2002 was the last year in which NASA's auditors were able to provide a "clean" opinion of the Agency's financial statements. 2003 was the year NASA implemented its integrated financial management system, and the process and data issues uncovered during that implementation resulted in the auditors' inability to provide subsequent opinions on NASA's financial statements. NASA has made considerable progress toward improved financial health and reporting since that time, as evidenced by improved scores on the Financial Management Improvement component of the President's Management Agenda scorecard. The Agency is currently "green" on progress based on the successful accomplishment of its corrective action plan milestones.
NASA's annual financial audit, which is required by the Congress through the Chief Financial Officer (CFO) Act of 1990, is performed by the accounting firm of Ernst & Young through the Office of Inspector General. NASA develops a financial improvement corrective action plan each year that addresses weaknesses identified through the Agency's annual financial audit, including financial analysis and oversight, and Property, Plant and Equipment valuation. This is part of the internal controls process described further below. Because the identified weaknesses have root causes in many NASA functions, including the Office of the Chief Financial Officer (OCFO), Office of the Chief Information Officer (OCIO), Integrated Enterprise Management Program (IEMP), and Institutions & Management (I&M), responsibility for completing individual actions is shared by these organizations. The corrective action plan has 90 unique action items, of which 66 (73%) have been completed to date from the 2006 audit.
I came into the Agency in November 2005 and knew that this was gong to be one of my first areas to focus attention. I determined that a weekly meeting to review the Agency's progress in financial management was needed. This meeting brought together the elements of the Agency that were called out in the annual financial audits: the OCFO, OCIO, IEMP, and I&M. This was important because everyone listed had different parts of the corrective action plan and material weaknesses described below that had to be worked. This meeting has been broadened to include many other elements of mission support, but we still routinely review progress and obstacles for improved financial management.
Let me share with you the plans for continuing to improve financial management during FY 2008 and beyond.
In addition to cost reduction efforts, internal controls directly influence our ability to effectively use resources and the Agency takes internal control seriously. NASA's Assistant Administrator for Internal Controls and Management Systems, Jay Henn, describes internal controls as a process: (1) focus on Agency goals/objectives; (2) figure out what can go wrong (risk assessment); (3) put into place the policies and procedures (i.e., controls) that are needed to prevent those things from going wrong; and (4) continually check (testing/assessment) to make sure those controls are working. Senior managers across the Agency have been required to attest to the soundness of those internal controls within their scope of responsibility. There will be further review of internal controls and related improvement activities in the coming year.
The Federal Managers Financial Integrity Act of 1982 requires that each agency head report annually, through a Statement of Assurance, on the effectiveness of the control and financial systems that protect Federal programs. As part of this annual evaluation, each agency reports on serious internal control deficiencies, known as material weaknesses, that have been identified through internal audits, external audits, or other management reporting. (There is currently no single definition of "material weakness" in use by the Federal government. NASA defines material weakness as "a control deficiency – or a combination of deficiencies – that endangers the accomplishment of the Agency's mission, results in repeated violations of statutory or regulatory requirements, and/or significantly weakens safeguards against waste, loss, unauthorized use, or mismanagement of Agency assets"). Last year, NASA reported three such weaknesses – NASA's Financial Management System, Asset Management, and Information Technology Security – and still considers these areas as material weaknesses.
Other Weaknesses/Management Challenges
In addition, NASA identifies, reports internally, and corrects successively less serious internal control deficiencies that we refer to as "other weaknesses" and "management challenges." Last year NASA's "watch list" of internal control deficiencies included one "other weakness" (Acquisition Management) and five "management challenges" (Financial Management Policies and Procedures, Financial Management Staffing, Financial Management Data Integrity, Full Cost Integration, and Mission Management Aircraft).
Oversight of Internal Controls
NASA uses the Operations Management Council (OMC), which I chair, and a subset of the OMC called the Senior Assessment Team (SAT) to provide ongoing and senior-level oversight of NASA's internal control policies, programs and deficiencies. The SAT is chaired by the Director of the Office of Program and Institutional Integration, Rick Keegan, and its members represent all of NASA's major programmatic, institutional, and financial management organizations, as well as NASA's Field Centers. The NASA Office of Inspector General (OIG) serves on the SAT in an advisory capacity.
