Financial Audit: Restatements to the National Science		 
Foundation's Fiscal Year 2003 Financial Statements (22-DEC-05,	 
GAO-06-229R).							 
                                                                 
The Secretary of Treasury, in coordination with the Director of  
the Office of Management and Budget (OMB), is required to	 
annually prepare and submit audited financial statements of the  
U.S. government to the President and Congress. We are required to
audit these consolidated financial statements (CFS) and report on
the results of our work. An issue meriting concern and close	 
scrutiny that emerged during our fiscal year 2004 CFS audit was  
the growing number of Chief Financial Officers (CFO) Act agencies
that restated certain of their financial statements for fiscal	 
year 2003 to correct errors. Errors in financial statements can  
result from mathematical mistakes, mistakes in the application of
accounting principles, or oversight or misuse of facts that	 
existed at the time the financial statements were prepared.	 
Frequent restatements to correct errors can undermine public	 
trust and confidence in both the entity and all responsible	 
parties. Further, when restatements do occur, it is important	 
that financial statements clearly communicate, and readers of the
restated financial statements understand, that the financial	 
statements originally issued by management in the previous year  
and the opinion thereon should be used. Because of the varying	 
nature and circumstances surrounding the restatements, we are	 
issuing a number of separate reports on the matter. This report  
communicates our observations regarding the National Science	 
Foundation's (NSF) fiscal year 2003 restatements. Going forward, 
we hope that the lessons learned from the fiscal year 2003	 
restatements, together with our recommendations, will help (1)	 
NSF avoid the need for restatements to its future financial	 
statements and (2) ensure that NSF's auditor applies appropriate 
audit procedures in future audits to test for unrecorded and	 
unbilled licensee fees and related internal controls. We reviewed
four key areas with respect to the restatements of NSF's fiscal  
year 2003 financial statements: (1) the nature and cause of the  
errors that necessitated the restatements, including planned	 
corrective actions by the agency and its auditors; (2) the timing
of communicating the material misstatement to users of the	 
financial statements; (3) the extent of transparency exhibited in
disclosing the nature and impact of the material misstatement in 
the financial statements and the reissued auditor's report; and  
(4) audit issues that contributed to the failure to detect the	 
errors that necessitated the restatements during the audit of the
agency's fiscal year 2003 financial statements. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-229R					        
    ACCNO:   A43818						        
  TITLE:     Financial Audit: Restatements to the National Science    
Foundation's Fiscal Year 2003 Financial Statements		 
     DATE:   12/22/2005 
  SUBJECT:   Accounting errors					 
	     Accounting standards				 
	     Auditing procedures				 
	     Auditing standards 				 
	     Financial statement audits 			 
	     Financial statements				 
	     Internal controls					 
	     Reporting requirements				 
	     H-1B Visas 					 
	     Transparency					 

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GAO-06-229R

December 22, 2005

Mr. Thomas N. Cooley Chief Financial Officer National Science Foundation

Ms. Christine C. Boesz Inspector General

National Science Foundation

Subject: Financial Audit: Restatements to the National Science
Foundation's Fiscal Year 2003 Financial Statements

As you know, the Secretary of the Treasury, in coordination with the
Director of the Office of Management and Budget (OMB), is required to
annually prepare and submit audited financial statements of the U.S.
government to the President and Congress. We are required to audit these
consolidated financial statements (CFS) and report on the results of our
work.1 An issue meriting concern and close scrutiny that emerged during
our fiscal year 2004 CFS audit was the growing number of Chief Financial
Officers (CFO) Act agencies that restated2 certain of their financial
statements for fiscal year 2003 to correct errors.3 Errors in financial
statements can result from mathematical mistakes, mistakes in the
application of accounting principles, or oversight or misuse of facts that
existed at the time the financial statements were prepared. Frequent
restatements to correct errors can undermine public trust and confidence
in both the entity and all responsible parties. Further, when restatements
do occur, it is important that financial statements clearly communicate,
and readers of the restated financial statements understand, that the
financial statements originally issued by management in the previous year
and the opinion thereon should no longer be relied on and instead the
restated financial statements and related auditor's opinion should be
used.

