Financial Audit: Restatements to the Nuclear Regulatory
Commission's Fiscal Year 2003 Financial Statements (27-OCT-05,
GAO-06-30R).
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 Nuclear Regulatory
Commission's (NRC) 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)
NRC avoid the need for restatements to its future financial
statements and (2) ensure that NRC'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 NRC'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-06-30R
ACCNO: A40497
TITLE: Financial Audit: Restatements to the Nuclear Regulatory
Commission's Fiscal Year 2003 Financial Statements
DATE: 10/27/2005
SUBJECT: Accounting errors
Accounting standards
Auditing procedures
Auditing standards
Financial statement audits
Financial statements
Internal controls
Reporting requirements
Transparency
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GAO-06-30R
A
United States Government Accountability Office Washington, D.C. 20548
October 27, 2005
Mr. Jesse Funches
Chief Financial Officer
Nuclear Regulatory Commission
The Honorable Hubert T. Bell
Inspector General
Nuclear Regulatory Commission
Subject: Financial Audit: Restatements to the Nuclear Regulatory
Commission's Fiscal Year 2003 Financial Statements
As you know, 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.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
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 (SFFAS) 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.
no longer be relied on and instead the restated financial statements and
related auditor's opinion should be used.
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 one 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 an 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
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.
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, Nuclear Regulatory Commission (NRC), and
Office of Personnel Management.
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 NRC'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 (1) NRC avoid the need for restatements to its future financial
statements and (2) ensure that NRC'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 NRC'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 NRC's lack of effective internal controls over unrecorded
and unbilled licensee fees7 led to the material misstatement that
necessitated the restatement of NRC's originally issued fiscal year 2003
financial statements. NRC's management representation letter, dated
November 20, 2003, included representations that NRC's fiscal year 2003
financial statements were fairly stated and that the agency had effective
internal controls. As of
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.
6Transparency is the full, accurate, and timely disclosure of information.
7Licensee fees include fees related to reactor and materials inspections.
the same date, the contracted independent public accountant (IPA) dated
its audit report, which contained an unqualified, or clean, audit opinion
on NRC's fiscal year 2003 financial statements. On December 17, 2003,
certain NRC officials became aware that (1) there was an underbilling
error of at least $500,000 for fiscal year 2003,8 (2) the underbilling
error may have resulted from an internal control deficiency within NRC's
licensee fee billing system that could affect the reliability of NRC's
fiscal year 2003 financial statements, and (3) further research was needed
to determine the cause of the error and whether the error was an isolated
incident or a systemic billing system weakness. Nevertheless, on December
19, 2003,9 over 1 month prior to OMB's required January 30, 2004 due date
for federal agencies to issue their fiscal year 2003 financial statements,
NRC submitted its management representation letter and financial
statements to OMB.
Consistent with OMB Bulletin 01-02, Audit Requirements for Federal
Financial Statements,10 NRC should have timely notified the IPA of the
error and related internal control deficiency, but never did. According to
the IPA, it was not aware of the material error until May 2004 when it
independently discovered that NRC had recorded and billed licensee fees
during fiscal year 2004 that instead should have been recorded and billed
during fiscal year 2003. The IPA determined that the underbilling error
resulted from certain internal control deficiencies related to NRC's fee
billing system.
Based on its interpretation of 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, the IPA stated that upon discovery of the error in May 2004, it
discussed the material error with NRC but did not advise NRC to make
appropriate disclosures of the newly discovered facts and their effects on
the fiscal year 2003 financial statements to persons who may have been
relying on such financial statements and related auditor's report. The IPA
told us that it came to this decision because (1) it considered issuance
of
8Underbilling error was discovered by NRC as a result of an inquiry from
an NRC licensee.
9Although OMB encouraged CFO Act agencies to accelerate issuance of their
fiscal year 2003 audited financial statements to November 15, 2003 (or as
close to that date as possible) in preparation for the accelerated
reporting date for fiscal year 2004, OMB's required due date for agencies'
fiscal year 2003 audited financial statements was January 30, 2004.
