ML20056D074

Results of Audit of NRC FY92 Financial Statements

ML20056D074
Person / Time
Issue date:	06/29/1993
From:	David Williams NRC OFFICE OF THE INSPECTOR GENERAL (OIG)
To:
References
OIG-93A-12, NUDOCS 9308030224
Download: ML20056D074 (61)

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OFFICE OF THE INSPECTOR GENERAL l

US NUCLEAR l

REGULATORY COMMISSION I

RESULTS OF THE AUDIT OF l

U.S. NRCS FISCAL YEAR 1992 FINANCIAL STATEMENTS l

OIG/93A-12 June 29,1993 I

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June 29, 1993 I

l OFFICE OF THE INSPECTOR GENERAL MEMORANDUM FOR:

The Chairman I

Commissioner Rogers Commissioner Curtiss Commissioner Remick Commissioner de Planque d(.

FROM:

David C. Williams I

Inspector General

SUBJECT:

RESULTS OF AUDIT OF U.S.

NUCLEAR REGULATORY COMMISSION'S FISCAL YEAR 1992 FINANCIAL STATEMENTS Attached is our audit report of NRC's Fiscal Year 1992 financial statements.

The report consists of five sections:

a synopsis of I

the various individual audit reports which comprise the overall report; the independent auditor's report on principal statements; the principal statements; the independent auditor's report on I

internal control structure; and the independent auditor's report on_ compliance with laws and regulations.

Written comments concerning the draft report for the internal control structure were obtained from the Chief Financial Officer (CFO) and are I

included as an appendix to the contractor's reports.

The CFO had no comments on the other draft reports.

In the auditor's report on the NRC's Fiscal Year 1992 Principal Financial Statements, the contractor issued a qualified opinion on the Statement of Financial Position, and the Statements of I

operations, cash Flows, and Budget and Actual Expenses.

The opinion was qualified because of the inability of the contractor to determine whether NRC funds spent by DOE at its national laboratories for NRC requested work were done so within I

applicable laws and regulations.

In addition, the Property, Plant and Equipment account was incomplete because of the lack of historical records and procedures to capture the financial data.

I In the Report on Internal Control Structure, the contractor identified conditions that existed during fiscal year 1992 which I

needed to be addressed.

Consequently, the contractor made six recommendations for improving the internal control structure.

In addition, an issue regarding the DOE laboratory expenditures was reported in the Report on Compliance with Laws and Regulations.

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I In commenting on the Report on Internal Control Structure, the CFO agreed with the intent of all six recommendations.

However, the CFO only agreed that 3 of the 4 findings were material l;

weaknesses.

The CFO did not believe that the untimely billing of 3

fees should be characterized as a material weakness.

He felt that the agency had made great strides in reducing the billing cycle and would continue to look for other cost effective methods to reduce the time required to bill for services rendered.

However, he did agree that the fees ($51.6 million) which had been earned, but not billed by the end of the fiscal year, should have been booked in the accounting records and procedures needed to be developed to ensure that this took place.

We continue to believe that this area is a material weakness until plans to g

shorten the cycle for billing 10 CFR Part 170 fees are developed 5

and implemented and processes are in place to ensure that fees that have been earned are booked in the accounting system as required.

We appreciate NRC staff's cooperation and interest in improving financial management within NRC.

We look forward to working with E

them when we audit the Fiscal Year 1993 principal financial 5

statements.

Attachments:

As Stated cc:

J.

Taylor, EDO H.

Thompson, EDO J.

Sniezek, EDO S.

Chilk, SECY g

W.

Parler, OGC 5

D.

Rathbun, CA T.

Murley, NRR E.

Jordan, AEOD E.

Beckjord, RES R.

Bernero, NMSS P.

Norry, ADM R.

Scroggins, OC P.

Bird, OP T.

Martin, RI S.

Ebneter, RII A.B.

Davis, RIII J.

Milhoan, RIV J.

Martin, RV J.

Blaha, EDO J.

Funches, ICC I

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srNorsIs or rr I992 AoDIT OF NRC'S PRINCIPAL FINANCIAL STATEMENTS I

I The Office of the Inspector General (OIG) is required by the Chief Financial Officers Act to audit the Principal Financial Statements of the U.S. Nuclear Regulatory Commission-(NRC)

I produced at the end of each fiscal year.

