Testimony 

Before Congressional Requesters

United States Government Accountability Office

GAO 

For Release on Delivery 

Expected at 10:00 a.m. EST 

Thursday, October 27, 2005 NATIONAL AERONAUTICS

AND SPACE 

ADMINISTRATION 

Long-standing Financial 

Management Challenges 

Threaten the Agency’s 

Ability to Manage Its 

Programs 

Statement of Gregory D. Kutz, Managing Director 

Forensic Audits and Special Investigations 

Allen Li, Director 

Acquisition and Sourcing Management 

GAO-06-216T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-216T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Greg Kutz at 

(202) 512-9095 or Allen Li at (202) 512-3600. 

Highlights of GAO-06-216T, a testimony to 

congressional requesters 

October 27, 2005

NATIONAL AERONAUTICS AND SPACE 

ADMINISTRATION 

Long-standing Financial Management 

Challenges Threaten NASA’s Ability to 

Manage Its Programs 

NASA’s new core financial management system has not addressed many of 

the agency’s most significant management challenges—including improving 

contract management, producing credible cost estimates, and producing 

auditable financial statements. Because NASA did not use disciplined 

acquisition and implementation practices, the new system lacks basic 

functionality—such as the ability to (1) produce transaction-level support for 

key account balances, (2) properly identify adjustments or correcting 

entries, and (3) correctly and consistently post transactions to the right 

accounts. In addition, NASA did not use the implementation of its new 

system as an opportunity to transform its operations and instead, automated 

many of its existing, ineffective processes. Compounding its existing 

problems, NASA also failed to recognize the importance and need for highly 

skilled, well-trained financial personnel. 

Most federal agencies have been able to obtain unqualified audit opinions, 

while NASA’s financial statements remain unauditable. However, the 

problems experienced by NASA in its effort to reform its financial 

management organization and implement a modern, integrated financial 

management system are not uncommon among federal agencies. In fact, 

many federal financial system modernization efforts have exceeded 

budgeted cost and scheduled delivery dates without providing the 

anticipated system functionality. 

GAO’s related report, released today, details NASA’s progress toward 

implementing prior recommendations related to its financial management 

system. Overall progress has been slow, but in some areas NASA is 

beginning to take steps toward improvements. 

NASA’s Progress in Implementing GAO’s Recommendations 

Recommendations related to: Closed 

Partially

implemented Open

System component interoperability and enterprise 

architecture 1 6 23

Process reengineering and requirements definition, 

management, and testing 1 3 1

External financial reporting 0 0 4

Program life-cycle cost estimates and funding reserves 1 4 1

Total 3 13 29

Source: GAO. 

To its credit, NASA has recognized the need to enhance the capabilities and 

improve the functioning of its core financial management system. Strong 

executive leadership will be critical for ensuring that NASA’s financial 

management organization delivers the kind of analysis and forward-looking 

information it needs to effectively manage its many complex programs. 

Such leadership must be combined with effective organizational alignment, 

strategic human capital management, and end-to-end business process 

reform. 

The Subcommittees asked GAO to 

testify on the status of the National 

Aeronautics and Space 

Administration’s (NASA) financial 

management reform efforts. NASA 

faces major financial management 

challenges that, if not addressed, 

will weaken its ability to manage its

highly complex programs. NASA 

has been on GAO’s high-risk list 

since 1990 because of its failure to 

effectively oversee its contracts, 

due in part to the agency’s lack of 

accurate and reliable information 

on contract spending. GAO’s 

statement focuses on (1) NASA’s 

key financial management 

challenges, (2) how NASA’s 

financial management challenges 

compare with other federal 

agencies, (3) GAO’s assessment of 

NASA’s progress toward 

implementing recommendations 

aimed at improving its financial 

management system, and (4) the 

steps NASA must take to reform its 

financial management organization. 

In its related report, released today, 

GAO recommends that NASA 

develop an integrated enterprise 

master schedule and milestones—

including improvement activities 

and plans, dates for completion, 

performance measures, and clear 

accountability. 

 
Page 1 GAO-06-216T 

Mr. Chairmen and Members of the Subcommittees: 

Thank you for the opportunity to discuss the financial management 

challenges facing the National Aeronautics and Space Administration 

(NASA). Since its inception in 1958, NASA has undertaken numerous 

programs—involving earth and space science, aerospace technology, 

human space flight, and biological and physical research—that have 

resulted in significant scientific and technological advances and enhanced 

the quality of life on earth. In recent years, NASA has experienced a 

number of setbacks with its programs and operations, including massive 

cost overruns associated with the International Space Station and, with 

the Columbia tragedy, the need for the agency to develop return-to-flight 

strategies and mitigate the impact of the loss of the shuttle on the 

construction of the space station. On January 14, 2004, President Bush 

outlined a bold new vision for U.S. space exploration that will set a new 

course for NASA. However, a key to the successful execution of this new 

vision is NASA’s ability to address a number of long-standing financial 

management challenges that threaten NASA’s ability to manage its 

programs, oversee its contractors, and effectively allocate its budget 

across its numerous projects and programs. 

