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. 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). 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 cost- estimating handbook in 2002—the first such guidance provided to its cost- estimating 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 cost- estimating 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. 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 cost- performance 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 (PMI), 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 financial- coding structure. To its credit, as part of PMIdisciplined 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 cost- estimating 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 in- depth training to project management and cost-estimating and analysis personnel to ensure understanding and knowledge of NASA’s cost- estimating 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 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). 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 same problems remain.