oversight

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

Published by the Government Accountability Office on 2003-11-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Committee on Commerce,
                Science, and Transportation, United
                States Senate, and the Committee on
                Science, House of Representatives

November 2003
                BUSINESS
                MODERNIZATION
                NASA’s Integrated
                Financial Management
                Program Does Not
                Fully Address
                Agency’s External
                Reporting Issues




GAO-04-151
                a
                                                November 2003


                                                BUSINESS MODERNIZATION

                                                NASA’s Integrated Financial Management
Highlights of GAO-04-151, a report to the       Program Does Not Fully Address
Committee on Commerce, Science, and
Transportation, U.S. Senate, and the            Agency’s External Reporting Issues
Committee on Science, House of
Representatives




In April 2000, the National                     The core financial module of IFMP provides NASA its first agencywide
Aeronautics and Space                           accounting system—a significant improvement over the 10 disparate systems
Administration (NASA) began its                 previously used. However, to meet IFMP’s aggressive implementation
Integrated Financial Management                 schedule, NASA deferred testing and implementation of many key
program (IFMP), its third attempt
                                                requirements of the core financial module. Consequently, when NASA
at modernizing its financial
management processes and                        announced, in June 2003, that this module was fully operational at each of its
systems. In April 2003, GAO                     10 centers, about two-thirds of the financial events or transaction types
reported that NASA’s acquisition                needed to carry out day-to-day operations and produce external financial
strategy has increased the risk that            reports had not been implemented in the module. NASA officials
the agency will implement a system              acknowledged that, as part of their implementation strategy, they had not yet
that will cost more and do less than            converted the module to support full-cost accounting. In addition, we found
planned. This report is one of a                that NASA also deferred implementation of other key core financial module
series of reviews of NASA’s                     capabilities. Because NASA did not use disciplined processes for defining,
acquisition and implementation of               managing, and testing key system requirements, or substantially reengineer
IFMP, and focuses on the core                   its business processes prior to implementation, the core financial module, as
financial module’s ability to
                                                implemented in June 2003, does not address several long-standing external
provide the information necessary
for external financial reporting.               reporting issues and has created some new problems.

                                                •   Long-standing external financial reporting issues have not been
                                                    addressed. NASA has not used its implementation of the core financial
                                                    module as an opportunity to drive needed changes in its management
GAO is recommending that NASA                       practices and business processes. Therefore, the system does little to
(1) identify all areas that are not                 address NASA’s ability to properly account for $37 billion of reported
compliant with the Federal
Financial Management
                                                    property or certain aspects of the agency’s $15 billion annual budget.
Improvement Act (FFMIA) of 1996
and (2) develop an implementation               •   New financial reporting problems have emerged. NASA went
plan for addressing those areas and                 forward with its aggressive implementation plans even though agency
incorporating them into IFMP,                       managers knew of problems with the module’s ability to properly
including the need for                              process and record certain transactions. As a result, the module does
reengineering some processes,                       not appropriately capture critical information on the cost of NASA’s
such as the cost and other                          operations, such as certain accrued costs, accounts payable, and
information that it requires from                   obligation transactions.
contractors. This plan should
include time frames and details on
how any changes will be
                                                In April 2003, GAO reported that the core financial module did not address
monitored, tested, and                          key internal management information requirements. Now, GAO has found
documented. NASA disagreed with                 that the module cannot reliably provide key financial data needed for
GAO’s recommendations, saying                   external financial reporting. Although NASA intends to address many of
that the report did not reflect                 these issues, its implementation approach raises concerns over its ability to
IFMP’s most recent progress. GAO                do so. These deferred external reporting capabilities, combined with the
considered recent IFMP progress                 findings from our April 2003 report, indicate that NASA’s June 2003 core
and reaffirmed its position.                    financial module and related systems do not substantially comply with the
                                                requirements of FFMIA. FFMIA addresses the need for agencies’ financial
www.gao.gov GAO-04-151
                                                systems to provide value to those who use financial data. NASA must
To view the full product, including the scope   address these issues if the core financial module and IFMP are to achieve the
and methodology, click on the link above.       objective of providing reliable, timely financial information for both internal
For more information, contact Gregory D.
Kutz at (202) 512-9095 or kutzg@gao.gov.        management decision-making and external reporting purposes.
Contents