For years, NASA has cited deficiencies within its financial management 

systems as a primary reason for not having the data required to oversee its 

contractors, accurately account for the full cost of its operations, and 

efficiently produce accurate and reliable information needed for both 

management decision making and external reporting purposes. In fact, 

since 1990 we have identified NASA’s contract management as an area of 

high risk, in part because the agency lacked effective systems and 

processes for overseeing contract spending and performance. In April 

2000, NASA began its third attempt at modernizing its financial 

management processes and systems. The first two efforts were eventually 

abandoned after a total of 12 years and a reported $180 million investment. 

NASA expects this current effort, known as the Integrated Enterprise 

Management Program (IEMP),1

 to produce an integrated, agencywide 

financial management system through the acquisition and incremental 

implementation of commercial software packages and related hardware 

and software components. However, in April and November 2003—3 years 

 1

 The effort was formerly known as the Integrated Financial Management Program (IFMP). 

According to NASA, IFMP was renamed to reflect the addition of program management 

and labor distribution. 
Page 2 GAO-06-216T 

into NASA’s IEMP implementation effort and with significant investment 

already made in the program—we issued a series of four reports2

 that 

detailed weaknesses in NASA’s acquisition and implementation strategy 

for IEMP. As part of the four reports we issued, we made 45 

recommendations aimed at improving NASA’s overall management and 

implementation of IEMP. Our related report,3 released today, details our 

assessment of NASA’s progress toward implementing each of our 45 

recommendations. 

Our testimony today will focus on the results of our recent work related to 

NASA’s financial management challenges and the agency’s efforts to 

implement our recommendations related to IEMP. Specifically, I will 

discuss (1) NASA’s key financial management challenges, (2) how NASA’s 

financial management challenges compare with other federal agencies, 

(3) our assessment of NASA’s progress toward implementing our 

recommendations aimed at improving IEMP, and (4) the steps NASA must 

take to reform its financial management organization. 

We have performed work and issued several reports in response to 

legislative mandates and at the request of the House Science Committee. 

We also reviewed the reports of NASA’s Office of Inspector General and 

the independent public accounting (IPA) firms that audited NASA’s 

financial statements for fiscal year 2004 and for several previous years. 

However, we did not review the IPA’s underlying audit work. We 

performed all work in accordance with U.S. generally accepted 

government auditing standards. Our statement today is drawn from the 

findings and conclusions in reports issued by GAO, NASA’s Office of 

Inspector General, and the IPAs. 

In summary, NASA currently lacks the systems, processes, and human 

capital needed to produce credible cost estimates, oversee its contractors 

 2

 GAO, Business Modernization: Improvements Needed in Management of NASA’s 

Integrated Financial Management Program, GAO-03-507 (Washington, D.C.: Apr. 30, 

2003); Business Modernization: NASA’s Integrated Financial Management Program Does 

Not Fully Address Agency’s External Reporting Issues, GAO-04-151 (Washington, D.C.: 

Nov. 21, 2003); Information Technology: Architecture Needed to Guide NASA’s Financial 

Management Modernization, GAO-04-43 (Washington, D.C.: Nov. 21, 2003); and Business 

Modernization: Disciplined Processes Needed to Better Manage NASA’s Integrated 

Financial Management Program, GAO-04-118 (Washington, D.C.: Nov. 21, 2003). 

3

 GAO, Business Modernization: Some Progress Made toward Implementing GAO 

Recommendations Related to NASA’s Integrated Financial Management Program 

(IFMP), GAO-05-799R (Washington, D.C.: Sept. 9, 2005). 
Page 3 GAO-06-216T 

and their financial and program performance, control program costs, and 

produce timely, reliable financial information and auditable annual 

financial statements. Although NASA has acknowledged the need for 

improved financial management systems, processes, and human capital 

and has begun to take steps toward achieving that goal, progress has been 

slow. Because NASA did not adopt disciplined acquisition and 

implementation practices when implementing its financial management 

system, IEMP, it has been forced to take actions that should have been 

accomplished prior to implementation—causing the agency to 

unnecessarily invest time and resources to rework already deployed 

system components in order to produce a system that meets user 

requirements. Further, NASA did not use IEMP as an opportunity to 

transform the way it does business and instead, automated many of its 

existing ineffective business processes. As a result, NASA has yet to 

address its most significant program management and external financial 

reporting issues—including improving contract management, producing 

credible cost estimates, and properly accounting for nearly $38 billion of 

reported property, plant, and equipment (PP&E) and material. 

NASA has fundamental problems with its financial management 

operations that not only affect its ability to externally report reliable 

information, but more importantly, hamper its ability to effectively manage 

and oversee its major programs, such as the space station and shuttle 

program. Since 1990, we have identified NASA’s contract management as a 

high-risk area. This assessment has been based in part on our repeated 

finding that NASA does not have good cost-estimating processes or the 

financial information needed to develop good cost estimates for its 

programs, making it difficult for NASA to oversee its contracts and control 

costs. NASA’s difficulties are rooted in an agency culture that has not 

viewed financial management as an integral part of the agency’s program 

management decision process. Although NASA has acknowledged the 

need for improved financial management information and has begun to 

take steps toward achieving that goal, NASA currently lacks the systems, 

processes, and human capital needed to produce credible cost estimates, 

oversee its contractors and its financial and program performance, control 

program costs, and produce auditable financial statements. 

