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October 27, 2005: 

Mr. Jesse Funches: 
Chief Financial Officer:
Nuclear Regulatory Commission: 

The Honorable Hubert T. Bell: 
Inspector General: 
Nuclear Regulatory Commission: 

Subject: Financial Audit: Restatements to the Nuclear Regulatory 
Commission's Fiscal Year 2003 Financial Statements: 

As you know, the Secretary of Treasury, in coordination with the 
Director of the Office of Management and Budget (OMB), is required to 
annually prepare and submit audited financial statements of the U.S. 
government to the President and Congress. We are required to audit 
these consolidated financial statements (CFS) and report on the results 
of our work.[Footnote 1] An issue meriting concern and close scrutiny 
that emerged during our fiscal year 2004 CFS audit was the growing 
number of Chief Financial Officers (CFO) Act agencies that 
restated[Footnote 2] certain of their financial statements for fiscal 
year 2003 to correct errors.[Footnote 3] Errors in financial statements 
can result from mathematical mistakes, mistakes in the application of 
accounting principles, or oversight or misuse of facts that existed at 
the time the financial statements were prepared. Frequent restatements 
to correct errors can undermine public trust and confidence in both the 
entity and all responsible parties. Further, when restatements do 
occur, it is important that financial statements clearly communicate, 
and readers of the restated financial statements understand, that the 
financial statements originally issued by management in the previous 
year and the opinion thereon should no longer be relied on and instead 
the restated financial statements and related auditor's opinion should 
be used. 

Eleven of the 23 CFO Act agencies[Footnote 4] restated certain of their 
financial statements for fiscal year 2003. Five CFO Act agencies had 
restatements in fiscal year 2003 covering their fiscal year 2002 
financial statements. Three CFO Act agencies had restatements covering 
both years. We noted that the extent of the restatements to CFO Act 
agencies' fiscal year 2003 financial statements varied from agency to 
agency, ranging from correcting two line items on one agency's balance 
sheet to correcting numerous line items on several of another agency's 
financial statements. In some cases, the net operating results of an 
agency were affected by the restatement. The amounts of the agencies' 
restatements ranged from several million dollars to more than $91 
billion. 

Nine of the 11 agencies that had restatements for fiscal year 2003 
received unqualified opinions on their originally issued fiscal year 
2003 financial statements. The auditors for 6 of these 9 agencies 
issued unqualified opinions on the restated financial statements, 
replacing the previous unqualified opinions on the respective agencies' 
original fiscal year 2003 financial statements. The auditors for 2 of 
these 9 withdrew their unqualified opinions on the fiscal year 2003 
financial statements and issued other than unqualified opinions on the 
respective agencies' restated fiscal year 2003 financial statements 
because they could not determine whether there were any additional 
misstatements and the effect of any such misstatements on the restated 
fiscal year 2003 financial statements. For the remaining agency, the 
principal auditor of the agency's fiscal year 2004 financial statements 
was not the principal auditor of the agency's fiscal year 2003 
financial statements, and an audit opinion on the agency's restated 
fiscal year 2003 financial statements was not issued. 

Our review focused on the 9 agencies with restatements for fiscal year 
2003 that received unqualified opinions on their originally issued 
fiscal year 2003 financial statements.[Footnote 5] These were the 
Department of Agriculture, Department of State, Department of Justice, 
Department of Transportation, Department of Health and Human Services, 
General Services Administration, National Science Foundation, Nuclear 
Regulatory Commission (NRC), and Office of Personnel Management. 

Because of the varying nature and circumstances surrounding the 
restatements, we are issuing a number of separate reports on the 
matter. This report communicates our observations regarding NRC's 
fiscal year 2003 restatements. Going forward, we hope that the lessons 
learned from the fiscal year 2003 restatements, together with our 
recommendations, will help (1) NRC avoid the need for restatements to 
its future financial statements and (2) ensure that NRC's auditor 
applies appropriate audit procedures in future audits to test for 
unrecorded and unbilled licensee fees and related internal controls. 

We reviewed four key areas with respect to the restatements of NRC's 
fiscal year 2003 financial statements: (1) the nature and cause of the 
errors that necessitated the restatements, including planned corrective 
actions by the agency and its auditors; (2) the timing of communicating 
the material misstatement to users of the financial statements; (3) the 
extent of transparency[Footnote 6] exhibited in disclosing the nature 
and impact of the material misstatement in the financial statements and 
the reissued auditor's report; and (4) audit issues that contributed to 
the failure to detect the errors that necessitated the restatements 
during the audit of the agency's fiscal year 2003 financial statements. 

