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Can Gwendolyn Brown fix the space agency's chronic financial woes?
Kris Frieswick, CFO Magazine
May 1, 2004
The National Aeronautics and Space Administration has long been criticized for its inability to manage costs. During the 1990s, faced with flat budgets and ambitious program goals, NASA adopted a management approach of "faster, better, cheaper." But by the decade's end, the approach was blamed for a number of mission failures. Meanwhile, the cost of the International Space Station (ISS) spiraled billions of dollars over budget. Embattled administrator Daniel Goldin resigned in 2001 after nearly 10 years on the job, and NASA named Sean O'Keefe, a self-described "bean counter," as Goldin's replacement. Fourteen months later, the loss of the Columbia space shuttle and its seven astronauts shook the agency to its core.
Then, last January, President George W. Bush unveiled a grand "vision" of landing astronauts on the moon by 2020, and on Mars sometime thereafter. The vision gave NASA a new sense of mission, lifted its morale, and raised expectations of steadily increasing budgets. But the vision also came under fire from critics who wondered fire from critics who wondered why the country needed to go to Mars, and how it could afford it.
Two weeks later, troubling new doubts were raised about NASA's financial management. PricewaterhouseCoopers, the agency's auditor, issued a disclaimed opinion on NASA's 2003 financial statements. PwC complained that NASA couldn't adequately document more than $565 billion — billion — in year-end adjustments to the financial-statement accounts, which NASA delivered to the auditors two months late. Because of "the lack of a sufficient audit trail to support that its financial statements are presented fairly," concluded the auditors, "it was not possible to complete further audit procedures on NASA's September 30, 2003, financial statements within the reporting deadline established by [the Office of Management and Budget]."
Ironically, the PwC audit report was posted on the NASA inspector general's Website on March 11 — the same day that O'Keefe testified before a Senate appropriations subcommittee regarding the agency's FY 2005 budget request. But no one seemed to notice, or care.
NASA says blame for the financial mayhem falls squarely on the so-called Integrated Financial Management Program (IFMP), an ambitious enterprise-software implementation. In June 2003, the agency finished rolling out the core financial module of the program's SAP R/3 system. NASA's CFO, Gwendolyn Brown, says the conversion to the new system caused the problems with the audit. In particular, she blames the difficulty the agency had converting the historical financial data from 10 legacy systems — some written in COBOL — into the new system, and reconciling the two versions for its year-end reports. Brown says that despite the difficulties with both the June 30 quarterly financial-statement preparation and the year-end close, the system is up and running, and she has confidence in the accuracy of the agency's financial reporting going forward.
"It is working," says Brown, who was confirmed as CFO in November 2003, "and we are moving forward to ensure that we're ready to go to the moon, to Mars, and beyond, financially."
But when will they be ready? NASA's target date of 2007 for completing the SAP rollout seems optimistic, given the agency's track record so far. What's more, the problems with financial management go well beyond implementing new software. Brown's explanation for the disclaimed audit may account for some of the problems identified in both the June 30, 2003, financials and the year-end audit — but only some.
PwC's audit found numerous basic reporting errors in the year-end and third-quarter financial statements that had nothing to do with the conversion, and which auditors said finance executives should have caught before filing the statements.
For example, in the June 2003 quarterly statement, auditors found a $204 million line item called "Other" that "could not be explained or supported, indicating that NASA had not correctly reconciled its budgetary resources to its net cost of operations." PwC also found a $200 million discrepancy between identical line items on two different financial statements. In the year-end audit, PwC discovered that NASA's stated fund balance was actually $2 billion more than the balance in its Treasury account. (PwC noted that NASA changed the balance to match the Treasury balance without disclosing that it had done so in the financial statements.) The agency also changed the method used to depreciate assets without disclosing that it had done so and explaining why, as is required by government financial-reporting regulations. And it continued to use an incorrect method to account for costs incurred, despite repeated warnings from the General Accounting Office (GAO) and PwC that the method did not even comply with NASA's own financial-management manual.
In addition, finance personnel responsible for converting the year-end data (and who racked up the $565 billion in adjustments) didn't have the skills they needed to do the job. Says Patrick Ciganer, NASA's program executive officer for integrated financial management, "We had people in each of the NASA centers [10 in all, including the Kennedy, Glenn, and Marshall space centers] who knew that they had to make the year-end adjustments. The problem was, they had never done them before. They had been trained, but in some cases that was six or eight months before, and they did it wrong." The SAP system recorded each errant keystroke, creating a series of unsupported journal entries and adjustments that PwC could not have fully audited even if it had had a whole year to do it.