NASA’s Long-standing 

Financial 

Management 

Challenges Threaten 

the Agency’s Ability to 

Manage Its Programs 

and Produce 

Auditable Financial 

Statements 
Page 4 GAO-06-216T 

As currently designed, NASA’s financial management system has not 

addressed many of the agency’s most significant program management 

challenges—including improving contract management and producing 

credible cost estimates. Because program managers and cost estimators 

were not involved in the initial design and implementation of the core 

financial module, the system was not designed to meet their needs and 

thus, does not contain the cost data needed to manage NASA’s most 

complex projects and programs. This, combined with NASA’s failure to 

reengineer its contractor cost-reporting processes and a lack of trained 

financial management personnel, has undermined NASA’s recent efforts to 

improve its cost-estimating and contract monitoring capabilities. 

As we have reported numerous times, NASA consistently develops 

unrealistic cost and schedule estimates, which at least in part, contributes 

to the cost growth and schedule increases in many of its programs. To 

adequately oversee NASA’s largest and most complex programs and 

projects and mitigate potential cost growth and schedule increases, 

managers need well-defined processes for estimating the cost of programs 

and monitoring progress against those estimates. A well-recognized 

technique used to monitor progress on contracts, and a long-time NASA 

program management requirement, is earned value management (EVM).4

EVM goes beyond the two-dimensional approach of comparing budgeted 

costs to actuals. Instead, it attempts to compare the value of work 

accomplished during a given period with the work scheduled for that 

period. Recognizing the need to establish a disciplined cost-estimating 

process that incorporates the concepts of EVM, NASA developed a costestimating handbook in 2002—the first such guidance provided to its costestimating community and program and project managers. However, as we 

reported in April 2003, the information requirements of program managers 

and cost estimators, which were outlined in the cost-estimating handbook, 

were not considered when NASA designed and implemented the core 

financial module—the backbone of IEMP. 

When NASA deployed the core financial module in 2003, NASA’s costestimating guidance was inconsistently applied across programs. 

However, NASA has recently begun to take steps to institutionalize the use 

of more disciplined cost-estimating and contract-management processes. 

 4

 NASA requires EVM reporting and analysis for research and development contracts with a 

total anticipated final value of $70 million or more, and for production contracts with a 

total anticipated final value of $300 million or more. 

NASA Lacks the Systems, 

Processes, and Human 

Capital Needed to 

Effectively Manage Its 

Programs 
Page 5 GAO-06-216T 

For this initiative to be successful, as we have previously recommended, 

NASA will also need to reengineer its business processes—including its 

contractor cost-reporting requirements—and configure its financial system 

to accommodate the information required by program managers and cost 

estimators. However, NASA has yet to fully address weaknesses in its (1) 

contractor cost-reporting requirements and (2) financial and technical 

work-breakdown structure. 

• Weaknesses in NASA contractor cost-reporting requirements affect 

NASA’s ability to manage its programs and monitor contractor 

performance. NASA obtains contractor cost data from two primary 

sources—monthly contractor financial management reports (i.e., NASA 

Form 533), and monthly contractor cost performance reports. Both 

reports contain budget and actual cost data, but only contractor costperformance reports contain the data needed to perform EVM analysis. 

However, NASA did not evaluate the adequacy of its existing contractor 

cost-reporting vehicles to determine whether the reports met the 

information needs of program managers and cost estimators. Instead, 

NASA chose to use NASA Form 533 data to populate the core financial 

module without considering the merits of the data contained in the 

contractor cost-performance reports. Consequently, the cost data 

maintained in the core financial module are not adequate for monitoring 

contractor performance for NASA’s largest, most complex contracts—

those requiring EVM reporting and analysis. As discussed in our related 

report, through an initiative known as Project Management Information 

Improvement (PMI2

), NASA plans to enhance the core financial module to 

provide better project management information for decision-making 

purposes. As part of this initiative, NASA plans to evaluate its contractor 

cost-reporting policies and processes. 

• The core financial module as currently implemented does not capture cost 

information at the same level of detail that it is received from NASA’s 

contractors. Instead of implementing a financial-coding structure that met 

the information needs of program managers, NASA embedded the same 

financial-coding structure that it used in its legacy reporting systems in the 

core financial module. As a result, the availability of detailed cost data 

depends on the adequacy of NASA’s legacy-coding structure. Therefore, in 

some cases, contractor-provided cost data must be aggregated to a higher, 

less detailed level before they are posted against the legacy financialcoding structure. To its credit, as part of PMI2

, NASA is in the process of 

addressing this issue. However, NASA is still several years away from 

reaping the benefit of these planned improvements. 

