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entitled 'Financial Audit: Restatements to the National Science 
Foundation's Fiscal Year 2003 Financial Statements' which was released 
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December 22, 2005: 

Mr. Thomas N. Cooley: 
Chief Financial Officer: 
National Science Foundation: 

Ms. Christine C. Boesz: 
Inspector General: 
National Science Foundation: 

Subject: Financial Audit: Restatements to the National Science 
Foundation's Fiscal Year 2003 Financial Statements: 

As you know, the Secretary of the 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 an 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 the 
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 (NSF), 
Nuclear Regulatory Commission, 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 NSF'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 NSF and its auditor avoid the need for 
restatements to NSF's future financial statements. 

We reviewed four key areas with respect to the restatements of NSF'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: 

Failure to properly record the H-1B Nonimmigrant Petitioner 
Fees[Footnote 7] (H-1B) account funds for fiscal years 1999 through 
2003 led to the material misstatement of about $216 million that 
necessitated the restatements of NSF's originally issued fiscal year 
2003 Balance Sheet and Statement of Changes in Net Position. According 
to the NSF contracted independent public accountant's (IPA) management 
letter report dated November 4, 2004, NSF's Division of Financial 
Management (DFM) did not have adequate internal controls to ensure that 
it provided accurate financial data, which may have contributed to the 
recording error that necessitated the restatements. NSF's IPA did not 
discover the error during its audit of NSF's fiscal year 2003 financial 
statements. In our view, the IPA did not understand that the H-1B 
account funds are special funds, which are to be accounted for 
differently than certain other NSF receipts. In addition, we found that 
the IPA was not aware of the U.S. Department of the Treasury's 
Financial Management Service (FMS) guidance relating to the recording 
of H-1B account funds. Consequently, the IPA did not design or perform 
adequate audit procedures to detect the accounting errors. 

We are making a recommendation to NSF's CFO to address the issues we 
identified with respect to the H-1B account funds recording error that 
necessitated the fiscal year 2003 restatements. We are also making a 
recommendation to NSF's Inspector General to work with the IPA so that 
audit procedures to detect any future material H-1B account funds 
recording errors are fully and effectively implemented. 

In commenting on a draft of this report, the NSF's CFO and Inspector 
General, in separate letters, offered their views regarding the 
materiality of the errors and the impact of the errors on Net Position. 
We have clarified our perspective on both points. The report notes that 
the recording errors in individual years may not have been material, 
but that the cumulative effect of the errors on the fiscal year 2003 
financial statements was deemed material by NSF's IPA. We also note 
that Total Net Position was unchanged, but that the two distinct 
components of net position, were misstated. 

NSF's Inspector General concurred with our recommendation and stated 
that her office had instituted procedures to ensure that the IPA 
designed and performed audit steps to detect any future H-1B account 
fund recording errors. 

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 8] 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 the Department of the Treasury (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 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.[Footnote 9] 

Objective, Scope, and Methodology: 

The objective of our review of restatements of NSF'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 NSF to help preclude similar 
errors from occurring in the future. We interviewed the preparers and 
auditors of NSF'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; 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 NSF'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 the draft of this report from NSF's CFO and 
Inspector General or their designees. Written comments from NSF's CFO 
and Inspector General are reprinted in Enclosures I and II, 
respectively, and are also discussed in the "Agency Comments and Our 
Evaluation" section. We also received technical comments from NSF's 
Inspector General which we have incorporated as appropriate but have 
not reprinted in Enclosure II. 

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

With respect to the restatements of NSF's fiscal year 2003 Balance 
Sheet and Statement of Changes in Net Position, we identified the 
following two areas that need improvement: (1) accounting for and 
reporting of the H-1B account funds; and (2) audit procedures over the 
proper recording of H-1B account funds. These issues are discussed in 
detail below. 

