NASA Advisory Council Meeting Report of Audit and Finance Committee February 7, 2008 Members:NASA: Mr. Robert Hanisee, Chairman Hon. Ronald Spoehel Hon. Ted McPhersonMr. Bruce Ward Hon. Michael Montelongo Mr. Howard Stanislawski

10:00 – 10:30 Update from Deputy CFOBruce Ward 10:30 – 11:00Presentation # 1 FY08 Audit PlanOIG 11:00 – 12:00Presentation # 2 FY07 Financial Statement Audit Results OIG & E&Y 12:00 – 12:30Presentation # 3 Comprehensive Compliance StrategyFrank Petersen 12:30 – 1:30 Working Lunch Open Discussion with CFORonald Spoehel 1:30 – 2:30Presentation # 4 Earned Value Management Mike Blythe 2:30 - 3:30 ESTPresentation # 5 NSSC Transition Update Cathy Claunch Team Leader - DCFO JSC Carol Harvey 3:30 – 3:45 EST Break 3:45 – 5:30 ESTAdministrative Session Audit & Finance Committee Fact-Finding Meeting HQ Room 8O69 February 6,

October 18 NAC Meeting Review Fund Balance With Treasury – In Balance Environmental Liability - Need IV&V Cleanup cost estimate Property Plant & Equipment (Long Pole in Tent) FASAB accepted change in accounting for theme assets PP&E (06 Financial Statement) $33.2B R&D Reclassification – Prior Years 12.7B R&D Reclassification – FY07 6.0B Anticipated FY07 Balance 20.5B ~ Space Exploration PP&E (ISS, Shuttle, WIP) 18.4B Building & Structure 2.1B OCFO Personnel FTE’s – 19 FTE’s Below Authorized NASA Shared Services Center – moving forward cautiously Grant Accounting – May 2008 implementation with SAP version 8.1 upgrade 4400 Grants $850M 3

ERNST & YOUNG September 30, 2007 Audit Report Background: FY 2003 NASA Implementation (IEMP) Integrated Enterprise Management Program FY 2007 NASA Implemented a System Upgrade to resolve certain system configuration issues. “Significant Progress had been made….But many improvements were either completed during the final quarter of FY2007 or are ongoing. Continue to identify issues related to Internal Controls And retention of documentation related to property accounting As a result of these limitations E&Y declined to express an opinion on financial statements for FY 2007 and/or on the effectiveness of NASA’s Internal Control over financial reporting. 4

E&Y Audit Report dtd September 30, 2007 (cont’d) Basis for Disclaimer Two Material Weaknesses 1. Financial Systems, Analyses an oversight 2. Controls over Property, Plant and Equipment (PP&E) FY 2007 Audit Report versus 05 and 06 Reports Significantly greater granularity as regards control deficiencies A useable road map for remediation 5

E&Y Audit Report dtd September 30, 2007 (cont’d) Financial Systems, analyses, and oversight Progress was noted in: ▪ Core financial systems – another update planned ▪ Funds balance with treasury – Success noted ▪ Data Integrity resolution ▪ Completed reorganization plan for HQ OCFO – Staffing shortages noted ▪ Nine additional areas of review – where appropriate programs noted Despite some improvement management and E&Y continued “to identify weaknesses in entity-wide internal control which impaired NASA’s ability to report accurate financial information on a timely basis” Thus a Disclaimer 6

OIG Audit Recommendations - Ensure that the Office of the Chief Financial Officer is staffed with properly trained personnel who can address the Agency’s financial management and accountability challenges; - Ensure that accounting practices are consistent with applicable standards and are consistently applied; - Establish internal controls that provide reasonable assurance that the financial statements are supported, complete and accurate; and - Implement recommendations made by our office and the Government Accountability Office. 7

E&Y Audit Recommendations I. Financial Systems, Analyses and Oversight - 11 Improvements indicated - 19 Recommendations to continue what is currently being done Stabilize prior period and other adjustments Continue Controls over entity-wide account reconciliations, analyses and oversight - 5 Recommendations requiring assistance outside of OCFO Timely close expired travel, grants and contracts - 1 New Recommendation – SFFAS 6 Environmental Liability “Shuttle” II. Property, Plant and Equipment - 7 Improvements indicated - 1 recommendation to continue what is currently being done Continue to review, monitor and refine implementation of new policy - 7 New Recommendations - Develop More robust detect and monitoring controls - Refine the revised contractor cost reporting requirements - Clearly demonstrate completeness and accuracy of prior contractors held assets 8

