IG-00-019

AUDIT

REPORT

JOHNSON SPACE CENTER EXCHANGE

USE OF APPROPRIATED FUNDS FOR

EXCHANGE ACTIVITIES

March 27, 2000

National Aeronautics and

Space Administration

OFFICE OF INSPECTOR GENERAL
Additional Copies

To obtain additional copies of this report, contact the Assistant Inspector General for Auditing at (202)

358-1232, or visit www.hq.nasa.gov/office/oig/hq/issuedaudits.html.

Suggestions for Future Audits

To suggest ideas for or to request future audits, contact the Assistant Inspector General for Auditing.

Ideas and requests can also be mailed to:

Assistant Inspector General for Auditing

Code W

NASA Headquarters

Washington, DC 20546-0001

NASA Hotline

To report fraud, waste, abuse, or mismanagement, contact the NASA OIG Hotline at (800)

424-9183, (800) 535-8134 (TDD), or at www.hq.nasa.gov/office/oig/hq/hotline.html#form; or write to

the NASA Inspector General, P.O. Box 23089, L’Enfant Plaza Station, Washington, DC 20026. The

identity of each writer and caller can be kept confidential, upon request, to the extent permitted by law.

Reader Survey

Please complete the reader survey at the end of this report or at

http://www.hq.nasa.gov/office/oig/hq/audits.html

_____________________________________________________________________________

Acronyms

CFO Chief Financial Officer

FY Fiscal Year

NPD NASA Policy Directive

OIG Office of Inspector General
W March 27, 2000

TO: A/Administrator

FROM: W/Inspector General

SUBJECT: INFORMATION: Audit of Johnson Space Center Exchange Use of Appropriated

Funds for Exchange Activities

Report Number IG-00-019

The NASA Office of Inspector General (OIG) completed a quality control review of the Sheryl C.

Stanley, P.C., audit of the Johnson Space Center Exchange (Johnson Exchange) fiscal year 1998

Financial Statements.1 During the quality control review, we identified a condition at the Johnson

Exchange involving the use of appropriated funds2 for payment of an Exchange expense, a

nonappropriated fund3 activity.

The Johnson Exchange inappropriately used $5,800 in appropriated funds to pay for the fee of the

financial statement audit of the Johnson Exchange. Such expenses, which are considered operating

expenses, are the responsibility of the Exchange and should be paid with revenue generated by

Exchange operations. Appropriated funds used for those expenses could have been put to better use.

Background

NASA Policy Directive (NPD) 9050.6E, “NASA Exchange Activities,” dated December 2, 1997,

authorizes Center Directors to establish an Exchange to contribute to the efficiency, welfare, and morale

of NASA personnel. Center Directors are required to appoint an Exchange Council to oversee and

manage the exchange operations in a sound, business-like manner. Exchange-operated activities are

generally self-sustained, that is, supported by nonappropriated funds. The Directive also requires the

Council to obtain annual audits of the Centers’ Exchange

 

1 NASA Inspector General final report on “Quality Control Review of Sheryl C. Stanley, P.C, Audit of NASA Johnson Space

Center Exchange Financial Statements for Fiscal Year Ended September 30, 1998,” IG-99-041, dated September 17, 1999.

2

Federal funds authorized (that is, appropriated) by Congress for an agency’s operations. As required by the United States

Code, appropriated funds may e used only for their intended purpose and for a definite period of time.

3

Funds received from sources other than congressional appropriations.
2

financial statements and to submit the statements and the audit reports to the Center Chief Financial

Officer by December 31 annually.

Recommendation

We recommended that the Associate Administrator for Management Systems ensure that the Johnson

Exchange and all other NASA Exchanges reimburse the Agency for appropriated funds spent on

accounting fees since December 2, 1997, the effective date of NPD 9050.6E, and use nonappropriated

funds to pay for all future operating expenses.

Management Response and OIG Evaluation

Johnson management nonconcurred with the draft report recommendation, which was directed to the

Johnson Exchange only. Management stated that our finding was based on a narrow and inappropriate

interpretation of NPD 9050.6E. Under management’s interpretation of several policy provisions, the

NPD provides the discretionary authority to use appropriated funds for the Exchange’s annual financial

statement audits. In part, management relies on the provision of the NPD that places a responsibility on

the Center Director to operate the Exchange in a business-like manner and authorizes the Center

Director to use appropriated funds for certain Exchange expenses. We disagree because the NPD and

Space Act allow expenditure of appropriated funds only for specific items, that is, for property,

equipment, and maintenance of the property and equipment.