10Office of Management and Budget, Bulletin 01-02, Audit Requirements for
Federal Financial Statements (Washington, D.C.: Oct. 16, 2000).
the fiscal years 2004 and 2003 comparative financial statements to be
imminent and (2) in May 2004, it did not think that any users would still
be relying on the fiscal year 2003 financial statements and related
auditor's report. However, in our view, the issuance of NRC's fiscal years
2004 and 2003 comparative financial statements, which occurred in November
2004, was not imminent when the IPA discovered the material error in May
2004, more than 5 months prior to OMB's November 15, 2004 deadline for
federal agencies to issue their fiscal year 2004 financial statements. In
addition, the IPA did not provide us with documentation of the basis for
its conclusion that users were not likely to still be relying on the
fiscal year 2003 financial statements and would not attach importance to
the correction of the material error. In our view, such documentation
should include the identification of potential users, such as Congress,
OMB, GAO, and the Department of the Treasury (Treasury), and an analysis
of whether the users would likely be relying on the fiscal year 2003
financial statements. We have some concerns that, without notification,
anyone who may have been relying on the fiscal year 2003 financial
statements would not have known from May to mid-November 2004, or for more
than 5 months, that NRC's originally issued financial statements, which
received an unqualified opinion, were materially misstated and should not
be relied on.
In addition to NRC's lack of effective internal controls over licensee
fees, we noted two areas where additional audit procedures could have
identified the problem at the time of the fiscal year 2003 audit. During
its audit of the fiscal year 2003 financial statements, the IPA did not
design or perform sufficient audit procedures to (1) determine whether all
eligible licensee fees11 were billed and properly presented in the
financial statements and (2) detect the internal control deficiencies
related to NRC's recording of licensee fees.
We are making a recommendation to NRC's CFO to determine whether the new
procedures, which NRC represents as having been established, effectively
ensure that all eligible licensee fees are properly recorded and billed.
We are also making a recommendation to NRC's Inspector General to work
with the IPA so that audit procedures to test for unrecorded and unbilled
licensee fees and related internal controls are fully and effectively
implemented.
11Certain fees are exempt from fee collection by regulation.
In commenting on a draft of this report, NRC's CFO and Inspector General
both concurred with the recommendation that we made to each of them. We
also received a technical comment from NRC's CFO, which we have
incorporated.
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.12
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 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.
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
12Federal Accounting Standards Advisory Board, Statement of Federal
Financial Accounting Concepts No. 1, Objectives of Federal Financial
Reporting.
(SFFAS) No. 21, Reporting Corrections of Errors and Changes in Accounting
Principles, and AU section 561.13
Objective, Scope, and Methodology
The objective of our review of restatements of NRC'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 NRC to help preclude similar errors
from occurring in the future. We interviewed the preparers and auditors of
NRC'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; OMB Bulletin 01-02; 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 NRC's fiscal year 2003
financial statements from December 2004 to July 2005 in accordance with
U.S. generally accepted government auditing standards.
We requested comments on a draft of this report from NRC's CFO and
Inspector General or their designees. Written comments from NRC's CFO and
Inspector General are reprinted in enclosures I and II, respectively, and
are also discussed in the Agency Comments section.
13Generally accepted government auditing standards incorporate AICPA
reporting and auditing standards unless the Comptroller General of the
United States excludes them by formal announcement.
Issues Related to With respect to restatement of certain of NRC's fiscal
year 2003 financial
statements, we identified the following three areas that need
improvement:Restatements of NRC's (1) certain internal controls related to
NRC's recording of licensee fees; Fiscal Year 2003 (2) communication by
NRC with the IPA, OIG, and users of the financial Financial Statements
statements concerning the identified material error; and (3) audit
procedures for unrecorded and unbilled licensee fees and related internal
controls. These issues are discussed in detail below.
