March 2001

GAO-01-438

FINANCIAL

MANAGEMENT

Misstatement of

NASA’s Statement of

Budgetary Resources

Report to the Chairman, Subcommittee on

Space and Aeronautics, Committee on

Science, House of Representatives

United States General Accounting Office

GAO

Page 1 GAO-01-438. NASA's Statement of Budgetary Resources

March 30, 2001

The Honorable Dana Rohrabacher

Chairman, Subcommittee on Space and Aeronautics

Committee on Science

House of Representatives

Dear Mr. Chairman:

In June 2000, the House Committee on Science identified a significant

discrepancy between an amount reported in the National Aeronautics and

Space Administration’s (NASA) audited financial statements for fiscal year

1999 and its submission in the President’s Budget for fiscal year 2001. The

Committee’s inquiry into this discrepancy resulted in NASA’s Chief

Financial Officer (CFO) subsequently determining that the information in

the audited financial statements was in error by about $644 million. The

error occurred in NASA’s Statement of Budgetary Resources (SBR), a

financial statement that was required for federal agencies beginning in

fiscal year 1998. The NASA Office of the Inspector General (IG), which is

responsible for conducting or arranging for an independent audit of

NASA’s financial statements, contracted with Arthur Andersen LLP to

meet this requirement.

The SBR is intended to provide information on an agency’s use of

budgetary resources provided by the Congress. If reliable, the SBR can

provide valuable information for management and oversight purposes to

assess the obligations related to prior-year agency activities and to make

decisions about future funding. Certain information presented in the SBR

is also presented in the Statement of Financing, another relatively new

federal financial statement also first required in fiscal year 1998. This

statement is intended to explain how budgetary resources obligated during

the period relate to the net cost of operations for that reporting entity. We

have previously reported that several agencies were not properly

reconciling and disclosing differences between amounts in their SBRs and

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-438. NASA's Statement of Budgetary Resources

the President’s Budget, and improvements could be made by auditors to

adequately document the results of SBR audit procedures performed.1

This report is in response to your request that we review (1) the nature

and causes of the discrepancy between NASA’s SBR and its budget

documents, and also the adequacy of Office of Management and Budget

(OMB) and related guidance available on the preparation of the SBR,

(2) the adequacy of the auditing procedures performed by Arthur

Andersen on the SBR and the Statement of Financing in NASA’s fiscal year

1999 accountability report, and (3) the role of the NASA IG in overseeing

Arthur Andersen’s audit.

To fulfill these objectives, we reviewed documentation of the NASA CFO’s

preparation of the budgetary statements for fiscal year 1999, Arthur

Andersen’s working papers supporting its audit of the budgetary

statements, and the documentation prepared by the NASA IG related to its

oversight of the audit. In addition, we spoke to NASA CFO, Arthur

Andersen, and NASA IG officials about the preparation and audit of the

budgetary statements. We reviewed applicable Treasury, OMB, and NASA

guidance as well as related generally accepted accounting principles and

concepts that relate to budgetary accounting. We also reviewed applicable

OMB, GAO, and American Institute of Certified Public Accountants

(AICPA) standards related to federal financial statement audits. Because

we did not audit NASA’s financial statements, we do not express an

opinion on the statements for fiscal years 1999 or 1998, as originally

presented, or as restated in NASA’s revised Statement of Budgetary

Resources for fiscal years 1999, 1998, and 1997. Further, consistent with

our objectives, our review focused only on the audit of the budgetary

statements and, thus, we cannot conclude on the adequacy of Arthur

Andersen’s work on the other principal statements, its report on internal

control and compliance with laws and regulations, or whether NASA’s

systems comply substantially with the Federal Financial Management

Improvement Act (FFMIA).2

 Our work was performed from October 2000

to February 2001 in accordance with generally accepted government

 1

Federal Accounting and Reporting: Framework for Assessing the Reliability of Budget

Execution Data Is Not Yet Fully Implemented (GAO-01-43, October 6, 2000).

2

FFMIA requires that agencies implement and maintain financial management systems that

comply substantially with federal financial management systems requirements, applicable

federal accounting standards, and the United States Government Standard General Ledger

(SGL) at the transaction level.
Page 3 GAO-01-438. NASA's Statement of Budgetary Resources

auditing standards. Further details on our scope and methodology are in

appendix I.

NASA’s fiscal year 1999 SBR was misstated by a reported $644 million due,

in part, to a misinterpretation of guidance and errors in NASA’s ad hoc

process for generating budgetary information. The misstatement was in

the “Recoveries of Prior Year Obligations” line of the statement. The

overstatement of this line item indicated to users of NASA’s budgetary

reports that additional funds, which did not in fact exist, were available for

new obligations or to cover increases in existing obligations and could

have been used to reduce needed funding. NASA has subsequently

reported that its reporting of no “Recoveries” for fiscal year 1998 was also

in error. The bulk of the fiscal year 1999 error was caused when NASA

headquarters officials erroneously added a category of transactions—

disbursements from expired appropriation accounts—to the “Recoveries”

line.

NASA headquarters officials have stated that they mistakenly included

these transactions because they misinterpreted the applicable OMB

guidance on this line of the SBR. OMB guidance calls for using the

Recoveries line to report downward adjustments of obligations incurred in

prior fiscal years that were not outlayed. The guidance contained in OMB

Circular A-34 and the Treasury Financial Manual provides detailed

instructions on the form and content of the various line items comprising

the SBR, including the Recoveries line.

NASA used an ad hoc process to gather the required information for

certain line items on the SBR because NASA’s reporting units (NASA

headquarters and nine centers) do not have the corresponding general

ledger accounts to capture the adjustments specified in the OMB guidance.

As a result, the NASA locations used various methods to extract the data

for this line item from their separate systems and entered the data on

spreadsheets, which were then compiled by NASA headquarters. NASA

officials have indicated that undetected errors in this spreadsheet

process—in addition to the inclusion of the erroneous category of

transactions—were also responsible for a portion of the SBR

misstatement. According to NASA officials, they have strengthened

internal controls over this process for fiscal year 2000.

Arthur Andersen did not detect the error in NASA’s SBR during its audit of

the fiscal year 1999 financial statements. Evidence in Arthur Andersen’s

Results in Brief
Page 4 GAO-01-438. NASA's Statement of Budgetary Resources

working papers relating to understanding and testing internal controls and

validating underlying data for key financial statement balances was not

adequate to support Arthur Andersen’s unqualified audit opinion3

 on the

SBR and Statement of Financing for fiscal year 1999. Generally accepted

government auditing standards (GAGAS) require an auditor to gain a

sufficient understanding of internal controls to plan the audit and to obtain

sufficient competent evidential matter to render an opinion on the

financial statements. Although Arthur Andersen’s working papers

contained NASA-prepared flowcharts relating to the budget formulation

and execution processes at one of NASA’s centers, these flowcharts did

not identify the related internal controls. Also, for fiscal year 1999, Arthur

Andersen performed limited testing of internal controls related to the SBR

and Statement of Financing. Arthur Andersen’s audit management team

told us that they did not become aware of NASA’s ad hoc procedures used

for the Recoveries line item until after the Committee discovered the

discrepancy in June 2000.

We found that Arthur Andersen’s audit of the SBR and the Statement of

Financing was characterized by excessive reliance on representations by

NASA management, which led to an inappropriate assessment of risk

related to the budgetary statements and resulted in the absence of any

independent validation of underlying data for key balances. For the

Recoveries line item on the SBR, the work performed was evidenced by

one paragraph in the auditor’s working papers documenting statements by

management of why the balance had increased from $0 for fiscal year 1998

to $686 million for fiscal year 1999. We did not see any documentation in

Arthur Andersen’s working papers to show independent verification of the

reasonableness of the balance despite an explanation from management

that raises questions about the fiscal year 1998 as well as the fiscal year

1999 Recoveries balance. We also did not find documentation of any

validation of underlying data for other key balances in the budgetary

statements such as “Undelivered Orders,” which had a $2.2 billion balance

at September 30, 1999. Financial statement audits of other federal agencies

have identified high error rates when testing underlying data for accounts

such as Recoveries and Undelivered Orders.

 3

An unqualified, or clean, audit opinion means that the auditor believes that information

presented in the financial statements as a whole is presented fairly, in all material respects,

in accordance with generally accepted accounting principles.
Page 5 GAO-01-438. NASA's Statement of Budgetary Resources

The systems deficiencies that led to the SBR error and Arthur Andersen’s

lack of understanding of the ad hoc process used by NASA to work around

these deficiencies also raise questions about Arthur Andersen’s conclusion

that NASA’s financial management systems comply substantially with

FFMIA. The act requires agencies to implement and maintain financial

management systems4 that comply substantially with federal financial

management systems requirements, applicable generally accepted

accounting principles, and the U.S. Government Standard General Ledger

(SGL) at the transaction level. The need for the ad hoc process and the

resulting error raise questions related to all three FFMIA requirements.

For example, substantial manual efforts were required at year-end because

NASA did not have general ledger accounts to accumulate transactions

related to Recoveries during fiscal year 1999. In addition, because of the

$644 million error, the presentation of the Recoveries line did not comply

with generally accepted accounting principles. The primary evidence

relied upon by Arthur Andersen to support its conclusions on FFMIA

compliance was a memorandum from NASA management explaining why

it believed NASA’s systems comply with FFMIA.

The NASA IG letter transmitting Arthur Andersen’s report to the NASA

Administrator and Chief Financial Officer included in the Fiscal Year 1999

Accountability Report stated that the IG did not express opinions on

NASA’s financial statements or on conclusions about the effectiveness of

internal controls and compliance with laws and regulations. The letter

stated that Arthur Andersen was responsible for the auditor’s report and

for the conclusions expressed in the report. The NASA IG reviewed Arthur

Andersen’s working papers and audit reports using a detailed checklist it

developed based on GAGAS. The NASA IG did not identify the error in the

SBR or question the extent of the audit procedures Arthur Andersen

applied to the budgetary statements or to assess compliance with FFMIA.

To improve the quality and consistency of future audits, beginning with

fiscal year 2001, the NASA IG will require its independent public

accountant to perform the audits in accordance with the GAO/President’s

Council on Integrity and Efficiency Financial Audit Manual.

 4

OMB Circular A-127, revised July 23, 1993, Financial Management Systems, defines

financial management systems as a unified set of financial systems that are planned for and

managed together, operated in an integrated fashion, and linked together electronically in

an efficient and effective manner to provide agencywide financial system support

necessary to carry out an agency’s mission and support its financial management needs.
Page 6 GAO-01-438. NASA's Statement of Budgetary Resources

We are making recommendations that address the need for (1) the NASA

CFO to ensure that the policies and procedures used to prepare the SBR

are effective and (2) the NASA IG to review the procedures it uses to

oversee the work of its independent public accountants. In commenting on

a draft of this report, NASA management concurred with our

recommendation regarding improvements in the financial statement

preparation process, and the NASA IG concurred with our

recommendation on the audit quality control review process. In addition,

NASA management concurred with our conclusion regarding the

misstatement in the fiscal year 1999 SBR.