Letter                                                                                                  1
                             Results in Brief                                                           3
                             Background                                                                 5
                             Schedule-driven Approach Limits Transaction Processing
                               Capabilities                                                             9
                             Long-standing External Reporting Issues Not Addressed                     11
                             NASA’S Implementation of IFMP Has Created New Reporting
                               Problems                                                                15
                             Core Financial Module Does Not Substantially Comply
                               With FFMIA                                                              17
                             Conclusion                                                                21
                             Recommendations                                                           22
                             Agency Comments and Our Evaluation                                        22


Appendixes
              Appendix I:    Objective, Scope, and Methodology                                         30
             Appendix II:    Comments From the National Aeronautics and Space
                             Administration                                                            32
             Appendix III:   GAO Contact and Staff Acknowledgments                                     38
                             GAO Contact                                                               38
                             Acknowledgments                                                           38




                             Abbreviations

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


                             Page i                            GAO-04-151 NASA’s External Reporting Issues
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Page ii                                     GAO-04-151 NASA’s External Reporting Issues
A
United States General Accounting Office
Washington, D.C. 20548



                                    November 21, 2003                                                                         Leter




                                    The Honorable John McCain
                                    Chairman
                                    The Honorable Ernest F. Hollings
                                    Ranking Minority Member
                                    Committee on Commerce, Science,
                                     and Transportation
                                    United States Senate

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

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

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


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




                                    Page 1                                     GAO-04-151 NASA’s External Reporting Issues
eventually abandoned after spending a total of 12 years and a reported
$180 million. Given the importance of NASA’s current effort, you asked us
to assess the program. In April 2003, we issued our first report on IFMP to
alert you to concerns we had, based on our work to date. In that report, we
provided you with, among other things, our assessment of the core
financial module’s ability to satisfy NASA’s internal management decision-
making needs.

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



2
 See U.S. General Accounting Office, Business Modernization: Disciplined Processes
Needed to Better Manage NASA’s Integrated Financial Management Program, GAO-04-118
(Washington, D.C.: Nov. 21, 2003). Also, see U.S. General Accounting Office, Information
Technology: Architecture Needed to Guide NASA’s Financial Management Modernization,
GAO-04-43 (Washington, D.C.: Nov. 21, 2003).
3
 See U.S. General Accounting Office, Business Modernization: NASA Challenges in
Managing Its Integrated Financial Management Program, GAO-04-255 (Washington, D.C.:
Nov. 21, 2003).
4
31 U.S.C. 3512 note (2000) (Federal Financial Management Improvement).




Page 2                                      GAO-04-151 NASA’s External Reporting Issues
                   We performed our work from April 2003 through September 2003 in
                   accordance with generally accepted government auditing standards.
                   Details on our objective, scope, and methodology are in appendix I.



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

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

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



                   Page 3                                GAO-04-151 NASA’s External Reporting Issues
external reporting issues—accurately capturing, recording, and accounting
for PP&E and materials and ensuring that its system meets the broader
objectives of federal managerial cost accounting standards. Specifically,
NASA has not reengineered the agency’s processes for capturing contract
costs associated with PP&E and material and therefore continues to update
the core financial module using periodic summary-level manual entries.
Although NASA plans to implement an integrated asset management
module in 2005, this alone will not ensure that NASA uses transaction-level
detail to update the core financial module and thereby provide independent
control over its property.

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

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

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

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



Page 4                                GAO-04-151 NASA’s External Reporting Issues
             financial reporting purposes does not by itself constitute FFMIA
             compliance. In its written comments, NASA indicated that it has made
             changes to the module since June and that the core financial module as
             implemented in October 2003 has many of the capabilities that were
             lacking in the June 2003 module. However, with the possible exception of
             full-cost accounting, which was planned for October 1, 2003, NASA
             acknowledges that the cited changes involve manual workarounds for
             producing year-end numbers. FFMIA goes well beyond producing
             auditable financial statements once a year; it requires financial systems
             that ensure accountability and accurate data for managerial and reporting
             purposes on an ongoing basis throughout the year.