1The Government Management Reform Act of 1994 has required such reporting,
covering the executive branch of government, beginning with financial
statements prepared for fiscal year 1997. 31 U.S.C. S: 331 (e). The
federal government has elected to include certain financial information on
the legislative and judicial branches in the CFS as well.

2A financial statement restatement occurs when an entity either
voluntarily or prompted by its auditors or regulators revises public
financial information that has previously been reported.

3According to Federal Accounting Standards Advisory Board, Statement of
Federal Financial Accounting Standards No. 21, Reporting Corrections of
Errors and Changes in Accounting Principles, prior period financial
statements presented should be restated only to correct errors that caused
such statements to be materially misstated.

Eleven of the 23 CFO Act agencies4 restated certain of their financial
statements for fiscal year 2003. Five CFO Act agencies had restatements in
fiscal year 2003 covering their fiscal year 2002 financial statements.
Three CFO Act agencies had restatements covering both years. We noted that
the extent of the restatements to CFO Act agencies' fiscal year 2003
financial statements varied from agency to agency, ranging from correcting
two line items on an agency's balance sheet to correcting numerous line
items on several of another agency's financial statements. In some cases,
the net operating results of the agency were affected by the restatement.
The amounts of the agencies' restatements ranged from several million
dollars to more than $91 billion.

Nine of the 11 agencies that had restatements for fiscal year 2003
received unqualified opinions on their originally issued fiscal year 2003
financial statements. The auditors for 6 of these 9 agencies issued
unqualified opinions on the restated financial statements, replacing the
previous unqualified opinions on the respective agencies' original fiscal
year 2003 financial statements. The auditors for 2 of these 9 withdrew
their unqualified opinions on the fiscal year 2003 financial statements
and issued other than unqualified opinions on the respective agencies'
restated fiscal year 2003 financial statements because they could not
determine whether there were any additional misstatements and the effect
of any such misstatements on the restated fiscal year 2003 financial
statements. For the remaining agency, the principal auditor of the
agency's fiscal year 2004 financial statements was not the principal
auditor of the agency's fiscal year 2003 financial statements, and an
audit opinion on the agency's restated fiscal year 2003 financial
statements was not issued.

Our review focused on the 9 agencies with restatements for fiscal year
2003 that received unqualified opinions on their originally issued fiscal
year 2003 financial statements.5 These were the Department of Agriculture,
Department of State, Department of Justice, Department of Transportation,
Department of Health and Human Services, General Services Administration,
National Science Foundation (NSF), Nuclear Regulatory Commission, and
Office of Personnel Management.

4The Federal Emergency Management Agency (FEMA) was transferred to the
Department of Homeland Security (DHS) effective March 1, 2003. With this
transfer, FEMA was no longer required to prepare and have audited
stand-alone financial statements under the CFO Act, leaving 23 CFO Act
agencies for the remainder of fiscal year 2003 and 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, increasing the
number of CFO Act agencies again to 24 beginning in fiscal year 2005.

5The 2 agencies that had restatements for fiscal year 2003 but did not
receive unqualified opinions on their originally issued fiscal year 2003
financial statements were the Department of Defense and the Small Business
Administration.

Because of the varying nature and circumstances surrounding the
restatements, we are issuing a number of separate reports on the matter.
This report communicates our observations regarding NSF's fiscal year 2003
restatements. Going forward, we hope that the lessons learned from the
fiscal year 2003 restatements, together with our recommendations, will
help NSF and its auditor avoid the need for restatements to NSF's future
financial statements.