However, Arthur Andersen and the NASA IG disagreed with our analysis in

most areas. Arthur Andersen stated that it believes that our conclusion

concerning the adequacy of its work on the 1999 NASA audit is

fundamentally incorrect. The NASA IG also disagreed with our conclusion

on the adequacy of Arthur Andersen’s audit work on the 1999 SBR and

Statement of Financing. We disagree with the Arthur Andersen and NASA

IG comments. The evidence in Arthur Andersen’s working papers—

including the 1996, 1997, and 1998 working papers we were provided—was

not adequate to support unqualified audit opinions on the fiscal year 1999

SBR and Statement of Financing.

NASA is required to prepare annual financial statements and have them

audited under the mandate of the Chief Financial Officers Act of 1990, as

expanded by the Government Management Reform Act of 1994 (GMRA).

OMB’s implementing guidance5

 indicates that the principal financial

statements are the Balance Sheet, the Statement of Net Cost, the

Statement of Changes in Net Position, the Statement of Budgetary

Resources, and the Statement of Financing. GMRA requires that agencies

submit audited financial statements to OMB no later than March 1 for the

preceding fiscal year. These statements are to be prepared in accordance

with generally accepted accounting principles (GAAP).6

 In addition,

FFMIA requires that agencies implement and maintain financial

management systems that comply substantially with federal financial

management systems requirements, applicable generally accepted

 5

OMB bulletin 97-01, Form and Content of Agency Financial Statements, as amended.

6

The Federal Accounting Standards Advisory Board (FASAB) promulgates GAAP for

federal government entities.

Background
Page 7 GAO-01-438. NASA's Statement of Budgetary Resources

accounting principles, and the SGL at the transaction level. Audits of an

agency’s financial statements are intended, in part, to provide for the

production of complete, reliable, timely, and consistent financial

information for use by management and the Congress in the financing,

management, and evaluation of federal programs. As part of the annual

financial statement audit, FFMIA requires the auditor to report whether

the agency’s financial management systems comply substantially with its

requirements.

The SBR was designed to provide information on budget execution

amounts, including budgetary resources, availability of budgetary

resources, and how obligated resources have been used.7

 The SBR consists

of three separate but related sections that provide information about

budgetary resources, status of budgetary resources, and outlays8

 for major

budgetary accounts.

• Budgetary Resources. This section shows total budgetary resources

made available to the agency for obligation9

 during the reporting

period. It consists of new budget authority, unobligated amounts

available from prior reporting periods, transfers available from prioryear balances, reimbursements and other income, and adjustments

such as recoveries of prior-year obligations.

• Status of Budgetary Resources. This section displays the status of

budgetary resources at the end of the period and consists of

obligations incurred and the unobligated balances at the end of the

period that are either available or are unavailable except to adjust or

liquidate obligations chargeable to prior period appropriations. The

 7

OMB issues form and content guidance for federal agency financial statements including

the SBR. The SBR follows the structure outlined in the Statement of Federal Financial

Accounting Concepts (SFFAC) No. 2, Entity and Display, using the definitions from the

Statement of Federal Financial Accounting Standards (SFFAS) No. 7, Accounting for

Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and

Financial Accounting.

8

Outlays are the measure of government spending. They are payments to liquidate

obligations, other than the repayment of debt. Outlays generally are equal to cash

disbursements but also are recorded for cash-equivalent transactions, such as the subsidy

cost of direct loans and loan guaranties and interest accrued on public issues of public

debt.

9

An obligation is a binding agreement that will result in outlays, immediately or in the

future. Budgetary resources must be available before obligations can be incurred legally.

Description of Budgetary

Statements
Page 8 GAO-01-438. NASA's Statement of Budgetary Resources

total for this section and for the Budgetary Resources section must

agree.

• Outlays. This section shows the relationship between obligations and

outlays and discloses the payments made to liquidate obligations, net

of offsetting collections.10 Obligations are usually liquidated by means

of cash payments (outlays) such as currency, checks, or electronic

fund transfers. This section reconciles outlays with obligations

incurred and the change in obligated balances during the year.

Recoveries of Prior Year Obligations, the specific line in which the NASA

misstatement occurred, is reported in the budgetary resources section of

the SBR. Typically, recoveries of prior-year obligations are included in the

Adjustments line item on the SBR. Recoveries of Prior Year Obligations, as

defined in OMB Circular A-34, Instructions on Budget Execution, are

cancellations or downward adjustments of obligations incurred in prior

fiscal years that were not outlayed. For example, if an undelivered order

established in a prior year for $1,000 relates to a contract that has been

canceled, then a downward adjustment of $1,000 for obligations would be

recorded. Certain recoveries of prior-year obligations result in budgetary

resources that are available for new obligations while others are available

only for upward adjustments of valid prior-year obligations.

The SBR provides the means to assess the reliability of certain budget

execution data presented in the President’s Budget by linking audited data

from the SBR to the “actual” column on the agency’s Program and

Financing (P&F) Schedules included in the Budget. OMB Bulletin 97-01,

Form and Content of Agency Financial Statements, requires agencies to

disclose any material differences between amounts in the SBR and

amounts reported as actuals in the P&F Schedule. Further, the guidance

requires agencies to report budgetary information in the SBR based on

budget terminology, definitions, and guidance issued in OMB Circular A34. In addition, the Department of the Treasury’s Financial Manual

contains an SGL Supplement that is released annually that reports

crosswalks of SGL accounts that feed into specific line items for the

principal financial statements, including the SBR. OMB Circular A-34, in

turn, provides guidance on the preparation of the agency’s Report on

 10Offsetting collections result from business-type transactions with the public and other

government accounts. They are deducted from gross budget authority and outlays, rather

than added to receipts, and by law are credited directly to expenditure accounts.
Page 9 GAO-01-438. NASA's Statement of Budgetary Resources

Budget Execution and Budgetary Resources (Standard Form 133), which

can be used as the source of information for the SBR.

The Statement of Financing explains how budgetary resources obligated

during the period relate to the net cost of operations.11 This information

should be presented in a way that clarifies the relationship between the

obligation basis of budgetary accounting and the accrual basis12 of

proprietary accounting.13 By explaining this relationship through a

reconciliation process, the statement provides information necessary to

understand how budgetary (and some nonbudgetary) resources finance

the cost of operations and affect the assets and liabilities of the reporting

entity. Two line items on the Statement of Financing are also reported on

the SBR: “obligations incurred” and “spending authority from offsetting

collections and adjustments.” The amounts reported for these items

should be the same on both statements.

The SBR and the Statement of Financing are relatively new financial

statements that are unique to the federal government. The auditor’s

understanding of these statements and the internal controls underlying

their preparation are, therefore, especially important to rendering an

opinion on whether the financial statements are fairly stated.

Federal financial statements are to be audited in accordance with

GAGAS.14 For financial statement audits, GAGAS incorporates the

 11An agency’s net cost of operations is the gross cost incurred, less any exchange revenue

(e.g., user fees) earned from its activities.

12The accrual basis of accounting refers to the practice of recognizing revenues when

earned and expenses when incurred, without regard to the time of receipt or payment of

cash. The accrual basis of accounting is contrasted with the cash basis, under which

revenue is recognized only when the cash is received, and expenses are recorded only

when the cash is paid.

13The budgetary accounting system is used to keep track of spending authority at various

stages of budget execution from appropriation, to apportionment of an allotment, to

obligation, and eventual outlay. Proprietary accounts are used to record all nonbudgetary

activity in the government, such as information about the operations of the government’s programs, assets, and liabilities.

14GAGAS, promulgated by the Comptroller General of the United States, are to be followed

by federal auditors and audit organizations and by other auditors auditing federal

organizations, programs, or activities when required by law, contract, or policy. These

standards pertain to auditors’ professional qualifications, the quality of audit effort, and the

characteristics of professional and meaningful audit reports.

Financial Statement Audit

Requirements
Page 10 GAO-01-438. NASA's Statement of Budgetary Resources

standards of the AICPA. Financial statement audits of federal departments

and agencies, performed in accordance with GAGAS, are intended to

provide reasonable assurance about whether the financial statements for

an audited entity present fairly, in all material respects, its financial

position, net cost, changes in net position, budgetary status, and financing

(e.g., reconciliation of net costs to budgetary obligations), in conformity

with generally accepted accounting principles. GAGAS for financial audits

prescribe additional standards in the following three areas.

• General standards contain requirements on auditor qualifications,

independence, due professional care, and quality control.

• Fieldwork standards contain requirements on audit planning,

irregularities, illegal acts and other noncompliance, internal controls,

sufficient competent evidential matter, and working papers.

• Reporting standards contain requirements on elements of the auditors’

reports.

The three generally accepted standards of fieldwork issued by the AICPA

and incorporated into GAGAS are as follows.

• The work is to be adequately planned and assistants, if any, are to be

properly supervised.

• A sufficient understanding of internal control is to be obtained to plan

the audit and to determine the nature, timing, and extent of tests to be

performed.

• Sufficient competent evidential matter is to be obtained through

inspection, observation, inquiries, and confirmations to afford a

reasonable basis for an opinion regarding the financial statement

under audit.

Audit standards for fieldwork generally encompass the planning and

performance of the audit and the sufficiency and competency of evidential

matter obtained to support an auditor’s conclusions and opinions. Audit

fieldwork standards also require that a sufficient understanding of an

entity’s internal control be obtained to plan the audit and to determine the

nature, timing, and extent of tests to be performed. Standards also require

that auditors retain a written record of their audit evidence in the form of

working papers. The information contained in working papers constitutes

the principal record of the work that the auditor has performed and the

conclusions that the auditor has reached. GAGAS have additional working

paper standards that require that the working papers contain sufficient

information to enable an experienced auditor having no previous
Page 11 GAO-01-438. NASA's Statement of Budgetary Resources

connection with the audit to ascertain from them the evidence that

supports the auditor’s significant conclusions and judgments.

The AICPA has issued Statements on Auditing Standards (SAS) that

interpret its standards of fieldwork and reporting. SAS are issued by the

Auditing Standards Board, the senior technical body of the AICPA

designated to issue pronouncements on auditing matters. OMB Bulletin 98-

08, Audit Requirements for Federal Financial Statements, establishes the

minimum requirements for audits of federal financial statements. OMB

audit guidance requires auditors (1) to report whether agencies’ financial

statements are fairly presented in all material respects, in conformity with

GAAP, (2) to obtain an understanding of the components of internal

controls and assess the level of control risk, and (3) to test whether

agencies comply with laws and regulations that have a direct and material

effect on the financial statements. In addition, as part of the financial

statement audit, the auditor is to report whether an agency’s financial

management systems comply substantially with FFMIA. OMB

requirements incorporate both GAGAS and AICPA audit standards.

Inspectors General have the general responsibility under the Inspector

General Act of 1978 to take steps to ensure that the work of nonfederal

auditors complies with GAGAS. Further, under the CFO Act, NASA’s

Office of Inspector General is responsible for performing an audit or

contracting with an independent external auditor to perform an audit of

the agency’s annual financial statements in accordance with GAGAS. OMB

Bulletin No. 98-08 also requires that the Inspectors General (1) ensure that

audits conducted by the IG staff and audits conducted by independent

auditors under contract are performed and audit reports completed in a

timely manner and in accordance with the requirements of OMB Bulletin

No. 98-08, (2) provide technical advice and liaison to agency officials and

independent external auditors, (3) obtain or conduct quality control

reviews of audits made by independent external auditors, and (4) monitor

and report on management’s progress in resolving audit findings.