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


             5
              FFMIA requires auditors to report whether agencies’ financial management systems
             comply with federal financial management systems requirements, applicable federal
             accounting standards (U.S. generally accepted accounting principles), and the U.S. Standard
             General Ledger at the transaction level.
             6
              Policies and standards prescribed for executive agencies to follow in developing, operating,
             evaluating, and reporting on financial management systems are defined in the Office of
             Management and Budget (OMB) Circular A-127, Financial Management Systems. These
             system requirements provide the framework for establishing integrated financial
             management systems to support the partnership between program and financial managers,
             and ensure the integrity of information for decision making and measuring performance.
             7
              The SGL was established by an interagency task force under the direction of OMB and
             mandated for use by agencies in OMB and Treasury regulations in 1986. The SGL promotes
             consistency in financial transaction processing and reporting by providing a uniform chart
             of accounts and pro forma transactions used to standardize federal agencies’ financial
             information accumulation and processing throughout the year.




             Page 5                                        GAO-04-151 NASA’s External Reporting Issues
standards.8 Thus, the auditor’s report implied that NASA could not only
generate reliable information once a year for external financial reporting
purposes but also could provide the kind of information needed for day-to-
day management decision making.

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

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


8
 In October 1990, the Secretary of the Treasury, the Director of OMB, and the Comptroller
General established the Federal Accounting Standards Advisory Board (FASAB) to develop
a set of generally accepted accounting standards for the federal government. FASAB
promulgates federal accounting standards that agency Chief Financial Officers use in
developing financial management systems and preparing financial statements.
9
 At that time, we began a special effort to review and report on the federal program areas
that our work had identified as high risk because of vulnerabilities to waste, fraud, abuse,
and mismanagement. We first issued our High-Risk Series in December 1992 and have
continued to include NASA’s contract management as an area of high risk since. See U.S.
General Accounting Office, High-Risk Series: NASA Contract Management, GAO/HR-93-11
(Washington, D.C.: December 1992) and Major Management Challenges and Program
Risks: National Aeronautics and Space Administration, GAO-03-114 (Washington, D.C.:
January 2003).




Page 6                                        GAO-04-151 NASA’s External Reporting Issues
2008, but after NASA’s new Administrator came on board in fiscal year
2002, the timeline was accelerated to fiscal year 2006, with the core
financial module to be completed in fiscal year 2003. NASA’s IFMP
includes nine module projects supporting a range of financial,
administrative, and functional areas. According to NASA officials, of the
nine module projects, five are in operation, one is currently in
implementation, and three are future modules. The five modules in
operation are resume management, position description management,
travel management, executive financial management information (called
Erasmus), and core financial; the one project in implementation is budget
formulation; and the three future module projects are human resources,
asset management, and contract administration.

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

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

10
     SAP R/3 is an integrated software solution produced by software vendor SAP, Inc.
11
  JFMIP is a joint undertaking of the U.S. Department of the Treasury, General Accounting
Office, Office of Management and Budget, and Office of Personnel Management, working in
cooperation with one another, with other agencies, and with the private sector, to improve
financial management in the federal government. The program was given statutory
authorization in the Budget and Accounting Procedures Act of 1950 (31 U.S.C. 3511(d)).
One of JFMIP’s roles has been to establish detailed requirements for agencies’ financial
management systems.




Page 7                                          GAO-04-151 NASA’s External Reporting Issues
cost management. NASA completed implementation of the core financial
module at all 10 NASA centers in June 2003. The pilot for the core financial
module—conducted at Marshall Space Flight Center—was implemented in
October 2002. NASA then deployed the core financial module at the other 9
NASA centers in three “waves,” the last of which was completed in June
2003.

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

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

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

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




12
 U.S. General Accounting Office, Business Modernization: Improvements Needed in
Management of NASA’s Integrated Financial Management Program, GAO-03-507
(Washington, D.C.: Apr. 30, 2003).
13
  NASA defined those in the financial accounting arena as the system’s users who, under
NASA’s plan, would determine the system’s requirements, guide its implementation, and
define and measure its success. Those who would benefit from the system’s new
capabilities were identified as stakeholders. Under NASA’s plan, they would be the ultimate
beneficiaries of the system improvements, but would not have a role in setting requirements
or measuring and determining the success of the system’s implementation.




Page 8                                       GAO-04-151 NASA’s External Reporting Issues
Schedule-driven              Although NASA has met the core financial management module’s
                             implementation schedule, the system as implemented in June 2003 has
Approach Limits              limited external financial reporting capabilities. When NASA announced in
Transaction Processing       June 2003 that the core financial management module was complete, NASA
                             officials acknowledged that additional work remained, including the need
Capabilities                 to develop and configure a cost-allocation structure within the system so
                             that it would accumulate the full cost of NASA’s programs and projects for
                             external financial reporting purposes. However, to meet its
                             implementation schedule, we also found that NASA (1) deferred
                             requirements that require significant business process reengineering or
                             extensive software configuration and (2) continues to rely on manual
                             procedures for many transactions that should be automated in the new
                             system. Consequently, only about one-third of the transaction types that
                             NASA uses in its business processes are currently implemented and fully
                             automated in the core financial module.



