts and
control costs. NASA's difficulties are rooted in an agency culture that
has not viewed financial management as an integral part of the agency's
program management decision process. Although NASA has acknowledged the
need for improved financial management information and has begun to take
steps toward achieving that goal, NASA currently lacks the systems,
processes, and human capital needed to produce credible cost estimates,
oversee its contractors and its financial and program performance, control
program costs, and produce auditable financial statements.
NASA Lacks the Systems, Processes, and Human Capital Needed to Effectively
Manage Its Programs
As currently designed, NASA's financial management system has not
addressed many of the agency's most significant program management
challenges-including improving contract management and producing credible
cost estimates. Because program managers and cost estimators were not
involved in the initial design and implementation of the core financial
module, the system was not designed to meet their needs and thus, does not
contain the cost data needed to manage NASA's most complex projects and
programs. This, combined with NASA's failure to reengineer its contractor
cost-reporting processes and a lack of trained financial management
personnel, has undermined NASA's recent efforts to improve its
cost-estimating and contract monitoring capabilities.
As we have reported numerous times, NASA consistently develops unrealistic
cost and schedule estimates, which at least in part, contributes to the
cost growth and schedule increases in many of its programs. To adequately
oversee NASA's largest and most complex programs and projects and mitigate
potential cost growth and schedule increases, managers need well-defined
processes for estimating the cost of programs and monitoring progress
against those estimates. A well-recognized technique used to monitor
progress on contracts, and a long-time NASA program management
requirement, is earned value management (EVM).4 EVM goes beyond the
two-dimensional approach of comparing budgeted costs to actuals. Instead,
it attempts to compare the value of work accomplished during a given
period with the work scheduled for that period. Recognizing the need to
establish a disciplined cost-estimating process that incorporates the
concepts of EVM, NASA developed a costestimating handbook in 2002-the
first such guidance provided to its costestimating community and program
and project managers. However, as we reported in April 2003, the
information requirements of program managers and cost estimators, which
were outlined in the cost-estimating handbook, were not considered when
NASA designed and implemented the core financial module-the backbone of
IEMP.
When NASA deployed the core financial module in 2003, NASA's
costestimating guidance was inconsistently applied across programs.
However, NASA has recently begun to take steps to institutionalize the use
of more disciplined cost-estimating and contract-management processes.
4 NASA requires EVM reporting and analysis for research and development
contracts with a total anticipated final value of $70 million or more, and
for production contracts with a total anticipated final value of $300
million or more.
For this initiative to be successful, as we have previously recommended,
NASA will also need to reengineer its business processes-including its
contractor cost-reporting requirements-and configure its financial system
to accommodate the information required by program managers and cost
estimators. However, NASA has yet to fully address weaknesses in its (1)
contractor cost-reporting requirements and (2) financial and technical
work-breakdown structure.
o Weaknesses in NASA contractor cost-reporting requirements affect
NASA's ability to manage its programs and monitor contractor performance.
NASA obtains contractor cost data from two primary sources-monthly
contractor financial management reports (i.e., NASA Form 533), and monthly
contractor cost performance reports. Both reports contain budget and
actual cost data, but only contractor costperformance reports contain the
data needed to perform EVM analysis. However, NASA did not evaluate the
adequacy of its existing contractor cost-reporting vehicles to determine
whether the reports met the information needs of program managers and cost
estimators. Instead, NASA chose to use NASA Form 533 data to populate the
core financial module without considering the merits of the data contained
in the contractor cost-performance reports. Consequently, the cost data
maintained in the core financial module are not adequate for monitoring
contractor performance for NASA's largest, most complex contracts- those
requiring EVM reporting and analysis. As discussed in our related report,
through an initiative known as Project Management Information Improvement
(PMI2), NASA plans to enhance the core financial module to provide better
project management information for decision-making purposes. As part of
this initiative, NASA plans to evaluate its contractor cost-reporting
policies and processes.
o The core financial module as currently implemented does not capture
cost information at the same level of detail that it is received from
NASA's contractors. Instead of implementing a financial-coding structure
that met the information needs of program managers, NASA embedded the same
financial-coding structure that it used in its legacy reporting systems in
the core financial module. As a result, the availability of detailed cost
data depends on the adequacy of NASA's legacy-coding structure. Therefore,
in some cases, contractor-provided cost data must be aggregated to a
higher, less detailed level before they are posted against the legacy
financialcoding structure. To its credit, as part of PMI2, NASA is in the
process of addressing this issue. However, NASA is still several years
away from reaping the benefit of these planned improvements.
