Page 1 GAO-06-30R NRC Fiscal Year 2003 Restatement

United States Government Accountability Office

Washington, D.C. 20548

A

October 27, 2005

Mr. Jesse Funches

Chief Financial Officer

Nuclear Regulatory Commission 

The Honorable Hubert T. Bell

Inspector General

Nuclear Regulatory Commission 

Subject: Financial Audit: Restatements to the Nuclear Regulatory 

Commission’s Fiscal Year 2003 Financial Statements

As you know, the Secretary of Treasury, in coordination with the Director 

of the Office of Management and Budget (OMB), is required to annually 

prepare and submit audited financial statements of the U.S. government to 

the President and Congress. We are required to audit these consolidated 

financial statements (CFS) and report on the results of our work.1

 An issue 

meriting concern and close scrutiny that emerged during our fiscal year 

2004 CFS audit was the growing number of Chief Financial Officers (CFO) 

Act agencies that restated2

 certain of their financial statements for fiscal 

year 2003 to correct errors.3

 Errors in financial statements can result from 

mathematical mistakes, mistakes in the application of accounting 

principles, or oversight or misuse of facts that existed at the time the 

financial statements were prepared. Frequent restatements to correct 

errors can undermine public trust and confidence in both the entity and all 

responsible parties. Further, when restatements do occur, it is important 

that financial statements clearly communicate, and readers of the restated 

financial statements understand, that the financial statements originally 

issued by management in the previous year and the opinion thereon should 

1

The Government Management Reform Act of 1994 has required such reporting, covering 

the executive branch of government, beginning with financial statements prepared for fiscal 

year 1997. 31 U.S.C. § 331 (e). The federal government has elected to include certain 

financial information on the legislative and judicial branches in the CFS as well.

2

A financial statement restatement occurs when an entity either voluntarily or prompted by 

its auditors or regulators revises public financial information that has previously been 

reported.

3

According to Federal Accounting Standards Advisory Board, Statement of Federal 

Financial Accounting Standards (SFFAS) No. 21, Reporting Corrections of Errors and 

Changes in Accounting Principles, prior period financial statements presented should be 

restated only to correct errors that caused such statements to be materially misstated.
Page 2 GAO-06-30R NRC Fiscal Year 2003 Restatement

no longer be relied on and instead the restated financial statements and 

related auditor’s opinion should be used.

Eleven of the 23 CFO Act agencies4

 restated certain of their financial 

statements for fiscal year 2003. Five CFO Act agencies had restatements in 

fiscal year 2003 covering their fiscal year 2002 financial statements. Three 

CFO Act agencies had restatements covering both years. We noted that the 

extent of the restatements to CFO Act agencies’ fiscal year 2003 financial 

statements varied from agency to agency, ranging from correcting two line 

items on one agency’s balance sheet to correcting numerous line items on 

several of another agency’s financial statements. In some cases, the net 

operating results of an agency were affected by the restatement. The 

amounts of the agencies’ restatements ranged from several million dollars 

to more than $91 billion.

Nine of the 11 agencies that had restatements for fiscal year 2003 received 

unqualified opinions on their originally issued fiscal year 2003 financial 

statements. The auditors for 6 of these 9 agencies issued unqualified 

opinions on the restated financial statements, replacing the previous 

unqualified opinions on the respective agencies’ original fiscal year 2003 

financial statements. The auditors for 2 of these 9 withdrew their 

unqualified opinions on the fiscal year 2003 financial statements and issued 

other than unqualified opinions on the respective agencies’ restated fiscal 

year 2003 financial statements because they could not determine whether 

there were any additional misstatements and the effect of any such 

misstatements on the restated fiscal year 2003 financial statements. For the 

remaining agency, the principal auditor of the agency’s fiscal year 2004 

financial statements was not the principal auditor of the agency’s fiscal 

year 2003 financial statements, and an audit opinion on the agency’s 

restated fiscal year 2003 financial statements was not issued.