In addition to ineffective business processes that result in inadequate 

management information, we reported in May 2004 that NASA’s use of 
Page 6 GAO-06-216T 

disciplined cost-estimating practices and EVM analysis was undermined by 

a lack or trained staff and ineffective use and placement of cost analysts 

across the agency. According to NASA officials, at the time, resource 

constraints have prevented the agency from staffing many project offices 

with appropriate personnel to fulfill all project functions. In response to 

recommendations we made in our May 2004 report, NASA has begun to 

take action to improve the efficiency and effectiveness of its costestimating and EVM analysis staffs. Specifically, NASA has included 

requirements in its March 2005 update to NASA’s Program and Project 

Management Processes and Requirements document that should facilitate 

efficient and effective use of cost-estimating EVM analysis staff. Further, 

according to NASA, it plans to provide both awareness briefings and indepth training to project management and cost-estimating and analysis 

personnel to ensure understanding and knowledge of NASA’s costestimating and program management policies and procedures. However, 

because these initiatives have only recently begun, we cannot determine to 

what degree these efforts will enable NASA to provide credible cost 

estimates. 

As discussed in our related report, released today, NASA has recognized 

the need to enhance the capabilities of the core financial module in order 

to better serve its program management and cost-estimating communities. 

As NASA proceeds with its planned improvements, it will be critical that 

the agency address weaknesses in its financial management systems, 

processes, and human capital in a comprehensive manner. Anything short 

of this will continue to put NASA’s programs at risk of cost and schedule 

overruns. 

NASA’s core financial module—the backbone of IEMP—does not 

currently address many of the agency’s most challenging external 

reporting issues—including problems related to budgetary accounting and 

property accounting. NASA’s independent financial statement auditors 

disclaimed an opinion on NASA’s fiscal year 2003 and 2004 financial 

statements. The disclaimer resulted from NASA’s inability to provide the 

auditors with sufficient evidence to support the financial statements 

throughout the fiscal year and at year end. Further, material weaknesses 

were found in NASA’s controls for: (1) financial systems, analysis, and 

oversight used to prepare the financial statements; (2) reconciling 

differences in Fund Balance with Treasury; (3) assuring that PP&E and 

materials are presented fairly; and (4) securing the computing 

environment that supports IEMP. Although many of these material 

weaknesses and NASA’s difficulty in producing auditable financial 

Ineffective Systems and 

Processes and 

Inadequately Trained 

Financial Management 

Personnel Hamper 

External FinancialReporting Efforts 
Page 7 GAO-06-216T 

statements can be linked to IEMP, weaknesses in NASA’s business 

processes and human capital management are also factors. Based on our 

review of NASA’s fiscal year 2005 interim financial statements, problems 

associated with NASA’s financial management persisted during fiscal year 

2005. 

Although NASA has been working to stabilize the core financial module 

since it was deployed in June 2003, NASA has yet to produce auditable 

interim or annual financial statements. In fact, as part of its report 

disclaiming an opinion on NASA’s fiscal year 2004 financial statements, 

NASA’s independent auditor reported that the core financial module was 

unable to (1) produce transaction-level detail in support of financial 

statement account balances, (2) identify adjustments or correcting entries, 

and (3) correctly and consistently post transactions to the right accounts. 

These are basic system requirements that are integral to the effective 

functioning of a financial management system. For this and other reasons, 

for fiscal year 2004, NASA’s auditor found that NASA’s financial system did 

not comply substantially with the requirements of the Federal Financial 

Management Improvement Act of 1996 (FFMIA).5

 FFMIA stresses the need 

for agencies to have systems that can generate timely, accurate, and useful 

financial information with which to make informed decisions, manage 

daily operations, and ensure accountability on an ongoing basis. NASA’s 

ongoing inability to meet the basic requirements of FFMIA is central to our 

reporting of NASA’s contract management as an area of high risk. 

Because NASA’s core financial module does not meet basic federal 

financial management system requirements, NASA was unable to provide 

support for certain fiscal year 2004 financial statement balances including 

accounts payable and undelivered orders. Additionally, NASA was unable 

to provide the auditors with subsidiary listings of cash receipts and cash 

disbursements to support its budgetary outlays during the fiscal year. 

Finally, according to the auditor’s report, NASA management continues to 

identify certain transactions that are being posted incorrectly due to 

improper configuration of the core financial module. Based on our review 

of NASA’s fiscal 2005 quarterly financial statement notes, many of these 

 5

 Pub. L. No. 104-208, div. A., § 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996). 

FFMIA requires CFO Act agencies to implement and maintain financial management 

systems that comply substantially with federal financial management system requirements, 

applicable federal accounting standards, and the U.S. Government Standard General 

Ledger at the transaction level. FFMIA also requires the auditors of agencies’ financial 

statements to report on such compliance. 
Page 8 GAO-06-216T 

same problems remain. For example, due to functionality and 

configuration issues, the system continues to create inappropriate 

transactional postings which result in abnormal balances and 

misstatements in unobligated balances and other budgetary accounts. In 

addition, due to data integrity issues from fiscal years 2003 and 2004, the 

opening balances for many budgetary and proprietary accounts in fiscal 

year 2005 are misstated. 

Similarly, as part of our recent work assessing NASA’s controls over travel 

and the use of its passenger aircraft,6

 NASA was unable to provide us with 

timely, reliable data and support for amounts spent on travel for fiscal year 

2004. After 4 months of trying to extract travel data from the IEMP system, 

NASA officials provided us with what they said was a complete population 

of travel-related disbursement transactions. However, the data provided 

were missing significant travel expense categories. For example, NASA 

had several contracts with major hotel chains to provide rooms at 

discount rates; however, NASA did not include the charges related to 

rooms purchased under these contracts as travel-related expenses. 