In addition to ineffective business processes that result in inadequate
management information, we reported in May 2004 that NASA's use of
disciplined cost-estimating practices and EVM analysis was undermined by a
lack or trained staff and ineffective use and placement of cost analysts
across the agency. According to NASA officials, at the time, resource
constraints have prevented the agency from staffing many project offices
with appropriate personnel to fulfill all project functions. In response
to recommendations we made in our May 2004 report, NASA has begun to take
action to improve the efficiency and effectiveness of its costestimating
and EVM analysis staffs. Specifically, NASA has included requirements in
its March 2005 update to NASA's Program and Project Management Processes
and Requirements document that should facilitate efficient and effective
use of cost-estimating EVM analysis staff. Further, according to NASA, it
plans to provide both awareness briefings and indepth training to project
management and cost-estimating and analysis personnel to ensure
understanding and knowledge of NASA's costestimating and program
management policies and procedures. However, because these initiatives
have only recently begun, we cannot determine to what degree these efforts
will enable NASA to provide credible cost estimates.
As discussed in our related report, released today, NASA has recognized
the need to enhance the capabilities of the core financial module in order
to better serve its program management and cost-estimating communities. As
NASA proceeds with its planned improvements, it will be critical that the
agency address weaknesses in its financial management systems, processes,
and human capital in a comprehensive manner. Anything short of this will
continue to put NASA's programs at risk of cost and schedule overruns.
Ineffective Systems and Processes and Inadequately Trained Financial
Management Personnel Hamper External Financial-Reporting Efforts
NASA's core financial module-the backbone of IEMP-does not currently
address many of the agency's most challenging external reporting
issues-including problems related to budgetary accounting and property
accounting. NASA's independent financial statement auditors disclaimed an
opinion on NASA's fiscal year 2003 and 2004 financial statements. The
disclaimer resulted from NASA's inability to provide the auditors with
sufficient evidence to support the financial statements throughout the
fiscal year and at year end. Further, material weaknesses were found in
NASA's controls for: (1) financial systems, analysis, and oversight used
to prepare the financial statements; (2) reconciling differences in Fund
Balance with Treasury; (3) assuring that PP&E and materials are presented
fairly; and (4) securing the computing environment that supports IEMP.
Although many of these material weaknesses and NASA's difficulty in
producing auditable financial
statements can be linked to IEMP, weaknesses in NASA's business processes
and human capital management are also factors. Based on our review of
NASA's fiscal year 2005 interim financial statements, problems associated
with NASA's financial management persisted during fiscal year 2005.
Although NASA has been working to stabilize the core financial module
since it was deployed in June 2003, NASA has yet to produce auditable
interim or annual financial statements. In fact, as part of its report
disclaiming an opinion on NASA's fiscal year 2004 financial statements,
NASA's independent auditor reported that the core financial module was
unable to (1) produce transaction-level detail in support of financial
statement account balances, (2) identify adjustments or correcting
entries, and (3) correctly and consistently post transactions to the right
accounts. These are basic system requirements that are integral to the
effective functioning of a financial management system. For this and other
reasons, for fiscal year 2004, NASA's auditor found that NASA's financial
system did not comply substantially with the requirements of the Federal
Financial Management Improvement Act of 1996 (FFMIA).5 FFMIA stresses the
need for agencies to have systems that can generate timely, accurate, and
useful financial information with which to make informed decisions, manage
daily operations, and ensure accountability on an ongoing basis. NASA's
ongoing inability to meet the basic requirements of FFMIA is central to
our reporting of NASA's contract management as an area of high risk.
Because NASA's core financial module does not meet basic federal financial
management system requirements, NASA was unable to provide support for
certain fiscal year 2004 financial statement balances including accounts
payable and undelivered orders. Additionally, NASA was unable to provide
the auditors with subsidiary listings of cash receipts and cash
disbursements to support its budgetary outlays during the fiscal year.
Finally, according to the auditor's report, NASA management continues to
identify certain transactions that are being posted incorrectly due to
improper configuration of the core financial module. Based on our review
of NASA's fiscal 2005 quarterly financial statement notes, many of these
5 Pub. L. No. 104-208, div. A., S: 101(f), title VIII, 110 Stat. 3009,
3009-389 (Sept. 30, 1996). FFMIA requires CFO Act agencies to implement
and maintain financial management systems that comply substantially with
federal financial management system requirements, applicable federal
accounting standards, and the U.S. Government Standard General Ledger at
the transaction level. FFMIA also requires the auditors of agencies'
financial statements to report on such compliance.
same problems remain. For example, due to functionality and configuration
issues, the system continues to create inappropriate transactional
postings which result in abnormal balances and misstatements in
unobligated balances and other budgetary accounts. In addition, due to
data integrity issues from fiscal years 2003 and 2004, the opening
balances for many budgetary and proprietary accounts in fiscal year 2005
are misstated.