The disclaimed audit would not be as significant if it were just a one-off even, but in fact, NASA has a long-standing history of financial mismanagement. The agency's contract-management function has earned a spot on the GAO's "high risk" watch list every year since 1990 (see "Mission [out of] Control," at the end of this article). This year, NASA was 1 of only 3 federal agencies (out of 23) that received a disclaimed audit opinion.
Other lowlights of NASA's financial history include the ISS audit, which the GAO has performed annually since 2000 to determine whether NASA is adhering to congressional spending caps placed on the ISS and related space-shuttle flights. In each audit, the GAO auditors have been "unable to determine whether the obligations that NASA was reporting to Congress were accurate," says Gregory D. Kutz, director in the financial management assurance team at the GAO. Adds Kutz, "This is a problem that has been around NASA for a long time." The latest GAO audit report, released in April, revealed that NASA didn't include any information on the ISS and shuttle obligations in its FY 2005 budget request, as required by law, "so we had nothing to audit this year," the report said. A NASA spokesperson called the omission an "editorial oversight."
In 2000, a $644 million oversight was discovered on NASA's 1999 financial audit. The mistake was detected not by its auditors (then Arthur Andersen) nor by its CFO (then Arnold Holz), but by a congressional staffer reviewing the statements. As a result of the mistake and subsequent investigation, the GAO called into question the quality of the five previous Andersen audits — all clean, and a source of agencywide pride. "[The GAO] said the Arthur Andersen audits were audit failures," says Kutz. "They had given NASA clean audit opinions for five years. Andersen said the reporting systems were compliant and that there were no material weaknesses."
In 2001, with Andersen dissolving in the wake of Enron, NASA chose PwC as its new auditors. The firm gave the space agency its first disclaimed audit opinion, blaming widespread reporting and audit-trail deficiencies. "How could PwC all of a sudden say that everything is a problem, when all that changed was the auditor?" asks Kutz.
In NASA's defense, many of its problems with financial management are endemic to the agency as a whole. NASA has long been faulted for its "stovepipe" structure, in which each center behaves as an independent entity with a unique history and culture that is loath to brook "outside" interference from other parts of NASA. Finance executives are co-located in NASA's 10 centers, and each center has a different financial-reporting system. Each finance chief reports to the center's director, with only a dotted line to CFO Brown.
"It's like a dozen dueling fiefdoms," says Keith Cowing, editor of NASA Watch, a Website devoted to tracking all things NASA. (The site claims a devoted readership, including some highly placed members of the agency and Congress.) Administrator O'Keefe has recognized the problem and is trying to unite the organization through his so-called One NASA management approach (of which the SAP system is a cornerstone). But Cowing isn't sure he'll succeed. "This whole notion of 'one NASA' sounds good on paper, and they've done some things that cracked through the walls," he says. "But I don't know how much they'll ever integrate."
The structural barriers have combined over time to make any NASA-wide initiatives an exercise in frustration, a problem that Brown is also working hard to overcome. The CFO has instituted policy changes that she hopes will make finance-team members more accountable to her. Prior to her arrival, policies were written on an agencywide level, but each center was free to create processes and procedures to apply the policies as it wished. Brown has sought to change that.
"I've told them that from now on, the agency will set policy, process, and procedure, and you, the centers, will do implementation," says Brown. "If we're going to be accountable and credible, that's what we have to do here." The centers are "not as autonomous as they used to be," a change that, she reports, has been met with some "inertia" from finance staffers. The problem isn't just administratively challenging: one of the main reasons that Brown offers for the mammoth $2 billion difference between its year-end fund account balance and its Treasury account balance is that the center-based finance staffers "failed to follow policies and procedures" — policies that include monthly reconciliations with the actual Treasury balance — once the SAP module was installed. (NASA headquarters is also required to do those monthly reconciliations.)
Optimistic to a Fault
Another of NASA's defining characteristics, which was identified as a contributing factor to the Columbia disaster in 2003 by the Columbia Accident Investigation Board, is its propensity for being overly optimistic about challenges, coupled with an unwillingness to hear bad news. This, the board said in its report on the accident, leads to bad communication and system breakdowns — because, eventually, even NASA employees aren't sure what's happy talk and what's the truth. This characteristic is evident in the finance organization, too.
For years, the GAO and NASA's own inspector general had warned of material weaknesses in both the new IFMP system and the finance department. In its most recent evaluation of the system, published in early November 2003, the GAO said the system didn't give project-cost estimators the full-cost accounting information they needed; didn't properly account for contractor-held property or accounts payable; and improperly processed accrued costs and obligations. The GAO pointed out that the new core financial module hadn't been fully tested, and in some cases processed transactions incorrectly. In a rebuttal letter accompanying the report, NASA deputy administrator Frederick Gregory "respectfully disagreed" with every point the GAO made. (Gregory's rebuttal implies that by October, NASA had already addressed all of the problems that, in fact, ended up causing the $565 billion in year-end adjustments.)