Further, although agency personnel regularly used NASA-owned 

passenger aircraft and other charter aircraft in support of official business 

travel, the cost associated with the use of these aircraft was not 

considered a travel expense and, therefore, the millions of dollars 

associated with this travel were not included in the data provided. In 

addition to missing data, the travel data NASA provided contained 

duplicate transactions and other data anomalies that made it appear as if 

NASA were paying the same bill multiple times, which, for those 

transactions we tested, was not the case. 

NASA’s failure to provide reliable data related to its travel disbursements 

is significant for three reasons. First, it illustrates the shortcomings of 

NASA’s financial management system and NASA’s ongoing struggle to 

provide transaction-level support for key account balances. Second, it 

indicates that the budget amounts NASA reports for travel each year to the 

Congress are significantly understated. As part of its budget submission, 

NASA is required to report estimated and actual obligations in terms of 

object classification. Object classes describe the nature of the service or 

article for which the obligations are first incurred. One such object class is 

object class 21, travel and transportation of persons. However, because 

 6

 GAO, NASA Travel: Passenger Aircraft Services Annually Cost Taxpayers Millions More 

Than Commercial Airlines, GAO-05-818 (Washington, D.C.: Aug. 26, 2005). 
Page 9 GAO-06-216T 

NASA does not properly classify certain travel expense categories as 

object class 21—including business travel on noncommercial aircraft and 

travel services procured using a contract—the agency travel budget is 

significantly understated. Finally, the problems we found with NASA’s 

travel data point to weaknesses in NASA’s full-cost accounting initiative. 

According to NASA, on October 1, 2003, NASA implemented its full-cost 

initiative and is currently operating in a total full-cost environment, which 

includes managing programs and projects in terms of their total costs; 

accounting for all costs as either direct or as general and administrative; 

and budgeting for a program or project’s full costs. However, if NASA has 

failed to capture and properly link travel-related costs to the appropriate 

object classification, it raises serious questions about the agency’s ability 

to properly classify other less straightforward cost categories. 

As discussed previously, NASA did not use IEMP as an opportunity to 

transform the way it does business and instead, NASA automated many of 

its existing, ineffective business processes—including its process for 

recording PP&E and material in its general ledger. As we reported in 

November 2003, NASA does not appropriately capture and record PP&E 

and material in the core financial module general ledger at the 

transactions level. Instead, NASA first expenses its property acquisitions 

and then updates the core financial module’s general ledger using periodic 

summary-level manual entries—for both NASA-held and contractor-held 

property. 

Recording PP&E and material in the general ledger at the transaction level 

or item level at the time NASA makes disbursement for it would provide 

independent control over these assets. However, just as it did with its 

legacy systems, NASA continues to (1) record the cost of PP&E and 

materials as expenses when initially incurred, (2) periodically determine 

which of those costs should have been capitalized, and (3) manually adjust 

these records at a summary level. Because NASA does not maintain 

transaction-level detail, the agency is not able to link the money it spends 

on the purchase or construction of its property to discrete property items, 

which is needed to provide independent control over these assets. 

Although NASA manually records property at the summary level for both 

NASA-held and contractor-held property, NASA’s most significant 

challenge with respect to property accounting stems from property 

located at contractor facilities—which accounts for $8.5 billion or about 

one-fourth of NASA’s reported $34.6 billion of PP&E and materials—

because NASA must rely solely on its contractors to periodically report 

summary-level information on these assets to NASA. Until NASA 

successfully implements a single integrated system for reporting property, 
Page 10 GAO-06-216T 

and develops a methodology to identify and record capital costs as they 

occur, the agency will continue to experience difficulties maintaining 

effective control over PP&E and ensuring that it is not vulnerable to fraud, 

waste, and abuse. 

In fiscal years 2003 and 2004, NASA’s auditor reported that continued 

weaknesses in NASA’s financial statement preparation processes resulted 

in major delays and errors in preparing fiscal year-end financial 

statements. According to the auditor’s report, NASA personnel were not 

consistently utilizing uniform accounting processes that record, classify, 

and summarize information for the preparation of financial statements. 

Further, because significant weaknesses exist in the core financial 

module, NASA management must compensate for the weaknesses by 

implementing and strengthening additional controls that will ensure that 

errors and irregularities are detected in a timely manner. However, 

according to the auditor’s report, many of these control procedures were 

not adequately performed. As such, the auditor recommended that NASA 

provide additional training for financial personnel to ensure that they 

understand their role in processing transactions, performing account 

analysis and reconciliations, and maintaining supporting documentation. 
Page 11 GAO-06-216T 

The problems experienced by NASA in its effort to reform its financial 

management organization and implement a modern, integrated financial 

management system are not uncommon. While the majority of CFO Act 

agencies have obtained clean or unqualified audit opinions on their 

financial statements, the underlying agency financial systems remain a 

serious problem. Agencies still generally lack the capacity to create the full 

range of information needed to effectively manage day-to-day operations. 

As shown in table 1, for fiscal year 2004, auditors reported that financial 

management systems of only 7 of the 23 CFO Act agencies7

 complied 

substantially with the requirements of FFMIA. 