Material Error Resulted from Deficiencies in Certain Internal Controls Related
to Recording Licensee Fees
In fiscal year 2004, NRC restated certain of its fiscal year 2003
financial statements to reflect approximately $3 million in unrecorded and
unbilled licensee fees,14 which resulted from certain internal control
deficiencies related to NRC's fee billing system. NRC inspects its
licensees' facilities and users of nuclear materials to ensure compliance
with regulatory requirements and recovers most of its appropriations from
inspection fees paid by NRC licensees. If NRC does not bill its licensees
or does not bill them for the full amount they owe, NRC's Accounts
Receivable and related revenue will be understated and the federal
government may not receive the full amount of fees to which it is
entitled.
According to NRC's IPA, during fiscal year 2003, the fee billing system
failed to include all billable hours in the invoices issued to NRC's
licensees. The IPA stated that this condition resulted from the following
deficiencies:
o inadequate testing by NRC of the fee billing system to ensure that
modifications to system software performed as intended,
o use of intensive manual processes, and
14According to NRC officials, since NRC was already restating the fiscal
year 2003 financial statements for this $3 million material error, it also
decided to correct for less significant errors that had been identified.
Specifically, the fiscal year 2003 Balance Sheet was restated for $777
thousand relating to capital leases, and the fiscal year 2003 Statement of
Budgetary Resources was restated for $4.7 million for unfilled customer
orders. These errors were not deemed material by NRC's IPA.
o lack of comprehensive quality assurance procedures over the billing
process.15
As a result, NRC had to restate its originally issued fiscal year 2003
Balance Sheet, Statement of Net Cost, Statement of Changes in Net
Position, and Statement of Financing to accurately reflect approximately
$3 million in licensee fees that had not been recorded and billed.
The $3 million unrecorded and unbilled licensee fees error represented
about 5 percent of the Other Intragovernmental Liabilities16 and about 6
percent of the Accounts Receivable balances on the originally issued
fiscal year 2003 Balance Sheet, approximately 5 percent of Net Cost of
Operations17 on NRC's originally issued fiscal year 2003 Statement of Net
Cost,18 about 5 percent of the Total Financing Sources component of
Cumulative Results of Operations on NRC's originally issued fiscal year
2003 Statement of Changes in Net Position, and approximately 4 percent of
the Total Resources Used to Finance Activities on NRC's originally issued
fiscal year 2003
Statement of Financing. Because at the time of the issuance of NRC's
fiscal years 2004 and 2003 comparative financial statements there was
insufficient evidence to support the completeness of the Accounts
15Procedures to detect potential underbillings were not effective because
they did not provide for reconciliations of data generated by different
sources. Such reconciliations are used to identify unrecorded and unbilled
fees and erroneous licensee invoices. In addition, some reports produced
by the fee system did not contain totals to enable comparisons of invoices
to data sources, thus complicating the process to detect potential
underbillings.
16The Other Intragovernmental Liabilities account increased by
approximately $3 million from approximately $57 million, as originally
reported in fiscal year 2003, to approximately $60 million when restated
in the fiscal year 2004 and 2003 comparative financial statements. The
underbilling error affected Other Intragovernmental Liabilities because
NRC incurs a liability to offset the net accounts receivable for fees
assessed. This liability represents amounts which, when collected, will be
transferred to Treasury to offset NRC's appropriations in the year
collected. Therefore, the Total Financing Sources component of Cumulative
Results of Operations on the Statement of Changes in Net Position and the
Total Resources Used to Finance Activities on the Statement of Financing
were restated to capture the effect of NRC's obligation to transfer funds
to Treasury for fees assessed.
17The $3 million licensee fees error represented almost 1 percent of the
Earned Revenues from the Public reported on NRC's originally issued fiscal
year 2003 Statement of Net Cost.