Our review focused on the 9 agencies with restatements for fiscal year 2003 

that received unqualified opinions on their originally issued fiscal year 2003

4

The Federal Emergency Management Agency (FEMA) was transferred to the Department 

of Homeland Security (DHS) effective March 1, 2003. With this transfer, FEMA was no 

longer required to prepare and have audited stand-alone financial statements under the CFO 

Act, leaving 23 CFO Act agencies for the remainder of fiscal year 2003 and for fiscal year 

2004. The DHS Financial Accountability Act, Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 

2004), added DHS to the list of CFO Act agencies, increasing the number of CFO Act 

agencies again to 24 beginning in fiscal year 2005.
Page 3 GAO-06-30R NRC Fiscal Year 2003 Restatement

financial statements.5 These were the Department of Agriculture, 

Department of State, Department of Justice, Department of Transportation, 

Department of Health and Human Services, General Services 

Administration, National Science Foundation, Nuclear Regulatory 

Commission (NRC), and Office of Personnel Management.

Because of the varying nature and circumstances surrounding the 

restatements, we are issuing a number of separate reports on the matter. 

This report communicates our observations regarding NRC’s fiscal year 

2003 restatements. Going forward, we hope that the lessons learned from 

the fiscal year 2003 restatements, together with our recommendations, will 

help (1) NRC avoid the need for restatements to its future financial 

statements and (2) ensure that NRC’s auditor applies appropriate audit 

procedures in future audits to test for unrecorded and unbilled licensee 

fees and related internal controls.

We reviewed four key areas with respect to the restatements of NRC’s fiscal 

year 2003 financial statements: (1) the nature and cause of the errors that 

necessitated the restatements, including planned corrective actions by the 

agency and its auditors; (2) the timing of communicating the material 

misstatement to users of the financial statements; (3) the extent of 

transparency6

 exhibited in disclosing the nature and impact of the material 

misstatement in the financial statements and the reissued auditor’s report; 

and (4) audit issues that contributed to the failure to detect the errors that 

necessitated the restatements during the audit of the agency’s fiscal year 

2003 financial statements.

Results in Brief NRC’s lack of effective internal controls over unrecorded and unbilled 

licensee fees7

 led to the material misstatement that necessitated the 

restatement of NRC’s originally issued fiscal year 2003 financial statements. 

NRC’s management representation letter, dated November 20, 2003, 

included representations that NRC’s fiscal year 2003 financial statements 

were fairly stated and that the agency had effective internal controls. As of 

5

The 2 agencies that had restatements for fiscal year 2003 but did not receive unqualified 

opinions on their originally issued fiscal year 2003 financial statements were the 

Department of Defense and the Small Business Administration.

6

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

7

Licensee fees include fees related to reactor and materials inspections.
Page 4 GAO-06-30R NRC Fiscal Year 2003 Restatement

the same date, the contracted independent public accountant (IPA) dated 

its audit report, which contained an unqualified, or clean, audit opinion on 

NRC’s fiscal year 2003 financial statements. On December 17, 2003, certain 

NRC officials became aware that (1) there was an underbilling error of at 

least $500,000 for fiscal year 2003,8

 (2) the underbilling error may have 

resulted from an internal control deficiency within NRC’s licensee fee 

billing system that could affect the reliability of NRC’s fiscal year 2003 

financial statements, and (3) further research was needed to determine the 

cause of the error and whether the error was an isolated incident or a 

systemic billing system weakness. Nevertheless, on December 19, 2003,9

over 1 month prior to OMB’s required January 30, 2004 due date for federal 

agencies to issue their fiscal year 2003 financial statements, NRC submitted 

its management representation letter and financial statements to OMB. 

Consistent with OMB Bulletin 01-02, Audit Requirements for Federal 

Financial Statements,10 NRC should have timely notified the IPA of the 

error and related internal control deficiency, but never did. According to 

the IPA, it was not aware of the material error until May 2004 when it 

independently discovered that NRC had recorded and billed licensee fees 

during fiscal year 2004 that instead should have been recorded and billed 

during fiscal year 2003. The IPA determined that the underbilling error 

resulted from certain internal control deficiencies related to NRC’s fee 

billing system. 

Based on its interpretation of the American Institute of Certified Public 

Accountants (AICPA) Codification of Auditing Standards, AU section 561, 

Subsequent Discovery of Facts Existing at the Date of the Auditor’s 

Report, the IPA stated that upon discovery of the error in May 2004, it 

discussed the material error with NRC but did not advise NRC to make 

appropriate disclosures of the newly discovered facts and their effects on 

the fiscal year 2003 financial statements to persons who may have been 

relying on such financial statements and related auditor’s report. The IPA 

told us that it came to this decision because (1) it considered issuance of 

8

Underbilling error was discovered by NRC as a result of an inquiry from an NRC licensee.