Results in Brief: 

NRC's lack of effective internal controls over unrecorded and unbilled 
licensee fees[Footnote 7] led to the material misstatement that 
necessitated the restatement of NRC's originally issued fiscal year 
2003 financial statements. NRC's management representation letter, 
dated November 20, 2003, included representations that NRC's fiscal 
year 2003 financial statements were fairly stated and that the agency 
had effective internal controls. As of the same date, the contracted 
independent public accountant (IPA) dated its audit report, which 
contained an unqualified, or clean, audit opinion on NRC's fiscal year 
2003 financial statements. On December 17, 2003, certain NRC officials 
became aware that (1) there was an underbilling error of at least 
$500,000 for fiscal year 2003,[Footnote 8] (2) the underbilling error 
may have resulted from an internal control deficiency within NRC's 
licensee fee billing system that could affect the reliability of NRC's 
fiscal year 2003 financial statements, and (3) further research was 
needed to determine the cause of the error and whether the error was an 
isolated incident or a systemic billing system weakness. Nevertheless, 
on December 19, 2003,[Footnote 9] over 1 month prior to OMB's required 
January 30, 2004 due date for federal agencies to issue their fiscal 
year 2003 financial statements, NRC submitted its management 
representation letter and financial statements to OMB. 

Consistent with OMB Bulletin 01-02, Audit Requirements for Federal 
Financial Statements,[Footnote 10] NRC should have timely notified the 
IPA of the error and related internal control deficiency, but never 
did. According to the IPA, it was not aware of the material error until 
May 2004 when it independently discovered that NRC had recorded and 
billed licensee fees during fiscal year 2004 that instead should have 
been recorded and billed during fiscal year 2003. The IPA determined 
that the underbilling error resulted from certain internal control 
deficiencies related to NRC's fee billing system. 

Based on its interpretation of the American Institute of Certified 
Public Accountants (AICPA) Codification of Auditing Standards, AU 
section 561, Subsequent Discovery of Facts Existing at the Date of the 
Auditor's Report, the IPA stated that upon discovery of the error in 
May 2004, it discussed the material error with NRC but did not advise 
NRC to make appropriate disclosures of the newly discovered facts and 
their effects on the fiscal year 2003 financial statements to persons 
who may have been relying on such financial statements and related 
auditor's report. The IPA told us that it came to this decision because 
(1) it considered issuance of the fiscal years 2004 and 2003 
comparative financial statements to be imminent and (2) in May 2004, it 
did not think that any users would still be relying on the fiscal year 
2003 financial statements and related auditor's report. However, in our 
view, the issuance of NRC's fiscal years 2004 and 2003 comparative 
financial statements, which occurred in November 2004, was not imminent 
when the IPA discovered the material error in May 2004, more than 5 
months prior to OMB's November 15, 2004 deadline for federal agencies 
to issue their fiscal year 2004 financial statements. In addition, the 
IPA did not provide us with documentation of the basis for its 
conclusion that users were not likely to still be relying on the fiscal 
year 2003 financial statements and would not attach importance to the 
correction of the material error. In our view, such documentation 
should include the identification of potential users, such as Congress, 
OMB, GAO, and the Department of the Treasury (Treasury), and an 
analysis of whether the users would likely be relying on the fiscal 
year 2003 financial statements. We have some concerns that, without 
notification, anyone who may have been relying on the fiscal year 2003 
financial statements would not have known from May to mid-November 
2004, or for more than 5 months, that NRC's originally issued financial 
statements, which received an unqualified opinion, were materially 
misstated and should not be relied on. 

In addition to NRC's lack of effective internal controls over licensee 
fees, we noted two areas where additional audit procedures could have 
identified the problem at the time of the fiscal year 2003 audit. 
During its audit of the fiscal year 2003 financial statements, the IPA 
did not design or perform sufficient audit procedures to (1) determine 
whether all eligible licensee fees[Footnote 11] were billed and 
properly presented in the financial statements and (2) detect the 
internal control deficiencies related to NRC's recording of licensee 
fees. 

We are making a recommendation to NRC's CFO to determine whether the 
new procedures, which NRC represents as having been established, 
effectively ensure that all eligible licensee fees are properly 
recorded and billed. We are also making a recommendation to NRC's 
Inspector General to work with the IPA so that audit procedures to test 
for unrecorded and unbilled licensee fees and related internal controls 
are fully and effectively implemented. 

In commenting on a draft of this report, NRC's CFO and Inspector 
General both concurred with the recommendation that we made to each of 
them. We also received a technical comment from NRC's CFO, which we 
have incorporated. 