OIG contracted with R.

Navarro and Associates, Inc. to perform the audit of the principal statements for the fiscal year ended September 30, 1992 a

5 inc uding assessing the agency's internal control structure and compliance with applicable laws and regulations.

This year's audit was performed for the purpose of forming an opinion on the Principal Financial Statements.

The information in the Overview of NRC's Financial Statements and the Supplemental Information sections is not a required part of the Principal Financial Statements, but is supplementary information required by the Office of Management and Budget Bullatin No. 93-02.

The information in the Overview of NRC's Financial Statements and in the Supplemental Information section has not been subjected to I

the auditing procedures applied in the audit of the Principal Financial Statements, and accordingly, we express no opinion regarding this information.

The results of the audit of each major area are summarized as follows:

Principal Financial Statements

-- The contractor has issued a qualified opinion on the Statement of Financial Position as of September 30, I

1992.

The qualified opinion resulted from the incompleteness of the Property, Plant and Equipment account due to a lack of historical I

records.

In addition, there also was a lack of assurance regarding the Department of Energy's (DOE) compliance with laws and regulations related to NRC funds paid to DOE for work performed at DOE's national laboratories under an interagency agreement i

between NRC and DOE.

I Internal Control Structure

-- The contractor reported four material internal control weaknesses which had an effect on the financial statements.: problems relating to the general ledger; concern over funds spent at DOE's national laboratories; failure to bill licensees for services rendered in a timely manner; and lack of a policy for capitalizing supplies inventory, I

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leasehold improvements, and ADP software.

The. CFO did not believe that untimely billing of fees should be characterized as a material weakness.

The CFO felt that the agency had made great strides in reducing the billing cycle and would be looking at other cost effective methods to reduce the time required to bill for services rendered.

-- The contractor also reported that there was a need for NRC to present budgeted and actual expense 3

information in its financial statements at the 5

programmatic level.

NRC had elected to show budgeted and actual expenses at the appropriation level.

The contractor made six rccommendations to improve NRC's internal structure.

NRC has agreed with the intent of all of the 3

recommendations and pre.c'nted the corrective actions that were to 3;

take place.

See the Appendix at the end of the contractor's reports for the CFO's response.

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U.S. NUCLEAR REGULATORY COMMISSION

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INDEPENDENT AUDITORS' REPORTS AND l

PRINCIPAL STATEMENTS I

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I September 30,1992 l.

R. NAVARRO & ASSOCIATES, INC.

I CONTENTS INDEPENDENT AUDITORS' REPORT ON PRINCIPAL STATEMENTS 1-4 PRINCIPAL STATEMENTS I

l STATEMENT OF FINANCIAL POSITION 5-6 STATEMENT OF OPERATIONS AND CHANGES l

IN NET POSITION 7

STATEMENT OF CASH FLOWS 8-9 I

STATEMENT OF BUDGET AND ACTUAL EXPENSES 10 l

NOTES TO PRINCIPAL STATEMENTS 11 - 23 INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL STRUCTURE 24 - 44 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH I

LAWS AND REGULATIONS 45 - 47 APPENDIX COMMENTS OF THE CHIEF FINANCIAL OFFICER 48 - 49 I

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INDEPENDENT AUDITORS' REPORT ON I

PRINCIPAL STATEMENTS I

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.NAVARRO R

2831 Camino Del Rio South, Suite 306

& ASSOCIATES, INC.

San Diego, California 92108 (619,298-8193 cearmco nuevc eccovurwrs I

To the Commissioners I

U.S. NUCLEAR REGULATORY COMMISSION Bethesda, Maryland I

INDEPENDENT AUDITORS' REPORT ON PRINCIPAL STATEMENTS We have audited the accompanying principal statements of financial position of the U.S. Nuclear Regulatory Commission (NRC), as of September 30,1992 and the related principal statements C@

of operations and changes in net position, cash flows, and budget and actual expenses for the fiscal year then ended. These financial statements are the responsibility of NRC's management.

Our responsibility is to express an opinion on these financial statements based on our audit.