We reviewed four key areas with respect to the restatements of NSF's
fiscal year 2003 financial statements: (1) the nature and cause of the
errors that necessitated the restatements, including planned corrective
actions by the agency and its auditors; (2) the timing of communicating
the material misstatement to users of the financial statements; (3) the
extent of transparency6 exhibited in disclosing the nature and impact of
the material misstatement in the financial statements and the reissued
auditor's report; and (4) audit issues that contributed to the failure to
detect the errors that necessitated the restatements during the audit of
the agency's fiscal year 2003 financial statements.

Results in Brief

Failure to properly record the H-1B Nonimmigrant Petitioner Fees7 (H-1B)
account funds for fiscal years 1999 through 2003 led to the material
misstatement of about $216 million that necessitated the restatements of
NSF's originally issued fiscal year 2003 Balance Sheet and Statement of
Changes in Net Position. According to the NSF contracted independent
public accountant's (IPA) management letter report dated November 4, 2004,
NSF's Division of Financial Management (DFM) did not have adequate
internal controls to ensure that it provided accurate financial data,
which may have contributed to the recording error that necessitated the
restatements. NSF's IPA did not discover the error during its audit of
NSF's fiscal year 2003 financial statements. In our view, the IPA did not
understand that the H-1B account funds are special funds, which are to be
accounted for differently than certain other NSF receipts. In addition, we
found that the IPA was not aware of the U.S. Department of the Treasury's
Financial Management Service (FMS) guidance relating to the recording of
H-1B account funds. Consequently, the IPA did not design or perform
adequate audit procedures to detect the accounting errors.

6Transparency is the full, accurate, and timely disclosure of information.

7H-1B account funds are fees collected by the U.S. Treasury from employers
that employ highly skilled aliens in specialty occupations. The American
Competitiveness and Workforce Improvement Act of 1998, Title IV, states
that the federal government shall impose a fee on an employer filing a
petition relating to granting an alien nonimmigrant status. Fees collected
shall be deposited with the Department of the Treasury in a separate
account, which shall be known as the H-1B Nonimmigrant Petitioner Account,
and disseminated for a variety of uses - such as job training, low-income
scholarship program, educational grants, systemic reform activities,
duties relating to petitions, and application processing and enforcement.

We are making a recommendation to NSF's CFO to address the issues we
identified with respect to the H-1B account funds recording error that
necessitated the fiscal year 2003 restatements. We are also making a
recommendation to NSF's Inspector General to work with the IPA so that
audit procedures to detect any future material H-1B account funds
recording errors are fully and effectively implemented.

In commenting on a draft of this report, the NSF's CFO and Inspector
General, in separate letters, offered their views regarding the
materiality of the errors and the impact of the errors on Net Position. We
have clarified our perspective on both points. The report notes that the
recording errors in individual years may not have been material, but that
the cumulative effect of the errors on the fiscal year 2003 financial
statements was deemed material by NSF's IPA. We also note that Total Net
Position was unchanged, but that the two distinct components of net
position, were misstated.

NSF's Inspector General concurred with our recommendation and stated that
her office had instituted procedures to ensure that the IPA designed and
performed audit steps to detect any future H-1B account fund recording
errors.

Background

In conducting the fiscal year 2004 audit of the CFS, we reviewed the 23
CFO Act agencies' performance and accountability reports for possible
restatements and identified 11 agencies that had restated certain of their
audited fiscal year 2003 financial statements.

The primary intended users of federal agencies' financial reports are
citizens, Congress, federal executives, and federal program managers.8
Each of these groups may use federal agencies' financial statements to
satisfy their specific needs. Citizens are interested in many aspects of
the federal government, particularly federal programs that affect their
financial well-being. Congress is interested in monitoring and assessing
the efficiency and effectiveness of federal programs. Federal executives,
such as central agency officials at OMB and the Department of the Treasury
(Treasury), are interested in federal financial statements to assist the
President of the United States. OMB assists the President in overseeing
the preparation of the federal budget by formulating the President's
spending plans, evaluating the effectiveness of agency programs, assessing
competing funding demands among agencies, and setting funding priorities.
Treasury assists the President in managing the finances of the federal
government and prepares the CFS, which is based on audited financial
statements prepared by federal agencies. GAO audits the CFS and reports on
the results of its audit. Finally, federal program managers use agency
financial statements as tools for managing their operations within the
limits of the spending authority granted by Congress.