The NASA IG performed financial statement audits of NASA beginning

with fiscal year 1992. For fiscal years 1992 and 1993, the NASA IG was

unable to express an opinion on the financial statements. The NASA IG

expressed an unqualified opinion on NASA financial statements for fiscal

years 1994 and 1995, meaning that the auditor believed that the

information presented in the financial statements as a whole was fairly

presented, in all material respects, in accordance with generally accepted

Role of Agency Inspectors

General
Page 12 GAO-01-438. NASA's Statement of Budgetary Resources

accounting principles in effect at the time. The NASA IG contracted with

Arthur Andersen for NASA’s financial statement audit beginning with

fiscal year 1996. The 5-year fixed-fee contract covered the audits, which

were to be conducted in accordance with GAGAS, for fiscal years 1996

through 2000. Arthur Andersen’s audit fees were $650,000 for each of the

first 4 years, and $680,000 for fiscal year 2000, comprising a total of

approximately $3.3 million. Arthur Andersen expressed unqualified

opinions on the fiscal years 1996 through 1999 financial statements. Also,

for fiscal years 1997 through 1999, Arthur Andersen reported that NASA’s

financial management systems were in substantial compliance with

FFMIA.

OMB Circular A-34 and the Treasury Financial Manual provide detailed

instructions on the preparation of the various line items comprising the

SBR, including a description of the specific SGL accounts to be included in

the Recoveries line. However, NASA’s general ledger system did not

include the accounts needed to capture the data for the Recoveries line. As

a result, NASA had to rely on an ad hoc process that included a data call

from the reporting units’ (nine centers and headquarters) separate systems

and a compilation of reported amounts using a spreadsheet. In addition,

when compiling these data, NASA headquarters mistakenly added

amounts that were not relevant to the Recoveries line. Headquarters

officials stated that the error resulted from their misinterpretation of the

OMB guidance on what to include in the Recoveries line. NASA is

currently acquiring and implementing a single, commercial-off-the-shelf

core accounting system that it believes will ameliorate the system

problems identified. As we have previously reported,15 other agencies have

had problems preparing the SBR. According to NASA, it has strengthened

internal controls over this process for fiscal year 2000.

The guidance available to NASA and other federal agencies on the

accumulation and presentation of budgetary execution information

includes specific instructions on which SGL accounts flow to which line

items on the SBR. OMB Bulletin 97-01, Form and Content of Agency

Financial Statements, provides the format and instructions for the overall

layout of the various sections of the SBR. The bulletin refers the reader to

 15Federal Accounting and Reporting: Framework for Assessing the Reliability of Budget

Execution Data Is Not Yet Fully Implemented (GAO-01-43, October 6, 2000).

Causes of NASA’s SBR

Misstatement

OMB and Treasury

Guidance Provide

Information on Form and

Content of SBR Line Items
Page 13 GAO-01-438. NASA's Statement of Budgetary Resources

OMB Circular A-34, Instructions on Budget Execution, for more specific

guidance on the contents of line items included in the SBR. The SBR

includes, in condensed form, information that OMB Circular A-34 requires

agencies to report on the SF 133. OMB Circular A-34 provides detailed

instructions on the applicable definitions, concepts, and terminology, as

well as specific line-by-line instructions, for reporting budgetary execution

information. The circular also provides a crosswalk that links the SF 133

to other budgetary reports, including the President’s Budget and the

Treasury Annual Report Appendix.

The SGL provides a uniform Chart of Accounts and technical guidance to

be used in standardizing federal agency accounts. Agency financial

management systems’ compliance with the SGL at the transaction level is

one of the three requirements of FFMIA. The Department of the Treasury’s

Financial Manual contains an annual SGL Supplement that includes the

Chart of Accounts, account descriptions, accounting transactions, SGL

attributes, and report crosswalks for the various principal financial

statements. According to the Financial Manual crosswalk for fiscal year

1999, the “Recoveries of Prior Year Obligations” line on the SBR included

the following SGL accounts:

• Account 4871, Downward Adjustments of Prior-Year Unpaid

Unexpended Obligations16

• Account 4971, Downward Adjustments of Prior-Year Unpaid Expended

Authority17

In addition, Treasury’s Financial Management Service produces a

Budgetary Accounting Guide, available on the Treasury web site, which

provides guidance for the proper recording of budgetary accounting

events and completing common budget reports.

The SBR is a relatively new financial statement and is unique to the federal

government. As a result, many federal agencies face challenges in the

preparation of reliable budget execution data reported in the SBR. For

 16Defined as the amount of downward adjustments during the fiscal year to unpaid

unexpended obligations that were recorded in a prior year. Unpaid unexpended obligations

reflect the amount of goods or services ordered and obligated but not yet received and not

yet paid for (e.g., unpaid undelivered orders).

17Defined as the amount of downward adjustments during the fiscal year to unpaid

expended authority that were recorded in a prior year. Unpaid expended authority reflects

costs for goods and services received but not paid for (e.g., accounts payable).
Page 14 GAO-01-438. NASA's Statement of Budgetary Resources

example, as part of the preparation of the SBR, agencies are required18 to

disclose any material differences between amounts in the SBR and

amounts reported as actual in the President’s Budget P&F Schedules. This

disclosure helps to link budgetary amounts in the audited financial

statements and information in the President’s Budget. NASA did not

disclose in a footnote to the financial statements the significant difference

between the Recoveries as reported on the SBR and as reported on the

P&F Schedules. As stated in our October 2000 report, some other agencies

also did not disclose significant differences in those amounts.

To collect the data needed for the Recoveries line, personnel from NASA

headquarters Accounting, Reporting and Analysis Branch (part of the

Office of the Chief Financial Officer) instructed the nine centers and

headquarters accounting division to provide data on Excel spreadsheets.

The memorandum to the 10 reporting units provided minimal guidance on

the types of downward adjustments to accumulate on the spreadsheets.

Specifically, the memorandum included a request for data that would be

reported in SGL accounts 4871 and 4971, in accordance with Treasury’s

Financial Manual.

Because the reporting units’ automated systems did not contain general

ledger accounts that would capture the type of data included in SGL

accounts 4871 and 4971, the units used various procedures and system

queries to extract the requested data. Because each of the reporting units

maintain different accounting systems, it was left up to the units to

determine how best to gather the requested data. For example, some

reporting units wrote data extraction programs or queries to obtain the

data from their accounting systems, one unit did not use its accounting

system and instead requested the information from its Procurement

Division, and at least one unit developed written formal instructions to

gather the data. After preliminary data were obtained, the reporting units

performed a manual review to determine which transactions met their

criteria for a downward adjustment. We found that no one in the CFO’s

office validated the completeness or accuracy of underlying data that was

submitted by the reporting units for inclusion in NASA’s Fiscal Year 1999

Accountability Report. We noted that after the House Committee on

Science identified the error in the SBR, NASA’s Office of the CFO staff

 18This requirement is found in SFFAS No. 7, Accounting for Revenue and Other Financing

Sources and Concepts for Reconciling Budgetary and Financial Accounting.

Ad Hoc Process Used to

Gather and Submit Data

Not Captured by NASA’s

General Ledger Systems
Page 15 GAO-01-438. NASA's Statement of Budgetary Resources

sent a memorandum to the reporting units stating that an analysis of the

data submitted revealed significant misinterpretations by the units of its

guidance for identifying transactions that qualify as downward

adjustments.

NASA CFO personnel received the spreadsheet data from each of the 10

reporting units and compiled a consolidated amount. In doing so, CFO

personnel decided to add other data to the totals submitted by the

reporting units. Specifically, CFO personnel mistakenly believed that

disbursements from expired appropriation accounts19 should be included

in the Recoveries line item in the SBR, although this information is not

relevant to this line. Using summary data reported by each of the reporting

units in their general ledgers, CFO personnel calculated an amount that

they believed represented disbursements from expired appropriation

accounts for the year. NASA officials stated that they misinterpreted OMB

guidance on what to include in the Recoveries line.

The House Science Committee discovered the discrepancy in comparing

the SBR Recoveries line in the financial statements ($686 million) to the

related line in the President’s Budget P&F Schedules ($56 million). After

the Committee discovered the discrepancy, NASA’s CFO personnel

determined that it had made an error and initially revised the SBR amount

to $94 million, a reduction of $592 million from the amount originally

reported on the SBR. NASA subsequently restated the fiscal year 1999

amount in response to the Committee’s request, reducing the SBR amount

by another $52 million to $42 million, which increased the amount of the

error to $644 million. Based on our discussions with NASA staff and a

review of relevant documentation, all but about $32 million of the error

related to the inclusion of the calculated amount of disbursements from

expired appropriations in the Recoveries line. The remaining amount was

attributed to other errors found in the spreadsheet data submitted by the

reporting units.

The error in the SBR was also in NASA’s SF 133s prepared for fiscal year

1999. However, the portion of the misstatement in the budgetary

information reported in the SBR and SF 133s related to expired

 19An appropriation account in which the balance is no longer available for incurring new

obligations because the time available for incurring such obligations has expired. Expired

accounts are maintained for 5 years. During this 5-year period, obligations may be adjusted

if otherwise proper and outlays may be made from these accounts.
Page 16 GAO-01-438. NASA's Statement of Budgetary Resources

appropriation accounts was not carried over into the President’s Budget

because the P&F Schedules do not report activity in expired accounts

related to recoveries of prior-year obligations. The other errors of

approximately $32 million related to errors in the spreadsheet data may

have had an impact on the P&F Schedules. However, because NASA did

not prepare revised SF 133s to separate the amounts between current and

expired appropriations, the actual dollar amount of the effect is not

known.

In a written response to the Committee’s request for a complete

explanation of the error, NASA’s Associate Administrator for Legislative

Affairs stated, “The misinterpretation of available guidance and the

resulting misclassification on the Statement of Budgetary Resources was

not identified by NASA at the time of statement development because the

statement preparers thought that all changes associated with expired

appropriations should be reflected as adjustments in the Statement of

Budgetary Resources.... The preparers subsequently realized that other

guidance, including Office of Management and Budget (OMB) Circular A34 and the Treasury Financial Manual, clarified the financial statement

preparation guidance.”

According to NASA officials, they have strengthened internal controls over

the financial statement preparation process for fiscal year 2000.

Specifically, in response to the Committee, as well as in our follow-up

discussions, NASA officials stated that they have instituted additional

independent verification and validation of data used in the financial

statement reporting process to ensure accuracy and understanding and

adherence to federal guidance. According to NASA’s response to the

Committee, this process will include a critique and verification of the

contents of the statements by knowledgeable NASA professionals, in

addition to the primary preparers and to the independent auditors.

Arthur Andersen did not detect the error in NASA’s SBR during its audit of

the fiscal year 1999 financial statements. Evidence in Arthur Andersen’s

working papers was not adequate to support unqualified audit opinions on

NASA’s SBR and Statement of Financing in accordance with GAGAS.