Accordingly, we reaffirm our position on the recommendation. We redirected the recommendation to

the Associate Administrator for Management Systems and included all NASA Exchanges as a result of

management’s comments, supplemented by additional input from the NASA Associate General

Counsel,4 further audit work that identified this same issue at other Centers, and support provided by an

OIG Attorney Advisor. We request that the Office of Management Systems provide comments on the

redirected recommendation.

[original signed by]

Roberta L. Gross

Enclosure

Final Report on Audit of Johnson Space Center Exchange Use of Appropriated Funds

 For Exchange Activities

 

4

The Office of the General Counsel issued a memorandum, dated February 17, 2000, supporting NASA management’s position

on using appropriated funds for audit fees.
FINAL REPORT

AUDIT OF JOHNSON SPACE CENTER EXCHANGE USE OF

APPROPRIATED FUNDS FOR EXCHANGE ACTIVITIES
W March 27, 2000

TO: J/Associate Administrator for Management Systems

JSC/AA/Director, Johnson Space Center

JSC/AH/Chairman, Exchange Council

FROM: W/Assistant Inspector General for Auditing

SUBJECT: Final Report on the Audit of Johnson Space Center Exchange Use of Appropriated

Funds for Exchange Activities

Assignment Number A9906101

Report Number IG-00-019

The subject final report is provided for your use and comment. Please refer to the Results in Brief

section for the overall review results. Our evaluation of your response is incorporated into the body

of the report. In response to management's comments, we redirected the recommendation to the

Associate Administrator for Management Systems and included all NASA Exchanges. Therefore,

we request management comments on the revised recommendation by April 26, 2000.

If you have questions concerning the report, please contact Mr. Patrick A. Iler, Director, Audit

Quality, at (216) 433-5408, or Ms. Van Tran, Auditor-in-Charge, at (202) 358-0466. We

appreciate the courtesies extended to the audit staff. The final report distribution is in Appendix C.

[Original signed by]

Russell A. Rau

Enclosure
2

cc:

B/Chief Financial Officer

B/Comptroller

BF/Director, Financial Management Division

G/General Counsel

JL/Director, Contractor Industrial Relations

JM/Director, Management Assessment Division

JSC/AH/Exchange Operations Manager

JSC/AL/Chief Counsel

JSC/LA/Chief Financial Officer
3

bcc:

AIGA, IG, Reading Chron

GRC/501-9/P. Iler

JSC/281/P. Ritterhouse

W/V. Tran
NASA Office of Inspector General

IG-00-019 March 27, 2000

 A9906101

Johnson Space Center Exchange Use of Appropriated Funds

for Exchange Activities

Introduction

The NASA Office of Inspector General (OIG) performed a quality control review of the Sheryl C.

Stanley, P.C., audit of the Johnson Space Center Exchange (Johnson Exchange) fiscal year (FY) 1998

Financial Statements.5 Sheryl C. Stanley, P.C. is a public accounting firm retained by the Johnson

Exchange for the annual financial statement audits. The Johnson Exchange is a Government

instrumentality, operating under NASA’s control for the benefit of Agency employees. During the

quality control review, we identified a condition at the Johnson Exchange involving the use of

appropriated funds6 for payment of an Exchange expense, a nonappropriated fund7 activity. Appendix

A contains additional details on our objective, scope, and methodology.

Results in Brief

The Johnson Exchange inappropriately used $5,800 in appropriated funds to pay for the fee of the

financial statement audit of the Johnson Exchange. Such expenses, which are considered operating

expenses, are the responsibility of the Exchange and should be paid with revenue generated by

Exchange operations. Appropriated funds used for those expenses could have been put to better use.

Background

NASA Policy Directive 9050.6E, “NASA Exchange Activities,” dated December 2, 1997, authorizes

Center Directors to establish an Exchange to contribute to the efficiency, welfare, and morale of NASA

personnel. Center Directors are required to appoint an Exchange Council to oversee and manage the

Exchange operations in a sound, business-like manner. The Council (hereafter, may also be referred to

as Exchange management) must consist of at least five Center employees who perform their duties

without pay from the Exchange. Council members serve as Chairperson, Treasurer, Exchange

Operations Manager, Secretary, or other advisory capacities. Exchange-operated activities are

generally self-sustained, that is, supported by nonappropriated funds. The Directive also requires the

 

5

 NASA Inspector General final report on “Quality Control Review of Sheryl C. Stanley, P.C, Audit of NASA Johnson Space

Center Exchange Financial Statements for Fiscal Year Ended September 30, 1998,” IG-99-041, dated September 17, 1999.