8Federal Accounting Standards Advisory Board, Statement of Federal
Financial Accounting Concepts No. 1, Objectives of Federal Financial
Reporting.

The primary accounting and auditing standards that apply to restatement
disclosures by federal entities are the Federal Accounting Standards
Advisory Board's Statement of Federal Financial Accounting Standards
(SFFAS) No. 21, Reporting Corrections of Errors and Changes in Accounting
Principles, and the American Institute of Certified Public Accountants
(AICPA) Codification of Auditing Standards, AU section 561, Subsequent
Discovery of Facts Existing at the Date of the Auditor's Report.9

Objective, Scope, and Methodology

The objective of our review of restatements of NSF's fiscal year 2003
financial statements was to determine the nature and cause of the errors,
the transparency and timing of communicating the material misstatements,
any audit issues relating to such misstatements, and any actions being
taken to help preclude similar errors from occurring in the future.

We reviewed the nature and causes of the restatements, and we also
examined corrective actions taken by NSF to help preclude similar errors
from occurring in the future. We interviewed the preparers and auditors of
NSF's fiscal year 2003 financial statements, including staff from the
agency's Office of Inspector General (OIG), and we obtained and reviewed
relevant audit documentation. Our work was not designed to and we did not
test the accuracy or appropriateness of the restatements.

In our review, we considered certain accounting and auditing standards,
including SFFAS No. 21; the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 16, Prior Period
Adjustments; and the AICPA Codification of Auditing Standards, AU section
420, Consistency of Application of Generally Accepted Accounting
Principles, AU section 508, Reports on Audited Financial Statements, and
AU section 561.

We performed our review of the restatements of NSF's fiscal year 2003
financial statements from December 2004 to July 2005 in accordance with
U.S. generally accepted government auditing standards.

9Generally accepted government auditing standards incorporate AICPA
reporting standards and Statements on Auditing Standards unless the
Comptroller General of the United States excludes them by formal
announcement.

We requested comments on the draft of this report from NSF's CFO and
Inspector General or their designees. Written comments from NSF's CFO and
Inspector General are reprinted in Enclosures I and II, respectively, and
are also discussed in the "Agency Comments and Our Evaluation" section. We
also received technical comments from NSF's Inspector General which we
have incorporated as appropriate but have not reprinted in Enclosure II.

Issues Related to Restatements of Certain of NSF's Fiscal Year 2003
Financial Statements

With respect to the restatements of NSF's fiscal year 2003 Balance Sheet
and Statement of Changes in Net Position, we identified the following two
areas that need improvement: (1) accounting for and reporting of the H-1B
account funds; and (2) audit procedures over the proper recording of H-1B
account funds. These issues are discussed in detail below.

H-1B Account Funds Were Not Properly Recorded

In fiscal year 2004, NSF restated certain of its originally issued fiscal
year 2003 financial statements to correct for the improper recording of
approximately $216 million of H-1B account funds for fiscal years 1999
through 2003. Specifically, the H-1B account funds were incorrectly
recorded as Other Appropriations Realized when received instead of
Appropriated Trust or Special Fund Receipts. The recording errors caused
the Unexpended Appropriations and Cumulative Results of Operations
balances on both the originally issued fiscal year 2003 Balance Sheet and
Statement of Changes in Net Position to be materially overstated and
understated, respectively, by $216 million. Although Total Net Position
was unchanged, these two accounts represent distinct components of net
position. In addition, the recording errors in individual years may not
have been material, however, the cumulative effect of the errors on the
fiscal year 2003 financial statements was deemed material by NSF's IPA.