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


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




                             Page 9                                     GAO-04-151 NASA’s External Reporting Issues
                              the core financial module and IFMP officials told us that this capability
                              would be fully implemented on October 26, 2003. However, because of the
                              timing of this report, we did not verify whether this implementation date
                              was met.

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



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

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




                              Page 10                                GAO-04-151 NASA’s External Reporting Issues
                           manual processes that resulted in a $644 million error in NASA’s fiscal year
                           1999 financial statements.

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



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



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



                           Page 11                               GAO-04-151 NASA’s External Reporting Issues
NASA Has Not                The core financial module, as implemented in June 2003, does not
Reengineered Processes to   appropriately capture and record PP&E and material in the module’s
                            general ledger at the transaction level. According to SGL requirements and
Properly Account for PP&E
                            NASA’s own accounting policy, recording PP&E and material in the general
and Materials               ledger at the transaction or item level provides independent control over
                            these assets. However, NASA currently updates the core financial module’s
                            general ledger using periodic summary-level manual entries. Although
                            NASA plans to implement an integrated asset management module in 2005,
                            this alone will not ensure that transaction-level detail is used to update the
                            core financial module.

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

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


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




                            Page 12                                      GAO-04-151 NASA’s External Reporting Issues
                             contractor’s possession. Based on these reports, NASA records the cost of
                             contractor-held assets in its general ledger and reverses the expense
                             previously recorded from the contractor cost reports. The problem with
                             NASA’s current process for capturing, recording, and accounting for
                             property in the possession of contractors is that it provides no way for
                             NASA to ensure that the money it spends on the construction of its
                             property is actually recorded as discrete property items.

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



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

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



                             Page 13                                GAO-04-151 NASA’s External Reporting Issues
purchase order, such as shipping costs, the system erroneously posts the
upward adjustment to a prior year obligation instead of a current year
obligation. Because the system does not properly capture and report these
adjustments, NASA must rely on manual compilations and system queries
to extract the data needed to prepare the agency’s Statement of Budgetary
Resources—just as it did using its legacy general ledger systems. As we
reported in March 2001, this cumbersome, labor-intensive effort to gather
the information needed at the end of each fiscal year was the underlying
cause of a $644 million misstatement in NASA’s fiscal year 1999 Statement
of Budgetary Resources.16

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




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




Page 14                                    GAO-04-151 NASA’s External Reporting Issues
NASA’S                       NASA’s implementation of the core financial module has also created new
                             reporting issues. Specifically, the core financial module does not
Implementation of            appropriately capture accrued costs and record the corresponding
IFMP Has Created New         liabilities as accounts payable. In addition, the core financial module
                             records obligations to the general ledger before the obligations are legally
Reporting Problems           binding. Although NASA knew about these problems prior to
                             implementation, the agency went forward with its implementation plans.



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

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

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



                             Page 15                               GAO-04-151 NASA’s External Reporting Issues
                             schedule information to monitor progress on the contract. However,
                             because program managers were not involved in defining system
                             requirements or reengineering business processes, the core financial
                             module is not being designed to integrate cost and schedule data needed by
                             program managers.



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

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




                             17
                                  31 U.S.C. 1501 (a) (1) (2000).




                             Page 16                               GAO-04-151 NASA’s External Reporting Issues
                         and monitor any documents that have been recorded without signatures to
                         ensure that obligations are not overstated at month-end.



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



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

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

                         • posts obligations to the general ledger prior to approval.




                         Page 17                               GAO-04-151 NASA’s External Reporting Issues
                         Among other things, FFMSR requires federal financial management
                         systems to produce accurate and reliable information for budgetary
                         reports, including the Statement of Budgetary Resources18 and the Report
                         on Budget Execution and Budgetary Resources (Standard Form 133).19 As
                         previously discussed, the core financial module does not capture and
                         record upward and downward adjustments of obligations incurred in prior
                         fiscal years, which is essential for producing both the Statement of
                         Budgetary Resources and Standard Form 133 reports. In addition, FFMSR
                         requires federal financial management systems to process transactions in
                         accordance with federal appropriations law, which states that no amount
                         may be recorded as an obligation unless it has been approved and is
                         supported by documentary evidence. As a result of system limitations we
                         have discussed, the core financial module erroneously posts obligations to
                         the general ledger prior to approval.