Similarly, as part of our recent work assessing NASA's controls over
travel and the use of its passenger aircraft,6 NASA was unable to provide
us with timely, reliable data and support for amounts spent on travel for
fiscal year 2004. After 4 months of trying to extract travel data from the
IEMP system, NASA officials provided us with what they said was a complete
population of travel-related disbursement transactions. However, the data
provided were missing significant travel expense categories. For example,
NASA had several contracts with major hotel chains to provide rooms at
discount rates; however, NASA did not include the charges related to rooms
purchased under these contracts as travel-related expenses. Further,
although agency personnel regularly used NASA-owned passenger aircraft and
other charter aircraft in support of official business travel, the cost
associated with the use of these aircraft was not considered a travel
expense and, therefore, the millions of dollars associated with this
travel were not included in the data provided. In addition to missing
data, the travel data NASA provided contained duplicate transactions and
other data anomalies that made it appear as if NASA were paying the same
bill multiple times, which, for those transactions we tested, was not the
case.
NASA's failure to provide reliable data related to its travel
disbursements is significant for three reasons. First, it illustrates the
shortcomings of NASA's financial management system and NASA's ongoing
struggle to provide transaction-level support for key account balances.
Second, it indicates that the budget amounts NASA reports for travel each
year to the Congress are significantly understated. As part of its budget
submission, NASA is required to report estimated and actual obligations in
terms of object classification. Object classes describe the nature of the
service or article for which the obligations are first incurred. One such
object class is object class 21, travel and transportation of persons.
However, because
6 GAO, NASA Travel: Passenger Aircraft Services Annually Cost Taxpayers
Millions More Than Commercial Airlines, GAO-05-818 (Washington, D.C.: Aug.
26, 2005).
NASA does not properly classify certain travel expense categories as
object class 21-including business travel on noncommercial aircraft and
travel services procured using a contract-the agency travel budget is
significantly understated. Finally, the problems we found with NASA's
travel data point to weaknesses in NASA's full-cost accounting initiative.
According to NASA, on October 1, 2003, NASA implemented its full-cost
initiative and is currently operating in a total full-cost environment,
which includes managing programs and projects in terms of their total
costs; accounting for all costs as either direct or as general and
administrative; and budgeting for a program or project's full costs.
However, if NASA has failed to capture and properly link travel-related
costs to the appropriate object classification, it raises serious
questions about the agency's ability to properly classify other less
straightforward cost categories.
As discussed previously, NASA did not use IEMP as an opportunity to
transform the way it does business and instead, NASA automated many of its
existing, ineffective business processes-including its process for
recording PP&E and material in its general ledger. As we reported in
November 2003, NASA does not appropriately capture and record PP&E and
material in the core financial module general ledger at the transactions
level. Instead, NASA first expenses its property acquisitions and then
updates the core financial module's general ledger using periodic
summary-level manual entries-for both NASA-held and contractor-held
property.
Recording PP&E and material in the general ledger at the transaction level
or item level at the time NASA makes disbursement for it would provide
independent control over these assets. However, just as it did with its
legacy systems, NASA continues 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 adjust
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 the purchase or construction of its property to discrete
property items, which is needed to provide independent control over these
assets. Although NASA manually records property at the summary level for
both NASA-held and contractor-held property, NASA's most significant
challenge with respect to property accounting stems from property located
at contractor facilities-which accounts for $8.5 billion or about
one-fourth of NASA's reported $34.6 billion of PP&E and materials- because
NASA must rely solely on its contractors to periodically report
summary-level information on these assets to NASA. Until NASA successfully
implements a single integrated system for reporting property,
and develops a methodology to identify and record capital costs as they
occur, the agency will continue to experience difficulties maintaining
effective control over PP&E and ensuring that it is not vulnerable to
fraud, waste, and abuse.
In fiscal years 2003 and 2004, NASA's auditor reported that continued
weaknesses in NASA's financial statement preparation processes resulted in
major delays and errors in preparing fiscal year-end financial statements.