6

Federal funds authorized (that is, appropriated) by Congress for an agency’s operations. As required by the United States

Code, appropriated funds may be used only for their intended purpose and for a definite period of time.

7

Funds received from sources other than congressional appropriations.
2

Council to obtain annual audits of the Centers’ Exchange financial statements and to submit the

statements and the audit reports to the Center Chief Financial Officer (CFO) by December 31 annually.

The Johnson Exchange operates and generates revenues from the employee cafeterias, gift shops,

recreation center, and vending concessions. For the year ended September 30, 1998, the Johnson

Exchange reported a cash balance of $2,386,6008 and a net income of $387,173.

Use of Appropriated Funds for Exchange Expenses

Finding. The Johnson Exchange inappropriately used appropriated funds to pay for the audit fee

incurred by the FY 1998 financial statement audit. The Exchange misinterpreted NASA policy, which

limits the use of appropriated funds to cafeteria equipment purchases and repairs. Consequently, the

Exchange was not paying for all operating expenses, and appropriated funds used for those expenses

could have been put to better use.

Use of Appropriated Funds. NASA Policy Directive 9050.6E, paragraph 1.i. states,

Activities shall generally be supported by nonappropriated funds under the Exchange’s sole jurisdiction.

Center Directors may authorize use of appropriated funds to provide for cafeterias, purchase and

maintenance of cafeteria equipment, other facilities, and equipment necessary for Exchange activities, with the

prior concurrence of the Center Chief Counsel and Chief Financial Officer.

The accounting fee for the FY 1998 financial statement audit was $5,800. As in previous years, the

Johnson Exchange used appropriated funds to pay the audit fees. The Exchange Treasurer explained

that his predecessor made the decision to use appropriated funds for the payment of the audit fee

several years ago. At that time, the Exchange was operated at a loss and did not have enough money to

pay for the annual audit. However, the practice continues because Exchange management

misinterpreted the Directive, which limits the use of appropriated funds for certain capital acquisitions

and repairs only. Further, the Agency has not determined that the accounting fee is a necessary expense

to enhance employee morale which would be required to fully comply with the intent of 31 U.S.C. §

1301(a)9 and related Comptroller General Decisions.10

The annual expense for a financial statement audit is a cost of doing business, that is, an operating

expense, and is a responsibility of the Exchange. Therefore, the Johnson Exchange should have paid

this expense with revenue generated by Exchange operations. Appropriated funds used for the

Exchange’s operating expenses could have been put to better use.

 

8

 The cash balance includes money market savings accounts and marketable securities.

9

Title 31, “Money and Finance,” Chapter 13, “Appropriations,” explains that only necessary expenses can be paid with

appropriated funds.

10 Related decisions include 18 Comptroller General Decision 147 and 27 Comptroller General Decision 679.
3

Redirected Recommendation, Management’s Response, and Evaluation of

Response

The Associate Administrator for Management Systems should ensure that the Johnson

Exchange and all other NASA Exchanges reimburse the Agency for appropriated funds spent

on accounting fees since December 2, 1997, the effective date of NPD 9050.6E, and use

nonappropriated funds to pay for all future operating expenses.

Management’s Response. Johnson Exchange management nonconcurred with the original

recommendation, which was directed to the Johnson Exchange only, to reimburse NASA for all

appropriated funds previously spent on accounting fees and to use nonappropriated funds to pay for all

future operating expenses. Johnson Exchange management stated that our finding is based on a narrow

and inappropriate interpretation of NPD 9050.6E. Management based its position on the following:

• The NPD authorizes the Center’s Exchange Council, not the Exchange Operations Manager, to

provide for an annual audit of books and records of the Exchange.

• The NPD places a responsibility on the Center Director to operate the Exchange and its

elements in a business-like manner.

• While the NDP states that Exchange activities should generally be supported by

nonappropriated funds, it also authorizes the Center Director to use appropriated funds

necessary for Exchange activities and provides noninclusive examples appropriate for the

expenditure of such funds.