"With most other [government agencies] with which we work, it's not a debate about the facts," says Kutz. "It's about the solutions. If you look at this [November] report, you will notice that [NASA] disagrees with everything we said. I think that says a lot there. We can't even agree with them about what the facts are."
Such institutionalized denial may have created a situation in which one hand of NASA doesn't know what the other is doing. In his rebuttal letter, Gregory said the agency had implemented the system's full-cost accounting capability as of October 1, 2003. Shortly thereafter, "IFMP management" told the GAO that the capability would be functioning at the end of October. As of the end of March 2004, the system, says Ciganer, was "about 75 percent there."
Another glaring example of this disconnect can be found in Brown's written response to the Senate Commerce Committee in September 2003 during her confirmation as NASA CFO, just days before the fiscal year-end close. Prior to her confirmation, she had been deputy CFO in charge of financial management, and was deeply involved in the rollout of the core financial module in June 2003. In her statement, Brown declared that "[w]ith my leadership, the agency is currently on track to...have fiscal-year 2003 financial statements audited by November 15, which is two months earlier than required." Brown claims that when she wrote those words, she was unaware of the full extent of the reporting problems that would result in NASA filing its financial statements two months late. However, she says that when she testified in September, she was aware that patches and workarounds for problems identified back in June hadn't even arrived from SAP yet. Given that knowledge, her predictions of an early audit opinion were, at best, extremely optimistic.
Although NASA's institutional deficiencies are significant, some problems are exclusively the province of NASA's finance department. Based on its history, it appears that the team is just not very good at what it's supposed to do.
The department's repeated inability to properly prove it is adhering to spending caps on the ISS and shuttle-related costs — and its failure to disclose those obligations in its FY 2005 budget request — are sadly typical of the way the finance team prepares its financial statements, critics charge. Internal sources say that the $2 billion Treasury-balance discrepancy in this year's financial statements was nothing more than "sloppy bookkeeping." The GAO has said repeatedly that human capital and lack of skills are key material weaknesses on NASA's finance team.
Brown concedes that human capital is an issue. "We're working toward doing some realignment to make sure we can fully support the new vision," she says. "We're asking, 'What are the knowledge skills and abilities that I need to have on the financial-management side and the budget side?'" She has made attracting new talent one of her top priorities, an especially pressing one since many finance staffers will be retiring soon, she says. It might not be easy to replace them, however, in part because NASA, and all government agencies, use a different general-ledger system than that taught in accounting classes.
"I have been having a hard time attracting people," admits Brown. "We are hoping to find the brightest and train them."
As far back as January 2003, PwC recommended that NASA improve its processes for preparing its financial statements to "assure that information presented on the financial statements and footnote disclosures are accurate and are consistent with the requirements of" the OMB. The auditor credits NASA with some improvement in this area — such as issuing an internal "quality review checklist" and doing technical training — but it says that the 2003 statements contained "inconsistencies that should have been identified and corrected by NASA management through its internal quality-control review." The statements did not contain key disclosures, including the fund-balance problem and a change in the way NASA depreciated assets between 2002 and 2003.
Brown says that NASA filed the initial financial statements in December, and that "we thought [they] were in pretty good shape." (The filing didn't include footnotes, which are usually filed later during an "iterative process," she says.) Shortly after seeing them, PwC's auditors indicated it would take them too long to complete the audit, and they would have to disclaim it. "Once they say you're getting a disclaimer, it doesn't make sense to go back and redo [the footnotes]," says Brown. "You take what you can get and move forward and make a note for the following year."
In addition, despite opposition by the GAO, NASA still uses an accounting procedure that doesn't comply with government accounting regulations — or even with NASA's own financial-management manual. NASA creates a "suspense file" into which it dumps any costs incurred that exceed obligations, instead of accruing those costs as they are incurred, as required. But Gregory defends the practice. In his rebuttal to the November 2003 GAO report, he denies that the suspense file is a problem, and says it's the method NASA uses to alert management to cost overruns. Gregory explains that at year-end, the costs over obligations are put back into the general ledger manually — a practice that the GAO understandably sees as a risk.
Perhaps the most fundamental problem with financial management at NASA is that the agency doesn't need to be financially accountable to get full funding for its projects. This lack of any consequence for the poor quality of its work makes dramatic improvement in NASA's finance department unlikely, despite Brown's firm commitment to do just that.