H-1B Account Funds Were Not Properly Recorded: 

In fiscal year 2004, NSF restated certain of its originally issued 
fiscal year 2003 financial statements to correct for the improper 
recording of approximately $216 million of H-1B account funds for 
fiscal years 1999 through 2003. Specifically, the H-1B account funds 
were incorrectly recorded as Other Appropriations Realized when 
received instead of Appropriated Trust or Special Fund Receipts. The 
recording errors caused the Unexpended Appropriations and Cumulative 
Results of Operations balances on both the originally issued fiscal 
year 2003 Balance Sheet and Statement of Changes in Net Position to be 
materially overstated and understated, respectively, by $216 million. 
Although Total Net Position was unchanged, these two accounts represent 
distinct components of net position. In addition, the recording errors 
in individual years may not have been material, however, the cumulative 
effect of the errors on the fiscal year 2003 financial statements was 
deemed material by NSF's IPA. 

In February 1999, FMS issued guidance entitled Unavailable Special Fund 
Receipt Account Transfers that provided definitions and descriptive 
journal entries for recording special funds in accordance with SFFAS 
No. 7, Accounting for Revenue and Other Financing Sources and Concepts 
for Reconciling Budgetary and Financial Accounting. The H-1B account 
funds are NSF's only appropriations that are classified as special 
funds. NSF incorrectly recorded the H-1B account funds as Other 
Appropriations Realized instead of Appropriated Trust or Special Fund 
Receipts because NSF was not aware of the February 1999 FMS guidance, 
and as a result, NSF was not aware that such funds were recorded in 
error. An NSF official told us that they believed, until fiscal year 
2004, that they were appropriately recording the receipt of the H-1B 
account funds. 

In July 2004, OMB sent an email following up on a March 2004 
notification to NSF staff personnel that the H-1B account funds were 
incorrectly recorded and that NSF was required to follow the related 
FMS guidance.[Footnote 10] NSF staff personnel corrected NSF's error 
approximately 8 months after the agency was first notified. However, 
according to NSF officials, NSF management did not become aware of the 
magnitude of the misstatement until October 2004. Further, the IPA and 
OIG stated that they were unaware of the H-1B account funds recording 
error until NSF provided them a draft of the fiscal years 2004 and 2003 
comparative financial statements in October 2004 that contained the 
restatements to the fiscal year 2003 financial statements. 

According to the NSF IPA's management letter report dated November 4, 
2004, NSF's DFM did not have adequate internal controls to ensure that 
it provided accurate financial data. The IPA stated that this may have 
contributed to the recording errors that necessitated the restatements. 
The IPA's report pointed out that first and second drafts of the 
comparative fiscal years 2004 and 2003 financial statements provided by 
DFM contained numerous errors. 

To resolve this matter, the IPA generally recommended that NSF's Chief 
Financial Officer determine the appropriate skills and abilities needed 
in the DFM organizational structure to fulfill NSF's responsibilities 
for providing accurate financial data, and implement steps to improve 
top level supervisory review procedures and practices. 

NSF management responded to the IPA's recommendations stating that they 
believed that normal supervisory controls were in place and that such 
controls provide the review procedures and practices recommended by the 
IPA. Nevertheless, NSF management stated that the IPA's recommendations 
would be incorporated in NSF's annual performance review process. In 
addition, subsequent to the IPA making its recommendations, NSF filled 
the office of deputy CFO position which had been vacant for 18 months. 
According to the IPA, this action will provide better oversight of 
NSF's financial reporting process. 

Audit Procedures were Not Adequately Designed to Detect the Improper 
Recording of H-1B Account Funds: 

The above noted material error was not discovered during the audit of 
NSF's fiscal year 2003 financial statements. In our view, the IPA did 
not understand that the H-1B account funds are special funds, which are 
to be accounted for differently than certain other NSF receipts. In 
addition, we found that the IPA was not aware of the 1999 FMS guidance 
relating to the recording of H-1B account funds. Consequently, the IPA 
did not design or perform adequate audit procedures to detect the 
errors. 

According to the Financial Audit Manual (FAM),[Footnote 11] the auditor 
should perform audit procedures to test for all significant 
assertions[Footnote 12] 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 
NSF's H-1B account funds recording error, the auditor should have 
identified the presentation and disclosure assertion as significant and 
performed audit procedures to determine whether NSF's receipts, 
annually and in the aggregate, were properly reported in the financial 
statements. To test for presentation and disclosure, the auditor should 
perform audit procedures to determine whether (1) accounts are properly 
classified and described in the financial statements, (2) the financial 
statements are prepared in conformance with generally accepted 
accounting principles, and (3) footnotes contain all information 
required to be disclosed. The IPA performed certain audit procedures 
during fiscal year 2003 to test budget accounts. However, because the 
IPA (1) did not understand that the H-1B account funds are special 
funds, which are to be accounted for differently than certain other NSF 
receipts, and (2) was not aware of the 1999 FMS guidance relating to 
the recording of H-1B account funds, the IPA did not design or perform 
audit procedures to adequately test for the presentation and disclosure 
assertion as it related to the H-1B account funds. 