9

Although OMB encouraged CFO Act agencies to accelerate issuance of their fiscal year 

2003 audited financial statements to November 15, 2003 (or as close to that date as possible) 

in preparation for the accelerated reporting date for fiscal year 2004, OMB’s required due 

date for agencies’ fiscal year 2003 audited financial statements was January 30, 2004. 

10Office of Management and Budget, Bulletin 01-02, Audit Requirements for Federal 

Financial Statements (Washington, D.C.: Oct. 16, 2000).
Page 5 GAO-06-30R NRC Fiscal Year 2003 Restatement

the fiscal years 2004 and 2003 comparative financial statements to be 

imminent and (2) in May 2004, it did not think that any users would still be 

relying on the fiscal year 2003 financial statements and related auditor’s 

report. However, in our view, the issuance of NRC’s fiscal years 2004 and 

2003 comparative financial statements, which occurred in November 2004, 

was not imminent when the IPA discovered the material error in May 2004, 

more than 5 months prior to OMB’s November 15, 2004 deadline for federal 

agencies to issue their fiscal year 2004 financial statements. In addition, the 

IPA did not provide us with documentation of the basis for its conclusion 

that users were not likely to still be relying on the fiscal year 2003 financial 

statements and would not attach importance to the correction of the 

material error. In our view, such documentation should include the

identification of potential users, such as Congress, OMB, GAO, and the 

Department of the Treasury (Treasury), and an analysis of whether the 

users would likely be relying on the fiscal year 2003 financial statements. 

We have some concerns that, without notification, anyone who may have 

been relying on the fiscal year 2003 financial statements would not have 

known from May to mid-November 2004, or for more than 5 months, that 

NRC’s originally issued financial statements, which received an unqualified 

opinion, were materially misstated and should not be relied on. 

In addition to NRC’s lack of effective internal controls over licensee fees, 

we noted two areas where additional audit procedures could have 

identified the problem at the time of the fiscal year 2003 audit. During its 

audit of the fiscal year 2003 financial statements, the IPA did not design or 

perform sufficient audit procedures to (1) determine whether all eligible 

licensee fees11 were billed and properly presented in the financial 

statements and (2) detect the internal control deficiencies related to NRC’s 

recording of licensee fees.

We are making a recommendation to NRC’s CFO to determine whether the 

new procedures, which NRC represents as having been established, 

effectively ensure that all eligible licensee fees are properly recorded and 

billed. We are also making a recommendation to NRC’s Inspector General 

to work with the IPA so that audit procedures to test for unrecorded and 

unbilled licensee fees and related internal controls are fully and effectively 

implemented.

11Certain fees are exempt from fee collection by regulation. 
Page 6 GAO-06-30R NRC Fiscal Year 2003 Restatement

In commenting on a draft of this report, NRC’s CFO and Inspector General 

both concurred with the recommendation that we made to each of them. 

We also received a technical comment from NRC’s CFO, which we have 

incorporated. 

Background In conducting the fiscal year 2004 audit of the CFS, we reviewed the 23 

CFO Act agencies’ performance and accountability reports for possible 

restatements and identified 11 agencies that had restated certain of their 

audited fiscal year 2003 financial statements.

The primary intended users of federal agencies’ financial reports are 

citizens, Congress, federal executives, and federal program managers.12

Each of these groups may use federal agencies’ financial statements to 

satisfy their specific needs. Citizens are interested in many aspects of the 

federal government, particularly federal programs that affect their financial 

well-being. Congress is interested in monitoring and assessing the 

efficiency and effectiveness of federal programs. Federal executives, such 

as central agency officials at OMB and Treasury, are interested in federal 

financial statements to assist the President of the United States. OMB 

assists the President in overseeing the preparation of the federal budget by 

formulating the President’s spending plans, evaluating the effectiveness of 

agency programs, assessing competing funding demands among agencies, 

and setting funding priorities. Treasury assists the President in managing 

the finances of the federal government and prepares the CFS, which is 

based on audited financial statements prepared by federal agencies. GAO 

audits the CFS and reports on the results of its audit. Finally, federal 

program managers use agency financial statements as tools for managing 

their operations within the limits of the spending authority granted by 

Congress. 

