Financial Audit:

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

GAO-06-229R: Published: Dec 22, 2005. Publicly Released: Dec 22, 2005.


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Gary T. Engel
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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. 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 certain of their financial statements for fiscal year 2003 to correct errors. 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. 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 the National Science Foundation's (NSF) 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) NSF avoid the need for restatements to its future financial statements and (2) ensure that NSF'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 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 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.

Failure to properly record the H-1B Nonimmigrant Petitioner Fees (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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In January 2006, NSF's CFO informed us that NSF implemented the proper accounting treatment for Special Fund Receipts as verified by NSF's IPA. By implementing sufficient controls over accounting for NSF's Special Fund receipts, NSF has improved its controls over financial reporting.

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

    Agency Affected: National Science Foundation

  2. Status: Closed - Implemented

    Comments: In January 2006, NSF's IG informed us that subsequent to our review, her office instituted procedures to ensure that NSF's IPA designed and performed audit steps to detect any Special Fund receipts recording errors for fiscal year 2005. Further, NSF's IG stated that NSF has hired a new audit firm for the fiscal year 2006 financial statements audit and that the NSF IG will ensure that corrective actions taken in fiscal year 2005 will carry forward to fiscal year 2006 and future audits. By taking these actions, NSF's IG has improved its ability to detect Special Fund receipt errors and our ability to use the audit work in this area on future audits of the CFS.

    Recommendation: NSF's Inspector General should 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 Affected: National Science Foundation


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