Table 1: Auditors’ Determination of Financial Statement Opinion, Internal Controls, 

and FFMIA Compliance for Fiscal Year 2004 

Agencies 

Unqualified 

opinion 

FFMIA 

compliance

No material 

weaknesses

Department of Agriculture X 

Department of Commerce X X

Department of Defense 

Department of Education X 

Department of Energy X X X

Department of Health and Human 

Services 

X 

Department of Housing and Urban 

Development 

Department of the Interior X 

Department of Justice 

Department of Labor X X X

Department of State X 

Department of Transportation X 

 7

 There were initially 24 CFO Act agencies. See Pub. L. No. 101-576, §205, 104 Stat. 2838, 

2842-2843 (1990). The Federal Emergency Management Agency (FEMA), one of the 24 CFO 

Act agencies, was subsequently transferred to the Department of Homeland Security (DHS) 

effective March 1, 2003. With this transfer, FEMA is no longer required to prepare and have 

audited financial statements under the CFO Act, leaving 23 CFO Act agencies for fiscal year 

2004. For fiscal years 2003 and 2004, DHS was required to prepare audited financial 

statements under the Accountability of Tax Dollars Act of 2002 (Pub. L. No. 107- 289, 116 

Stat. 2049 (Nov. 7, 2002)). Because DHS was not a CFO Act agency, it was not subject to 

FFMIA 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 and deleted FEMA, 

increasing the number of CFO Act agencies again to 24 for fiscal year 2005. 

While Most Agencies 

Receive Unqualified 

Opinions on Their 

Financial Statements, 

Systems 

Modernization 

Continues to be a 

Challenge 
Page 12 GAO-06-216T 

Agencies 

Unqualified 

opinion 

FFMIA 

compliance

No material 

weaknesses

Department of the Treasury X 

Department of Veterans Affairs X 

Agency for International Development X 

Environmental Protection Agency X X

General Services Administration X X

National Aeronautics and Space 

Administration 

National Science Foundation X X X

Nuclear Regulatory Commission X 

Office of Personnel Management X 

Small Business Administration 

Social Security Administration X X X

Total 18 7 4

Source: GAO analysis. 

Similarly, as shown in table 1, auditors reported that only four agencies 

had no material internal control weaknesses. A material weakness is a 

condition that precludes the entity’s internal control from providing 

reasonable assurance that misstatements, losses, or noncompliance 

material in relation to the financial statements or to stewardship 

information would be prevented or detected on a timely basis. 

NASA’s problems implementing IEMP are similar to those of other 

agencies we have audited. Modernizing financial management systems is 

critical to instituting strong financial management so that the systematic 

measurement of performance, the development of cost information, and 

the integration of program, budget, and financial information for 

management reporting can be achieved. The federal government has spent 

billions of dollars developing and implementing financial management 

systems throughout federal agencies. However, many of these efforts have 

exceeded budgeted cost and scheduled delivery dates without providing 

the anticipated system functionality. 

Although the implementation of any major system is not risk free, 

organizations that follow and effectively implement disciplined processes, 

along with effective human capital and IT management practices, can 

reduce these risks to acceptable levels. We have issued numerous reports 

highlighting the problems associated with the inability to effectively 

implement disciplined processes in the areas of requirements 
Page 13 GAO-06-216T 

management, testing, data conversion and system interfaces, risk 

management, and project management. For example, ill-defined or 

incomplete requirements have been identified by many experts as a root 

cause of system failure. As a case in point, we recently reported8

 that the 

Army has encountered problems implementing a new system intended to 

improve depot operations. One reason that users had not been provided 

with the intended systems capabilities was because of the breakdown in 

the requirements management process. As a consequence, the Army 

implemented error-prone, time-consuming manual workarounds to 

minimize disruption to critical operations, and the financial management 

operations continued to be affected by systems problems. 

Similarly, many of NASA’s financial management problems outlined in our 

testimony are the result of an undisciplined, ineffective requirements 

management process—including the failure of NASA’s financial 

management system to (1) post transactions to the right accounts, (2) 

properly identify adjustment or correcting entries, and (3) provide the 

information program managers and cost estimators need to monitor 

contractor performance and produce credible cost estimates. To its credit, 

as discussed in our related report released today, NASA officials 

acknowledged that the requirements management and testing 

methodology and tools used to implement the core financial module did 

not result in requirements that were consistent, verifiable, and traceable, 

or that contained the necessary specificity to minimize the requirementrelated defects. NASA has recently implemented a new requirements 

management and testing methodology. However, NASA does not plan to 

use its improved requirements management process to properly define and 

document system requirements for already deployed IEMP modules until 

October 2006—when NASA plans to redefine the core financial module 

requirements as part of the core financial module system upgrade. 

 8

 GAO, Army Depot Maintenance: Ineffective Oversight of Depot Maintenance Operations 

and System Implementation Efforts, GAO-05-441 (Washington, D.C.: June 30, 2005). 
Page 14 GAO-06-216T 

Our related report, released today, details our assessment of NASA’s 

progress toward implementing our prior recommendations related to 

IEMP. Overall, progress has been slow, particularly with respect to 

developing a well-defined enterprise architecture, which is critical for 

guiding and constraining NASA’s investment in IEMP. However, in some 

other areas—such as NASA’s initiative to enhance the core financial 

module to provide better project management information—NASA is 

beginning to make progress. Of the 45 recommendations we made, NASA 

has closed 3 and partially implemented 13; however, 29 recommendations 

remain open. 