The primary accounting and auditing standards that apply to restatement 

disclosures by federal entities are the Federal Accounting Standards 

Advisory Board’s Statement of Federal Financial Accounting Standards

12Federal Accounting Standards Advisory Board, Statement of Federal Financial Accounting 

Concepts No. 1, Objectives of Federal Financial Reporting. 
Page 7 GAO-06-30R NRC Fiscal Year 2003 Restatement

(SFFAS) No. 21, Reporting Corrections of Errors and Changes in 

Accounting Principles, and AU section 561.13

Objective, Scope, and 

Methodology

The objective of our review of restatements of NRC’s fiscal year 2003 

financial statements was to determine the nature and cause of the errors, 

the transparency and timing of communicating the material misstatements, 

any audit issues relating to such misstatements, and any actions being 

taken to help preclude similar errors from occurring in the future.

We reviewed the nature and causes of the restatements, and we also 

examined corrective actions taken by NRC to help preclude similar errors 

from occurring in the future. We interviewed the preparers and auditors of 

NRC’s fiscal year 2003 financial statements, including staff from the 

agency’s Office of Inspector General (OIG), and we obtained and reviewed 

relevant audit documentation. Our work was not designed to and we did 

not test the accuracy or appropriateness of the restatements.

In our review, we considered certain accounting and auditing standards, 

including SFFAS No. 21; OMB Bulletin 01-02; the Financial Accounting 

Standards Board’s Statement of Financial Accounting Standards No. 16, 

Prior Period Adjustments; and the AICPA Codification of Auditing 

Standards, AU section 420, Consistency of Application of Generally 

Accepted Accounting Principles, AU section 508, Reports on Audited 

Financial Statements, and AU section 561.

We performed our review of the restatements of NRC’s fiscal year 2003 

financial statements from December 2004 to July 2005 in accordance with 

U.S. generally accepted government auditing standards.

We requested comments on a draft of this report from NRC’s CFO and 

Inspector General or their designees. Written comments from NRC’s CFO 

and Inspector General are reprinted in enclosures I and II, respectively, and 

are also discussed in the Agency Comments section.

13Generally accepted government auditing standards incorporate AICPA reporting and 

auditing standards unless the Comptroller General of the United States excludes them by 

formal announcement.
Page 8 GAO-06-30R NRC Fiscal Year 2003 Restatement

Issues Related to 

Restatements of NRC’s 

Fiscal Year 2003 

Financial Statements 

With respect to restatement of certain of NRC’s fiscal year 2003 financial 

statements, we identified the following three areas that need improvement: 

(1) certain internal controls related to NRC’s recording of licensee fees; 

(2) communication by NRC with the IPA, OIG, and users of the financial 

statements concerning the identified material error; and (3) audit 

procedures for unrecorded and unbilled licensee fees and related internal 

controls. These issues are discussed in detail below. 

Material Error Resulted 

from Deficiencies in Certain 

Internal Controls Related to 

Recording Licensee Fees 

In fiscal year 2004, NRC restated certain of its fiscal year 2003 financial 

statements to reflect approximately $3 million in unrecorded and unbilled 

licensee fees,14 which resulted from certain internal control deficiencies 

related to NRC’s fee billing system. NRC inspects its licensees’ facilities and 

users of nuclear materials to ensure compliance with regulatory 

requirements and recovers most of its appropriations from inspection fees 

paid by NRC licensees. If NRC does not bill its licensees or does not bill 

them for the full amount they owe, NRC’s Accounts Receivable and related 

revenue will be understated and the federal government may not receive 

the full amount of fees to which it is entitled. 

According to NRC’s IPA, during fiscal year 2003, the fee billing system 

failed to include all billable hours in the invoices issued to NRC’s licensees. 

The IPA stated that this condition resulted from the following deficiencies: 

• inadequate testing by NRC of the fee billing system to ensure that 

modifications to system software performed as intended, 

• use of intensive manual processes, and 

14According to NRC officials, since NRC was already restating the fiscal year 2003 financial 

statements for this $3 million material error, it also decided to correct for less significant 

errors that had been identified. Specifically, the fiscal year 2003 Balance Sheet was restated 

for $777 thousand relating to capital leases, and the fiscal year 2003 Statement of Budgetary 

Resources was restated for $4.7 million for unfilled customer orders. These errors were not 

deemed material by NRC’s IPA.
Page 9 GAO-06-30R NRC Fiscal Year 2003 Restatement

• lack of comprehensive quality assurance procedures over the billing 

process.15

As a result, NRC had to restate its originally issued fiscal year 2003 Balance 

Sheet, Statement of Net Cost, Statement of Changes in Net Position, and 

Statement of Financing to accurately reflect approximately $3 million in 

licensee fees that had not been recorded and billed.