Background: 

In conducting the fiscal year 2004 audit of the CFS, we reviewed the 23 
CFO Act agencies' performance and accountability reports for possible 
restatements and identified 11 agencies that had restated certain of 
their audited fiscal year 2003 financial statements. 

The primary intended users of federal agencies' financial reports are 
citizens, Congress, federal executives, and federal program 
managers.[Footnote 12] Each of these groups may use federal agencies' 
financial statements to satisfy their specific needs. Citizens are 
interested in many aspects of the federal government, particularly 
federal programs that affect their financial well-being. Congress is 
interested in monitoring and assessing the efficiency and effectiveness 
of federal programs. Federal executives, such as central agency 
officials at OMB and Treasury, are interested in federal financial 
statements to assist the President of the United States. OMB assists 
the President in overseeing the preparation of the federal budget by 
formulating the President's spending plans, evaluating the 
effectiveness of agency programs, assessing competing funding demands 
among agencies, and setting funding priorities. Treasury assists the 
President in managing the finances of the federal government and 
prepares the CFS, which is based on audited financial statements 
prepared by federal agencies. GAO audits the CFS and reports on the 
results of its audit. Finally, federal program managers use agency 
financial statements as tools for managing their operations within the 
limits of the spending authority granted by Congress. 

The primary accounting and auditing standards that apply to restatement 
disclosures by federal entities are the Federal Accounting Standards 
Advisory Board's Statement of Federal Financial Accounting Standards 
(SFFAS) No. 21, Reporting Corrections of Errors and Changes in 
Accounting Principles, and AU section 561.[Footnote 13] 

Objective, Scope, and Methodology: 

The objective of our review of restatements of NRC's fiscal year 2003 
financial statements was to determine the nature and cause of the 
errors, the transparency and timing of communicating the material 
misstatements, any audit issues relating to such misstatements, and any 
actions being taken to help preclude similar errors from occurring in 
the future. 

We reviewed the nature and causes of the restatements, and we also 
examined corrective actions taken by NRC to help preclude similar 
errors from occurring in the future. We interviewed the preparers and 
auditors of NRC's fiscal year 2003 financial statements, including 
staff from the agency's Office of Inspector General (OIG), and we 
obtained and reviewed relevant audit documentation. Our work was not 
designed to and we did not test the accuracy or appropriateness of the 
restatements. 

In our review, we considered certain accounting and auditing standards, 
including SFFAS No. 21; OMB Bulletin 01-02; the Financial Accounting 
Standards Board's Statement of Financial Accounting Standards No. 16, 
Prior Period Adjustments; and the AICPA Codification of Auditing 
Standards, AU section 420, Consistency of Application of Generally 
Accepted Accounting Principles, AU section 508, Reports on Audited 
Financial Statements, and AU section 561. 

We performed our review of the restatements of NRC's fiscal year 2003 
financial statements from December 2004 to July 2005 in accordance with 
U.S. generally accepted government auditing standards. 

We requested comments on a draft of this report from NRC's CFO and 
Inspector General or their designees. Written comments from NRC's CFO 
and Inspector General are reprinted in enclosures I and II, 
respectively, and are also discussed in the Agency Comments section. 

Issues Related to Restatements of NRC's Fiscal Year 2003 Financial 
Statements: 

With respect to restatement of certain of NRC's fiscal year 2003 
financial statements, we identified the following three areas that need 
improvement: (1) certain internal controls related to NRC's recording 
of licensee fees; (2) communication by NRC with the IPA, OIG, and users 
of the financial statements concerning the identified material error; 
and (3) audit procedures for unrecorded and unbilled licensee fees and 
related internal controls. These issues are discussed in detail below. 

Material Error Resulted from Deficiencies in Certain Internal Controls 
Related to Recording Licensee Fees: 

In fiscal year 2004, NRC restated certain of its fiscal year 2003 
financial statements to reflect approximately $3 million in unrecorded 
and unbilled licensee fees,[Footnote 14] which resulted from certain 
internal control deficiencies related to NRC's fee billing system. NRC 
inspects its licensees' facilities and users of nuclear materials to 
ensure compliance with regulatory requirements and recovers most of its 
appropriations from inspection fees paid by NRC licensees. If NRC does 
not bill its licensees or does not bill them for the full amount they 
owe, NRC's Accounts Receivable and related revenue will be understated 
and the federal government may not receive the full amount of fees to 
which it is entitled. 