Arthur Andersen’s working papers did not adequately document the

evaluation of the internal controls related to the two budgetary statements

or the independent validation of key amounts in the statements for fiscal

year 1999. In addition, the deficiencies in NASA’s general ledger and the

error in NASA’s SBR described earlier raise questions about Arthur

Audit Evidence

Inadequate for

Budgetary Statements
Page 17 GAO-01-438. NASA's Statement of Budgetary Resources

Andersen’s conclusion that NASA’s systems complied substantially with

the requirements of FFMIA. We found inadequate evidence in Arthur

Andersen’s working papers to support its conclusion on NASA’s FFMIA

compliance. Finally, the revised SBR amounts submitted to the House

Committee on Science were not subject to independent audit. However,

NASA IG officials told us that they asked Arthur Andersen to verify the

revised fiscal year 1999 SBR amounts as part of NASA’s fiscal year 2000

audit, which was not complete at the time of our review.

GAGAS and SAS No. 55 require consideration of internal control in a

financial statement audit. Further, OMB Bulletin No. 98-0820 requires that

the federal financial auditor report weaknesses in an agency’s internal

controls. GAGAS require that the auditor obtain an understanding of

internal controls sufficient to plan the audit by performing procedures to

understand the design of controls relevant to an audit of financial

statements, and whether they have been placed in operation.

After obtaining this understanding, the auditor is to assess the risks

embodied in the financial statements and may obtain evidential matter

about the effectiveness of both the design and operation of controls that

support a lower assessed level of risk. The auditor uses the knowledge

provided by the understanding of internal controls and the assessed level

of risk in determining the nature, timing, and extent of substantive tests to

be performed. Substantive tests are intended to independently validate

specific balances and can include analytical procedures21 or detail tests

such as

• confirmation of balances with third parties (e.g., banks),

• physical observation, such as inspection of property and equipment,

• inspection of supporting documentation, such as invoices, and

• recalculations of amounts, such as interest income.

 20OMB Bulletin 98-08 was effective for audits of federal departments’ and agencies’ fiscal

year 1999 financial statements. OMB has issued new guidance, OMB Bulletin 01-02,

effective for fiscal year 2000 financial statement audits.

21Analytical procedures are an important part of the audit process and consist of

evaluations of financial information made by a study of plausible relationships among both

financial and nonfinancial data.

Understanding of Internal

Control
Page 18 GAO-01-438. NASA's Statement of Budgetary Resources

In our review of the auditor’s working papers for the NASA fiscal year

1999 audit, we did not see evidence of a sufficient understanding of the

internal control process relative to budgetary execution to support the

extent of reliance Arthur Andersen placed on internal controls. An

auditor’s understanding about a particular type or group of transactions is

often documented in a “cycle memorandum.” We did not see evidence of a

complete cycle memorandum or similar documentation of the auditor’s

understanding of the budget execution process in the Arthur Andersen

working papers. Arthur Andersen’s files did contain flowcharts prepared

by NASA for both the budget formulation and budget execution processes;

however, the working papers did not describe the internal controls that

management represented were in effect. In addition, the flowcharts

pertained to one NASA center and did not address the entire agency (all

nine centers and headquarters). We found no documentation in Arthur

Andersen’s working papers relating to NASA’s ad hoc process described

earlier. In our follow-up meetings, the Arthur Andersen management team

responsible for the NASA audit told us that they were not aware of NASA’s

ad hoc process for the Recoveries line item until June 2000, after the SBR

misstatement was identified by the Committee and subsequently

investigated. A complete understanding of NASA’s ad hoc process could

have resulted in specific audit steps designed to determine whether the

Recoveries line was fairly stated.

Arthur Andersen identified two risks affecting the SBR. The first was the

risk that transactions recorded in the system would not be captured in the

SF 133. The second was the risk that commitments and obligations would

exceed allotments. However, several additional risks are associated with

the SBR, including the risk that reported undelivered orders have been

delivered, and the risk that items that should be deobligated are not

accurately reflected in NASA’s accounting and reporting system.

In addition, for the fiscal year 1999 audit, Arthur Andersen identified the

two budget risks at NASA headquarters only. The auditors concluded,

based on representations by NASA management, that the controls were

designed and operating effectively at headquarters and the nine centers.

We determined from reviewing other working papers that, in the

accounting and reporting environment at NASA in the period under

review, the budget execution process occurred at the individual center

level, as well as at headquarters, and that each center is subject to a

different internal control environment. We found no evidence in Arthur
Page 19 GAO-01-438. NASA's Statement of Budgetary Resources

Andersen’s working papers that controls were tested to validate

management’s representations. Auditing standards22 state that inquiry

alone is not sufficient to support a conclusion about the effectiveness of

design or operation of a specific control. “When the auditor determines

that a specific control may have a significant effect in reducing control risk

to a low level for a specific assertion, he or she ordinarily needs to

perform additional tests to obtain sufficient evidential matter to support

the conclusion about the effectiveness of the design or operation of that

control.” As a result, we believe that Arthur Andersen had an insufficient

basis to rely on NASA’s budgetary controls.

GAGAS fieldwork standards require an auditor to obtain sufficient

competent evidential matter to afford a reasonable basis for an opinion

regarding the financial statements under audit. In addition, SAS No. 56,

Analytical Procedures, provides guidance on the use of analytical

procedures and requires the use of analytical procedures in the planning

and overall review stages of all audits. Analytical procedures can be used

to obtain evidential matter about particular assertions (e.g., completeness,

existence, and valuation) related to account balances23 or classes of

transactions. The procedures involve comparison of recorded amounts or

ratios developed from recorded amounts to expectations developed by the

auditor. The auditor develops such expectations by identifying the

plausible relationships that are reasonably expected to exist based on the

auditor’s understanding of the client and of the industry in which the client

operates. Ordinarily, the results of analytical procedures alone are not

sufficient to provide the desired level of assurance for a significant

account balance or a major assertion on the financial statements. The

auditor’s reliance on substantive tests to achieve an audit objective related

to a major assertion on the financial statements is more commonly derived

from a combination of detailed tests of transactions and analytical

procedures.

We found limited evidence of any testing of internal controls or underlying

data relating to key balances on the budgetary statements. Instead, Arthur

Andersen relied on analytical procedures to support key budgetary

 22AICPA Codification of Statements on Auditing Standards, AU sections 319.68 and .69.

23Testing of the reasonableness of account balances or amounts in financial statements is

commonly referred to as substantive testing. This is in contrast to testing of the internal

controls related to a particular account or balance.

Sufficient Evidential

Matter
Page 20 GAO-01-438. NASA's Statement of Budgetary Resources

balances, such as Recoveries and $2.2 billion of Undelivered Orders.24

Moreover, Arthur Andersen’s analytical procedures were inadequate and

did not meet the requirements of SAS No. 56. Specifically, this standard

requires that significant differences be investigated and any explanation of

the differences by management be corroborated. In planning the analytical

procedures as a substantive test, the auditor is to consider the amount of

the difference from the expectation that can be accepted without further

investigation. The auditor then needs to evaluate the significant

unexpected differences. SAS No. 56 states that, while “inquiry of

management may assist the auditor,” management responses should be

“corroborated with other evidential matter.” 25 Further, SAS No. 56 requires

that “in those cases when an explanation for the difference can not be

obtained, the auditor should obtain sufficient evidence about the assertion

by performing other audit procedures to satisfy himself as to whether the

difference is a likely misstatement.”

However, Arthur Andersen’s analytical procedures on the SBR line items

did not use expectations. Further, the auditor’s working papers

documenting the analytical review procedures did not include any

evidence of corroboration of management’s statements with independent

evidential matter. Specifically, the Arthur Andersen documentation of its

analytical review of the “Recoveries of Prior Year Obligations” line

consisted of the following:

“Recoveries of Prior Year Obligations increased by $685,805 million [sic]. Amount

represents amounts that were deobligated from prior obligations. NASA was not able to

determine this amount in the prior year, therefore, the balance in this account in FY98 was

$0. The recoveries from prior year amounts are deducted from obligations incurred to

arrive at obligations incurred (net). The amount from prior year is included in the

Obligations Incurred (net) amount. Therefore, the obligations incurred (net) amount in the

prior year is higher than in the current year.”

This paragraph from Arthur Andersen’s working papers documents

statements by management to Arthur Andersen and represents all the

documentation we found to support the audit procedures performed on

the Recoveries line item of $686 million reported for fiscal year 1999 in

 24Undelivered orders is a key balance relating to several lines of the SBR and Statement of

Financing. Undelivered orders represent the value of goods and services ordered that have

been obligated but have not been received.

25AICPA Codification of Statements on Auditing Standards, AU section 329.21.
Page 21 GAO-01-438. NASA's Statement of Budgetary Resources

NASA’s SBR. This explanation raises questions not only about the fiscal

year 1999 Recoveries balance but also the fiscal year 1998 balance.

Specifically, as indicated in Arthur Andersen’s documentation for the

explanation of the large variance in the Recoveries line on the SBR from

the prior year, NASA management stated that it was not able to determine

the amount in fiscal year 1998. This explanation calls into question the

accuracy of the amounts as reported in fiscal year 1998, the first year for

which the SBR was prepared. Given this information, Arthur Andersen

should have performed further testing to validate the fiscal year 1998

balance because its audit opinion covered the comparative financial

statements issued for fiscal years 1999 and 1998. However, no further

testing of the fiscal year 1998 balance was performed.

In our follow-up meetings with Arthur Andersen auditors, we discussed

the analytical procedures they used and attempted to confirm whether or

not additional detail tests were performed for the fiscal year 1999 reported

amount. The auditors stated that they traced the Recoveries line item

amount on the SBR back to the source document, which they determined

was the SF 133, although this audit step is not documented in the working

papers. The SBR is prepared from the same information used to prepare

the SF 133. The Arthur Andersen auditors added that they felt comfortable

with the number as stated because management had prepared similar

statements (SF 133s) in the past. However, we found that NASA had never

reported an amount for Recoveries in its prior SF 133s. Again, no detail

tests of underlying data were performed to verify the reasonableness of

management’s explanation.

We also did not see any evidence of testing by Arthur Andersen of NASA’s

reported $2.2 billion of Undelivered Orders, a key budgetary balance. The

Recoveries line on the SBR reflects the amount of reductions in prior-year

unliquidated obligations, which include Undelivered Orders and Accounts

Payable. Undelivered Orders are also a key component of other line items

in the SBR and Statement of Financing. No audit procedures were

performed to determine whether internal controls were properly designed

and in place or to substantiate the balance of Undelivered Orders at yearend. Audits of other federal agencies have shown that accurate reporting

of budget execution data and Undelivered Orders, in particular, has been a

problem. Budget execution data is an area with a high risk of misstatement

for many federal departments and agencies that therefore warrants audit

scrutiny in the federal environment, as the following examples illustrate.
Page 22 GAO-01-438. NASA's Statement of Budgetary Resources

• During our audit of IRS’ fiscal year 1999 financial statements, we found

that IRS internal controls were inadequate to provide reasonable

assurance that the budgetary balances reported on its financial

statements were reliable or that its obligations did not exceed

budgetary resources.26 Our testing of a statistical sample of 130

undelivered orders at September 30, 1999, found errors in 55 cases (42

percent). Specifically, we found undelivered orders dating back as far

as 1996 that IRS should have deobligated.