E&Y Audit Recommendations (Cont’d) Control Over Property, Plant and Equipment New Capitalization Policy allowed NASA to write-off $12.7B in FY2007 – A Major Success NASA Owned Buildings & Equipment - $2.1B Space Exploration PP& E - $18.4B - Reconstructing cost data would not be cost justified New Capital investment – Constellation - NASA has revised new contractor cost reporting requirements Remains the major impediment to getting an audit opinion, Qualified or Unqualified Key to Resolution: 1. Prove to OIG and E&Y that NASA can accurately account and provide audit trail for capital acquisitions on new programs which has not been demonstrated yet. 2. Hope for FASAB relief on legacy assets. 8

Comprehensive Compliance Strategy (CCS) NASA’s New Chief Financial Officer, Ron Spoehel has changed the focus from fixing individual problems on an ad hoc basis to putting a comprehensive process in place to bring NASA into full compliance with legal and regulatory requirements for financial management - for example, a majority of request for documentation as part of the Ernst & Young 2008 annual financial statement audit are expected to be routinely scheduled and provided as a result of having this comprehensive approach in place. - NASA has defined and documented the requirements for compliance, data integrity and internal control by financial statement line item with KPMG’s (Big 4 Accounting Firm) help. - Next Step is to activate this approach more fully in

NASA Grant Financial Management and Accounting 4400 active grants are outstanding = $850 million Improvements are being addressed to enhance the value of this portfolio by moving to managing single grants and strengthening the grant management cycle: - Effective front end definition of requirements - Improve monitoring during the life of the grant - Better understanding of the results of the grant investment through assessment and final reporting. 10

Financial Staff Personnel Update April 2007: 103 FTEs, 10 below Authorized 113 July 2007: 92 FTEs, 21 below Authorized 113 August 2007: Authorized decreased by 4 to 109 September 2007: 90 FTEs, 19 below Authorized 109 February 2008: 96 FTEs, 8 below Authorized 104 Goddard Space Flight Center CFO – Hired and on board 11

NASA Shared Services Center, Stennis Space Center, MS On February 1, 2008, NASA successfully “went live” with the transaction processing of accounts payable, accounts receivable and fund balance with Treasury cash reconcilements that were moved from three (3) centers (Stennis, Dryden, Marshall) to the NASA Shared Services Center at Stennis - Additional work from other centers is scheduled to be moved in 2008: April – Langley, Glenn and Kennedy Space Center June – Johnson and Ames Research Center July – Goddard, NASA Management Office (JPL) and HQ - Reimbursable Billings: transfer in Grants: Will assume disbursement responsibility after SAP update scheduled for October

Earned Value Management at NASA What it is: - A methodology for integrating scope, schedule and resources, and for objectively measuring project performance and progress; it quantifies progress and accomplishment. - An “early warning” tool or “lead indicator” that provides the project management team with objectives, accurate and timely data for effective decision making; it helps predict future performance based on historic trends - An NPR and FAR requirement for all acquisitions for development designated as major in accordance with OMB Circular A-11 - A rigorous American National Standard Institute/Electronic Industries Alliance (ANSI/EIA) standard containing 7 principles for 32 guidelines 13

Earned Value Management at NASA NASA Implementation (Began 1 year ago) - Office of the Chief Engineer is the responsible function - NASA EVM Working Group - supports the office of the Chief Engineer - Facilitated consistent EVM policy, processes, implementation, training and tools across the Agency - supports NASA program and project managers by addressing EVM needs, requirements and issues 14

Earned Value Management at NASA Status of EVM at NASA - Uneven application at contract and project levels - Pilots at MSFC and GSFC have yielded lessons and recommended changes - SAP and business process issued have been identified and are being addressed - Agency is committed to increased EVM use to mitigate GAO “High Risk” areas - Augmented training and Agencywide tools now available to promote and support EVM 15

Earned Value Management at NASA The “Way Ahead” for EVM - Communicate, communicate, communicate with the “field” - It’s a critical project management discipline - It increases the assurance of program success - It is not optional - Establish processes to ensure EVM requirements are fully implemented on applicable contracts - Harness already established Agency-wide groups to address needed SAP and business process enhancements - Develop and execute Center in-house EVM implementation plans - Establish a set of standards EVM metrics to be reported to Senior Management 16

Important Conclusions Each of three (3) important Constituents – NASA’s Executive Leadership, NASA Inspector General and Ernst & Young (outside auditors) independently told us of the improved confidence in the NASA Office of the Chief Financial Officer as a result of: Ron Spoehel’s (New Chief Financial Officer) leadership in advancing progress already underway as a result of Terry Bowie’s (Deputy Chief Financial Officer) effective work and that of many other NASA associates Filling of several key vacancies in staff 17

Important Conclusions (cont.) Significant progress and valuable results have been made in the past 24 months at NASA regarding internal controls, data integrity and management reporting ……..With More to come 18