NASA Advisory Council Meeting

Report of Audit and Finance Committee

February 7, 2008

Members: NASA:Mr. Robert Hanisee, Chairman Hon. Ronald Spoehel Hon. Ted McPherson Mr. Bruce WardHon. Michael MontelongoMr. Howard Stanislawski

10:00 – 10:30 Update from Deputy CFO Bruce Ward

10:30 – 11:00 Presentation # 1FY08 Audit Plan OIG

11:00 – 12:00 Presentation # 2

FY07 Financial Statement Audit Results OIG & E&Y

12:00 – 12:30 Presentation # 3Comprehensive Compliance Strategy Frank Petersen

12:30 – 1:30 Working LunchOpen Discussion with CFO Ronald Spoehel

1:30 – 2:30 Presentation # 4Earned Value Management Mike Blythe

2:30 - 3:30 EST Presentation # 5

NSSC Transition Update Cathy Claunch Team Leader - DCFO JSC

Carol Harvey 3:30 – 3:45 EST Break

3:45 – 5:30 EST Administrative Session

Audit & Finance CommitteeFact-Finding Meeting

HQ Room 8O69February 6, 2008

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October 18 NAC Meeting Review

Fund Balance With Treasury – In Balance Environmental Liability - Need IV&V Cleanup cost estimate

Property Plant & Equipment (Long Pole in Tent)FASAB accepted change in accounting for theme assetsPP&E (06 Financial Statement) $33.2BR&D Reclassification – Prior Years 12.7B R&D Reclassification – FY07 6.0B

Anticipated FY07 Balance 20.5B ~Space Exploration PP&E (ISS, Shuttle, WIP) 18.4BBuilding & Structure 2.1BOCFO Personnel FTE’s – 19 FTE’s Below AuthorizedNASA Shared Services Center – moving forward cautiouslyGrant Accounting – May 2008 implementation with

SAP version 8.1 upgrade 4400 Grants $850M

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ERNST & YOUNG September 30, 2007 Audit Report

Background: FY 2003 NASA Implementation (IEMP)Integrated Enterprise Management Program

FY 2007 NASA Implemented a System Upgrade to resolve certain system configuration issues.

“Significant Progress had been made….But many improvements were either completed during the final quarter of FY2007 or are ongoing. Continue to identify issues related to Internal ControlsAnd retention of documentation related to property accounting

As a result of these limitations E&Y declined to express an opinion on financialstatements for FY 2007 and/or on the effectiveness of NASA’s Internal Controlover financial reporting.

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E&Y Audit Report dtdSeptember 30, 2007 (cont’d)

Basis for Disclaimer

Two Material Weaknesses

1. Financial Systems, Analyses an oversight2. Controls over Property, Plant and Equipment (PP&E)

FY 2007 Audit Report versus 05 and 06 ReportsSignificantly greater granularity as regards control deficienciesA useable road map for remediation

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E&Y Audit Report dtdSeptember 30, 2007 (cont’d)

Financial Systems, analyses, and oversight

Progress was noted in:

▪ Core financial systems – another update planned ▪ Funds balance with treasury – Success noted ▪ Data Integrity resolution ▪ Completed reorganization plan for HQ OCFO – Staffing shortages noted ▪ Nine additional areas of review – where appropriate programs noted

Despite some improvement management and E&Y continued “to identifyweaknesses in entity-wide internal control which impairedNASA’s ability to report accurate financial information on a timely basis”

Thus a Disclaimer

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OIG Audit Recommendations

- Ensure that the Office of the Chief Financial Officer is staffed with properly trained personnel who can address the Agency’s financial management and accountability challenges;

- Ensure that accounting practices are consistent with applicable standards and are consistently applied;

- Establish internal controls that provide reasonable assurance that the financial statements are supported, complete and accurate; and

- Implement recommendations made by our office and the Government Accountability Office.

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E&Y Audit Recommendations

I. Financial Systems, Analyses and Oversight - 11 Improvements indicated

- 19 Recommendations to continue what is currently being done Stabilize prior period and other adjustments Continue Controls over entity-wide account reconciliations, analyses and

oversight- 5 Recommendations requiring assistance outside of OCFO Timely close expired travel, grants and contracts - 1 New Recommendation – SFFAS 6

Environmental Liability “Shuttle”

II. Property, Plant and Equipment - 7 Improvements indicated - 1 recommendation to continue what is currently being done Continue to review, monitor and refine implementation of new policy - 7 New Recommendations - Develop More robust detect and monitoring controls - Refine the revised contractor cost reporting requirements - Clearly demonstrate completeness and accuracy of prior contractors held assets

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E&Y Audit Recommendations (Cont’d)

Control Over Property, Plant and EquipmentNew Capitalization Policy allowed NASA to write-off $12.7B in FY2007 – A Major

Success

NASA Owned Buildings & Equipment - $2.1B

Space Exploration PP& E - $18.4B - Reconstructing cost data would not be cost justified

New Capital investment – Constellation - NASA has revised new contractor cost reporting requirements

Remains the major impediment to getting an audit opinion, Qualified or Unqualified

Key to Resolution: 1. Prove to OIG and E&Y that NASA can accurately account and provide audit

trail for capital acquisitions on new programs which has not been demonstrated yet.