18In addition, Net Cost of Operations reported on NRC's originally issued
fiscal year 2003 Statement of Changes in Net Position and Statement of
Financing were also understated by approximately 5 percent.
Receivable and related revenue balances reported in NRC's restated fiscal
year 2003 financial statements, the IPA updated the originally issued
unqualified opinion to a qualified opinion.
According to NRC officials, the fee billing system has since been modified
to improve the functionality of the system's interface, and the acceptance
testing of fee billing system software modifications has been expanded and
is now independently validated and verified. The officials also stated
that they implemented a manual internal control procedure that compares
the number of inspection hours billed by NRC on licensee invoices against
the number of hours eligible to be charged to inspections by NRC staff as
indicated in the NRC inspection database. These procedures are to be
performed throughout the year and thus are intended to determine, on a
timely basis, that all eligible hours have been billed.
Identified Material Error Was Not Communicated Timely
NRC's management representation letter, dated November 20, 2003, included
representations that NRC's fiscal year 2003 financial statements were
fairly stated and that the agency had effective internal controls. As of
the same date, the IPA dated its audit report, which contained an
unqualified, or clean, audit opinion on NRC's fiscal year 2003 financial
statements. On December 17, 2003, certain NRC officials became aware that
(1) there was an underbilling error of at least $500,000 for fiscal year
2003, (2) the underbilling error may have resulted from an internal
control deficiency within NRC's licensee fee billing system that could
affect the reliability of NRC's fiscal year 2003 financial statements, and
(3) further research was needed to determine the cause of the error and
whether the error was an isolated incident or a systemic billing system
weakness. Nevertheless, on December 19, 2003, over 1 month prior to OMB's
required January 30, 2004 due date for federal agencies to issue their
fiscal year 2003 financial statements, NRC submitted its management
representation letter and financial statements to OMB.
Subsequently, NRC researched the problem and by February 2004 had
completed a preliminary review of NRC's fiscal year 2003 licensee fees.
This review identified a total of about $2.4 million of unrecorded and
unbilled licensee fees for fiscal year 2003. NRC continued to research the
issue and by November 2004 found additional unrecorded and unbilled
licensee fees. In total, approximately $3 million in unrecorded and
unbilled licensee fees was identified for fiscal year 2003.
According to the OIG, despite the fact that NRC officials met with the
agency's IPA and OIG on several occasions between the time that NRC's
staff discovered the billing error and the IPA subsequently discovered the
error, NRC did not report the billing error to the IPA or OIG.
Specifically, the IPA and OIG stated that they were totally unaware of the
error until the IPA discovered in May 2004 that NRC, as a result of the
error, had recorded licensee fees and issued bills during fiscal year 2004
for licensee fees that instead should have been recorded and billed in
fiscal year 2003. In accordance with OMB Bulletin 01-02, there shall be
open and timely communication throughout the audit process between agency
officials, including the CFO and the OIG, as well as the IPA if one is
used, which would include potential audit findings, materially misstated
or unsupported amounts in the financial statements, and material
weaknesses in internal control. Accordingly, NRC officials had a
responsibility to report the billing error and, if known, the cause of the
error to the IPA when NRC became aware of it on December 17, 2003, because
of the effect that the error could have on the fiscal year 2003 financial
statements. Failure to timely provide this information is a serious matter
that violates the tenets of the relationship between the audited entity
and the auditor. As a result, NRC's OIG initiated an investigation of the
matter and issued an internal report dated February 14, 2005, which we
reviewed as part of our work, that discusses the details of the material
error noted above.