According to NRC's IPA, during fiscal year 2003, the fee billing system 
failed to include all billable hours in the invoices issued to NRC's 
licensees. The IPA stated that this condition resulted from the 
following deficiencies: 

* inadequate testing by NRC of the fee billing system to ensure that 
modifications to system software performed as intended, 

* use of intensive manual processes, and: 

* lack of comprehensive quality assurance procedures over the billing 
process.[Footnote 15] 

As a result, NRC had to restate its originally issued fiscal year 2003 
Balance Sheet, Statement of Net Cost, Statement of Changes in Net 
Position, and Statement of Financing to accurately reflect 
approximately $3 million in licensee fees that had not been recorded 
and billed. 

The $3 million unrecorded and unbilled licensee fees error represented 
about 5 percent of the Other Intragovernmental Liabilities[Footnote 16] 
and about 6 percent of the Accounts Receivable balances on the 
originally issued fiscal year 2003 Balance Sheet, approximately 5 
percent of Net Cost of Operations[Footnote 17] on NRC's originally 
issued fiscal year 2003 Statement of Net Cost,[Footnote 18] about 5 
percent of the Total Financing Sources component of Cumulative Results 
of Operations on NRC's originally issued fiscal year 2003 Statement of 
Changes in Net Position, and approximately 4 percent of the Total 
Resources Used to Finance Activities on NRC's originally issued fiscal 
year 2003 Statement of Financing. Because at the time of the issuance 
of NRC's fiscal years 2004 and 2003 comparative financial statements 
there was insufficient evidence to support the completeness of the 
Accounts Receivable and related revenue balances reported in NRC's 
restated fiscal year 2003 financial statements, the IPA updated the 
originally issued unqualified opinion to a qualified opinion. 

According to NRC officials, the fee billing system has since been 
modified to improve the functionality of the system's interface, and 
the acceptance testing of fee billing system software modifications has 
been expanded and is now independently validated and verified. The 
officials also stated that they implemented a manual internal control 
procedure that compares the number of inspection hours billed by NRC on 
licensee invoices against the number of hours eligible to be charged to 
inspections by NRC staff as indicated in the NRC inspection database. 
These procedures are to be performed throughout the year and thus are 
intended to determine, on a timely basis, that all eligible hours have 
been billed. 

Identified Material Error Was Not Communicated Timely: 

NRC's management representation letter, dated November 20, 2003, 
included representations that NRC's fiscal year 2003 financial 
statements were fairly stated and that the agency had effective 
internal controls. As of the same date, the IPA dated its audit report, 
which contained an unqualified, or clean, audit opinion on NRC's fiscal 
year 2003 financial statements. On December 17, 2003, certain NRC 
officials became aware that (1) there was an underbilling error of at 
least $500,000 for fiscal year 2003, (2) the underbilling error may 
have resulted from an internal control deficiency within NRC's licensee 
fee billing system that could affect the reliability of NRC's fiscal 
year 2003 financial statements, and (3) further research was needed to 
determine the cause of the error and whether the error was an isolated 
incident or a systemic billing system weakness. Nevertheless, on 
December 19, 2003, over 1 month prior to OMB's required January 30, 
2004 due date for federal agencies to issue their fiscal year 2003 
financial statements, NRC submitted its management representation 
letter and financial statements to OMB. 

Subsequently, NRC researched the problem and by February 2004 had 
completed a preliminary review of NRC's fiscal year 2003 licensee fees. 
This review identified a total of about $2.4 million of unrecorded and 
unbilled licensee fees for fiscal year 2003. NRC continued to research 
the issue and by November 2004 found additional unrecorded and unbilled 
licensee fees. In total, approximately $3 million in unrecorded and 
unbilled licensee fees was identified for fiscal year 2003. 

According to the OIG, despite the fact that NRC officials met with the 
agency's IPA and OIG on several occasions between the time that NRC's 
staff discovered the billing error and the IPA subsequently discovered 
the error, NRC did not report the billing error to the IPA or OIG. 
Specifically, the IPA and OIG stated that they were totally unaware of 
the error until the IPA discovered in May 2004 that NRC, as a result of 
the error, had recorded licensee fees and issued bills during fiscal 
year 2004 for licensee fees that instead should have been recorded and 
billed in fiscal year 2003. In accordance with OMB Bulletin 01-02, 
there shall be open and timely communication throughout the audit 
process between agency officials, including the CFO and the OIG, as 
well as the IPA if one is used, which would include potential audit 
findings, materially misstated or unsupported amounts in the financial 
statements, and material weaknesses in internal control. Accordingly, 
NRC officials had a responsibility to report the billing error and, if 
known, the cause of the error to the IPA when NRC became aware of it on 
December 17, 2003, because of the effect that the error could have on 
the fiscal year 2003 financial statements. Failure to timely provide 
this information is a serious matter that violates the tenets of the 
relationship between the audited entity and the auditor. As a result, 
NRC's OIG initiated an investigation of the matter and issued an 
internal report dated February 14, 2005, which we reviewed as part of 
our work, that discusses the details of the material error noted above. 