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

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

                         18
                          The Statement of Budgetary Resources provides information on the availability and use of
                         budgetary resources, as well as the status of budgetary resources at the end of the period.
                         19
                           The Standard Form 133 is prepared quarterly and is the principal source of information for
                         Statement of Budgetary Resources. It also fulfills the requirement that the President review
                         federal expenditures at least four times a year.




                         Page 18                                       GAO-04-151 NASA’s External Reporting Issues
                     reported on the Statement of Budgetary Resources and Standard Form 133
                     cannot be traced directly to NASA’s general ledger accounts. NASA also
                     does not properly record PP&E and materials as assets when they are first
                     acquired. Instead, NASA initially records these items as expenses and then
                     later corrects these records using manual procedures. Although this
                     manual process provides NASA a vehicle for reporting PP&E and material
                     costs for financial statement reporting, it is not sufficient for compliance
                     with the SGL. Finally, NASA does not maintain transaction-level detail for
                     its contractor-held property. Instead, it relies solely on its contractors to
                     maintain such records and to periodically report summary-level
                     information on these assets to NASA. This situation has resulted in
                     material weaknesses over this property, as previously reported by NASA’s
                     current independent auditor.



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

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

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


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




                     Page 19                                     GAO-04-151 NASA’s External Reporting Issues
   record accounts payable when the cumulative costs for a given contract
   exceed obligations. Instead, these transactions are held outside the
   general ledger, in suspense, until additional funds are obligated, thus
   understating NASA’s reported program costs and liabilities.

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

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

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



Page 20                               GAO-04-151 NASA’s External Reporting Issues
                weaknesses in the agency’s internal controls. As noted earlier, NASA
                has not addressed material weaknesses in its internal controls and
                processes over PP&E and materials, which make up nearly 85 percent,
                or $37 billion, of NASA’s assets. Instead, NASA plans to rely on existing
                legacy systems and processes—including the extensive use of manual
                accounting entries—that the agency’s independent auditor has found to
                be inadequate for property accounting. As a result, NASA faces serious
                challenges in complying with these standards.

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



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




             Page 21                                 GAO-04-151 NASA’s External Reporting Issues
Recommendations       Based on the findings from this review, in conjunction with our April 2003
                      report, we reiterate our April 2003 recommendation that NASA:

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

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

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

                      • property, plant, equipment, and materials;

                      • budgetary information including adjustments to prior year obligations;

                      • accounts payable and accrued costs; and

                      • the full cost of programs for financial reporting purposes.

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



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



                      Page 22                                GAO-04-151 NASA’s External Reporting Issues
                        Moreover, NASA’s comments assert that for PP&E and budgetary reporting,
                        the manual processes or workarounds it has developed to produce year-
                        end balances for the agency’s annual financial statements also satisfy the
                        requirements of FFMIA. We disagree with this assertion. The development
                        of significant manual workarounds in these areas masks the fact that
                        NASA’s core financial module is not designed to, and cannot, produce
                        timely and reliable PP&E and budgetary data with traceability to
                        transaction-based support. The ability to produce reliable numbers once a
                        year for financial reporting purposes does not by itself constitute FFMIA
                        compliance. In its written comments, NASA indicated that it has made
                        changes to the module since June and that the core financial module as
                        implemented in October 2003 has many of the capabilities that were
                        lacking in the June 2003 module. Although we requested status updates
                        between June and October to track NASA’s progress, we did not reassess
                        the module’s capabilities as of October 2003. However, with the possible
                        exception of full-cost accounting, which was planned for October 1, 2003,
                        the changes NASA has cited still involve manual workarounds for
                        producing year-end numbers. FFMIA goes beyond producing auditable
                        financial statements once a year and requires financial systems that ensure
                        accountability on an ongoing basis throughout the year.

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



                        Page 23                               GAO-04-151 NASA’s External Reporting Issues
                            business needs takes more than merely placing business or line
                            management representation on the implementation team.21 Instead, at best
                            practice organizations, business managers had a vested interest in the
                            success of the project and were actively involved in leading the
                            improvement effort.