After NRC's IPA independently discovered the error in May 2004, the IPA
discussed the error with NRC but did not advise NRC to notify the users of
the financial statements, such as Congress, OMB, GAO, and Treasury, about
the material error. According to AU section 561, once the auditor becomes
aware of subsequently discovered information that is found to be both
reliable and to have existed at the date of the auditor's report, the
auditor should take certain actions if the nature and effect of the matter
are such that (1) the auditor's report would have been affected if the
information had been known to the auditor at the date of the report and
had not been reflected in the financial statements and (2) the auditor
believes there are persons currently relying or likely to rely on the
financial statements who would attach importance to the information. If
these conditions are met, the auditor should advise the reporting entity
to make appropriate disclosures of the newly discovered facts and their
effects on the financial statements to persons who are known to be relying
or who are likely to rely on the financial statements and the related
auditor's report. AU 561 states that when issuance of financial statements
accompanied by the auditor's report for a subsequent period is imminent,
so that disclosure is not delayed, appropriate disclosure of the revision
can be made in such
statements instead of reissuing the earlier statements. AU section 561
also states that if a material error in the prior year financial
statements has been discovered but the effect of the subsequently
discovered information cannot be quantified without a prolonged
investigation, appropriate disclosure would consist of the reporting
entity notifying users known or likely to be relying on the financial
statements and the related auditor's report that the statements and
auditor's report should not be relied on and that revised financial
statements and a revised auditor's report will be issued upon completion
of an investigation. AU section 561 further states that the auditor should
take whatever steps are necessary to be satisfied that the reporting
entity has made the appropriate disclosures.
However, until the issuance of NRC's fiscal years 2004 and 2003
comparative financial statements on November 15, 2004, users of NRC's
financial statements were not aware that certain of the fiscal year 2003
financial statements originally issued were materially misstated. Based on
its interpretation of AU 561, the IPA stated that it discussed the error
with NRC but did not advise NRC to make appropriate disclosures of the
newly discovered facts and their effects on the fiscal year 2003 financial
statements to persons known to rely or likely to rely on such financial
statements and related auditor's report. The IPA told us that it came to
this decision because (1) it considered issuance of the fiscal years 2004
and 2003 comparative financial statements to be imminent and (2) in May
2004, it did not think that any users would still be relying on the fiscal
year 2003 financial statements and related auditor's report. However, in
our view, the issuance of NRC's fiscal years 2004 and 2003 comparative
financial statements, which occurred in November 2004, was not imminent
when the IPA discovered the material error in May 2004, more than 5 months
prior to OMB's November 15, 2004 deadline for federal agencies to issue
their fiscal year 2004 financial statements. In addition, the IPA did not
provide us with documentation of the basis for its conclusion that users
were not likely to still be relying on the fiscal year 2003 financial
statements and would not attach importance to the correction of the
material error. In our view, such documentation should include
identification of potential users, such as Congress, OMB, GAO, and
Treasury, and an analysis of whether the users would likely be relying on
the fiscal year 2003 financial statements. We have concerns that, without
notification, anyone who may have been relying on the fiscal year 2003
financial statements would not have known from May to mid-November 2004,
or for more than 5 months, that NRC's originally issued financial
statements, which received an unqualified opinion, were materially
misstated and should not be relied on.
Audit Procedures Did Not Detect Unrecorded and Unbilled Licensee Fees and
Related Internal Control Deficiencies
The above-noted material error was not discovered during the audit of
NRC's fiscal year 2003 financial statements because the IPA did not design
or perform sufficient audit procedures to (1) determine whether all
eligible licensee fees were billed and properly presented in the financial
statements and (2) detect the previously noted internal control
deficiencies related to NRC's recording of licensee fees.
According to the Financial Audit Manual (FAM),19 the auditor should
perform audit procedures to test for all significant assertions20 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 NRC's Accounts Receivable and related revenue
and the potential for material understatement, the auditor should have
identified the completeness assertion as significant and performed audit
procedures to determine whether all applicable fees were billed and
presented in the financial statements. To test for completeness, the
auditor should (1) select from an independent population of items that
should be recorded in the account, (2) select items that should be
recorded from a source that is likely to contain all the items that should
be recorded, and (3) determine whether the selected items are included in
the recorded balance. However, although the IPA did perform certain audit
procedures during fiscal year 2003 to test Accounts Receivable and related
revenue, the IPA did not design or perform audit procedures to test for
the completeness assertion. For example, we found no documentation of
audit procedures to compare the total number of inspection hours billed by
NRC on licensee invoices against the total number of hours charged to
inspections by NRC staff in the NRC inspection database in order to
determine if all eligible hours had been billed.