In 2003, we issued four reports outlining the considerable challenges 

NASA faces in meeting its IEMP commitments and providing NASA with 

the necessary tools to oversee its contracts and manage its programs. For 

example, in April 2003, we reported that NASA had deferred addressing 

the needs of key system stakeholders, including program managers and 

cost estimators, and was not following key best practices for acquiring and 

implementing the system. Then, in November 2003, we reported that NASA 

(1) acquired and deployed system components of IEMP without an 

enterprise architecture, or agencywide modernization blueprint, to guide 

and constrain program investment decisions; (2) did not use disciplined 

cost-estimating processes or recognized best practices in preparing its lifecycle cost estimates; and (3) had delayed implementation of many key 

external reporting capabilities. 

As part of the four reports we issued on IEMP, we made 45 

recommendations in the following areas: commercial system component 

integration; enterprise architecture development and use; risk mitigation; 

system requirements definition, management, and testing; external 

financial reporting; and program cost and schedule control. Since that 

time, NASA’s effort has been focused primarily on trying to stabilize the 

core financial module, the backbone of IEMP. However, in our report 

being released today, we recognize that NASA has begun taking steps to 

implement a number of our recommendations. Table 2 summarizes our 

assessment of the extent to which NASA has implemented our 

recommendations. 

NASA Has Begun 

Taking Steps to 

Implement Some of 

Our 

Recommendations for 

IEMP, but Progress Is 

Slow 
Page 15 GAO-06-216T 

Table 2: NASA’s Progress Toward Implementing GAO’s Recommendations 

Recommendations Closed 

Partially

implemented Open Comments 

Recommendations to improve NASA’s 

acquisition management practices. 

GAO-03-507 

0 2 0 Key elements of dependency analysis methodology still 

lacking. 

Suitability of already acquired components not evaluated 

before acquiring additional components. 

Recommendations regarding 

development and use of enterprise 

architecture. 

GAO-04-43

1 4 17 Architecture still missing important content and key 

architecture management processes not yet established. 

Already implemented system components not mapped to 

architecture. 

Recommendations to mitigate risk 

associated with relying on already 

deployed components. 

GAO-03-507 

0 0 6 NASA did not develop a formal corrective action plan to 

mitigate risks. 

Recommendations regarding defining 

program management needs and 

reengineering business processes. 

GAO-03-507 

1 0 1 Stakeholders engaged to define program management 

needs. 

Plans to reengineer contractor cost-reporting processes 

still several years away. 

Recommendations to improve NASA’s 

requirements management and testing 

processes. 

GAO-03-507 

0 3 0 New requirements management methodology and tools 

acquired for future modules but core financial module 

requirements not yet fully defined. 

Recommendations to improve external 

financial reporting. 

GAO-04-151

0 0 4 Little progress made in developing a detailed plan for 

delivering a financial system that substantially complies 

with federal standards. 

Recommendations regarding IEMP 

program life-cycle cost estimates and 

funding reserves. 

GAO-04-118 

1 4 1 Significant progress made in preparing life-cycle cost 

estimates but consistency and support for estimates still 

lacking. 

Total 3 13 29 

Source: GAO analysis. 

In its written comments on our draft report, NASA raised concerns that 

our characterization of certain recommendations as “open” did not 

appropriately recognize the full extent of the agency’s effort and suggested 

that we use instead “partially implemented” or, whenever appropriate, 

“closed.” We disagree with NASA’s assessment. 

We considered a recommendation closed when NASA provided us with 

documentation that demonstrated it had fully addressed the concerns we 

raised in our prior reports. Recognizing that many of our 

recommendations may take considerable time and effort to fully 

implement, we considered the recommendation to be partially 
Page 16 GAO-06-216T 

implemented if the documentation provided indicated that NASA had 

made significant progress addressing our concerns. For recommendations 

we consider open, NASA’s documentation indicated that the agency was 

either in the very early planning stages or had not yet begun to implement 

the recommendation. 

Successfully stabilizing and enhancing NASA’s financial management 

system are essential to enabling the agency to provide its managers with 

the kind of timely, relevant, and reliable information that they need to 

manage cost, measure performance, and make program-funding decisions. 

However, NASA cannot rely on technology alone to solve its financial 

management problems. Rather, NASA must transform its financial 

management organization into a customer-focused partner in program 

results, but its ability to do this hinges on the sustained leadership of 

NASA’s top executives. 

Clear, strong executive leadership will be critical for ensuring that NASA’s 

financial management organization delivers the kind of analysis and 

forward-looking information that the agency needs to effectively manage 

its many complex programs. To be effective, such leadership must also 

combine with effective organizational alignment, strategic human capital 

management, and end-to-end business process improvement. This goes far 

beyond merely obtaining an unqualified audit opinion and requires that 

agency financial managers focus on their overall operations in a strategic 

way and not be content with an automated system that helps the agency 

get a “clean” audit opinion once a year without providing additional value 

to the program managers and cost estimators who use its financial data. 