2. Hope for FASAB relief on legacy assets.

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Comprehensive Compliance

Strategy (CCS)

NASA’s New Chief Financial Officer, Ron Spoehel has changed the focus from fixing individual problems on an ad hoc basis to putting a comprehensive process in place to bring NASA into full compliance with legal and regulatory requirements for financial management

- for example, a majority of request for documentation as part of the Ernst & Young 2008 annual financial statement audit are expected to be routinely scheduled and provided as a result of having this comprehensive approach in place.

- NASA has defined and documented the requirements for compliance, data integrity and internal control by financial statement line item with KPMG’s (Big 4 Accounting Firm) help.

- Next Step is to activate this approach more fully in 2008.

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NASA Grant Financial Management and Accounting

4400 active grants are outstanding = $850 million

Improvements are being addressed to enhance the value of this portfolio by moving to managing single grants and strengthening the grant management cycle:

- Effective front end definition of requirements - Improve monitoring during the life of the grant - Better understanding of the results of the grant

investment through assessment and final reporting.

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Financial Staff Personnel Update

April 2007: 103 FTEs, 10 below Authorized 113

July 2007: 92 FTEs, 21 below Authorized 113

August 2007: Authorized decreased by 4 to 109

September 2007: 90 FTEs, 19 below Authorized 109

February 2008: 96 FTEs, 8 below Authorized 104

Goddard Space Flight Center CFO – Hired and on board

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NASA Shared Services Center, Stennis Space Center, MS

On February 1, 2008, NASA successfully “went live” with the transaction processing of accounts payable, accounts receivable and fund balance with Treasury cash reconcilements that were moved from three (3) centers (Stennis, Dryden, Marshall) to the NASA Shared Services Center at Stennis

- Additional work from other centers is scheduled to be moved in 2008:

April – Langley, Glenn and Kennedy Space Center June – Johnson and Ames Research Center July – Goddard, NASA Management Office (JPL) and

HQ- Reimbursable Billings: transfer in 2008- Grants: Will assume disbursement responsibility after

SAP update scheduled for October 2008

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Earned Value Management at NASA

What it is:- A methodology for integrating scope, schedule and resources,

and for objectively measuring project performance and progress; it quantifies progress and accomplishment.

- An “early warning” tool or “lead indicator” that provides the project management team with objectives, accurate and timely data for effective decision making; it helps predict future performance based on historic trends

- An NPR and FAR requirement for all acquisitions for development designated as major in accordance with OMB Circular A-11

- A rigorous American National Standard Institute/Electronic Industries Alliance (ANSI/EIA) standard containing 7 principles for 32 guidelines

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Earned Value Management at NASA

NASA Implementation (Began 1 year ago)

- Office of the Chief Engineer is the responsible function

- NASA EVM Working Group

- supports the office of the Chief Engineer

- Facilitated consistent EVM policy, processes, implementation, training and tools across the Agency

- supports NASA program and project managers by addressing EVM needs, requirements and issues

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Earned Value Management at NASA

Status of EVM at NASA - Uneven application at contract and project levels - Pilots at MSFC and GSFC have yielded lessons

and recommended changes - SAP and business process issued have been

identified and are being addressed - Agency is committed to increased EVM use to

mitigate GAO “High Risk” areas - Augmented training and Agencywide tools now

available to promote and support EVM

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Earned Value Management at NASA

The “Way Ahead” for EVM- Communicate, communicate, communicate with the “field”

- It’s a critical project management discipline- It increases the assurance of program success - It is not optional

- Establish processes to ensure EVM requirements are fully implemented on applicable contracts

- Harness already established Agency-wide groups to address needed SAP and business process enhancements

- Develop and execute Center in-house EVM implementation plans - Establish a set of standards EVM metrics to be reported to Senior

Management

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Important Conclusions

Each of three (3) important Constituents – NASA’s Executive Leadership, NASA Inspector General and Ernst & Young (outside auditors) independently told us of the improved confidence in the NASA Office of the Chief Financial Officer as a result of:

• Ron Spoehel’s (New Chief Financial Officer) leadership in advancing progress already underway as a result of Terry Bowie’s (Deputy Chief Financial Officer) effective work and that of many other NASA associates

• Filling of several key vacancies in staff

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Important Conclusions (cont.)

Significant progress and valuable results have been made in the past 24 months at NASA regarding internal controls, data integrity and management reporting

……..With More to come

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