Also, during the fiscal year 2003 audit, the IPA did not identify and
report the internal control deficiencies, described earlier in this
report, that led to NRC's failure to bill for all applicable licensee
fees. According to OMB
19GAO/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).
20Financial 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.
Bulletin 01-02, auditors are responsible for performing sufficient tests
of internal controls that have been properly designed and placed in
operation to support a low level of assessed control risk.21 However, the
IPA's fiscal year 2003 audit procedures were not sufficient to detect
NRC's internal control deficiencies. The IPA stated that it took
corrective action in fiscal year 2004 and designed audit procedures to
detect unrecorded and unbilled licensee fees and to test related internal
controls.
Conclusions NRC did not disclose the material error it detected in its
fiscal year 2003 financial statements to its IPA or OIG. In addition, in
our view, NRC did not timely disclose the material error to users of its
financial statements. NRC corrected the error and issued restated
financial statements as part of its fiscal years 2004 and 2003 comparative
financial statements on November 15, 2004, more than 8 months after NRC
determined that the error totaled at least $2.4 million and about 11
months after it first became aware of an underbilling error. Going
forward, it will be important for NRC to ensure that its new procedures,
which it represents as having been implemented, effectively address the
cause of the error. In addition, it will be important that the agency
promptly notify its IPA and OIG of any errors it discovers in future
financial statements. It will also be important that NRC's auditor fully
and effectively implement audit procedures to detect any similar errors or
internal control deficiencies in the future.
Recommendations for We recommend that NRC's Chief Financial Officer
determine whether the new procedures, which NRC represents as having been
established,
Executive Action effectively ensure that all eligible licensee fees are
recorded and billed.
We recommend that NRC's Inspector General work with NRC's IPA so that
audit procedures to test for unrecorded and unbilled licensee fees and
related internal controls are fully and effectively implemented.
Agency Comments In written comments on a draft of this report, which are
reprinted in enclosures I and II, NRC's CFO and Inspector General, in
separate letters, concurred with the recommendations that we made to each
of them. We
21Control risk is the risk that a material misstatement that could occur
in an assertion will not be prevented or detected and corrected on a
timely basis by the entity's internal control.
also received a technical comment from NRC's CFO, which we have
incorporated.
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
Page 16 GAO-06-30R NRC Fiscal Year 2003 Restatement
Enclosure II: Comments from the Inspector General, Nuclear Regulatory Commission
Note: A GAO comment supplementing those in the report text appear at the
end of this enclosure.
See comment 1.
Enclosure II: Comments from the Inspector General, Nuclear Regulatory
Commission
Enclosure II: Comments from the Inspector General, Nuclear Regulatory Commission
The following is a comment on the Nuclear Regulatory Commission's (NRC)
Inspector General letter dated October 14, 2005.
GAO Comment 1.
NRC's Inspector General noted that there is no "inspection database" that
includes all the hours billed during a particular year. We agree. Our
report does not state that the inspection database includes all the hours
billed during a particular year. Instead, this report states that the NRC
inspection database includes the hours eligible to be charged to
inspections by NRC staff. NRC's Inspector General also stated that data in
the fee billing system comes from several sources and, as a result, the
testing of completeness is accomplished through a variety of alternative
techniques. While we agree that data in the fee billing system comes from
several sources and that the testing of completeness can be accomplished
through several means, the IPA's fiscal year 2003 audit procedures were
not designed or performed to test for the completeness assertion.
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