According to the auditor's report, NASA personnel were not consistently
utilizing uniform accounting processes that record, classify, and
summarize information for the preparation of financial statements.
Further, because significant weaknesses exist in the core financial
module, NASA management must compensate for the weaknesses by implementing
and strengthening additional controls that will ensure that errors and
irregularities are detected in a timely manner. However, according to the
auditor's report, many of these control procedures were not adequately
performed. As such, the auditor recommended that NASA provide additional
training for financial personnel to ensure that they understand their role
in processing transactions, performing account analysis and
reconciliations, and maintaining supporting documentation.
While Most Agencies Receive Unqualified Opinions on Their Financial
Statements, Systems Modernization Continues to be a Challenge
The problems experienced by NASA in its effort to reform its financial
management organization and implement a modern, integrated financial
management system are not uncommon. While the majority of CFO Act agencies
have obtained clean or unqualified audit opinions on their financial
statements, the underlying agency financial systems remain a serious
problem. Agencies still generally lack the capacity to create the full
range of information needed to effectively manage day-to-day operations.
As shown in table 1, for fiscal year 2004, auditors reported that
financial management systems of only 7 of the 23 CFO Act agencies7
complied substantially with the requirements of FFMIA.
Table 1: Auditors' Determination of Financial Statement Opinion, Internal
Controls, and FFMIA Compliance for Fiscal Year 2004
Unqualified FFMIA No material
Agencies opinion compliance weaknesses
Department of Agriculture X
Department of Commerce X X
Department of Defense Department of Education X
Department of Energy X X
Department of Health and Human X Services
Department of Housing and Urban Development
Department of the Interior X Department of Justice
Department of Labor X X
Department of State X
Department of Transportation X
7 There were initially 24 CFO Act agencies. See Pub. L. No. 101-576,
S:205, 104 Stat. 2838, 2842-2843 (1990). The Federal Emergency Management
Agency (FEMA), one of the 24 CFO Act agencies, was subsequently
transferred to the Department of Homeland Security (DHS) effective March
1, 2003. With this transfer, FEMA is no longer required to prepare and
have audited financial statements under the CFO Act, leaving 23 CFO Act
agencies for fiscal year 2004. For fiscal years 2003 and 2004, DHS was
required to prepare audited financial statements under the Accountability
of Tax Dollars Act of 2002 (Pub. L. No. 107- 289, 116 Stat. 2049 (Nov. 7,
2002)). Because DHS was not a CFO Act agency, it was not subject to FFMIA
for fiscal year 2004. The DHS Financial Accountability Act, Pub. L. No.
108-330, 118 Stat. 1275 (Oct. 16, 2004), added DHS to the list of CFO Act
agencies and deleted FEMA, increasing the number of CFO Act agencies again
to 24 for fiscal year 2005.
Unqualified FFMIA No material Agencies opinion compliance weaknesses
Department of the Treasury
X
Department of Veterans Affairs X
Agency for International Development X
Environmental Protection Agency X X
General Services Administration X X
National Aeronautics and Space Administration
National Science Foundation X X
Nuclear Regulatory Commission X
Office of Personnel Management X Small Business Administration
Social Security Administration X X
Total 18 7
Source: GAO analysis.
Similarly, as shown in table 1, auditors reported that only four agencies
had no material internal control weaknesses. A material weakness is a
condition that precludes the entity's internal control from providing
reasonable assurance that misstatements, losses, or noncompliance material
in relation to the financial statements or to stewardship information
would be prevented or detected on a timely basis.
NASA's problems implementing IEMP are similar to those of other agencies
we have audited. Modernizing financial management systems is critical to
instituting strong financial management so that the systematic measurement
of performance, the development of cost information, and the integration
of program, budget, and financial information for management reporting can
be achieved. The federal government has spent billions of dollars
developing and implementing financial management systems throughout
federal agencies. However, many of these efforts have exceeded budgeted
cost and scheduled delivery dates without providing the anticipated system
functionality.
Although the implementation of any major system is not risk free,
organizations that follow and effectively implement disciplined processes,
along with effective human capital and IT management practices, can reduce
these risks to acceptable levels. We have issued numerous reports
highlighting the problems associated with the inability to effectively
implement disciplined processes in the areas of requirements
management, testing, data conversion and system interfaces, risk
management, and project management. For example, ill-defined or incomplete
requirements have been identified by many experts as a root cause of
system failure. As a case in point, we recently reported8 that the Army
has encountered problems implementing a new system intended to improve
depot operations. One reason that users had not been provided with the
intended systems capabilities was because of the breakdown in the
requirements management process. As a consequence, the Army implemented
error-prone, time-consuming manual workarounds to minimize disruption to
critical operations, and the financial management operations continued to
be affected by systems problems.