In February 1999, FMS issued guidance entitled Unavailable Special Fund
Receipt Account Transfers that  provided definitions and descriptive
journal entries for recording special funds in accordance with SFFAS No.
7, Accounting for Revenue and Other Financing Sources and Concepts for
Reconciling Budgetary and Financial Accounting. The H-1B account funds are
NSF's only appropriations that are classified as special funds. NSF
incorrectly recorded the H-1B account funds as Other Appropriations
Realized instead of Appropriated Trust or Special Fund Receipts because
NSF was not aware of the February 1999 FMS guidance, and as a result, NSF
was not aware that such funds were recorded in error. An NSF official told
us that they believed, until fiscal year 2004, that they were
appropriately recording the receipt of the H-1B account funds.

In July 2004, OMB sent an email following up on a March 2004 notification
to NSF staff personnel that the H-1B account funds were incorrectly
recorded and that NSF was required to follow the related FMS guidance.10
NSF staff personnel corrected NSF's error approximately 8 months after the
agency was first notified. However, according to NSF officials, NSF
management did not become aware of the magnitude of the misstatement until
October 2004. Further, the IPA and OIG stated that they were unaware of
the H-1B account funds recording error until NSF provided them a draft of
the fiscal years 2004 and 2003 comparative financial statements in October
2004 that contained the restatements to the fiscal year 2003 financial
statements.

According to the NSF IPA's management letter report dated November 4,
2004, NSF's DFM did not have adequate internal controls to ensure that it
provided accurate financial data. The IPA stated that this may have
contributed to the recording errors that necessitated the restatements.
The IPA's report pointed out that first and second drafts of the
comparative fiscal years 2004 and 2003 financial statements provided by
DFM contained numerous errors.

To resolve this matter, the IPA generally recommended that NSF's Chief
Financial Officer determine the appropriate skills and abilities needed in
the DFM organizational structure to fulfill NSF's responsibilities for
providing accurate financial data, and implement steps to improve top
level supervisory review procedures and practices.

NSF management responded to the IPA's recommendations stating that they
believed that normal supervisory controls were in place and that such
controls provide the review procedures and practices recommended by the
IPA. Nevertheless, NSF management stated that the IPA's recommendations
would be incorporated in NSF's annual performance review process. In
addition, subsequent to the IPA making its recommendations, NSF filled the
office of deputy CFO position which had been vacant for 18 months.
According to the IPA, this action will provide better oversight of NSF's
financial reporting process.

Audit Procedures were Not Adequately Designed to Detect the Improper
Recording of H-1B Account Funds

The above noted material error was not discovered during the audit of
NSF's fiscal year 2003 financial statements. In our view, the IPA did not
understand that the H-1B account funds are special funds, which are to be
accounted for differently than certain other NSF receipts. In addition, we
found that the IPA was not aware of the 1999 FMS guidance relating to the
recording of H-1B account funds. Consequently, the IPA did not design or
perform adequate audit procedures to detect the errors.

10According to OMB's e-mail correspondence dated July 6, 2004, to NSF
staff personnel, if the error was not corrected, then the special and
trust fund budget authority recorded in NSF's H-1B account funds will not
crosswalk into the agency's actual columns of the Program and Financing
Schedule in the fiscal year 2006 [President's] Budget.

According to the Financial Audit Manual (FAM),11 the auditor should
perform audit procedures to test for all significant assertions12 in
significant financial statement line items and accounts. The FAM states
that an assertion is significant if misstatements in the assertion could
exceed test materiality for the related line item, account, or disclosure.
Based on the materiality of NSF's H-1B account funds recording error, the
auditor should have identified the presentation and disclosure assertion
as significant and performed audit procedures to determine whether NSF's
receipts, annually and in the aggregate, were properly reported in the
financial statements. To test for presentation and disclosure, the auditor
should perform audit procedures to determine whether (1) accounts are
properly classified and described in the financial

statements, (2) the financial statements are prepared in conformance with
generally accepted accounting principles, and (3) footnotes contain all
information required to be disclosed. The IPA performed certain audit
procedures during fiscal year 2003 to test budget accounts. However,
because the IPA (1) did not understand that the H-1B account funds are
special funds, which are to be accounted for differently than certain
other NSF receipts, and (2) was not aware of the 1999 FMS guidance
relating to the recording of H-1B account funds, the IPA did not design or
perform audit procedures to adequately test for the presentation and
disclosure assertion as it related to the H-1B account funds.