After NRC's IPA independently discovered the error in May 2004, the IPA 
discussed the error with NRC but did not advise NRC to notify the users 
of the financial statements, such as Congress, OMB, GAO, and Treasury, 
about the material error. According to AU section 561, once the auditor 
becomes aware of subsequently discovered information that is found to 
be both reliable and to have existed at the date of the auditor's 
report, the auditor should take certain actions if the nature and 
effect of the matter are such that (1) the auditor's report would have 
been affected if the information had been known to the auditor at the 
date of the report and had not been reflected in the financial 
statements and (2) the auditor believes there are persons currently 
relying or likely to rely on the financial statements who would attach 
importance to the information. If these conditions are met, the auditor 
should advise the reporting entity to make appropriate disclosures of 
the newly discovered facts and their effects on the financial 
statements to persons who are known to be relying or who are likely to 
rely on the financial statements and the related auditor's report. AU 
561 states that when issuance of financial statements accompanied by 
the auditor's report for a subsequent period is imminent, so that 
disclosure is not delayed, appropriate disclosure of the revision can 
be made in such statements instead of reissuing the earlier statements. 
AU section 561 also states that if a material error in the prior year 
financial statements has been discovered but the effect of the 
subsequently discovered information cannot be quantified without a 
prolonged investigation, appropriate disclosure would consist of the 
reporting entity notifying users known or likely to be relying on the 
financial statements and the related auditor's report that the 
statements and auditor's report should not be relied on and that 
revised financial statements and a revised auditor's report will be 
issued upon completion of an investigation. AU section 561 further 
states that the auditor should take whatever steps are necessary to be 
satisfied that the reporting entity has made the appropriate 
disclosures. 

However, until the issuance of NRC's fiscal years 2004 and 2003 
comparative financial statements on November 15, 2004, users of NRC's 
financial statements were not aware that certain of the fiscal year 
2003 financial statements originally issued were materially misstated. 
Based on its interpretation of AU 561, the IPA stated that it discussed 
the error with NRC but did not advise NRC to make appropriate 
disclosures of the newly discovered facts and their effects on the 
fiscal year 2003 financial statements to persons known to rely or 
likely to rely on such financial statements and related auditor's 
report. The IPA told us that it came to this decision because (1) it 
considered issuance of the fiscal years 2004 and 2003 comparative 
financial statements to be imminent and (2) in May 2004, it did not 
think that any users would still be relying on the fiscal year 2003 
financial statements and related auditor's report. However, in our 
view, the issuance of NRC's fiscal years 2004 and 2003 comparative 
financial statements, which occurred in November 2004, was not imminent 
when the IPA discovered the material error in May 2004, more than 5 
months prior to OMB's November 15, 2004 deadline for federal agencies 
to issue their fiscal year 2004 financial statements. In addition, the 
IPA did not provide us with documentation of the basis for its 
conclusion that users were not likely to still be relying on the fiscal 
year 2003 financial statements and would not attach importance to the 
correction of the material error. In our view, such documentation 
should include identification of potential users, such as Congress, 
OMB, GAO, and Treasury, and an analysis of whether the users would 
likely be relying on the fiscal year 2003 financial statements. We have 
concerns that, without notification, anyone who may have been relying 
on the fiscal year 2003 financial statements would not have known from 
May to mid-November 2004, or for more than 5 months, that NRC's 
originally issued financial statements, which received an unqualified 
opinion, were materially misstated and should not be relied on. 

Audit Procedures Did Not Detect Unrecorded and Unbilled Licensee Fees 
and Related Internal Control Deficiencies: 

The above-noted material error was not discovered during the audit of 
NRC's fiscal year 2003 financial statements because the IPA did not 
design or perform sufficient audit procedures to (1) determine whether 
all eligible licensee fees were billed and properly presented in the 
financial statements and (2) detect the previously noted internal 
control deficiencies related to NRC's recording of licensee fees. 