• Audit results showed that for the Air Force Working Capital Fund,

approximately $211 million out of approximately $1 billion in

unliquidated obligations tested (700 out of 2,526 transactions tested)

were incorrect, inadequately supported, or not supported.27

• Audit work also disclosed a material weakness in the Department of

State’s internal control process related to its management of

unliquidated obligations, citing unsupported obligations and the lack

of a structured process to reconcile and deobligate funds in a timely

manner.28 A review of $279 million of unliquidated obligations that had

no activity during fiscal year 1999 disclosed that 47 percent

($132 million) should have been deobligated.

It is important to note that the previous discussion focuses primarily on

the SBR amounts and audit procedures related to them as originally

reported in NASA’s Fiscal Year 1999 Accountability Report. You also asked

whether the revised SBR amounts submitted to the Committee on Science

by NASA’s Associate Administrator for Legislative Affairs on

September 21, 2000, are reliable. The revised information was a

representation from NASA management and was not subject to

independent audit by either Arthur Andersen or the NASA IG before being

reported to the Committee. However, NASA IG officials told us that they

asked Arthur Andersen to verify the revised fiscal year 1999 SBR amounts

as part of NASA’s fiscal year 2000 audit, which was not complete at the

time of our review.

 26Financial Audit: IRS’ Fiscal Year 1999 Financial Statements (GAO/AIMD-00-76,

February 29, 2000).

27Opinion on Fiscal Year 1999 Air Force Working Capital Fund Financial Statements, Air

Force Audit Agency, Audit Report 99068011, February 9, 2000.

28Audit of the Department of State’s 1999 and 1998 Principal Financial Statements, United

States Department of State, Office of the Inspector General, Audit Report 00-FM-022,

August, 2000.

Audit Procedures on NASA’s

Revised SBR
Page 23 GAO-01-438. NASA's Statement of Budgetary Resources

As stated in our scope and methodology section (see appendix I), we were

not asked to and did not perform audit procedures to support an

expression of opinion as to whether the revised numbers are fairly stated

in all material respects. Typical tests we perform to verify SBR amounts

have included detailed transaction-based testing of a statistical sample of

key budgetary balances and activities, as previously discussed. Auditing

the SBR is a complex process and an area in which we have received

several requests for guidance. To address that need, we will issue an Audit

Alert29 to provide more explicit guidance on auditing the SBR.

The systems deficiencies that led to the SBR error and Arthur Andersen’s

lack of understanding of the ad hoc process used by NASA to work around

these deficiencies also raise questions about Arthur Andersen’s

conclusions that NASA’s systems comply substantially with FFMIA.

FFMIA requires that agencies implement and maintain systems that

substantially comply with

• federal financial management systems requirements (FFMSR),30

• applicable generally accepted accounting principles, and

• the U.S. Standard General Ledger (SGL) at the transaction level.

The error in the SBR raises questions related to all three FFMIA

requirements.

FFMSR call for systems to provide timely and useful information and

report events and transactions according to the accounting classification

structure and within the given accounting period. The Report on Budget

Execution and Budgetary Resources (Standard Form 133) can serve as a

principal source of information for the SBR and is prepared and reported

quarterly to OMB. NASA did not use the ad hoc year-end data call to

generate the Recoveries line of the SBR and Standard Form 133 during

 29Audit Alerts are nonauthoritative guidance we issue intended to provide auditors of

federal government departments and agencies with information that will help them

improve the efficiency and effectiveness of their audits. Audit Alerts are based on existing

professional literature and the experiences of members of the federal government audit

community.

30The Joint Financial Management Improvement Program (JFMIP) has issued two

documents that address federal financial management system requirements: Framework

for Federal Financial Management Systems (FFMSR-0, January 1995) and Core Financial

System Requirements (FFMSR-1, September 1995).

Auditor Did Not Identify

Possible FFMIA

Implications of Ad Hoc

Procedures for Budgetary

Information
Page 24 GAO-01-438. NASA's Statement of Budgetary Resources

fiscal year 1999 or at any time during the prior 3 fiscal years. As a result,

NASA’s systems did not produce information in a timely or useful manner

to support accurate reporting of key budgetary data as called for by

FFMSR. In addition, the year-end data call was necessary because NASA

did not have the SGL accounts to capture certain budgetary execution data

that are required for the SF 133 and SBR. FFMSR state that systems must

use the SGL chart of accounts as the basis for preparing external reports

to OMB and Treasury. Because NASA did not have the SGL accounts

required for Recoveries, its systems did not support timely and accurate

reporting of information in the Standard Form 133 to OMB for fiscal years

1996 through 1999 as called for by FFMSR. In addition, the error in NASA’s

SBR for fiscal year 1999 resulted in financial statements that were not

prepared in accordance with generally accepted accounting principles.

We reviewed Arthur Andersen’s working papers supporting its assessment

of NASA’s FFMIA compliance. In these working papers, we found a

memorandum written by NASA’s CFO personnel acknowledging the

financial management system deficiencies (for example, nonintegrated

systems) and discussing numerous work-arounds and manual processes

that, in management’s opinion, enabled the agency to be in substantial

compliance with FFMIA. That working paper included a handwritten note

by an Arthur Andersen staff member documenting a telephone

conversation with an OMB staff member. According to the note, the OMB

staff member advised Arthur Andersen that “an agency would be in

substantial compliance with the U.S. SGL requirements if the agency can

‘cross-walk’ its accounts to the SGL.” At the time of this conversation,

however, Arthur Andersen was unaware that NASA was using the ad hoc

process to generate a year-end number. Because the Recoveries amount

was generated through a data call and thus not produced by the use of

specific NASA accounts, the issue of crosswalks to the SGL is not relevant.

We found no further documented evidence that supported Arthur

Andersen’s conclusion on FFMIA compliance.

The NASA IG letter transmitting Arthur Andersen’s report to the NASA

Administrator and Chief Financial Officer included in the Fiscal Year 1999

Accountability Report stated that the NASA IG did not accept

responsibility for expressing an opinion on NASA’s financial statements

for 1999 and 1998 and that the auditor’s report was the responsibility of

Arthur Andersen. The NASA IG reviewed Arthur Andersen’s working

papers and audit reports and reported that, in its opinion, Arthur

Andersen’s working papers and audit reports “complied in all material

NASA IG Responsible

for Audit Oversight
Page 25 GAO-01-438. NASA's Statement of Budgetary Resources

respects with applicable standards and mandated requirements.” The

report also stated that the NASA IG monitored the progress of the audit at

key points and reviewed Arthur Andersen’s report and related working

papers to ensure compliance with applicable standards.

Inspector general responsibilities for audits, such as the NASA financial

statement audit (conducted by Arthur Andersen under contract to the

NASA IG), are identified in the Inspector General Act of 1978, as amended;

the CFO Act of 1990, as expanded by GMRA; and OMB Bulletin No. 98-08,

Audit Requirements for Federal Financial Statements. In fulfilling its

responsibilities for the fiscal year 1999 financial statement audit, the NASA

IG performed a quality control review of the audit by Arthur Andersen

using a detailed checklist based on GAGAS. According to the checklist, the

objectives of the NASA IG quality control review were to:

• ensure that the independent public accountant conducted the audit in

accordance with applicable auditing standards (e.g., GAGAS) and OMB

bulletin requirements,

• identify any follow-up work that needs to be done by the independent

public accountant, and

• identify issues (either by the independent public accountant or the IG)

that may require management attention.

We reviewed the NASA IG’s documentation of its work to monitor the

quality of the audit work performed by Arthur Andersen. In completing its

quality control checklist, the NASA IG reviewed Arthur Andersen’s

internal control documentation. We found that the NASA IG staff made

several notes questioning specific areas within certain processes. In

addition, the NASA IG staff reviewed the one-paragraph working paper on

Arthur Andersen’s analytical procedures related to the SBR that identified

a large variance between the amount reported on the fiscal years 1998 and

1999 balances for the Recoveries line. The NASA IG’s working papers did

not include any documentation that would indicate that the NASA IG staff

questioned the adequacy of the work performed on NASA’s budgetary

statements.

The NASA IG checklist also indicated that Arthur Andersen had tested

FFMIA compliance. We did not see any evidence that the NASA IG staff

questioned the limited nature of Arthur Andersen’s work to assess FFMIA

compliance. As noted earlier, Arthur Andersen’s documented support for

its FFMIA assessment consisted of a memorandum written by NASA
Page 26 GAO-01-438. NASA's Statement of Budgetary Resources

management and a discussion with an OMB official and did not indicate

any testing related to FFMIA.

In our discussions, the NASA IG staff indicated that they had recently

issued a Request for Quotes (RFQ) to solicit a contractor to perform future

NASA financial statement audits. As noted previously, fiscal year 2000 is

the final year in Arthur Andersen’s 5-year contract. To improve the quality

and consistency of future audits, the RFQ specifies that the independent

public accountant must perform the audits in accordance with the GAO

Financial Audit Manual.

31 If properly implemented, use of the manual

would improve the quality of NASA’s future financial statement audits.

The budgetary statements, where the NASA misstatement occurred, if

reliable, can provide information that can be used to assess the costs of

prior-year agency activities and make decisions about future funding. As

we noted, preparation of these relatively new budgetary statements, which

are unique to the federal government, presents challenges to both the

agency in accumulating the needed data and to auditors in rendering their

opinion on whether the statements are fairly presented. NASA

management, its independent auditors, and the NASA IG all play a critical

role in ensuring that the relevant accounting and auditing standards and

related guidance are followed for these important statements.

To ensure that NASA’s strengthened procedures over financial statement

preparation are in place and operating as intended, we recommend that

the NASA Chief Financial Officer review the effectiveness of the enhanced

procedures for the fiscal year 2000 reporting process and modify the

procedures as necessary.

In addition, we recommend that the NASA IG review its overall quality

control procedures for monitoring the work of independent public

accountants and strengthen its procedures where appropriate, including

 31The GAO Financial Audit Manual is currently being revised under a joint effort of GAO

and the President’s Council on Integrity and Efficiency and will be called the GAO/PCIE

Financial Audit Manual. It provides a methodology for compliance with professional

auditing standards, guidance published by OMB, and relevant statutes. The final version is

to be issued in May 2001 and is intended to be used as the primary guide for agency

financial statement audits conducted by the IG community and GAO, beginning with the

audits of fiscal year 2001 financial statements.

Conclusions

Recommendations
Page 27 GAO-01-438. NASA's Statement of Budgetary Resources

updating the quality control checklist to incorporate the requirements of

the GAO/PCIE Financial Audit Manual to monitor whether the

independent public accountant’s work was performed in accordance with

relevant professional standards and guidance.

We obtained written comments on a draft of this report from the NASA

Administrator, the NASA Inspector General, and the Arthur Andersen

Engagement Partner who had responsibility for the fiscal year 1999 NASA

financial statement audit. NASA management’s comments are reprinted in

appendix II, and the NASA IG and Arthur Andersen comments are

reprinted in appendix III.