The SAT generally meets four times a year – more if required. At every meeting, the SAT reviews the watch list items, beginning with the development or updating of a corrective action plan, then tracking progress against those plans, and finally recommending to the OMC that items be removed from the list. The SAT will meet on September 19 to review the outcome of this year's Statement of Assurance process and discuss potential new watch list items, and then will propose any additions or deletions for consideration by the OMC on September 25.
NASA is constantly working to correct each control deficiency. A specific organization within NASA has been identified as the "owner" of each deficiency, and those organizations have approved corrective action plans that guide their steps in eliminating their respective watch list items. In many cases, these action plans involve close cooperation with concerned parties, including the NASA OIG and the Office of Management and Budget.
The NASA OCFO and the Office of Internal Controls and Management Systems work closely with the NASA OIG regarding our material weaknesses and management challenges in the financial management and reporting areas. The OIG diligently monitors NASA's progress regarding correcting its material weaknesses and pursuing its corrective action plans. The OCFO holds weekly meetings with the OIG and the OIG provides a valuable oversight role to assist NASA in its efforts towards financial management improvement.
Process standardization plays a critical role in producing financial data that can be integrated, compared and analyzed across mission, programs, and projects. In contrast to several years ago when each Center uniquely defined and executed its own financial management processes, we've come a long way. During FY 2008, we'll build on that progress, focusing on further standardization of the following processes: Accounts Payable, Accounts Receivable, Financial Statement Preparation, and Property, Plant and Equipment. These are all key to continuing to build a healthy financial management system for NASA.
To use financial and resource data and improve its decision-making competency, the Agency needs financial and resource management information systems and operating tools, and as with processes, these tools need to be standardized. Therefore, we'll continue to refine existing financial management systems and tools such as Meta Data Manager; the tool used to identify, create, and track work breakdown structures across appropriations, missions, themes, programs, and projects; and Business Warehouse, the reporting tool used to access data from the Agency's financial management system.
Property, Plant & Equipment
If you have followed past IG or GAO audits, you know that NASA, like many Federal Agencies, has struggled with the best way to track the cost of Property, Plant and Equipment (PP&E). In the coming weeks, look for new PP&E guidance in the form of a NASA Interim Directive developed to address the issues that have been raised. The policy will allow the Agency to do a better job of determining whether something we are buying or building is an asset (and needs to be uniquely tracked throughout its life cycle) or an expense (and does not need to be uniquely tracked for financial statement purposes). We're making the change to improve the accuracy of information in the Agency's balance sheet and statement of net cost. At the same time, we anticipate that the change will benefit programs and projects by reducing the administrative effort associated with depreciating capital assets.
While we improve our financial management guidance, the Office of Institutions and Management is also reviewing and revising our guidance on how to manage NASA's public property holdings. Our goal is to better account for property during its full life cycle, from the time we acquire it, until it moves through the Government's disposition process.
Last, but not least, we are updating the information management systems used for property accountability and disposition. When the new system comes online during the coming year, we will have more meaningful information than ever about our property holdings. We will be able to more accurately determine what property we have, who has it, where it is, as well as its value and condition.
NASA's Deputy CFO and Nominated CFO
I appreciate all the hard work Deputy CFO Terry Bowie and his team have done. Terry has gotten us on a good path towards improved Agency financial health. He is a real trooper and agreed to take on the additional responsibility of Acting CFO while the nominee for this position has been going through nomination and confirmation. The Chief Financial Officer is one of the four Presidentially-appointed, Senate-confirmed positions (known as PAS) at NASA. The other three are: the Administrator, the Deputy Administrator, and the Inspector General. The Senate is now considering confirmation of NASA's CFO nominee, Ronald Spoehel. Ron served as Executive Vice President, CFO, and member of the Board of ManTech International and served as an executive officer of other global technology companies. His financial management experience will be an asset to NASA as we build upon the good work that Terry and his team are doing.