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



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

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




                            Page 24                                    GAO-04-151 NASA’s External Reporting Issues
                     Further, any effort that falls short of end-to-end business process
                     reengineering will likely not result in a system that substantially improves
                     the data available for contract oversight or ensures consistency between
                     costs reported in general purpose financial reports and costs reported to
                     program mangers.

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

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



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



                     Page 25                               GAO-04-151 NASA’s External Reporting Issues
largest contractors. We disagree with NASA’s assertion. Because NASA’s
current contractor cost-reporting processes do not provide the information
needed to distinguish between capital and non-capital expenditures, NASA
currently records as expenses all contractor costs as they are incurred and
then manually adjusts previous entries to record assets based on periodic
summary-level contractor property reports. While this process may satisfy
NASA financial statement reporting needs, the development of significant
manual workarounds in this area masks the fact that NASA’s core module is
not designed to and cannot produce timely and reliable PP&E data with
traceability to transaction-based support. The ability to produce reliable
numbers once a year for financial reporting purposes does not equate to
FFMIA compliance.

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

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



Page 26                                GAO-04-151 NASA’s External Reporting Issues
                        for government property in their possession and prohibits government
                        agencies from maintaining duplicate property records. Under these
                        circumstances, as part of an overall effort to reengineer its acquisition
                        management process, we believe that NASA must capture the cost and
                        other information it needs from its contractors and develop traceability to
                        contractor logistical records to ensure accountability over its contractor-
                        held property on an ongoing basis.



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



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


                        22
                             GAO-01-438.




                        Page 27                               GAO-04-151 NASA’s External Reporting Issues
                       general ledger in the period in which they are incurred. The risk in NASA’s
                       method is that when costs and liabilities are not properly recorded in the
                       general ledger, these balances are likely to be understated in any financial
                       reports produced during the year, as well as at year-end.

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



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



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




                       Page 28                                    GAO-04-151 NASA’s External Reporting Issues
As agreed with your offices, unless you announce its contents earlier, we
will not distribute this report further until 30 days from its date. At that
time, we will send copies to interested congressional committees, the
NASA Administrator, and the Director of the Office of Management and
Budget. We will make copies available to others upon request. In addition,
the report will be available at no charge on the GAO Web site at
http://www.gao.gov.

If you or your staffs have any questions concerning this report, please
contact me at (202) 512-9505 or kutzg@gao.gov, Keith Rhodes at (202) 512-
6412 or rhodesk@gao.gov, or Diane Handley at (404) 679-1986 or
handleyd@gao.gov. Key contributors to this report are acknowledged in
appendix III.




Gregory D. Kutz
Director
Financial Management and Assurance




Keith A. Rhodes
Chief Technologist
Applied Research and Methods




Page 29                               GAO-04-151 NASA’s External Reporting Issues
Appendix II

Comments From the National Aeronautics
and Space Administration                                             Appendx
                                                                           iI




              Page 32      GAO-04-151 NASA’s External Reporting Issues
Appendix II
Comments From the National Aeronautics
and Space Administration




Page 33                                  GAO-04-151 NASA’s External Reporting Issues
Appendix II
Comments From the National Aeronautics
and Space Administration




Page 34                                  GAO-04-151 NASA’s External Reporting Issues
Appendix II
Comments From the National Aeronautics
and Space Administration




Page 35                                  GAO-04-151 NASA’s External Reporting Issues
Appendix II
Comments From the National Aeronautics
and Space Administration




Page 36                                  GAO-04-151 NASA’s External Reporting Issues
Appendix II
Comments From the National Aeronautics
and Space Administration




Page 37                                  GAO-04-151 NASA’s External Reporting Issues
Appendix I

Objective, Scope, and Methodology                                                             AA
                                                                                               ppp
                                                                                                 ep
                                                                                                  ned
                                                                                                    nx
                                                                                                     idx
                                                                                                       eIis




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

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

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

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




              Page 30                               GAO-04-151 NASA’s External Reporting Issues
Appendix I
Objective, Scope, and Methodology




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

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

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




Page 31                              GAO-04-151 NASA’s External Reporting Issues
Appendix III

GAO Contact and Staff Acknowledgments                                                          Appendx
                                                                                                     Ii




GAO Contact       Diane Handley (404) 679-1986




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




(192087)          Page 38                            GAO-04-151 NASA’s External Reporting Issues
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