According to the Financial Audit Manual (FAM),[Footnote 19] the auditor 
should perform audit procedures to test for all significant 
assertions[Footnote 20] in significant financial statement line items 
and accounts. The FAM states that an assertion is significant if 
misstatements in the assertion could exceed test materiality for the 
related line item, account, or disclosure. Based on the materiality of 
NRC's Accounts Receivable and related revenue and the potential for 
material understatement, the auditor should have identified the 
completeness assertion as significant and performed audit procedures to 
determine whether all applicable fees were billed and presented in the 
financial statements. To test for completeness, the auditor should (1) 
select from an independent population of items that should be recorded 
in the account, (2) select items that should be recorded from a source 
that is likely to contain all the items that should be recorded, and 
(3) determine whether the selected items are included in the recorded 
balance. However, although the IPA did perform certain audit procedures 
during fiscal year 2003 to test Accounts Receivable and related 
revenue, the IPA did not design or perform audit procedures to test for 
the completeness assertion. For example, we found no documentation of 
audit procedures to compare the total number of inspection hours billed 
by NRC on licensee invoices against the total number of hours charged 
to inspections by NRC staff in the NRC inspection database in order to 
determine if all eligible hours had been billed. 

Also, during the fiscal year 2003 audit, the IPA did not identify and 
report the internal control deficiencies, described earlier in this 
report, that led to NRC's failure to bill for all applicable licensee 
fees. According to OMB Bulletin 01-02, auditors are responsible for 
performing sufficient tests of internal controls that have been 
properly designed and placed in operation to support a low level of 
assessed control risk.[Footnote 21] However, the IPA's fiscal year 2003 
audit procedures were not sufficient to detect NRC's internal control 
deficiencies. The IPA stated that it took corrective action in fiscal 
year 2004 and designed audit procedures to detect unrecorded and 
unbilled licensee fees and to test related internal controls. 

Conclusions: 

NRC did not disclose the material error it detected in its fiscal year 
2003 financial statements to its IPA or OIG. In addition, in our view, 
NRC did not timely disclose the material error to users of its 
financial statements. NRC corrected the error and issued restated 
financial statements as part of its fiscal years 2004 and 2003 
comparative financial statements on November 15, 2004, more than 8 
months after NRC determined that the error totaled at least $2.4 
million and about 11 months after it first became aware of an 
underbilling error. Going forward, it will be important for NRC to 
ensure that its new procedures, which it represents as having been 
implemented, effectively address the cause of the error. In addition, 
it will be important that the agency promptly notify its IPA and OIG of 
any errors it discovers in future financial statements. It will also be 
important that NRC's auditor fully and effectively implement audit 
procedures to detect any similar errors or internal control 
deficiencies in the future. 

Recommendations for Executive Action: 

We recommend that NRC's Chief Financial Officer determine whether the 
new procedures, which NRC represents as having been established, 
effectively ensure that all eligible licensee fees are recorded and 
billed. 

We recommend that NRC's Inspector General work with NRC's IPA so that 
audit procedures to test for unrecorded and unbilled licensee fees and 
related internal controls are fully and effectively implemented. 

Agency Comments: 

In written comments on a draft of this report, which are reprinted in 
enclosures I and II, NRC's CFO and Inspector General, in separate 
letters, concurred with the recommendations that we made to each of 
them. We also received a technical comment from NRC's CFO, which we 
have incorporated. 

Within 60 days of the date of this report, we would appreciate 
receiving a written statement on actions taken to address these 
recommendations. 

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of the Senate Committee on Homeland Security and 
Governmental Affairs; the Subcommittee on Federal Financial Management, 
Government Information, and International Security, Senate Committee on 
Homeland Security and Governmental Affairs; the House Committee on 
Government Reform; and the Subcommittee on Government Management, 
Finance and Accountability, House Committee on Government Reform. In 
addition, we are sending copies to the Fiscal Assistant Secretary of 
the Treasury and the Controller of OMB. This report is also available 
at no charge on GAO's Web site at www.gao.gov. 

We appreciate the courtesy and cooperation extended to us by your staff 
throughout our work. We look forward to continuing to work with your 
offices to help improve financial management in the federal government. 
If you have any questions about the contents of this report, please 
contact me at (202) 512-3406 or engelg@gao.gov. 

Signed by: 

Gary T. Engel: 
Director: 
Financial Management and Assurance: 

[End of section] 

Enclosure I: Comments from the Chief Financial Officer, Nuclear 
Regulatory Commission: 

UNITED STATES NUCLEAR REGULATORY COMMISSION: 
CHIEF FINANCIAL OFFICER: 
WASHINGTON, D.C. 20555-0001: 

October 19, 2005: 

Mr. Gary T. Engel, Director: 
Financial Management Assurance: 
United States: Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Engel: 

Thank you for the opportunity to review the United States Government 
Accountability Office's draft report, Financial Audit. Restatement to 
the Nuclear Regulatory Commissions Fiscal Year 2003 Financial 
Statements. 