The $3 million unrecorded and unbilled licensee fees error represented 

about 5 percent of the Other Intragovernmental Liabilities16 and about 6 

percent of the Accounts Receivable balances on the originally issued fiscal 

year 2003 Balance Sheet, approximately 5 percent of Net Cost of 

Operations17 on NRC’s originally issued fiscal year 2003 Statement of Net 

Cost,18 about 5 percent of the Total Financing Sources component of 

Cumulative Results of Operations on NRC’s originally issued fiscal year 

2003 Statement of Changes in Net Position, and approximately 4 percent of 

the Total Resources Used to Finance Activities on NRC’s originally issued 

fiscal year 2003 

Statement of Financing. Because at the time of the issuance of NRC’s fiscal 

years 2004 and 2003 comparative financial statements there was 

insufficient evidence to support the completeness of the Accounts 

15Procedures to detect potential underbillings were not effective because they did not 

provide for reconciliations of data generated by different sources. Such reconciliations are 

used to identify unrecorded and unbilled fees and erroneous licensee invoices. In addition, 

some reports produced by the fee system did not contain totals to enable comparisons of 

invoices to data sources, thus complicating the process to detect potential underbillings.

16The Other Intragovernmental Liabilities account increased by approximately $3 million 

from approximately $57 million, as originally reported in fiscal year 2003, to approximately 

$60 million when restated in the fiscal year 2004 and 2003 comparative financial statements. 

The underbilling error affected Other Intragovernmental Liabilities because NRC incurs a 

liability to offset the net accounts receivable for fees assessed. This liability represents 

amounts which, when collected, will be transferred to Treasury to offset NRC’s 

appropriations in the year collected. Therefore, the Total Financing Sources component of 

Cumulative Results of Operations on the Statement of Changes in Net Position and the Total 

Resources Used to Finance Activities on the Statement of Financing were restated to 

capture the effect of NRC’s obligation to transfer funds to Treasury for fees assessed.

17The $3 million licensee fees error represented almost 1 percent of the Earned Revenues 

from the Public reported on NRC’s originally issued fiscal year 2003 Statement of Net Cost. 

18In addition, Net Cost of Operations reported on NRC’s originally issued fiscal year 2003 

Statement of Changes in Net Position and Statement of Financing were also understated by 

approximately 5 percent.
Page 10 GAO-06-30R NRC Fiscal Year 2003 Restatement

Receivable and related revenue balances reported in NRC’s restated fiscal 

year 2003 financial statements, the IPA updated the originally issued 

unqualified opinion to a qualified opinion. 

According to NRC officials, the fee billing system has since been modified 

to improve the functionality of the system’s interface, and the acceptance 

testing of fee billing system software modifications has been expanded and 

is now independently validated and verified. The officials also stated that 

they implemented a manual internal control procedure that compares the 

number of inspection hours billed by NRC on licensee invoices against the 

number of hours eligible to be charged to inspections by NRC staff as 

indicated in the NRC inspection database. These procedures are to be 

performed throughout the year and thus are intended to determine, on a 

timely basis, that all eligible hours have been billed. 

Identified Material Error 

Was Not Communicated 

Timely

NRC’s management representation letter, dated November 20, 2003, 

included representations that NRC’s fiscal year 2003 financial statements 

were fairly stated and that the agency had effective internal controls. As of 

the same date, the IPA dated its audit report, which contained an 

unqualified, or clean, audit opinion on NRC’s fiscal year 2003 financial 

statements. On December 17, 2003, certain NRC officials became aware 

that (1) there was an underbilling error of at least $500,000 for fiscal year 

2003, (2) the underbilling error may have resulted from an internal control 

deficiency within NRC’s licensee fee billing system that could affect the 

reliability of NRC’s fiscal year 2003 financial statements, and (3) further 

research was needed to determine the cause of the error and whether the 

error was an isolated incident or a systemic billing system weakness. 