According to NSF's IPA, it has now obtained and reviewed the February 1999
FMS guidance. The IPA also stated that, beginning with fiscal year 2005,
audit procedures will be designed and performed to detect any future H-1B
account funds recording errors.

Conclusions

NSF restated certain of its originally issued fiscal year 2003 financial
statements and disclosed the material error in the notes to the restated
financial statements. Going forward, the key will be for NSF to fully and
effectively implement policies and procedures to help ensure that H-1B
account funds are properly recorded. It will also be important for NSF's
auditor to fully and effectively implement audit procedures to detect any
H-1B account funds recording errors that occur in the future.

11GAO/President's Council on Integrity and Efficiency, Financial Audit
Manual, GAO-01-765G (Washington, D.C.: July 2001), updated by GAO-04-1015G
and GAO-04-942G (July 2004).

12Financial statement assertions are management representations that are
embodied in financial statement components. The assertions can be either
explicit or implicit and can be classified into the following categories:
(1) existence or occurrence, (2) completeness, (3) rights and obligations,
(4) valuation or allocation, and (5) presentation and disclosure.

Recommendations for Executive Action

We recommend that NSF's Chief Financial Officer ensure that NSF fully and
effectively implements policies and procedures to properly record H-1B
account funds.

We recommend that NSF's Inspector General work with NSF's IPA so that
audit procedures to detect any future material H-1B account funds
recording errors are fully and effectively implemented.

Agency Comments and Our Evaluation

In commenting on a draft of this report, NSF's CFO and Inspector General,
in separate letters, offered their views regarding the materiality of the
errors and the impact of the errors on Net Position. We have clarified our
perspective on both points. Our report makes clear that there was no
effect on NSF's Total Net Position and that the cumulative effect of the
continuing recording errors for fiscal years 1999 through 2003 caused the
Unexpended Appropriations and Cumulative Results of Operations balances on
both the originally issued fiscal year 2003 Balance Sheet and Statement of
Changes in Net Position to be materially overstated and understated,
respectively. The component accounts making up the Statement of Changes in
Net Position became increasingly overstated and understated each year
until the accounting treatment was corrected for the entire 5-year period
in the restated fiscal year 2003 financial statements. To provide more
context for this improper accounting and subsequent restatements, we have
added language to our report stating that in any 1 year, the recording
error of H-1B account fund receipts may not have been material, but that
the cumulative effect of the errors on the fiscal year 2003 Balance Sheet
and Statement of Changes in Net Position was deemed material by NSF's IPA.

NSF's CFO also stated that OMB's March 2004 notification of the accounting
error and need to follow the previously issued 1999 FMS guidance was
communicated at the staff level and not formally through the CFO or the
deputy CFO, which caused management delays in ensuring the appropriate
level of attention to the issue. In our view, agency financial managers
should have been aware of and implemented the new accounting guidance in
1999 when it was first issued by FMS, which would have avoided the need
for the fiscal year 2003 restatements.

NSF's CFO further stated that the IPA's management letter findings that we
reported had no actual bearing on the facts of the restatements and that
NSF's management response to the IPA findings should be reflected for
proper balance and context. As we noted in this report, NSF's IPA reported
in a finding dealing with financial management practices that NSF did not
have adequate internal controls to ensure that it provided accurate
financial data which may have contributed to the recording error that
necessitated the restatements. To resolve this matter, the IPA generally
recommended that NSF's Chief Financial Officer determine the appropriate
skills and abilities needed in the DFM organizational structure to fulfill
NSF's responsibilities for providing accurate financial data and implement
steps to improve top level supervisory review procedures and practices.
NSF management responded to the IPA's recommendations stating that they
believed that normal supervisory controls were in place and that such
controls provide the review procedures and practices recommended by the
IPA. Nevertheless, NSF management stated that the IPA's recommendations
would be incorporated in NSF's annual performance review process. It
should be noted that, in providing its perspective on the IPA-identified
issue and management's response, the OIG said the errors in NSF's
financial statements and the untimely notification of the need to restate
NSF's fiscal year 2003 financial statements demonstrated that management's
controls over financial reporting were not adequate or appropriate.