Similarly, many of NASA's financial management problems outlined in our
testimony are the result of an undisciplined, ineffective requirements
management process-including the failure of NASA's financial management
system to (1) post transactions to the right accounts, (2) properly
identify adjustment or correcting entries, and (3) provide the information
program managers and cost estimators need to monitor contractor
performance and produce credible cost estimates. To its credit, as
discussed in our related report released today, NASA officials
acknowledged that the requirements management and testing methodology and
tools used to implement the core financial module did not result in
requirements that were consistent, verifiable, and traceable, or that
contained the necessary specificity to minimize the requirementrelated
defects. NASA has recently implemented a new requirements management and
testing methodology. However, NASA does not plan to use its improved
requirements management process to properly define and document system
requirements for already deployed IEMP modules until October 2006-when
NASA plans to redefine the core financial module requirements as part of
the core financial module system upgrade.
8 GAO, Army Depot Maintenance: Ineffective Oversight of Depot Maintenance
Operations and System Implementation Efforts, GAO-05-441 (Washington,
D.C.: June 30, 2005).
NASA Has Begun Taking Steps to Implement Some of Our Recommendations for IEMP,
but Progress Is Slow
Our related report, released today, details our assessment of NASA's
progress toward implementing our prior recommendations related to IEMP.
Overall, progress has been slow, particularly with respect to developing a
well-defined enterprise architecture, which is critical for guiding and
constraining NASA's investment in IEMP. However, in some other areas-such
as NASA's initiative to enhance the core financial module to provide
better project management information-NASA is beginning to make progress.
Of the 45 recommendations we made, NASA has closed 3 and partially
implemented 13; however, 29 recommendations remain open.
In 2003, we issued four reports outlining the considerable challenges NASA
faces in meeting its IEMP commitments and providing NASA with the
necessary tools to oversee its contracts and manage its programs. For
example, in April 2003, we reported that NASA had deferred addressing the
needs of key system stakeholders, 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 IEMP 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
lifecycle cost estimates; and (3) had delayed implementation of many key
external reporting capabilities.
As part of the four reports we issued on IEMP, we made 45 recommendations
in the following areas: commercial system component integration;
enterprise architecture development and use; risk mitigation; system
requirements definition, management, and testing; external financial
reporting; and program cost and schedule control. Since that time, NASA's
effort has been focused primarily on trying to stabilize the core
financial module, the backbone of IEMP. However, in our report being
released today, we recognize that NASA has begun taking steps to implement
a number of our recommendations. Table 2 summarizes our assessment of the
extent to which NASA has implemented our recommendations.
Table 2: NASA's Progress Toward Implementing GAO's Recommendations
Partially
implemented Open Comments
Recommendations Closed
Recommendations to improve NASA's
0 2 0 Key elements of dependency analysis methodology still
acquisition management practices. GAO-03-507
lacking.
Suitability of already acquired components not evaluated before acquiring
additional components.
Recommendations regarding
development and use of enterprise
architecture.
GAO-04-43
1 4 17 Architecture still missing important content and key architecture
management processes not yet established.
Already implemented system components not mapped to architecture.
Recommendations to mitigate risk 0 0 6 NASA did not develop a formal corrective
action plan to
associated with relying on already deployed components. GAO-03-507
mitigate risks.
Recommendations regarding defining program management needs and
reengineering business processes. GAO-03-507
1 0 1 Stakeholders engaged to define program management needs.
Plans to reengineer contractor cost-reporting processes still several
years away.
Recommendations to improve NASA's 0 3 0 New requirements management methodology
and tools
requirements management and testing
processes.
GAO-03-507
acquired for future modules but core financial module requirements not yet
fully defined.
Recommendations to improve 0 0 4 Little progress made in developing
external a detailed plan for
financial reporting. delivering a financial system that
substantially complies
GAO-04-151 with federal standards.
1 4 1 Significant progress made in
Recommendations regarding IEMP preparing life-cycle cost
program life-cycle cost estimates but consistency and support
estimates and for estimates still
funding reserves. lacking.
GAO-04-118
Total 3 13 29
Source: GAO analysis.
In its written comments on our draft report, NASA raised concerns that our
characterization of certain recommendations as "open" did not
appropriately recognize the full extent of the agency's effort and
suggested that we use instead "partially implemented" or, whenever
appropriate, "closed." We disagree with NASA's assessment.