Nevertheless, on December 19, 2003, over 1 month prior to OMB’s required 

January 30, 2004 due date for federal agencies to issue their fiscal year 2003 

financial statements, NRC submitted its management representation letter 

and financial statements to OMB. 

Subsequently, NRC researched the problem and by February 2004 had 

completed a preliminary review of NRC’s fiscal year 2003 licensee fees. 

This review identified a total of about $2.4 million of unrecorded and 

unbilled licensee fees for fiscal year 2003. NRC continued to research the 

issue and by November 2004 found additional unrecorded and unbilled 

licensee fees. In total, approximately $3 million in unrecorded and unbilled 

licensee fees was identified for fiscal year 2003. 
Page 11 GAO-06-30R NRC Fiscal Year 2003 Restatement

According to the OIG, despite the fact that NRC officials met with the 

agency’s IPA and OIG on several occasions between the time that NRC’s 

staff discovered the billing error and the IPA subsequently discovered the 

error, NRC did not report the billing error to the IPA or OIG. Specifically,

the IPA and OIG stated that they were totally unaware of the error until the 

IPA discovered in May 2004 that NRC, as a result of the error, had recorded 

licensee fees and issued bills during fiscal year 2004 for licensee fees that 

instead should have been recorded and billed in fiscal year 2003. In 

accordance with OMB Bulletin 01-02, there shall be open and timely 

communication throughout the audit process between agency officials, 

including the CFO and the OIG, as well as the IPA if one is used, which 

would include potential audit findings, materially misstated or unsupported 

amounts in the financial statements, and material weaknesses in internal 

control. Accordingly, NRC officials had a responsibility to report the billing 

error and, if known, the cause of the error to the IPA when NRC became 

aware of it on December 17, 2003, because of the effect that the error could 

have on the fiscal year 2003 financial statements. Failure to timely provide 

this information is a serious matter that violates the tenets of the 

relationship between the audited entity and the auditor. As a result, NRC’s 

OIG initiated an investigation of the matter and issued an internal report 

dated February 14, 2005, which we reviewed as part of our work, that 

discusses the details of the material error noted above.

After NRC’s IPA independently discovered the error in May 2004, the IPA 

discussed the error with NRC but did not advise NRC to notify the users of 

the financial statements, such as Congress, OMB, GAO, and Treasury, about 

the material error. According to AU section 561, once the auditor becomes 

aware of subsequently discovered information that is found to be both 

reliable and to have existed at the date of the auditor’s report, the auditor 

should take certain actions if the nature and effect of the matter are such 

that (1) the auditor’s report would have been affected if the information 

had been known to the auditor at the date of the report and had not been 

reflected in the financial statements and (2) the auditor believes there are 

persons currently relying or likely to rely on the financial statements who 

would attach importance to the information. If these conditions are met, 

the auditor should advise the reporting entity to make appropriate 

disclosures of the newly discovered facts and their effects on the financial 

statements to persons who are known to be relying or who are likely to rely 

on the financial statements and the related auditor’s report. AU 561 states 

that when issuance of financial statements accompanied by the auditor’s 

report for a subsequent period is imminent, so that disclosure is not 

delayed, appropriate disclosure of the revision can be made in such 
Page 12 GAO-06-30R NRC Fiscal Year 2003 Restatement

statements instead of reissuing the earlier statements. AU section 561 also 

states that if a material error in the prior year financial statements has been 

discovered but the effect of the subsequently discovered information 

cannot be quantified without a prolonged investigation, appropriate 

disclosure would consist of the reporting entity notifying users known or 

likely to be relying on the financial statements and the related auditor’s 

report that the statements and auditor’s report should not be relied on and 

that revised financial statements and a revised auditor’s report will be 

issued upon completion of an investigation. AU section 561 further states 

that the auditor should take whatever steps are necessary to be satisfied 

that the reporting entity has made the appropriate disclosures.