Kutz believes that NASA, with some discipline, can overcome the financial-management challenges it faces. "The Department of Defense's problems are 100 times more challenging than NASA's problems," he notes. "NASA is much smaller; its problems are solvable."
But despite Brown's noble intentions, the truth is that even 14 years after passage of the 1990 Federal CFO Act, which requires federal agencies to produce auditable financial statements, a disclaimed audit opinion is still no big deal. Lack of consequences could take all the teeth out of any attempts by Brown to instill real financial discipline. "To my knowledge, there is no negative consequence for a disclaimed or failed audit," says Kutz, "except maybe for some bad publicity, or someone might call a hearing."
Don't look to Congress to impose accountability on NASA's financials. This year's disclaimed audit opinion barely caused a blip on its radar screen. "The direction of NASA and safety issues has been our overarching concern," says David Matsuda, a spokesperson for Sen. Frank R. Lautenberg (DN.J.), a member of the Senate Commerce, Science, and Transportation Committee. That sentiment is echoed by a staffer for the House Science Committee, who said that he was notified in January about the disclaimed audit and that he took the "conversion" explanation at face value. "I think there's a little numbness to it," says the staffer. "It's really hard to get congressmen fired up about a bad audit."
Indeed, shortly after the disclaimed audit was revealed, the Senate adopted a budget resolution that includes the President's budget request for NASA of $16.244 billion for FY 2005, and assumes full funding for Bush's NASA request through 2009. If approved by the House and later the full Congress, NASA's budget will be one of the only nondefense discretionary budget items in the resolution that receives an increase next year.
Given the uncertain state of the economy and the sure-to-be-astronomical costs of the moon-Mars program — not to mention the nation's looming Social Security and Medicare obligations — maybe it's time that NASA's financial problems were on somebody's radar screen.
Kris Frieswick is a senior writer at CFO.
Mission (out of) Control
Every year since 1990, the General Accounting Office has kept NASA on its "high risk" watch list because of the agency's problems with contract management. As excerpts from a 2003 GAO report indicate, the root of the problem is a lack of reliable financial information:
Much of NASA's success depends on the work of its contractors — on which it spends the greatest part of its funds… . But for many years, NASA has not been able to effectively oversee contracts, principally because it lacked accurate and reliable information on contract spending and it has placed little emphasis on end results, product performance, and cost control. NASA has addressed many acquisition-related weaknesses, but key tasks remain, including completing the design and implementation of a new integrated financial management system.
...NASA's ability to collect, maintain, and report the full cost of its projects and programs is weakened by diverse and often incompatible center-level accounting systems and uneven and nonstandard cost-reporting capabilities....
...NASA does not track the actual costs of completed space station components, even though it often estimates costs at the component level for planning and budgeting purposes.... NASA is also not yet able to uniformly ensure that contractors provide cost data at a level that will give managers the information they need to assess the validity of previous cost estimates, fully monitor the work being performed, and appropriately identify cost drivers....
Overall, our reviews as well as NASA's show that finance is not viewed as intrinsic to NASA's program management decision process, nor does it focus on what "could" and "should" take place from an analytical cost-planning standpoint.
Source: "Major Management Challenges and Program Risks; National Aeronautic and Space Administration," GAO, January 2003
Dramatic as the unveiling of President Bush's moon-Mars vision was, almost as surprising was how quickly the vision faded. In his State of the Union address just days after the announcement, Bush didn't mention space. Skeptics charged that the mission was dreamed up to boost the President's reelection campaign, especially since most of the enormous funds needed for the program would be appropriated after a Bush second term ended.
But if the moon-Mars mission has dimmed in the public eye, NASA is putting it front and center, reshuffling its priorities and redirecting its spending. Initial outlays on the mission are modest. From 2005 to 2009, NASA's budget for the mission is $12.6 billion, but only $1 billion of that is new funds; the rest will be diverted from other activities. (Those activities included the servicing of the Hubble space telescope, but the resulting outcry has prompted NASA to consider other options.)
How much would the moon-Mars mission ultimately cost? Nobody really knows, and NASA hasn't provided an official estimate. But when George Bush père proposed a manned earth-to-Mars mission in 1989, the total program cost was estimated at $400 billion. One thing is known: NASA's costs typically soar far beyond budget. When first proposed in 1984, the International Space Station was supposed to cost $8 billion, but so far Congress has appropriated $32 billion for it.
NASA administrator Sean O'Keefe said public interest in Mars exploration is reflected in the large number of hits registered by the agency's Website in recent months. But a CBS/New York Times poll taken in January reported that only 48 percent of Americans favored a manned mission to Mars, the first time in the poll's history that the question had received less than 50 percent approval. Meanwhile, a mere 17 percent thought the United States should be spending more on space programs.