According to NSF's IPA, it has now obtained and reviewed the February 
1999 FMS guidance. The IPA also stated that, beginning with fiscal year 
2005, audit procedures will be designed and performed to detect any 
future H-1B account funds recording errors. 

Conclusions: 

NSF restated certain of its originally issued fiscal year 2003 
financial statements and disclosed the material error in the notes to 
the restated financial statements. Going forward, the key will be for 
NSF to fully and effectively implement policies and procedures to help 
ensure that H-1B account funds are properly recorded. It will also be 
important for NSF's auditor to fully and effectively implement audit 
procedures to detect any H-1B account funds recording errors that occur 
in the future. 

Recommendations for Executive Action: 

We recommend that NSF's Chief Financial Officer ensure that NSF fully 
and effectively implements policies and procedures to properly record H-
1B account funds. 

We recommend that NSF's Inspector General work with NSF's IPA so that 
audit procedures to detect any future material H-1B account funds 
recording errors are fully and effectively implemented. 

Agency Comments and Our Evaluation: 

In commenting on a draft of this report, NSF's CFO and Inspector 
General, in separate letters, offered their views regarding the 
materiality of the errors and the impact of the errors on Net Position. 
We have clarified our perspective on both points. Our report makes 
clear that there was no effect on NSF's Total Net Position and that the 
cumulative effect of the continuing recording errors for fiscal years 
1999 through 2003 caused the Unexpended Appropriations and Cumulative 
Results of Operations balances on both the originally issued fiscal 
year 2003 Balance Sheet and Statement of Changes in Net Position to be 
materially overstated and understated, respectively. The component 
accounts making up the Statement of Changes in Net Position became 
increasingly overstated and understated each year until the accounting 
treatment was corrected for the entire 5-year period in the restated 
fiscal year 2003 financial statements. To provide more context for this 
improper accounting and subsequent restatements, we have added language 
to our report stating that in any 1 year, the recording error of H-1B 
account fund receipts may not have been material, but that the 
cumulative effect of the errors on the fiscal year 2003 Balance Sheet 
and Statement of Changes in Net Position was deemed material by NSF's 
IPA. 

NSF's CFO also stated that OMB's March 2004 notification of the 
accounting error and need to follow the previously issued 1999 FMS 
guidance was communicated at the staff level and not formally through 
the CFO or the deputy CFO, which caused management delays in ensuring 
the appropriate level of attention to the issue. In our view, agency 
financial managers should have been aware of and implemented the new 
accounting guidance in 1999 when it was first issued by FMS, which 
would have avoided the need for the fiscal year 2003 restatements. 

NSF's CFO further stated that the IPA's management letter findings that 
we reported had no actual bearing on the facts of the restatements and 
that NSF's management response to the IPA findings should be reflected 
for proper balance and context. As we noted in this report, NSF's IPA 
reported in a finding dealing with financial management practices that 
NSF did not have adequate internal controls to ensure that it provided 
accurate financial data which may have contributed to the recording 
error that necessitated the restatements. To resolve this matter, the 
IPA generally recommended that NSF's Chief Financial Officer determine 
the appropriate skills and abilities needed in the DFM organizational 
structure to fulfill NSF's responsibilities for providing accurate 
financial data and implement steps to improve top level supervisory 
review procedures and practices. NSF management responded to the IPA's 
recommendations stating that they believed that normal supervisory 
controls were in place and that such controls provide the review 
procedures and practices recommended by the IPA. Nevertheless, NSF 
management stated that the IPA's recommendations would be incorporated 
in NSF's annual performance review process. It should be noted that, in 
providing its perspective on the IPA-identified issue and management's 
response, the OIG said the errors in NSF's financial statements and the 
untimely notification of the need to restate NSF's fiscal year 2003 
financial statements demonstrated that management's controls over 
financial reporting were not adequate or appropriate. 