We considered a recommendation closed when NASA provided us with
documentation that demonstrated it had fully addressed the concerns we
raised in our prior reports. Recognizing that many of our recommendations
may take considerable time and effort to fully implement, we considered
the recommendation to be partially
NASA Faces Significant Challenges in Reforming Its Financial Management
Operations
implemented if the documentation provided indicated that NASA had made
significant progress addressing our concerns. For recommendations we
consider open, NASA's documentation indicated that the agency was either
in the very early planning stages or had not yet begun to implement the
recommendation.
Successfully stabilizing and enhancing NASA's financial management system
are 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, and make program-funding decisions. However,
NASA cannot rely on technology alone to solve its financial management
problems. Rather, NASA must transform its financial management
organization into a customer-focused partner in program results, but its
ability to do this hinges on the sustained leadership of NASA's top
executives.
Clear, strong executive leadership will be critical for ensuring that
NASA's financial management organization delivers the kind of analysis and
forward-looking information that the agency needs to effectively manage
its many complex programs. To be effective, such leadership must also
combine with effective organizational alignment, strategic human capital
management, and end-to-end business process improvement. This goes far
beyond merely 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.
The challenges that NASA faces in reforming its financial management
operations are daunting, but not insurmountable. However, our experience
has shown that improvements in several key elements are needed for NASA to
effectively address the underlying causes of its financial management
challenges. These elements, which will be key to any successful approach
to financial management reform, include:
o addressing NASA's financial management challenges as part of a
comprehensive, integrated, NASA-wide business process reform;
o providing for sustained leadership by the Administrator to implement
needed financial management reforms;
o establishing clear lines of responsibility, authority, and
accountability for such reform tied to the Administrator;
o incorporating results-oriented performance measures and monitoring
tied to financial management reforms;
o providing appropriate incentives or consequences for action or
inaction;
o developing and using an enterprisewide system architecture to guide
and direct financial management modernization investments; and
o ensuring effective oversight and monitoring.
Conclusion As NASA embarks upon the new course set by the President in
2004, a key to successfully implementing the vision of expanded U.S. space
exploration is NASA's ability to address a number of long-standing
financial management challenges. The lack of reliable, day-to-day
information continues to threaten NASA's ability to manage its programs,
oversee its contractors, and effectively allocate its budget across its
numerous projects and programs. Although NASA has acknowledged the need
for improved financial management systems, business processes, and human
capital management and has begun to take steps toward achieving those
goals, progress has been slow. By expeditiously implementing each of the
recommendations contained in our related report, NASA has the opportunity
to minimize the impact of past mistakes and begin to reap the benefits of
operating with an integrated financial management system. Further, clear,
strong executive 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
programs.
In closing, we commend the Subcommittees for holding this hearing as a
catalyst for improving NASA's financial management and business processes.
Continued oversight will be critical to ensuring that NASA achieves its
goals for improved financial management and reformed business processes.
Mr. Chairmen, this concludes our prepared statement. We would be pleased
to respond to any questions that you or other members of the subcommittees
may have.
For further information regarding this testimony, please contact Gregory
D. Kutz at (202) 512-9095 or [email protected], Allen Li at (202) 512-3600 or
[email protected], Randolph C. Hite at (202) 512-3439 or [email protected], or Keith
Rhodes at (202) 512-6412 or [email protected]. Individuals making key
contributions to this testimony included Fannie Bivins, Francine
DelVecchio, Diane Handley, and Chris Martin.
Contacts and Acknowledgments
Related GAO Products
NASA: Compliance with Cost Limits. GAO-05-492R. Washington, D.C.: April 8,
2005.
National Aeronautics and Space Administration: Significant Actions Needed
to Address Long-standing Financial Management Problems. GAO-04-754T.
Washington, D.C.: May 19, 2004.
NASA: Compliance with Cost Limits. GAO-04-648R. Washington, D.C.: April 2,
2004.
Space Shuttle: Further Improvements Needed in NASA's Modernization
Efforts. GAO-04-203. Washington, D.C.: January 15, 2004.
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 Agency's External Reporting Issues. GAO-04-151.
Washington, D.C.: November 21, 2003.
Business Modernization: NASA's Challenges in Managing Its Integrated
Financial Management Program. GAO-04-255. 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.
NASA: Major Management Challenges and Program Risks. GAO-03-849T.
Washington, D.C.: June 12, 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-02-504R.
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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