National Aeronautics and Space Administration: Leadership and Systems Needed to Effect Financial Management Improvements
Published: 2002-03-20T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: In fiscal years 1996 to 2000, the National Aeronautics and Space Administration (NASA) was one of the few agencies that received an unqualified opinion on its financial statements and was in substantial compliance with the Federal Financial Management Improvement Act (FFMIA). This suggested that NASA could generate reliable information for annual external financial reporting and could provide accurate, reliable information for day-to-day decision-making. In contrast with the unqualified or "clean" audit opinions of its previous auditor, Arthur Andersen, NASA's new independent auditor, PricewaterhouseCoopers, disclaimed an opinion on the agency's fiscal year 2001 financial statements because of significant internal control weaknesses. PricewaterhouseCoopers also concluded that NASA's financial management systems do not substantially comply with the requirements of FFMIA. Modernizing NASA's financial management system is essential to providing accurate, useful information for external financial reporting as well as internal management decision-making. NASA is working on an integrated financial management system that it expects to have fully operational in fiscal year 2006 at an estimated cost of $475 million. This is NASA's third attempt to implement a new financial management system. The first two efforts were abandoned after 12 years and $180 million. Given the high stakes involved, NASA's top management must provide the necessary direction, oversight, and sustained attention to ensure the project's success.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss the financial management  challenges facing the National Aeronautics and Space Administration  (NASA).
My testimony today will focus on our recent work related to NASA’s  financial management difficulties and its attempts to implement an  integrated financial management system. Although we have not performed  a comprehensive review of NASA’s financial management systems or  information since fiscal year 1993, in response to legislative mandates and  requests of other interested committees we have performed work and  issued several reports that specifically address the issues included in my  testimony today. My statement today is drawn from the findings and  conclusions in those reports, which include detailed information on our  scope and methodology. Also, as you have requested, my statement will  address the results of this year’s financial statement audit for which the  auditor’s opinion is a marked departure from the previous 5 years.
subsections: section_title: Financial Audit Results
paragraphs: After five years of receiving an unqualified opinion on its financial  statements, on February 22, 2002, NASA’s new independent auditordisclaimed an opinion on the agency’s fiscal year 2001 financial  statements. Specifically, the audit report states that NASA was unable to  provide the detailed support needed to determine the accuracy of the  agency’s reported obligations, expenses, property, plant, and equipment,  and materials for fiscal year 2001. According to the report, each of NASA’s  10 centers uses a different financial management system—each of which  has multiple feeder systems that summarize individual transactions on a  daily or monthly basis. Financial information from the centers may be  summarized more than once before it is uploaded into NASA’s General  Ledger Accounts System (GLAS). The successive summarization of data  through the various systems impedes NASA’s ability to maintain an audit  trail through the summary data to the detailed transaction-level source  documentation. Current OMB and GAO guidance on internal control  requires agencies to maintain transaction-level documentation and to  make the transaction-level documentation readily available for review.  NASA was unable to provide sufficient transaction-level documentation to  support certain obligation and expense transactions and certain  transaction-level cost allocations that the auditors had selected for testing.
In addition, the fiscal year 2001 audit report identifies a number of  significant internal control weaknesses related to accounting for space  station material and equipment and to computer security. The report also  states that NASA’s financial management systems do not substantially  comply with federal financial management systems requirements and  applicable federal accounting standards.
section_title: NASA’s Financial Management Difficulties Are Not New
paragraphs: While the fiscal year 2001 auditor’s report draws attention to the issue,  NASA’s financial management difficulties are not new. The weaknesses  discussed in the auditor’s report are consistent with the findings discussed  in our previous reports. We have reported on NASA’s contract  management problems, misstatement of its Statement of Budgetary  Resources, lack of detailed support for amounts reported against certain  cost limits, and lack of historical cost data for accurately projecting future  cost.
subsections: section_title: Long-standing Problems With Contract Management
paragraphs: We first identified NASA’s contract management as an area at high risk in  1990 because of vulnerabilities to waste, fraud, abuse, and  mismanagement. Specifically, we found that NASA lacked effective  systems and processes for overseeing contractor activities and did not  emphasize controlling costs. While NASA has made progress in managing  many of its procurement practices, little progress has been made in  correcting the financial system deficiencies that prevent NASA from  effectively managing and overseeing its procurement dollars. As a result,  contract management remains an area of high risk.