Finally, NSF's Inspector General concurred with our recommendation and 
stated that her office had instituted procedures to ensure that the IPA 
designed and performed audit steps to detect any H-1B account fund 
recording errors. We also received technical comments from NSF's 
Inspector General which we have incorporated as appropriate. 

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: 

Enclosure I: Comments from the Chief Financial Officer, National 
Science Foundation: 

NATIONAL SCIENCE FOUNDATION: 
4201 WILSON BOULEVARD: 
ARLINGTON, VIRGINIA 22230: 

NOV 30 2005: 

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

Dear Mr. Engel: 

The National Science Foundation (NSF) received your draft report 
entitled Financial Audit: Restatements to the National Science 
Foundation's Fiscal Year 2003 Financial Statements dated November 3, 
2005, and is providing our comments for your consideration. NSF 
appreciated the extension provided from November 18 to November 30 to 
provide an appropriate response. 

In reviewing the draft, NSF believes the report should include 
additional information that will allow the reader to put the 
restatement in perspective and provide more balanced reporting. The 
restatement was due to the receipt of clarifying guidance on a long- 
standing accounting treatment of our unique H-1 B Nonimmigrant 
Petitioner Fees funds as follows: 

* Since inception, in 1999, of NSF's receipt of H-1B account funds NSF 
had recorded the funds as other appropriations realized. This 
accounting treatment was due to the funds being provided via a warrant 
and associated guidance related to recording warrants. NSF believed, 
until 2005, we were appropriately recording the receipt of the H-1 B 
account funds. We received no information from our reporting oversight 
agencies until notified that the 1999 FMS guidance should be applied to 
our unique H-1 B account funds. 

* Clarifying guidance was communicated at the staff level and not 
formally through the CFO or the DCFO, which caused management delays in 
ensuring the appropriate level of attention to the issue. 

* This was a one time accounting change to our H-1B funds that resulted 
in a reclassification and had no net effect on NSF's net position. The 
report should address that the change was not material to NSF's 
financial statements, and does not reflect an area that needs 
improvements or recommendations going forward as noted. 

* NSF management is requesting that references to our management letter 
on pages 5, 10, 11 be removed from this report. The management letter 
finding referenced by the independent public accounting firm, KPMG, has 
no actual bearing on the facts of the restatement. However, if these 
references are retained we request that NSF's management response is 
also reflected for proper balance and context. 

NSF previously provided this information to your staff in 
communications in May 2005. My staff also relayed our decision process 
and our resolution actions completed. We view this restatement as a 
simple clarification of a long-standing accounting treatment. NSF has a 
history of financial management excellence and we are proud of our 
track record as a recognized leader in financial reporting. 

We appreciate the cooperation provided by your staff and the 
opportunity to respond to the draft report. We respectfully request 
your consideration of our comments. 

If you have any questions concerning our response, please contact me at 
(703) 292-8200 or John Lynskey at (703) 292-8280. 

Sincerely, 

Signed by: 

Thomas N. Cooley: 
Chief Financial Officer: 

The following are GAO's comments on the November 30, 2005, letter from 
the National Science Foundation's, Chief Financial Officer. 

GAO Comments: 

See "Agency Comments and Our Evaluation" section. 

It would be inappropriate to categorize the correction for a material 
error in NSF's financial statements as merely a reclassification. 
Although Total Net Position was unchanged, these two accounts represent 
distinct components of net position. Specifically, according to 
Statements of Federal Financial Accounting Concepts No. 2, Entity and 
Display, Cumulative Results of Operations generally includes the 
amounts accumulated over the years by an entity from its financing 
sources less its expenses and losses, while Unexpended Appropriations 
represents appropriations not yet obligated or expended, including 
undelivered orders. 

Further, IPA officials told us that they considered the error to be 
material and concluded that NSF needed to restate the fiscal year 2003 
financial statements and disclose in the comparative fiscal years 2004 
and 2003 financial statements that certain fiscal year 2003 balances 
have been restated. The IPA's audit report states that NSF's fiscal 
year 2003 Balance Sheet and Statement of Changes in Net Position were 
restated. In addition, the notes to NSF's comparative fiscal years 2004 
and 2003 financial statements includes a note disclosure titled 
"Restatement" that discusses the restatements. 