However, until the issuance of NRC’s fiscal years 2004 and 2003 

comparative financial statements on November 15, 2004, users of NRC’s 

financial statements were not aware that certain of the fiscal year 2003 

financial statements originally issued were materially misstated. Based on 

its interpretation of AU 561, the IPA stated that it discussed the error with 

NRC but did not advise NRC to make appropriate disclosures of the newly 

discovered facts and their effects on the fiscal year 2003 financial 

statements to persons known to rely or likely to rely on such financial 

statements and related auditor’s report. The IPA told us that it came to this 

decision because (1) it considered issuance of the fiscal years 2004 and 

2003 comparative financial statements to be imminent and (2) in May 2004, 

it did not think that any users would still be relying on the fiscal year 2003 

financial statements and related auditor’s report. However, in our view, the 

issuance of NRC’s fiscal years 2004 and 2003 comparative financial 

statements, which occurred in November 2004, was not imminent when the 

IPA discovered the material error in May 2004, more than 5 months prior to 

OMB’s November 15, 2004 deadline for federal agencies to issue their fiscal 

year 2004 financial statements. In addition, the IPA did not provide us with 

documentation of the basis for its conclusion that users were not likely to 

still be relying on the fiscal year 2003 financial statements and would not 

attach importance to the correction of the material error. In our view, such 

documentation should include identification of potential users, such as 

Congress, OMB, GAO, and Treasury, and an analysis of whether the users 

would likely be relying on the fiscal year 2003 financial statements. We 

have concerns that, without notification, anyone who may have been 

relying on the fiscal year 2003 financial statements would not have known 

from May to mid-November 2004, or for more than 5 months, that NRC’s 

originally issued financial statements, which received an unqualified 

opinion, were materially misstated and should not be relied on.
Page 13 GAO-06-30R NRC Fiscal Year 2003 Restatement

Audit Procedures Did Not 

Detect Unrecorded and 

Unbilled Licensee Fees and 

Related Internal Control 

Deficiencies

The above-noted material error was not discovered during the audit of 

NRC’s fiscal year 2003 financial statements because the IPA did not design 

or perform sufficient audit procedures to (1) determine whether all eligible 

licensee fees were billed and properly presented in the financial statements 

and (2) detect the previously noted internal control deficiencies related to 

NRC’s recording of licensee fees.

According to the Financial Audit Manual (FAM),19 the auditor should 

perform audit procedures to test for all significant assertions20 in 

significant financial statement line items and accounts. The FAM states that 

an assertion is significant if misstatements in the assertion could exceed 

test materiality for the related line item, account, or disclosure. Based on 

the materiality of NRC’s Accounts Receivable and related revenue and the 

potential for material understatement, the auditor should have identified 

the completeness assertion as significant and performed audit procedures 

to determine whether all applicable fees were billed and presented in the 

financial statements. To test for completeness, the auditor should (1) select 

from an independent population of items that should be recorded in the 

account, (2) select items that should be recorded from a source that is 

likely to contain all the items that should be recorded, and (3) determine 

whether the selected items are included in the recorded balance. However, 

although the IPA did perform certain audit procedures during fiscal year 

2003 to test Accounts Receivable and related revenue, the IPA did not 

design or perform audit procedures to test for the completeness assertion. 

For example, we found no documentation of audit procedures to compare 

the total number of inspection hours billed by NRC on licensee invoices 

against the total number of hours charged to inspections by NRC staff in 

the NRC inspection database in order to determine if all eligible hours had 

been billed. 

Also, during the fiscal year 2003 audit, the IPA did not identify and report 

the internal control deficiencies, described earlier in this report, that led to 

NRC’s failure to bill for all applicable licensee fees. According to OMB 

19GAO/President’s Council on Integrity and Efficiency, Financial Audit Manual,

GAO-01-765G (Washington, D.C.: July 2001), updated by GAO-04-1015G and GAO-04-942G 

(July 2004). 

20Financial statement assertions are management representations that are embodied in 

financial statement components. The assertions can be either explicit or implicit and can be 

classified into the following categories: (1) existence or occurrence, (2) completeness, 

(3) rights and obligations, (4) valuation or allocation, and (5) presentation and disclosure.
Page 14 GAO-06-30R NRC Fiscal Year 2003 Restatement

Bulletin 01-02, auditors are responsible for performing sufficient tests of 

internal controls that have been properly designed and placed in operation 

to support a low level of assessed control risk.21 However, the IPA’s fiscal 

year 2003 audit procedures were not sufficient to detect NRC’s internal 

control deficiencies. The IPA stated that it took corrective action in fiscal 

year 2004 and designed audit procedures to detect unrecorded and unbilled 

licensee fees and to test related internal controls. 