In commenting on a draft of this report, NASA management concurred

with our conclusion regarding the misstatement in the fiscal year 1999

SBR. NASA also stated that it was, and continues to be, in substantial

compliance with the requirements of FFMIA. Further, NASA management

concurred with our recommendation that its strengthened procedures

over financial statement preparation be reviewed for the fiscal year 2000

reporting process. The NASA IG stated that it has taken steps to

strengthen its oversight of NASA’s financial statement audits. In addition,

the NASA IG concurred with our recommendation that the requirements

of the GAO/PCIE Financial Audit Manual be incorporated in the IG’s

quality control process for future audits.

However, Arthur Andersen and the NASA IG disagreed with our analysis in

most areas. Arthur Andersen stated that it believes that our conclusion

concerning the adequacy of its work on the 1999 NASA audit is

fundamentally incorrect. The NASA IG also disagreed with our conclusion

on the adequacy of Arthur Andersen’s audit work on the 1999 SBR and

Statement of Financing. As discussed in the following sections and in our

additional evaluation in appendix III, we believe that our conclusion is

correct and disagree with the positions of Arthur Andersen and the NASA

IG.

NASA management concurred with our conclusion that the misstatement

in the fiscal year 1999 SBR was caused, in part, by a misinterpretation of

guidance for the preparation of the SBR and errors in the process for

generating certain budgetary data. NASA also noted that it had

strengthened its controls over the preparation of its financial statements

for fiscal year 2000 and concurred with our recommendation to review

Comments and Our

Evaluation

NASA Management

Comments
Page 28 GAO-01-438. NASA's Statement of Budgetary Resources

these enhanced procedures and modify them as necessary. NASA also

stated that the deficiencies in its general ledger and the SBR reporting

error are of such a nature that NASA was, and continues to be, in

substantial compliance with FFMIA.

Although we did not review NASA’s enhanced controls over preparation of

its fiscal year 2000 financial statements, we are pleased that NASA has

adopted our recommendation and is evaluating the effectiveness of these

controls based on a review of the fiscal year 2000 process. The scope of

our review of the 1999 NASA audit was not sufficient for us to conclude

whether NASA’s systems substantially complied with the requirements of

FFMIA. However, we believe that the inability of NASA’s systems to

routinely and reliably report information on the Recoveries line of the SBR

raises serious questions about whether NASA’s systems comply with

FFMIA. If NASA’s systems had accurately accumulated the appropriate

transactions in the required general ledger accounts during fiscal year

1999, the ad hoc process that resulted in the $1.3 billion of errors in

NASA’s SBR would not have been necessary.

NASA’s response to our draft report also included a number of technical

comments, which we have incorporated in the report as appropriate.

Arthur Andersen’s and the NASA IG’s comments fall into four general

areas—the sufficiency of Arthur Andersen’s work, the nature and

significance of the SBR error, GAO’s role regarding the 1999 NASA audit,

and compliance of NASA’s systems with FFMIA.

Arthur Andersen and the NASA IG concluded that the fiscal year 1999

audit work on the SBR and Statement of Financing was adequate and met

all professional standards. They further noted that exercising due

professional care does not guarantee that every error in financial

statements will be detected and that an audit does not imply infallibility on

the part of the auditor or the audit organization. The NASA IG further

stated that a single error in auditor judgment does not rise to the level of

violating auditing standards. Arthur Andersen and the NASA IG both

stated that we did not adequately consider what they considered to be the

justifiable reliance placed on the extensive testing of NASA’s internal

controls and processes and the substantial testing and sampling of

financial data underlying the SBR and Statement of Financing in the

previous years of the audit. Arthur Andersen noted that professional

standards expressly permit auditors to use testing of controls from prior

Arthur Andersen and

NASA IG Comments

Sufficiency of Arthur

Andersen’s Work
Page 29 GAO-01-438. NASA's Statement of Budgetary Resources

audits as long as they “obtain evidence about the nature and extent of

significant changes in policies, procedures and personnel since they last

performed those tests.” Arthur Andersen and the NASA IG stated that the

“low” risk assessments and “scaling back” of its testing of the SBR and

Statement of Financing for fiscal year 1999 were reasonable given what

they considered to be the extensive prior-year audit work and the fact that

the audit team was aware of no significant changes in policies, procedures,

and personnel since the prior-year testing.

We agree with Arthur Andersen and the NASA IG that an audit does not

imply infallibility on the part of the auditor or the audit organization or

guarantee that there are no errors in the financial statements. Our view of

the audit of NASA’s fiscal year 1999 SBR and Statement of Financing is

based not on the presence of a mistake but rather on the lack of evidence

in Arthur Andersen’s working papers. Specifically, we believe that Arthur

Andersen’s working papers, including the 1996, 1997, and 1998 working

papers we were provided—relating to understanding and testing internal

controls and validating underlying data for key financial statement

balances—were not adequate to support unqualified audit opinions on the

fiscal year 1999 SBR and Statement of Financing. We found Arthur

Andersen’s audit was characterized by excessive reliance on

representations by NASA management, which led to an inappropriate

assessment of risk related to the budgetary statements and resulted in the

absence of any independent validation of underlying data for key balances

supporting the fiscal year 1999 SBR and Statement of Financing.

For example, in its comments, Arthur Andersen stated that it had

conducted “extensive testing of the SF-133s—the budget report from

which the SBR is principally derived—and that such testing gave Andersen

reasonable assurance regarding the internal controls relating to the SF133s and thus on the integrity of the information in the SF-133s

themselves” and went on to say that they “did precisely what GAGAS

require in this setting—it reexamined the internal controls that had been in

place in prior years and produced accurate SF-133 data to ensure that they

were still effective.” It is important to note that we asked for and were

provided what Arthur Andersen represented to us were all working papers

from its fiscal year 1996 through 1999 audits that supported its conclusions

on the fiscal year 1999 SBR and Statement of Financing. The facts

documented in Arthur Andersen’s fiscal year 1999 and prior-year working

papers do not support Arthur Andersen’s position.
Page 30 GAO-01-438. NASA's Statement of Budgetary Resources

The following excerpt from a working paper documenting the results of

Arthur Andersen’s testing of NASA’s SF 133s for fiscal year 1997 supports

our conclusion that Arthur Andersen did not have a sufficient basis to

conclude that controls over the budgetary process were effective.

“In reviewing NASA’s process related to the preparation of the SF 133, AA has concluded

that there are no high-level controls in place that ensure proper and accurate preparation

of the SF 133 that are amenable to testing. As a result, AA has decided to test this process

by tracing all information reported on the SF 133 to its source (e.g., general ledger

reports).”

In this case, Arthur Andersen did not perform substantive testing of the

underlying data that were reported on the SF 133, despite its finding of the

lack of an adequate control environment over the SF 133 process. Instead,

Arthur Andersen compared the management-prepared SF 133s to

management’s own general ledger. Such a comparison can determine

whether clerical errors were made in transferring the data from its general

ledger source to the required reporting format in the SF 133, but cannot

offer any independent validation of the reported amounts. After tracing the

SF 133 data to the NASA general ledger, Arthur Andersen then concluded

that “NASA’s control process over the preparation of the SF 133 is

effective to prevent the occurrence of material misstatements.” Arthur

Andersen’s conclusion on the SF 133s is an example of a process that was

reviewed but not validated, a problem we identified throughout Arthur

Andersen’s working papers.

In addition, although Arthur Andersen stated that it reexamined the

internal controls that had been in place in prior years to ensure they were

still effective, we found that NASA’s SF 133s for fiscal years 1996 through

1998 did not record any amount for Recoveries—the line item in question.

Therefore, it would not have been possible for Arthur Andersen to have

reexamined the controls over an amount that had not previously been

reported. With fiscal year 1999 being the first year that NASA attempted to

report the Recoveries amount, this appears to be a significant change in

policies and procedures that would have precluded reliance on prior-year

testing, even if that testing had been adequate.

Our findings of Arthur Andersen’s inadequate testing of internal controls

are further supported by the fact that the audit management team did not

become aware of the ad hoc process used by NASA beginning in fiscal

year 1999—a new procedure that again would have precluded reliance on

prior-year testing—until after the Committee discovered the error in June

2000. Further, the NASA IG’s response to our draft report stated that
Page 31 GAO-01-438. NASA's Statement of Budgetary Resources

Arthur Andersen detected that NASA did not report Recoveries the very

first year (1998) NASA was required to prepare the SBR. This contradicts

Arthur Andersen’s conclusion that the SF 133 process for fiscal year 1998

was reliable. The NASA IG further stated that Arthur Andersen orally

advised NASA to report the Recoveries in the 1998 SBR. The NASA IG

further stated that NASA management informed Arthur Andersen that it

could not report this information because it did not have enough time, but

agreed to report Recoveries in fiscal year 1999. Arthur Andersen issued its

unqualified opinion for fiscal year 1998 without any evidence of the

potential magnitude of this reporting issue. Further, although Arthur

Andersen knew from its fiscal year 1998 work that NASA needed to

develop a new procedure to obtain the information needed to report

Recoveries, it accepted management’s representation one year later,

without independently validating the reported 1999 Recoveries balance of

$686 million versus $0 reported in fiscal year 1998. Despite these facts,

Arthur Andersen issued an unqualified opinion for fiscal year 1999 on

comparative (fiscal year 1998 and 1999) financial statements.

Based on the above discussion, we disagree with Arthur Andersen and the

NASA IG that the “low” risk assessments and “scaling back” of its testing

of the SBR and Statement of Financing in fiscal year 1999 were reasonable

because of its extensive prior-year work and the fact that the audit team

was not aware of any significant policy changes. The fiscal year 1999 and

prior-year working papers provided to us by Arthur Andersen clearly

demonstrate that not only was the audit work on the SBR and the

Statement of Financing not extensive, but there was in fact no testing in

some key areas. For example, as stated in our report, we found no

evidence of testing by Arthur Andersen of NASA’s reported $2.2 billion in

Undelivered Orders, a key budgetary balance that affects several line items

on the SBR and Statement of Financing. Arthur Andersen stated that it

sampled disbursements and reconciled unobligated balances disclosed in

the footnotes to the disclosure of Funds Held with Treasury, and, in turn,

reconciled Funds Held with Treasury to NASA reports submitted to

Treasury and generated by NASA’s general ledger. Similar to Arthur

Andersen’s testing of NASA’s fiscal year 1997 SF 133 process, its work on

unobligated balances simply entailed reconciling one managementprepared report to another, with no independent testing of the underlying

data.

Arthur Andersen’s comments and what it describes as audit work show a

fundamental misunderstanding of what is required to audit the SBR and

Statement of Financing and demonstrate that its “low” risk assessment and
Page 32 GAO-01-438. NASA's Statement of Budgetary Resources

“scaled back” testing were inappropriate. Specifically, unobligated

balances are a derived number with no transaction-based support. As a

result, it is not possible to test underlying data or audit the information

except through testing of areas such as Undelivered Orders. Arthur

Andersen’s comments demonstrate that it treated Undelivered Orders as a

derived number (e.g., net of disbursements and unobligated amounts),

which supports our conclusion that Arthur Andersen performed no testing

of the $2.2 billion of Undelivered Orders at September 30, 1999. As stated

in this report, audits of other federal entities have included extensive

statistical sampling of year-end transaction-based support for Undelivered

Orders. This extensive sampling has shown that Undelivered Orders are at

a high risk of misstatement for many federal departments and agencies. At

IRS, for example, as a result of our fiscal year 1999 audit work that

determined that Undelivered Orders were materially misstated, IRS

management was able to substantially improve the reliability of its

financial statements for Undelivered Orders for fiscal year 2000.