[End of section] 

Enclosure II: Comments from the Inspector General, National Science 
Foundation: 

NATIONAL SCIENCE FOUNDATION: 
OFFICE OF INSPECTOR GENERAL: 
4201 Wilson Boulevard: 
ARLINGTON, VIRGINIA 22230: 

November 30, 2005: 

Mr. Gary T. Engel:
Director: 
Financial Management and Assurance: 
U.S. Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Engel, 

Thank you for the opportunity to comment on your draft report entitled 
Financial Audit: Restatements to the National Science Foundation's 
Fiscal Year 2003 Financial Statements. 

In your draft report you recommended that "NSF's Inspector General work 
with NSF's IPA so that audit procedures to detect any future material H-
1B Nonimmigrant Petitioner Fees (H-113) account funds recording errors 
are fully and effectively implemented." We agree with the GAO report 
recommendation and that the II-113 fees were incorrectly reported in 
NSF's financial statements for fiscal years 1999 to 2003. For the most 
recent fiscal year 2005 financial statements, we instituted procedures 
to ensure that the IPA designed and performed audit steps to detect any 
H-1B account funds recording errors. However, we believe the report 
should include additional information that will allow the user to put 
the finding in perspective and provide more balanced reporting. 
Specifically: 

1. The fact that the special fund receipts are not material to NSF's 
overall financing sources needs to be disclosed in the report. The 
report indicates that the $216 million represents the cumulative amount 
received by NSF from 1999 through to 2003. However, in any one year, 
the special fund receipts were less than 2% - 5% of total funds 
received (1.2% of total appropriations received in fiscal year 2003). 

2. The report should state that there was no effect on Net Position and 
that this error was a reclassification between components of Net 
Position. The funds were clearly accounted for in a responsible 
fashion, but were in the incorrect category of Net Position. There were 
adequate controls over these funds and total resources were fairly 
stated. The Cumulative Results of Operations ending balance for fiscal 
year 2003 increased by $216 million (which includes S 186.2 million 
related to the beginning balance) and the Unexpended Appropriations 
decreased by the same amount. 

3. The report should clearly indicate that total net position was 
$7.045 billion for fiscal year 2003, of which the special fund receipts 
represented 3.1 percent. 

4. The statement that the IPA "..did not understand the proper 
accounting for these type of funds" is not accurate. Once these funds 
were identified, the IPA knew the appropriate accounting for the H-1B 
funds. 

We have attached suggested changes to the report in order to address 
these issues. 

We appreciate your consideration of our comments and if you have any 
questions, please contact me or Deborah Cureton, Associate Inspector 
General for Audit, on (703) 292-7100. 

Sincerely, 

Signed by: 

Dr. Christine C. Boesz: 
Inspector General: 

Attachment: 

The following are GAO's comments on the November 30, 2005, letter from 
the National Science Foundation's Inspector General. 

GAO Comments: 

See "Agency Comments and Our Evaluation" section. 

See GAO comment 2 in Enclosure I. 

We have clarified this point in our report by modifying the language to 
state that in our view, the IPA did not understand that the H-1B 
account funds are special funds, which are to be accounted for 
differently than certain other NSF receipts. 

[End of section] 

(198399): 

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 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] H-1B account funds are fees collected by the U.S. Treasury from 
employers that employ highly skilled aliens in specialty occupations. 
The American Competitiveness and Workforce Improvement Act of 1998, 
Title IV, states that the federal government shall impose a fee on an 
employer filing a petition relating to granting an alien nonimmigrant 
status. Fees collected shall be deposited with the Department of the 
Treasury in a separate account, which shall be known as the H-1B 
Nonimmigrant Petitioner Account, and disseminated for a variety of uses 
- such as job training, low-income scholarship program, educational 
grants, systemic reform activities, duties relating to petitions, and 
application processing and enforcement.

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

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

[10] According to OMB's e-mail correspondence dated July 6, 2004, to 
NSF staff personnel, if the error was not corrected, then the special 
and trust fund budget authority recorded in NSF's H-1B account funds 
will not crosswalk into the agency's actual columns of the Program and 
Financing Schedule in the fiscal year 2006 [President's] Budget. 

[11] 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). 

[12] 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.