I agree with the report's recommendation that the Nuclear Regulatory 
Commission's Chief Financial Officer determine whether the new fee 
billing procedures effectively ensure that all eligible licensee fees 
are recorded and billed. However, to more accurately reflect the 
actions the Nuclear Regulatory Commission has taken with respect to its 
fee billing system, I recommend the following change to the first 
sentence of the last paragraph on page 13 of the draft report: 

According to NRC officials, the fee billing system has since been 
modified to improve the functionality of the system's interface, and 
the acceptance testing of fee billing system software modifications has 
been expanded and is now independently validated and verified. 

If you have any questions concerning our response, please contact Mary 
S. Givvines, Director, Division of Financial Management on (301) 415- 
7379. 

Sincerely, 

Signed by: 

Jesse Funches: 

cc: Chairman Diaz; 
Commissioner McGaffigan; 
Commissioner Merrifield; 
Commissioner Jaczko; 
Commissioner Lyons; 
L. A. Reyes, EDO; 
M. Malloy, OEDO. 

[End of section] 

Enclosure II: Comments from the Inspector General, Nuclear Regulatory 
Commission: 

UNITED STATES NUCLEAR REGULATORY COMMISSION: 
OFFICE OF THE INSPECTOR GENERAL: 
WASHINGTON, D.C. 20555-0001: 

October 14, 2005: 

Mr. Gary T. Engel, 
Director: 
Financial Management and Assurance: 
United States Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Engel: 

The U. S. Nuclear Regulatory Commission (NRC), Office of the Inspector 
General appreciates the opportunity to respond to the Government 
Accountability Office (GAO) report entitled Financial Audit: 
Restatements to the Nuclear Regulatory Commission's Fiscal Year 2003 
Financial Statements. 

One point in the report requires clarification. 

This relates to the comment on the tests of completeness. On page 19 of 
the draft report, the statement is made that GAO found "no 
documentation of audit procedures to compare the total number of 
inspection hours billed by NRC on licensee invoices against the total 
number of hours charged to inspections by NRC staff in the NRC 
inspection database in order to determine if all eligible hours had 
been billed." 

OIG response: There is no "inspection database" that includes all the 
hours billed during a particular year. Data in the fee billing system 
comes from several sources. As a result, the testing of completeness is 
accomplished through a variety of alternative techniques. 

We have reviewed the report and concur with the recommendation that 
NRC's Inspector General work with its IPA so that audit procedures to 
test for unrecorded and unbilled licensee fees and related internal 
controls are fully and effectively implemented. 

Thank you for the opportunity to review the draft copy of this report. 
If you have any questions regarding this response, please contact 
Stephen Dingbaum, Assistant Inspector General for Audits, at (301) 415- 
5915. 

Sincerely, 

Signed by: 

Hubert T. Bell: 
Inspector General: 

cc: Chairman Diaz; 
Commissioner Merrifield; 
Commissioner Jaczko; 
Commissioner Lyons; 
Commissioner McGaffigan; 
Luis Reyes, EDO; 
Melinda Malloy, OEDO. 

The following is a comment on the Nuclear Regulatory Commission's (NRC) 
Inspector General letter dated October 14, 2005. 

GAO Comment: 

1. NRC's Inspector General noted that there is no "inspection database" 
that includes all the hours billed during a particular year. We agree. 
Our report does not state that the inspection database includes all the 
hours billed during a particular year. Instead, this report states that 
the NRC inspection database includes the hours eligible to be charged 
to inspections by NRC staff. NRC's Inspector General also stated that 
data in the fee billing system comes from several sources and, as a 
result, the testing of completeness is accomplished through a variety 
of alternative techniques. While we agree that data in the fee billing 
system comes from several sources and that the testing of completeness 
can be accomplished through several means, the IPA's fiscal year 2003 
audit procedures were not designed or performed to test for the 
completeness assertion. 

[End of section] 

(198394): 

FOOTNOTES 

[1] The Government Management Reform Act of 1994 has required such 
reporting, covering the executive branch of government, beginning with 
financial statements prepared for fiscal year 1997. 31 U.S.C.  331 
(e). The federal government has elected to include certain financial 
information on the legislative and judicial branches in the CFS as 
well. 

[2] A financial statement restatement occurs when an entity either 
voluntarily or prompted by its auditors or regulators revises public 
financial information that has previously been reported. 

[3] According to Federal Accounting Standards Advisory Board, Statement 
of Federal Financial Accounting Standards (SFFAS) No. 21, Reporting 
Corrections of Errors and Changes in Accounting Principles, prior 
period financial statements presented should be restated only to 
correct errors that caused such statements to be materially misstated. 