Arthur Andersen and the NASA IG characterized the misstatement in the

fiscal year 1999 NASA SBR as a misinterpretation by NASA management of

OMB guidance in preparing the Recoveries line on the SBR. They further

stated that the error was not material and that the SBR and Statement of

Financing have been the source of substantial confusion among federal

agencies and their auditors.

We agree with Arthur Andersen and the NASA IG that the preparation and

audit of the SBR and Statement of Financing have been a significant

source of confusion to agencies and their auditors. However, this

confusion and the newness of these statements further demonstrate that

Arthur Andersen’s “low” risk assessments and “scaling back” of its testing

of the SBR and Statement of Financing for fiscal year 1999 were

inappropriate. It is also important to note that the error in the Recoveries

line was not the only error in the SBR. After we released our draft report

for comment, NASA published final fiscal year 2000 financial statements,

which included the audited revised fiscal year 1999 SBR. The final 1999

NASA financial statements show the $644 million misstatement of the

Recoveries line as well as the Obligations Incurred line item, which was

also misstated by $644 million. Thus, in aggregate, total misstatements in

the final fiscal year 1999 NASA SBR were about $1.3 billion.

We agree that the error was due, in part, to a misinterpretation by NASA

CFO personnel. However, if NASA’s systems had appropriately captured

the relevant information in the required general ledger accounts during

Nature and Significance of the

SBR Error
Page 33 GAO-01-438. NASA's Statement of Budgetary Resources

fiscal year 1999, then the ad hoc process and resulting misinterpretation

and error by NASA would not have resulted.

Neither Arthur Andersen nor the NASA IG’s responses to our draft report

mentioned the fact that the Recoveries error in the 1999 SBR was

discovered by the House Science Committee while reviewing the NASA

financial statements. Regarding materiality, it is defined as the magnitude

of an omission or misstatement of accounting information that, in light of

surrounding circumstances, makes it probable that the judgment of a

reasonable person relying on the information would have been changed or

influenced by the misstatement. The fact that the Committee discovered

the discrepancy and asked NASA management whether $686 million of

Recoveries was actually available is a strong indicator that the

$644 million overstatement of Recoveries changed or influenced the

Committee’s judgment about the reliability of the SBR information. In

addition, Arthur Andersen’s response did not mention the fact that its

documented materiality level for the 1999 NASA audit was $150 million.

Thus, the $1.3 billion in errors in NASA’s SBR was nearly 9 times greater

than Arthur Andersen’s own materiality threshold.

Arthur Andersen and the NASA IG took exception to the findings in this

report stating that as part of our audit of the federal government’s fiscal

year 1999 consolidated financial statements we had previously reviewed

Arthur Andersen’s working papers relating to the fiscal year 1999 NASA

audit. Arthur Andersen further stated that consistent with our original

finding, Andersen’s audit was properly planned, and as the NASA IG

concluded, properly executed and reported. The NASA IG further stated

that we had reviewed its quality control working papers related to its

oversight of the NASA 1999 audit and that we had taken no exception to

its oversight approach. We agree with Arthur Andersen and the NASA IG

that we did review certain Arthur Andersen and NASA IG working papers

from the fiscal year 1999 NASA audit as part of our audit of the federal

government’s consolidated financial statements. However, Arthur

Andersen’s and the NASA IG’s characterization of the scope of our review

and whether our review resulted in any conclusions on the sufficiency of

Arthur Andersen’s work is incorrect.

The SBR and Statement of Financing were not included in the fiscal year

1999 federal government’s consolidated financial statements, and thus

Arthur Andersen’s working papers relating to the SBR and Statement of

Financing were not relevant to our audit. These statements have not been

prepared at the consolidated level but are prepared at the agency level.

GAO’s Role Regarding the 1999

NASA Audit
Page 34 GAO-01-438. NASA's Statement of Budgetary Resources

Further, we issued a disclaimer of opinion32 on the federal government’s

consolidated financial statements and, therefore, made no conclusion on

the reliability of any governmentwide financial information or on the

reliability of NASA’s financial statements or Arthur Andersen’s audit.

Also, the purpose of our review of NASA and many other smaller federal

agency financial audits was to determine whether findings from those

audits were consistent with our governmentwide findings and should be

considered in our reporting of the consolidated statements. As such, we

did not review or take any position with regard to the quality of Arthur

Andersen’s audit on the SBR and Statement of Financing or on the NASA

IG’s oversight approach for these statements.

Arthur Andersen and the NASA IG disagreed with our conclusion that the

systems deficiencies that led to the SBR error and Arthur Andersen’s lack

of understanding of the ad hoc process used by NASA raise questions

about whether NASA’s financial management systems comply

substantially with FFMIA. Arthur Andersen stated that its working papers

were replete with testing procedures to ensure compliance with FFMIA.

We disagree with Arthur Andersen and the NASA IG. Specifically, the fact

that NASA’s systems did not have the required SGL accounts (accounts

4871 and 4971) to capture certain budgetary execution data and the

resulting need for the ad hoc year-end data call raise questions about

whether NASA’s systems comply substantially with FFMIA.

Further, Arthur Andersen’s working papers did not show that it performed

extensive testing to support its conclusion that NASA’s systems comply

with FFMIA. For example, as stated in our report, the primary documented

evidence in Arthur Andersen’s working papers was a memorandum

prepared by NASA CFO personnel, which acknowledged problems with

NASA’s systems, such as lack of a single, integrated financial management

system and the use of alternative codes to the SGL. The memorandum

then concluded that NASA’s systems complied with FFMIA. Arthur

Andersen supplemented this memorandum with handwritten notes

documenting a telephone conversation between Arthur Andersen and an

OMB staff member that, according to the note, “an agency would be in

substantial compliance with U.S. SGL requirements if the agency can

 32A disclaimer of opinion means that we were unable to, and did not, express an opinion on

the government’s consolidated financial statements for fiscal year 1999.

Compliance of NASA’s Systems

With FFMIA
Page 35 GAO-01-438. NASA's Statement of Budgetary Resources

‘cross-walk’ its accounts to the SGL.” However, at the time of the

discussion with the OMB staff member, Arthur Andersen was not aware

that NASA was using the ad hoc process to develop a year-end number.

We found no further documented evidence that supported Arthur

Andersen’s conclusion on FFMIA compliance and disagree that a

memorandum from management and a telephone conversation with an

OMB staff member constitute extensive testing. Rather, this type of

evidence supports our conclusion that Arthur Andersen placed extensive

reliance on unvalidated management representations.

We are sending copies of this report to Senator John McCain, Chairman,

and Senator Ernest Hollings, Ranking Member, Commerce, Science, and

Transportation Committee, U.S. Senate; Representative Sherwood L.

Boehlert, Chairman, and Representative Ralph M. Hall, Ranking Minority

Member, Committee on Science, House of Representatives; Representative

Bart Gordon, Ranking Minority Member, Subcommittee on Space and

Aeronautics, Committee on Science, House of Representatives; and other

interested congressional committees. We are also sending copies to the

Honorable Daniel S. Goldin, Administrator, NASA; the Honorable Roberta

L. Gross, Inspector General, NASA; the Honorable Mitchell E. Daniels, Jr.,

Director, Office of Management and Budget; the Honorable Paul H. O’Neill,

Secretary, Department of the Treasury; and Graylin E. Smith, Engagement

Partner, Arthur Andersen LLP. Copies will be made available to others

upon request.
Page 36 GAO-01-438. NASA's Statement of Budgetary Resources

Please contact me at (202) 512-9095 if you or your staff have any questions

on this report. Key contributors to this report are listed in appendix IV.

Sincerely yours,

Gregory D. Kutz

Director

Financial Management and Assurance
Appendix I: Objectives, Scope, and

Methodology

Page 37 GAO-01-438. NASA's Statement of Budgetary Resources

The objectives of this report were to review (1) the nature and causes of

the discrepancy between NASA’s Statement of Budgetary Resources (SBR)

and Statement of Financing, including the adequacy of Office of

Management and Budget guidance and related guidance available on the

preparation of the SBR, (2) the adequacy of the auditing procedures

performed by Arthur Andersen on the SBR and the Statement of Financing

in NASA’s fiscal year 1999 accountability report, and (3) the role of the

NASA IG in overseeing Arthur Andersen’s audit.

To fulfill these objectives, we reviewed documentation and interviewed

NASA staff to determine how they accumulated, processed, and

summarized data needed to prepare their fiscal year 1999 SBR and related

budget documents. We also obtained an understanding of NASA’s

compilation process for its revised fiscal years 1999, 1998, and 1997 SBRs

submitted to the House Committee on Science. We met with NASA

officials and discussed their formal response to the Committee. We did not

review the process of preparing the SBR for fiscal year 2000.

We reviewed applicable Treasury, Office of Management and Budget, and

NASA guidance as well as related generally accepted accounting principles

and concepts that related to budgetary accounting. We also reviewed

applicable OMB, GAO, and AICPA standards related to federal financial

statement audits.

We met with representatives from Arthur Andersen to discuss its audit of

NASA’s financial statements, which included the SBR and the Statement of

Financing. We reviewed supporting working papers and made inquiries of

managers and staff who performed the audit to identify Arthur Andersen’s

scope of work and to assess whether audit procedures related to the

budgetary statements were adequate. We also interviewed Arthur

Andersen’s engagement partner on the NASA financial statement audit

who left the firm prior to the issuance of Arthur Andersen’s report on the

fiscal year 1999 audit. However, consistent with the objectives of this

review, we did not review any Arthur Andersen working papers related to

the information systems control portion of the fiscal year 1999 audit. We

also did not review the working papers related to Arthur Andersen’s audit

of NASA’s fiscal year 2000 financial statements.

We met with NASA Inspector General officials to discuss their role in

providing oversight of the financial audit. We reviewed working papers

supporting the Inspector General oversight of the fiscal year 1999 financial

Appendix I: Objectives, Scope, and

Methodology
Appendix I: Objectives, Scope, and

Methodology

Page 38 GAO-01-438. NASA's Statement of Budgetary Resources

statement audit, such as audit programs, checklists, documentation of key

meetings, and conclusions or summaries.

Because we did not audit NASA’s financial statements, we do not express

an opinion on the statements for fiscal years 1999 or 1998, as originally

presented, or as restated in NASA’s revised SBRs for fiscal years 1999,

1998, and 1997. Further, consistent with our objectives, as our review

focused only on the audit of the budgetary statements, we cannot

conclude on the adequacy of Arthur Andersen’s work on the other

principal statements, its report on internal control and compliance with

laws and regulations, or whether NASA’s systems comply substantially

with Federal Financial Management Improvement Act.

We performed our work at NASA headquarters and NASA IG offices in

Washington, D.C., and at Arthur Andersen LLP’s offices in Vienna, Virginia,

and Washington, D.C. We also reviewed documentation related to the

solicitation and award of the audit contract at NASA’s procurement offices

at Goddard Space Flight Center in Greenbelt, Maryland. Our work was

performed from October 2000 through February 2001 in accordance with

generally accepted government auditing standards.