The agency’s financial management systems environment is much the  same as it was in 1993, the last time we performed comprehensive audit  work in that area. It is comprised of decentralized, nonintegrated systems  with policies, procedures, and practices that are unique to each of its 10  centers. For the most part, data formats are not standardized, automated  systems are not interfaced, and on-line financial information is not readily  available to program managers. As a result, NASA cannot ensure that  contracts are being efficiently and effectively implemented and budgets  are executed as planned.
section_title: Misstatement of NASA’s Fiscal Year 1999 Statement of Budgetary Resource
paragraphs: NASA’s long-standing problems in developing and implementing integrated  financial management systems contributed to a $644 million misstatement  in NASA’s fiscal year 1999 Statement of Budgetary Resources (SBR),  which we discussed in our March 2001 report. This error was not detected  by NASA Chief Financial Officer (CFO) personnel or by its auditor, Arthur  Andersen. Instead, the House Committee on Science discovered the  discrepancy in comparing certain line items in the NASA SBR to related  figures in the President’s Budget.
NASA used an ad hoc process involving a computer spreadsheet to gather  the information needed for certain SBR line items because the needed data  were not captured by NASA’s general ledger systems. Because each of  NASA’s 10 reporting units maintained different accounting systems, none  of which were designed to meet FFMIA requirements, it was left up to the  units to determine how best to gather the requested data. This  cumbersome, time-consuming process ultimately contributed to the  misstatement of NASA’s SBR. 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.
Based on this work, we questioned NASA management’s and its auditor’s  determination that NASA’s systems were in substantial compliance with  the requirements of FFMIA. As I mentioned earlier, and it bears repeating,  FFMIA builds on previous financial management reform legislation by  emphasizing the need for agencies to have systems that can generate  timely, accurate, and useful information with which to make informed  decisions and to ensure accountability on an ongoing basis. This is really  the end goal of financial management reforms. In particular, we  questioned whether NASA complied with the federal financial  management systems requirements for using integrated financial  management systems.
section_title: NASA Lacks Detailed Support for Amounts Reported Against Cost Limits
paragraphs: NASA’s financial management problems were also highlighted in our effort  to verify amounts NASA reported to the Congress against legislatively  imposed spending limits on its International Space Station and Space  Shuttle programs. Since NASA began the current program to build the  space station, the program has been characterized by a series of schedule  delays, reduction in space station content and capabilities, and a  substantial development cost overrun. In February 2001, NASA revealed  that the program faced a $4 billion cost overrun that would raise the cost  of constructing the space station to $28 billion to $30 billion, 61 percent to  72 percent above the original 1993 estimate.
In part to address concerns regarding the escalating space station costs,  section 202 of the National Aeronautics and Space Administration  Authorization Act for Fiscal Year 2000 (P.L. 106-391), establishes general  cost limitations on the International Space Station and Space Shuttle  programs. The act requires that NASA, as part of its annual budget request,  update the Congress on its progress by (1) accounting for and reporting  amounts obligated against the limitations to date, (2) identifying the  amount of budget authority requested for the future development and  completion of the space station, and (3) arranging for the General  Accounting Office to verify the accounting submitted to the Congress  It was our intention to verify NASA’s accounting for the space station and  shuttle limits by testing the propriety of charges to various agency  programs to ensure that all obligations charged to the space station and  shuttle programs were appropriate and that no space station or shuttle  obligations were wrongly charged to other programs. However, NASA was  unable to provide the detailed obligation data needed to support amounts  reported to the Congress against the space station and shuttle program  cost limits. NASA’s inability to provide detailed data for amounts obligated  against the limits is again due to its lack of a modern, integrated financial  management system. As I mentioned earlier, NASA’s 10 centers operate  with decentralized, nonintegrated systems and with policies, procedures,  and practices that are unique to each center. Consequently, the systems  have differing capabilities with respect to providing detailed obligation  data. According to NASA officials, only 5 of its 10 centers are able to  provide complete, detailed support for amounts obligated during fiscal  years 1994 though 2001—the period in which NASA incurred obligations  related to the limits. In fact, at one center, detailed obligation data are not  available for even current-year obligations.
section_title: Historical Cost Data Needed to Accurately Project Future Costs
paragraphs: As part of our effort to verify NASA accounting for the space station and  shuttle cost limits, we also found that NASA was not able to provide  support for the actual cost of completed space station components—  either in total or by subsystems or elements. For example, NASA cannot  identify the actual costs of individual space station components such as  Unity (Node 1) or Destiny (U.S. Lab). Although in its audited fiscal year  2000 financial statements, NASA capitalized the cost of Unity, Destiny, and  other items in orbit or awaiting launch at about $8 billion, according to  NASA officials, these amounts are based primarily on cost estimates, not  actual costs.
