Financial Audit:

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

GAO-06-30R: Published: Oct 27, 2005. Publicly Released: Oct 27, 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 not 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 Nuclear Regulatory Commission's (NRC) 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 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.

NRC's lack of effective internal controls over unrecorded and unbilled licensee fees 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, (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. Consistent with OMB Bulletin 01-02, 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, 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. 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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to our recommendation, NRC's CFO informed us that NRC implemented several improvements to its fee billing process, which include: (1) revised quality assurance procedures for the billing process to include a global reconciliation for each quarterly fee billing cycle; (2) modifications of the Fee Billing System to improve functionality of the system's interface; (3) expanded acceptance testing for the Fee Billing System software modifications; (4) independent verification and validation of the acceptance testing for the Fee Billing System software modifications; (5) separate billing and reconciliation functions; (6) strengthened internal controls over the billing process; and (7) development of a statistical sampling plan to test that internal controls are functioning as intended. In addition, during FY 2007, NRC, in conjunction with its independent auditor, conducted internal control assessments of the fee billing process and procedures and concluded that such controls are effective. NRC's FY 2007 Performance and Accountability Report stated that NRC will continue to improve its Fee Billing System internal controls by implementing and monitoring corrective actions during the agency's internal control assessment. As a result of these actions, NRC has substantially improved its controls over recording and billing all eligible license fees.

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

    Agency Affected: Nuclear Regulatory Commission

  2. Status: Closed - Implemented

    Comments: We recommended that NRC's Inspector General (IG) work with NRC's IPA to implement audit procedures to test for unrecorded and unbilled licensee fees and related internal controls. In response to our recommendation, NRC implemented audit procedures relating to completeness over the fee billing process during the fiscal year 2005 audit of NRC's financial statements. Specifically, the NRC IG's audit tests for Licensee Fees now include procedures to: (1) trace and verify billable hours to detailed billing and invoice reports; (2) review the reliability of the agency's license fee certification process; (3) document and test the process for accumulating billable contract costs; and (4) trace and verify the consistent use and adequacy of the newly implemented global fee billing reconciliation. By taking these actions, NRC's IG has improved its ability to detect the type of errors that caused NRC to restate its financial statements and our ability to use the audit work in this area on future audits of the consolidated financial statements of the U.S. government.

    Recommendation: NRC's Inspector General should 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 Affected: Nuclear Regulatory Commission


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