Conclusions NRC did not disclose the material error it detected in its fiscal year 2003 

financial statements to its IPA or OIG. In addition, in our view, NRC did not 

timely disclose the material error to users of its financial statements. NRC 

corrected the error and issued restated financial statements as part of its 

fiscal years 2004 and 2003 comparative financial statements on November 

15, 2004, more than 8 months after NRC determined that the error totaled at 

least $2.4 million and about 11 months after it first became aware of an 

underbilling error. Going forward, it will be important for NRC to ensure 

that its new procedures, which it represents as having been implemented, 

effectively address the cause of the error. In addition, it will be important 

that the agency promptly notify its IPA and OIG of any errors it discovers in 

future financial statements. It will also be important that NRC’s auditor 

fully and effectively implement audit procedures to detect any similar 

errors or internal control deficiencies in the future.

Recommendations for 

Executive Action

We recommend that NRC’s Chief Financial Officer determine whether the 

new procedures, which NRC represents as having been established, 

effectively ensure that all eligible licensee fees are recorded and billed. 

We recommend that NRC’s Inspector General work with NRC’s IPA so that 

audit procedures to test for unrecorded and unbilled licensee fees and 

related internal controls are fully and effectively implemented. 

Agency Comments In written comments on a draft of this report, which are reprinted in 

enclosures I and II, NRC’s CFO and Inspector General, in separate letters, 

concurred with the recommendations that we made to each of them. We 

21Control risk is the risk that a material misstatement that could occur in an assertion will 

not be prevented or detected and corrected on a timely basis by the entity’s internal control. 
Page 15 GAO-06-30R NRC Fiscal Year 2003 Restatement

also received a technical comment from NRC’s CFO, which we have 

incorporated. 

Within 60 days of the date of this report, we would appreciate receiving a 

written statement on actions taken to address these recommendations.

We are sending copies of this report to the Chairmen and Ranking Minority 

Members of the Senate Committee on Homeland Security and 

Governmental Affairs; the Subcommittee on Federal Financial 

Management, Government Information, and International Security, Senate 

Committee on Homeland Security and Governmental Affairs; the House 

Committee on Government Reform; and the Subcommittee on Government 

Management, Finance and Accountability, House Committee on 

Government Reform. In addition, we are sending copies to the Fiscal 

Assistant Secretary of the Treasury and the Controller of OMB. This report 

is also available at no charge on GAO’s Web site at www.gao.gov.

We appreciate the courtesy and cooperation extended to us by your staff 

throughout our work. We look forward to continuing to work with your 

offices to help improve financial management in the federal government. If 

you have any questions about the contents of this report, please contact me 

at (202) 512-3406 or engelg@gao.gov.

Gary T. Engel

Director

Financial Management and Assurance
Page 16 GAO-06-30R NRC Fiscal Year 2003 Restatement

Enclosure I: Comments from the Chief 

Financial Officer, Nuclear Regulatory 

Commission
Page 17 GAO-06-30R NRC Fiscal Year 2003 Restatement

Enclosure II: Comments from the Inspector 

General, Nuclear Regulatory Commission

Note: A GAO comment

supplementing those in 

the report text appear 

at the end of this 

enclosure.

See comment 1.
Enclosure II: Comments from the Inspector 

General, Nuclear Regulatory Commission

Page 18 GAO-06-30R NRC Fiscal Year 2003 Restatement
Enclosure II: Comments from the Inspector 

General, Nuclear Regulatory Commission

Page 19 GAO-06-30R NRC Fiscal Year 2003 Restatement

The following is a comment on the Nuclear Regulatory Commission’s 

(NRC) Inspector General letter dated October 14, 2005. 

GAO Comment 1. NRC’s Inspector General noted that there is no “inspection database” 

that includes all the hours billed during a particular year. We agree. Our 

report does not state that the inspection database includes all the hours 

billed during a particular year. Instead, this report states that the NRC 

inspection database includes the hours eligible to be charged to 

inspections by NRC staff. NRC’s Inspector General also stated that data 

in the fee billing system comes from several sources and, as a result, 

the testing of completeness is accomplished through a variety of 

alternative techniques. While we agree that data in the fee billing 

system comes from several sources and that the testing of 

completeness can be accomplished through several means, the IPA’s 

fiscal year 2003 audit procedures were not designed or performed to 

test for the completeness assertion. 

(198394)
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