The challenges that NASA faces in reforming its financial management 

operations are daunting, but not insurmountable. However, our experience 

has shown that improvements in several key elements are needed for 

NASA to effectively address the underlying causes of its financial 

management challenges. These elements, which will be key to any 

successful approach to financial management reform, include: 

• addressing NASA’s financial management challenges as part of a 

comprehensive, integrated, NASA-wide business process reform; 

• providing for sustained leadership by the Administrator to implement 

needed financial management reforms; 

• establishing clear lines of responsibility, authority, and accountability 

for such reform tied to the Administrator; 

NASA Faces 

Significant Challenges 

in Reforming Its 

Financial 

Management 

Operations 
Page 17 GAO-06-216T 

• incorporating results-oriented performance measures and monitoring 

tied to financial management reforms; 

• providing appropriate incentives or consequences for action or 

inaction; 

• developing and using an enterprisewide system architecture to guide 

and direct financial management modernization investments; and 

• ensuring effective oversight and monitoring. 

As NASA embarks upon the new course set by the President in 2004, a key 

to successfully implementing the vision of expanded U.S. space 

exploration is NASA’s ability to address a number of long-standing 

financial management challenges. The lack of reliable, day-to-day 

information continues to threaten NASA’s ability to manage its programs, 

oversee its contractors, and effectively allocate its budget across its 

numerous projects and programs. Although NASA has acknowledged the 

need for improved financial management systems, business processes, and 

human capital management and has begun to take steps toward achieving 

those goals, progress has been slow. By expeditiously implementing each 

of the recommendations contained in our related report, NASA has the 

opportunity to minimize the impact of past mistakes and begin to reap the 

benefits of operating with an integrated financial management system. 

Further, clear, strong executive leadership will be critical for ensuring that 

NASA’s financial management organization delivers the kind of analysis 

and forward-looking information needed to effectively manage its many 

complex programs. 

In closing, we commend the Subcommittees for holding this hearing as a 

catalyst for improving NASA’s financial management and business 

processes. Continued oversight will be critical to ensuring that NASA 

achieves its goals for improved financial management and reformed 

business processes. Mr. Chairmen, this concludes our prepared statement. 

We would be pleased to respond to any questions that you or other 

members of the subcommittees may have. 

For further information regarding this testimony, please contact Gregory 

D. Kutz at (202) 512-9095 or kutzg@gao.gov, Allen Li at (202) 512-3600 or 

lia@gao.gov, Randolph C. Hite at (202) 512-3439 or hiter@gao.gov, or Keith 

Rhodes at (202) 512-6412 or rhodesk@gao.gov. Individuals making key 

contributions to this testimony included Fannie Bivins, Francine 

DelVecchio, Diane Handley, and Chris Martin. 

Conclusion 

Contacts and 

Acknowledgments 
Page 18 GAO-06-216T 

NASA: Compliance with Cost Limits. GAO-05-492R. Washington, D.C.: 

April 8, 2005. 

National Aeronautics and Space Administration: Significant Actions 

Needed to Address Long-standing Financial Management Problems. 

GAO-04-754T. Washington, D.C.: May 19, 2004. 

NASA: Compliance with Cost Limits. GAO-04-648R. Washington, D.C.: 

April 2, 2004. 

Space Shuttle: Further Improvements Needed in NASA’s Modernization 

Efforts. GAO-04-203. Washington, D.C.: January 15, 2004. 

Business Modernization: Disciplined Processes Needed to Better Manage 

NASA’s Integrated Financial Management Program. GAO-04-118. 

Washington, D.C.: November 21, 2003. 

Business Modernization: NASA’s Integrated Financial Management 

Program Does Not Fully Address Agency’s External Reporting Issues. 

GAO-04-151. Washington, D.C.: November 21, 2003. 

Business Modernization: NASA’s Challenges in Managing Its Integrated 

Financial Management Program. GAO-04-255. Washington, D.C.: 

November 21, 2003. 

Information Technology: Architecture Needed to Guide NASA’s 

Financial Management Modernization. GAO-04-43. Washington, D.C.: 

November 21, 2003. 

NASA: Major Management Challenges and Program Risks. GAO-03-849T. 

Washington, D.C.: June 12, 2003. 

Business Modernization: Improvements Needed in Management of 

NASA’s Integrated Financial Management Program. GAO-03-507. 

Washington D.C.: April 30, 2003. 

Major Management Challenges and Program Risks: National 

Aeronautics and Space Administration. GAO-03-114. Washington, D.C.: 

January 2003. 

NASA: Compliance With Cost Limits Cannot Be Verified. GAO-02-504R. 

Washington, D.C.: April 10, 2002. 

Related GAO Products 
Page 19 GAO-06-216T 

NASA: Leadership and Systems Needed to Effect Financial Management 

Improvements. GAO-02-551T. Washington, D.C.: March 20, 2002. 

NASA: International Space Station and Shuttle Support Cost 

Limits.GAO-01-1000R. Washington, D.C.: August 31, 2001. 

Financial Management: Misstatement of NASA’s Statement of Budgetary 

Resources. GAO-01-438. Washington, D.C.: March 30, 2001. 
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