Finally, NSF's Inspector General concurred with our recommendation and
stated that her office had instituted procedures to ensure that the IPA
designed and performed audit steps to detect any H-1B account fund
recording errors. We also received technical comments from NSF's Inspector
General which we have incorporated as appropriate.

                                   - - - - -

Within 60 days of the date of this report, we would appreciate receiving a
written statement on actions taken to address these recommendations.

We are sending copies of this report to the Chairmen and Ranking Minority
Members of the Senate Committee on Homeland Security and Governmental
Affairs; the Subcommittee on Federal Financial Management, Government
Information, and International Security, Senate Committee on Homeland
Security and Governmental Affairs; the House Committee on Government
Reform; and the Subcommittee on Government Management, Finance and
Accountability, House Committee on Government Reform. In addition, we are
sending copies to the Fiscal Assistant Secretary of the Treasury and the
Controller of OMB. This report is also available at no charge on GAO's Web
site at www.gao.gov.

We appreciate the courtesy and cooperation extended to us by your staff
throughout our work. We look forward to continuing to work with your
offices to help improve financial management in the federal government. If
you have any questions about the contents of this report, please contact
me at (202) 512-3406 or [email protected].

Gary T. Engel

Director

Financial Management and Assurance

Enclosure I: Comments from the Chief Financial Officer, National Science
Foundation

Note: GAO comments supplementing those in the report text appear at the
end of this enclosure.

See comment 1.

See comment 1.

See comment 2.

See comment 1.

The following are GAO's comments on the November 30, 2005, letter from the
National Science Foundation's, Chief Financial Officer.

GAO Comments

           1. See "Agency Comments and Our Evaluation" section.

           2. It would be inappropriate to categorize the correction for a
           material error in NSF's financial statements as merely a
           reclassification. Although Total Net Position was unchanged, these
           two accounts represent distinct components of net position.
           Specifically, according to Statements of Federal Financial
           Accounting Concepts No. 2, Entity and Display, Cumulative Results
           of Operations generally includes the amounts accumulated over the
           years by an entity from its financing sources less its expenses
           and losses, while Unexpended Appropriations represents
           appropriations not yet obligated or expended, including
           undelivered orders.

           Further, IPA officials told us that they considered the error to
           be material and concluded that NSF needed to restate the fiscal
           year 2003 financial statements and disclose in the comparative
           fiscal years 2004 and 2003 financial statements that certain
           fiscal year 2003 balances have been restated. The IPA's audit
           report states that NSF's fiscal year 2003 Balance Sheet and
           Statement of Changes in Net Position were restated. In addition,
           the notes to NSF's comparative fiscal years 2004 and 2003
           financial statements includes a note disclosure titled
           "Restatement" that discusses the restatements.

Enclosure II: Comments from the Inspector General, National Science
Foundation

Note: GAO comments supplementing those in the report text appear at the
end of this enclosure.

See comments 1 and 2.

See comments 1 and 2.

See comments 1 and 2.

See comment 3.

The following are GAO's comments on the November 30, 2005, letter from the
National Science Foundation's Inspector General.

GAO Comments

           1. See "Agency Comments and Our Evaluation" section.

           2. See GAO comment 2 in Enclosure I.

           3. We have clarified this point in our report by modifying the
           language to state that in our view, the IPA did not understand
           that the H-1B account funds are special funds, which are to be
           accounted for differently than certain other NSF receipts.

(198399)

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