• The NPD provides the discretionary authority to use appropriated funds for annual financial

audits called for by the Exchange Council. This position was further substantiated by a

September 25, 1990, letter from the NASA Comptroller that states in part, “Management and

oversight of the Exchange ... is clearly a proper use of the funds appropriated to the Agency.”

The complete text of management’s comments is in Appendix B.

Evaluation of Response. Management's comments are nonresponsive. We do not agree with the

management view that the NPD, as currently written, provides the discretion to use appropriated funds

to pay for the Exchange’s annual financial statement audit. The fact that the NPD authorizes the

Exchange Council rather than the Exchange Manager to provide for an annual audit of the Exchange’s

books and records is not relevant in determining whether appropriated funds should be used. The

Exchange Manager is a member of the Exchange Council, and like all other Council members, performs

his duties without compensation from the Exchange. The NPD also assigns the Center Director and the

Exchange Council many responsibilities. That alone does not justify using appropriated funds to support

Exchange activities beyond those specifically identified as allowable in the NPD.

We agree that the Center Director should operate the Exchange in a business-like manner. Since

general business practice is to pay normal operating expenses, such as an annual audit fee, from

operating revenues, this further supports our position that the Exchange’s annual audit fee should be
4

paid from nonappropriated funds. The responsibility to operate the Exchange in a business-like manner

does not authorize the Center Director to use appropriated funds to pay Exchange operating expenses.

In addition, the NPD provision that gives the Center Director authority to use appropriated funds for

certain Exchange expenses does not provide a general authorization and then give examples of expenses

for which appropriated funds can be used. Rather, the provision is specific and restrictive. The NPD

states, “Center Directors may authorize the use of appropriated funds for cafeterias, purchase and

maintenance of cafeteria equipment, and other facilities and equipment and equipment necessary for

Exchange activities, with the prior concurrence of the Center Chief Counsel and Chief Financial Officer

(CFO).” The provision is restricted to real property, equipment, and maintenance of such property and

equipment, which would not include a normal operating expense such as an audit fee. Using

appropriated funds to pay for Exchange audits goes beyond the intent of the NPD provision. This

provision also parallels language in the Space Act of 1958, as amended, which states, “In the

performance of its functions the Administration is authorized...to provide by contract or otherwise for

cafeterias and other necessary facilities for the welfare of employees of the Administration at its

installations and purchase and maintain equipment therefor.” The Space Act also limits appropriated

fund use to property, equipment, and maintenance of the property and equipment.

Management also cited the September 25, 1990, memorandum from the NASA Comptroller as

support for its use of appropriated funds for the audit fee. The memorandum states, in part, that

“Management and oversight of the Exchange which is an instrumentality of the government is clearly a

proper use of the funds appropriated to the Agency.” The statement is merely an assertion. The

memorandum does not include a justification or analysis to support the statement. In addition, the

memorandum also states, “I do want to emphasize that as far as practicable, each NASA Exchange that

conducts programs and charges fees for the use of that program, should include operational costs in the

use of those fees.” This supports our position that the prices charged by the Exchange for the products

and services it offers to employees should be set at a level to cover all operational expenses including

the annual audit fee. Finally, even if the NPD did provide for the discretionary use of appropriated

funds for the Exchange’s annual financial statement audit, we believe that this is not a proper business

practice. We continue to believe that the cost of an annual audit and all other normal operating

expenses are the responsibility of the Exchange and should be paid with nonappropriated funds under

the Exchange’s sole jurisdiction. As the Comptroller General has stated, “[T]he essence of a NAFI

[nonappropriated fund instrumentality] is that it is operated with the proceeds of its activities, rather than

with appropriated funds.”11

We reaffirm our position on the recommendation. We redirected the recommendation to the Associate

Administrator for Management Systems and included all NASA Exchanges as a result of management’s

comments, supplemented by additional input from the NASA Associate General Counsel,12 further audit

work that identified this same issue at other Centers, and support provided by an OIG Attorney

Advisor. We request that the Office of Management Systems provide comments on the redirected

 

11 The Comptroller made the statement in 64 Comptroller General Decision 110, 111 (1984).

12 The Office of the General Counsel issued a memorandum, dated February 17, 2000, supporting NASA management’s position

on using appropriated funds for audit fees.
5

recommendation. The recommendation is unresolved and undispositioned pending review and

evaluation of management's comments.
6

Appendix A. Objective, Scope, and Methodology

Objective

The audit objective was to determine whether the use of appropriated funds for payment of Exchange

operating expenses was appropriate.