We requested written comments on a draft of this report from the NASA

Administrator, the NASA IG, and the Arthur Andersen Engagement Partner

who had responsibility for the fiscal year 1999 NASA financial statement

audit. These comments are presented and evaluated in the “Comments and

Our Evaluation” section of this report. In addition, NASA management’s

comments are reprinted in appendix II, and the NASA IG and Arthur

Andersen comments are reprinted in appendix III.
Appendix II: Comments From NASA’s

Associate Deputy Administrator

Page 39 GAO-01-438. NASA's Statement of Budgetary Resources

Appendix II: Comments From NASA’s

Associate Deputy Administrator
Appendix II: Comments From NASA’s

Associate Deputy Administrator

Page 40 GAO-01-438. NASA's Statement of Budgetary Resources
Appendix II: Comments From NASA’s

Associate Deputy Administrator

Page 41 GAO-01-438. NASA's Statement of Budgetary Resources
Appendix II: Comments From NASA’s

Associate Deputy Administrator

Page 42 GAO-01-438. NASA's Statement of Budgetary Resources

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

 See comment 1.

See comment 2.

See comment 1.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 43 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 3.

See comment 1.

See comment 1.

See comment 4.

See comment 1.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 44 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.

See comment 5.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 45 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.

See comment 1.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 46 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.

See comment 1.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 47 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 2.

See comment 6.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 48 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 49 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 2.

See comment 1.

See comment 3.

See comment 7.

See comment 1.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 50 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 3.

See comment 7.

See comment 8.

See comment 9.

See comment 7.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 51 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 10.

See comment 11.

See comment 12.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 52 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.

See comment 1.

See comment 13.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 53 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 11.

See comment 14.

See comment 15.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 54 GAO-01-438. NASA's Statement of Budgetary Resources

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 14.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 55 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 16.

See comment 16.

See comment 1.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 56 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.

See comment 1.

See comment 7.

See comment 14.

See comment 6.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 57 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 17.

See comment 18.

See comment 2.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 58 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 14.

See comment 1.

See comment 16.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 59 GAO-01-438. NASA's Statement of Budgetary Resources
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 60 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 61 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 62 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 2 and 6.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 63 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.

See comment 6.

See comment 2.

See comment 1.

See comment 2.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 64 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 2.

See comment 17.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 65 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 66 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 1.

See comment 13.

See comment 15.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 67 GAO-01-438. NASA's Statement of Budgetary Resources

See comment 14. See comment 14.

See comment 1.

See comment 14.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 68 GAO-01-438. NASA's Statement of Budgetary Resources
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 69 GAO-01-438. NASA's Statement of Budgetary Resources

The following are GAO’s comments on the letters dated March 15, 2001,

from Arthur Andersen LLP and the NASA IG.

1. See the “Comments and Our Evaluation” section of this report.

2. We disagree with Arthur Andersen and the NASA IG that the audit of

the fiscal year 1999 NASA financial statements met all professional

standards. As discussed in the body of this report and the “Comments

and Our Evaluation” section, Arthur Andersen’s work did not meet

professional standards in at least three key areas: (1) GAGAS

fieldwork standards relating to a sufficient understanding of the

internal control structure, (2) GAGAS fieldwork standards relating to

sufficient competent evidential matter, and (3) SAS No. 56

requirements for analytical procedures.

3. We agree that the $644 million SBR reporting error discussed in our

report represented less than 5 percent of NASA’s budgetary resources.

However, the total fiscal year 1999 SBR errors as reported in the NASA

fiscal year 2000 financial statements were nearly $1.3 billion. The

errors include not only the $644 million on the Recoveries line, but

also $644 million on the Obligations Incurred line. As noted in our

report, the fact that the House Committee on Science, a user of the

financial statements, questioned whether the amounts in the SBR were

correct, is an indicator that the error was material. In addition, the

$1.3 billion in errors is nearly 9 times greater than Arthur Andersen’s

audit materiality threshold of $150 million.

4. As stated in our report, Arthur Andersen did not identify all material

risks related to the SBR and Statement of Financing. For example, we

found inappropriate risk assessments related to Recoveries and

Undelivered Orders. In addition, as Arthur Andersen and the NASA IG

noted, there is a great deal of confusion related to reporting and

auditing of SBR information. This confusion further supports our

conclusion that Arthur Andersen’s low risk assessment related to the

budgetary statements was inappropriate.

5. As discussed in the “Comments and Our Evaluation” section, we did

consider work Arthur Andersen conducted in prior years’ audits.

Arthur Andersen provided us with what it represented to be all

working papers from fiscal year 1996 through 1999 that supported its

fiscal year 1999 opinions on the SBR and Statement of Financing. Our

GAO Comments
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 70 GAO-01-438. NASA's Statement of Budgetary Resources

conclusion that Arthur Andersen’s work was not adequate was based

on our review of the fiscal year 1996 through 1999 working papers.

6. We agree that the use of prior-year testing of controls is acceptable

under the conditions stated in GAGAS. However, Arthur Andersen’s

fiscal year 1996 through 1998 control work was not sufficient to

provide any reliance relating to key budgetary accounts, such as

Recoveries and Undelivered Orders. For example, because NASA’s

new ad hoc process relating to Recoveries was a significant change in

NASA procedures, Arthur Andersen’s reliance on its prior audits was

inappropriate and inconsistent with the conditions in GAGAS.

7. We disagree that the error was fully offset in the SBR. The SBR

presents three separate but related sections—Budgetary Resources,

Status of Budgetary Resources, and Outlays. As discussed in the

Background section of our report, each section has special meaning.

The $1.3 billion of errors in the fiscal year 1999 SBR resulted in

misstatements in both Total Budgetary Resources and Total Status of

Budgetary Resources. Because the errors net out in the Outlays

section, they have no impact on Total Outlays. We agree with Arthur

Andersen that the SBR misstatements had no effect on the Statement

of Financing.

8. We agree with Arthur Andersen that the reporting error did not impact

the Statement of Financial Position, Statement of Net Cost, and

Statement of Changes in Net Position. However, we disagree that these

three financial statements are the “key” financial statements. The SBR

and Statement of Financing are at least as important as the other three

financial statements and are required principal financial statements

because of the importance of budgetary reporting in the federal

government. Information on the status and use of budgetary resources

is critical to agency management and the Congress.

9. We disagree with Arthur Andersen’s statement that federal agencies’

ability to use Recoveries is far more complex than the draft report

suggests. Our report clearly states that certain recoveries of prior-year

obligations result in budgetary resources that are available for new

obligations, while others are available only for upward adjustments of

valid prior-year obligations.

10. Arthur Andersen states that other agencies received clean opinions

that were ultimately determined to contain reporting errors. We

disagree with Arthur Andersen’s characterization of the findings in our
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 71 GAO-01-438. NASA's Statement of Budgetary Resources

earlier report. Our report found significant differences between

amounts in the other agencies’ SBR and the P&F Schedules that were

not properly disclosed in notes to the financial statements as required.

However, unlike the fiscal year 1999 NASA SBR errors, the differences

we noted in our earlier study were not errors in the SBR. The issue is

whether Arthur Andersen performed an adequate audit regarding the

SBR that would have reasonably disclosed such an error on a principal

financial statement.

11. We disagree with Arthur Andersen that it is undisputed that the

reporting error in NASA’s 1999 SBR was due to NASA financial

management’s misunderstanding of the precise components of the

Recoveries line item. While management’s misunderstanding certainly

was a contributing factor, a fundamental reason for the misstatement

was an inadequacy in NASA’s management system. Specifically, the ad

hoc process that resulted in the misinterpretation and error would not

have been necessary if NASA had the required SGL accounts to

appropriately accumulate the required information during fiscal year

1999 in accordance with generally accepted accounting principles.

12. A fundamental reason for the errors relates to systems deficiencies at

NASA. We found no evidence of a deliberate attempt by NASA to gain

advantage as a result of these errors.

13. Arthur Andersen and the NASA IG make numerous references to

crosswalks to the SGL accounts as evidence that NASA’s systems

comply with FFMIA. OMB does allow for alternative codes as long as

there are crosswalks; however, in this case, NASA did not have

alternative codes for Recoveries and therefore did not have related

crosswalks to the SGL accounts.

14. As stated in our report, NASA’s fiscal year 2000 financial statement

audit was not complete when we completed our fieldwork, and

therefore we did not review the fiscal year 2000 NASA financial

statements or Arthur Andersen’s working papers supporting its fiscal

year 2000 audit to determine whether the fiscal year 1999 SBR errors

were appropriately reported or whether Arthur Andersen’s audit work

was adequate.

15. Our report accurately reflects the nature and significance of the SBR

errors and why Arthur Andersen’s work was not sufficient to support

its unqualified opinions on the SBR and Statement of Financing or its

conclusion that NASA’s systems substantially complied with FFMIA.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 72 GAO-01-438. NASA's Statement of Budgetary Resources

16. We found that the NASA IG had a reasonable checklist that it used to

oversee the Arthur Andersen audit and are pleased that the NASA IG

believes it was able to improve Arthur Andersen’s audit quality in the

areas mentioned. However, the NASA IG did not identify the

$1.3 billion of errors in the SBR or question the limited extent of the

audit procedures applied to the budgetary statements or to assess

compliance with FFMIA. As stated previously, the NASA IG has agreed

to implement our recommendation to review the procedures it uses to

oversee the work of its independent public accountants.

17. Although we agree with the NASA IG that GAGAS do not require an

audit opinion on internal controls or compliance with laws and

regulations, Arthur Andersen’s work was not sufficient to meet GAGAS

requirements relating to the auditor obtaining a sufficient

understanding of the internal control structure and assessing control

risk.

18. We disagree with the NASA IG’s characterization of Arthur Andersen’s

procedures relating to Recoveries as being valid analytical review

procedures. As discussed in our report, Arthur Andersen’s analytical

procedures were inadequate and did not meet the requirements of SAS

No. 56. Specifically, the standard requires that significant differences

be investigated and any explanation of the differences by management

be corroborated. SAS No. 56 calls for procedures that involve

comparisons of recorded amounts or ratios developed from recorded

amounts to expectations developed by the auditor. Assuming that the

fiscal year 1998 amount for Recoveries was correctly reported as $0,

the auditor expectation would likely have been that the fiscal year 1999

amount was $0. However, the reported amount was $686 million. This

test did not meet the requirements of SAS No. 56 because no

expectation was documented or used in the procedure, and Arthur

Andersen did not independently corroborate a questionable

explanation by NASA of the substantial change in the balance. It is

important to note that, according to NASA, the fiscal year 1998

Recoveries line item was understated by $80 million.
Appendix III: Comments From Arthur

Andersen LLP and NASA’s Inspector General

Page 73 GAO-01-438. NASA's Statement of Budgetary Resources

Dianne D. Guensberg, (202) 512-5285

Staff making key contributions to this report were Abraham Akresh,

Francine DelVecchio, Mary Arnold Mohiyuddin, Thanomsri Piyapongroj,

and Harold Reich.

Appendix IV: GAO Contact and Staff

Acknowledgments

GAO Contact

Acknowledgments

(192000)