[4] The Federal Emergency Management Agency (FEMA) was transferred to 
the Department of Homeland Security (DHS) effective March 1, 2003. With 
this transfer, FEMA was no longer required to prepare and have audited 
stand-alone financial statements under the CFO Act, leaving 23 CFO Act 
agencies for the remainder of fiscal year 2003 and for fiscal year 
2004. The DHS Financial Accountability Act, Pub. L. No. 108-330, 118 
Stat. 1275 (Oct. 16, 2004), added DHS to the list of CFO Act agencies, 
increasing the number of CFO Act agencies again to 24 beginning in 
fiscal year 2005. 

[5] The 2 agencies that had restatements for fiscal year 2003 but did 
not receive unqualified opinions on their originally issued fiscal year 
2003 financial statements were the Department of Defense and the Small 
Business Administration. 

[6] Transparency is the full, accurate, and timely disclosure of 
information. 

[7] Licensee fees include fees related to reactor and materials 
inspections. 

[8] Underbilling error was discovered by NRC as a result of an inquiry 
from an NRC licensee. 

[9] Although OMB encouraged CFO Act agencies to accelerate issuance of 
their fiscal year 2003 audited financial statements to November 15, 
2003 (or as close to that date as possible) in preparation for the 
accelerated reporting date for fiscal year 2004, OMB's required due 
date for agencies' fiscal year 2003 audited financial statements was 
January 30, 2004. 

[10] Office of Management and Budget, Bulletin 01-02, Audit 
Requirements for Federal Financial Statements (Washington, D.C.: Oct. 
16, 2000). 

[11] Certain fees are exempt from fee collection by regulation. 

[12] Federal Accounting Standards Advisory Board, Statement of Federal 
Financial Accounting Concepts No. 1, Objectives of Federal Financial 
Reporting. 

[13] Generally accepted government auditing standards incorporate AICPA 
reporting and auditing standards unless the Comptroller General of the 
United States excludes them by formal announcement. 

[14] According to NRC officials, since NRC was already restating the 
fiscal year 2003 financial statements for this $3 million material 
error, it also decided to correct for less significant errors that had 
been identified. Specifically, the fiscal year 2003 Balance Sheet was 
restated for $777 thousand relating to capital leases, and the fiscal 
year 2003 Statement of Budgetary Resources was restated for $4.7 
million for unfilled customer orders. These errors were not deemed 
material by NRC's IPA. 

[15] Procedures to detect potential underbillings were not effective 
because they did not provide for reconciliations of data generated by 
different sources. Such reconciliations are used to identify unrecorded 
and unbilled fees and erroneous licensee invoices. In addition, some 
reports produced by the fee system did not contain totals to enable 
comparisons of invoices to data sources, thus complicating the process 
to detect potential underbillings. 

[16] The Other Intragovernmental Liabilities account increased by 
approximately $3 million from approximately $57 million, as originally 
reported in fiscal year 2003, to approximately $60 million when 
restated in the fiscal year 2004 and 2003 comparative financial 
statements. The underbilling error affected Other Intragovernmental 
Liabilities because NRC incurs a liability to offset the net accounts 
receivable for fees assessed. This liability represents amounts which, 
when collected, will be transferred to Treasury to offset NRC's 
appropriations in the year collected. Therefore, the Total Financing 
Sources component of Cumulative Results of Operations on the Statement 
of Changes in Net Position and the Total Resources Used to Finance 
Activities on the Statement of Financing were restated to capture the 
effect of NRC's obligation to transfer funds to Treasury for fees 
assessed. 

[17] The $3 million licensee fees error represented almost 1 percent of 
the Earned Revenues from the Public reported on NRC's originally issued 
fiscal year 2003 Statement of Net Cost. 

[18] In addition, Net Cost of Operations reported on NRC's originally 
issued fiscal year 2003 Statement of Changes in Net Position and 
Statement of Financing were also understated by approximately 5 
percent. 

[19] GAO/President's Council on Integrity and Efficiency, Financial 
Audit Manual, GAO-01-765G (Washington, D.C.: July 2001), updated by GAO-
04-1015G and GAO-04-942G (July 2004). 

[20] Financial statement assertions are management representations that 
are embodied in financial statement components. The assertions can be 
either explicit or implicit and can be classified into the following 
categories: (1) existence or occurrence, (2) completeness, (3) rights 
and obligations, (4) valuation or allocation, and (5) presentation and 
disclosure. 

[21] Control risk is the risk that a material misstatement that could 
occur in an assertion will not be prevented or detected and corrected 
on a timely basis by the entity's internal control.