Scope and Methodology

We reviewed NASA policies and procedures governing the Exchanges and interviewed Headquarters

officials and Johnson Exchange Council members. We evaluated management controls as they related

to the use of appropriated funds on Exchange activities only. We considered controls to be inadequate

as discussed in the finding. We did not use or rely on any computer-generated data during the audit.

Audit Field Work

We performed the audit from October through December 1999 at Headquarters and Johnson Space

Center in accordance with generally accepted government auditing standards.
7

 Appendix B. Management’s Response
8

Appendix B
9

Appendix C. Report Distribution

National Aeronautics and Space Administration (NASA) Headquarters

A/Administrator

B/Chief Financial Officer

B/Comptroller

BF/Director, Financial Management Division

G/General Counsel

J/Associate Administrator for Management Systems

JL/ Director, Contractor Industrial Relations

JM/Director, Management Assessment Division

NASA Center

Director, Johnson Space Center

 Chairman, Exchange Council, Johnson Space Center

 Exchange Operations Manager, Johnson Space Center

 Chief Counsel, Johnson Space Center

 Chief Financial Officer, Johnson Space Center

Chief Counsel, Kennedy Space Center

Non-NASA Federal Organizations and Individuals

Assistant to the President for Science and Technology Policy

Deputy Associate Director, Energy and Science Division, Office of Management and Budget

Branch Chief, Science and Space Programs Branch, Energy and Science Division, Office of

 Management and Budget

Associate Director, National Security and International Affairs Division, Defense Acquisition

 Issues, General Accounting Office

Professional Assistant, Senate Subcommittee on Science, Technology, and Space
10

Appendix C

Chairman and Ranking Minority Member - Congressional Committees and

Subcommittees

Senate Committee on Appropriations

Senate Subcommittee on VA, HUD, and Independent Agencies

Senate Committee on Commerce, Science, and Transportation

Senate Subcommittee on Science, Technology, and Space

Senate Committee on Governmental Affairs

House Committee on Appropriations

House Subcommittee on VA, HUD, and Independent Agencies

House Committee on Government Reform and Oversight

House Subcommittee on Government Management, Information, and Technology

House Subcommittee on National Security, Veterans Affairs, and International Relations

House Subcommittee on National Security, Veterans Affairs, and International Relations

House Committee on Science

House Subcommittee on Space and Aeronautics

Congressional Member

Honorable Pete Sessions, U.S. House of Representatives
NASA Assistant Inspector General for Auditing

Reader Survey

The NASA Office of Inspector General has a continuing interest in improving the usefulness of

our reports. We wish to make our reports responsive to our customers’ interests, consistent

with our statutory responsibility. Could you help us by completing our reader survey? For your

convenience, the questionnaire can be completed electronically through our homepage at

http://www.hq.nasa.gov/office/oig/hq/audits.html or can be mailed to the Assistant Inspector

General for Auditing; NASA Headquarters, Code W, Washington, DC 20546-0001.

Report Title: Johnson Space Center Exchange Use of Appropriated Funds for Exchange

Activities

Report Number: Report Date:

Circle the appropriate rating for the following statements.

Strongly

Agree Agree Neutra

l

Disagre

e

Strongl

y

Disagre

e

N/A

1. The report was clear, readable, and logically

organized.

5 4 3 2 1 N/A

2. The report was concise and to the point. 5 4 3 2 1 N/A

3. We effectively communicated the audit objectives,

scope, and methodology.

5 4 3 2 1 N/A

4. The report contained sufficient information to

support the finding(s) in a balanced and objective

manner.

5 4 3 2 1 N/A

Overall, how would you rate the report?

÷ Excellent Fair

 Very Good Poor

 Good

If you have any additional comments or wish to elaborate on any of the above

responses, please write them here. Use additional paper if necessary. 

 

 

 
 

 

How did you use the report? 

 

 

 

 

 

 

How could we improve our report? 

 

 

 

 

 

 

How would you identify yourself? (Select one)

 Congressional Staff Media

 NASA Employee Public Interest

 Private Citizen Other: 

 Government: Federal: State: Local: 

May we contact you about your comments?

Yes: _______ No: __________

Name: ________________________

Telephone: _____________________

Thank you for your cooperation in completing this survey.
Major Contributors to This Report

Patrick A. Iler, Director, Audit Quality

Van Tran, Auditor-in-Charge

Nancy C. Cipolla, Report Process Manager