NASA officials stated that its accounting systems were designed prior to  the implementation of current federal cost accounting standards and  financial systems standards that require agencies to track and maintain  cost data needed for management activities, such as estimating and  controlling costs, performance measurement, and making economic trade- off decisions. As a result, NASA’s systems do not track the cost of  individual space station subsystems or elements. According to NASA  officials, the agency manages and tracks space station costs by contract  and does not need to know the cost of individual subsystems or elements  to effectively manage the program. To the contrary, we found that NASA  estimates potential and probable future program costs to determine the  impact of canceling, deferring, or adding space station content. These cost  estimates often identify the cost of specific space station subsystems.  However, because NASA does not attempt to track costs by element or  subsystems, the agency does not know the actual cost of completed space  station components and is not able to reexamine its cost estimates for  validity once costs have been realized. We continue to believe that NASA  needs to collect, maintain, and report the full cost of individual  subsystems and hardware so that NASA can make valid comparisons  between estimates and final costs and so that the Congress can hold NASA  accountable for differences between budgeted and actual costs.
section_title: Transformation of the Finance Organization Needed To Reap the Full Benefit of New System
paragraphs: Modernizing NASA’s financial management system is essential to  providing timely, relevant, and reliable information needed to manage  cost, measure performance, make program-funding decisions, and analyze  outsourcing or privatization options. However, technology alone will not  solve NASA’s financial management problems. The key to transforming  NASA’s financial management organization into a customer-focused  partner in program results hinges on the sustained leadership of NASA’s  top executives. As we found in our study of leading private sector and  state organizations, clear, strong executive leadership—combined with  factors such as effective organizational alignment, strategic human capital  management, and end-to-end business process improvement—will be  critical for ensuring that NASA’s financial management organization  delivers the kind of analysis and forward-looking information needed to  effectively manage NASA’s many complex space programs. Specifically, as  discussed in the executive guide, to reap the full benefit of a modern,  integrated financial management system, NASA must go beyond obtaining  an unqualified audit opinion toward (1) routinely generating reliable cost  and performance information and analysis, (2) undertaking other value- added activities that support strategic decision-making and mission  performance, and (3) building a finance team that supports the agency’s  mission and goals.
An independent task force created by NASA to review and assess space  station costs, budget, and management reached a similar conclusion. In its  November 1, 2001, report the International Space Station (ISS)  Management and Cost Evaluation (IMCE) Task Force found that the space  station program office does not collect the historical cost data needed to  accurately project future costs and thus perform major program-level  financial forecasting and strategic planning. The task force also reported  that NASA’s ability to forecast and plan is weakened by diverse and often  incompatible center level accounting systems and uneven and non- standard cost reporting capabilities. The IMCE also concluded that the  current weaknesses in financial reporting are a symptom, not a cause, of  the problem and that enhanced reporting capabilities, by way of a new  integrated financial management system, will not thoroughly solve the  problem. The root of the problem, according to the task force, is that  finance is not viewed as intrinsic to NASA’s program management decision  process. The taskforce concluded that under the current organizational  structure, the financial management function is centered upon tracking  and documenting what “took place” rather than what “could and should  take place” from an analytical cost planning standpoint.
NASA has cited deficiencies with its financial management system as a  primary reason for not having the necessary data required for both internal  management and external reporting purposes. To its credit, NASA  recognizes the urgency of successfully implementing an integrated  financial management system. The stakes are particularly high,  considering this is NASA’s third attempt since 1988 to implement a new  system. The first two attempts were abandoned after 12 years and after  spending about $180 million. NASA expects to complete the current  systems effort by 2006 at a cost of $475 million.
The President’s Management Agenda includes improved financial  management performance as one of his five governmentwide management  goals. In addition, in August 2001, the Principals of the Joint Financial  Management Improvement Program—the Secretary of the Treasury, the  Director of the Office of Management and Budget, the Director of the  Office of Personnel Management, and the Comptroller General—began a  series of quarterly meetings that marked the first time all four of the  Principals had gathered together in over 10 years. To date, these sessions  have resulted in substantive deliberations and agreements focused on key  issues such as better defining measures for financial management success.  These measures include being able to routinely provide timely, reliable,  and useful financial information and having no material internal control  weaknesses.
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;  incorporating results-oriented performance measures and monitoring tied  to financial management reforms; providing appropriate incentives or consequences for action or inaction; establishing an enterprisewide system architecture to guide and direct  financial management modernization investments; and ensuring effective oversight and monitoring.
In this regard, NASA’s new Administrator comes to the position with a  strong management background and expertise in financial management.