SCOPE Except as discussed in the following paragraphs, we conducted our audit in accordance with generally accepted auditing standards, Government Auditina Standards, issued by the Comp-troller General of the United States, and Office of Management and Budget Bulletin 93-06, Audit Reauirements for Federal Financial Statements. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the principal statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in these statements, including the notes thereto. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Accounting principles are currently being studied by the Federal Accounting Standards Advisory Board. Generally accepted accounting principles for fede.ral entities will be promulgated by the Comptroller General and the Director of the Office of Management and Budget, based on advice I

from the Board. In the interim, federal agencies follow the applicable accounting standards con-E I 9

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tained in agency accounting policy, procedures manuals, and/or related guidance. The summary of significant accounting principles included in the Notes to Principal Statements, Note 1, des-cribes the accounting principles used by the U.S. Nuclear Regulaton/ Commission to prepare the principal statements. These are in contormity with standards contained i.: Title 2 of GAO's Policy and Procedures Manual for Guidance of Federal Acencies.

SCOPE RESTRICTIONS Compliance with Laws and Regulations NRC's principal statements for the fiscal year ended September 30,1992 include $109 million of reimbursable expenses incurred by the Department of Energy (DOE), which represents approx-imately 22% of the agency's total expenses. The funds were transferred under the provisions of the Energy Reorganization Act (P.L. 95-91) which are embodied in a Memorandum of Understanding (MOU) between NRC and DOE dated February 24,1978. The MOU establishes guidelines for the program planning, implementation, control, funding, and management of NRC funds. The responsibility to design, implement and evaluate the system of controls to assure compliance with laws and regulations rests with the Department of Energy.

I Our assessment of compliance with laws and regulations, which could have a material and direct effect on the NRC financial statements, did not provide for a review of DOE's extent of compliance with laws and regulations for the NRC funds DOE expended. Our assessment of compliance with laws and regulations over the funds transferred to DOE was limited to testing the controls maintained at NRC over the disbursing and recording of these fund transfers.

I Property, Plant and Equipment Because of the lack of complete historical accounting records, we were unable to form an opinion regarding the amounts reflected a Property, Plant and Equipment-net (stated at

$31,347,705) on the Statement of Financial Position at September 30,1992 and the related amount of depreciation, 58,428,661, included on the Statement of Operations and Changes in Net Position.

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I OPINION in our opinion, except for the effect on the principal statements of such adjustments,if any, as might have been determined to be necessary had we been able to examine sufficient evidence to satisfy ourselves as to the extent of compliance with laws and regulations for funds transferred to DOE, and the adjustments that may have been made to property, plant and equipment and depreciation expense at September 30,1992, the principal statements referred to in the first paragraph present fairly, in all material respects, the financial position of the U.S. Nuclear Regulatory Commission at September 30,1992 and the results of its operations ard changes in net position, the cash flows and the status of budget to actual expenses for the fiscal year then ended in conformity with the accounting principles described in Note 1.

Our audit was conducted for the purpose of forming an opinion on the principal statements described above. We did not review the financial information presented in management's overview. The information presented in the overview was reviewed by the Inspector General.

Accordingly, we do not express an opinion on this information.

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k,ho4 b * 'N s

San Diego, Califemia May 28,1993 I

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PRINCIPAL STATEMENTS I

o STATEMENT OF FINANCIAL POSITION o

STATEMENT OF OPERATIONS AND CHANGES IN NET POSITION o

STATEMENT OF CA">H FLOWS o

STATEMENT OF BUDGET AND ACTUAL I

EXPENSES o

NOTES TO PRINCIPAL STATEMENTS I

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I Principal Statements U.S. NUCLEAR REGULATORY COMMISSION STATEMENT OF FINANCIAL POSITION September 30,1992 ASSETS I

t Financial Resources:

I Fund balances with U.S. Treasury and Cash (Note 2)

$209,338,472 Accounts receivable, net - non-Federal (Note 3) 63,115,761 i

intragovemmental items:

I Accounts receivable, Federal (Note 3) 692,567 Advances, Federal (Note 4) 1,297,918 Total financial resources 274.444.718 Non-Financial Resources:

Resources transferable to Treasury 14,738 Advances and prepayments, non-Federal (Note 4) 1,351,334 inventory not held for sale 765,000 I

Property and equipment, net (Note 5) 31,347,705 Total non-financial resources 33,478,777 I

Total assets S307,923,495 LIABILITIES Funded Liabilities:

Accounts payable, non-Federal (Note 6)

$ 14,569,020 Accrued payroll and benefits (Note 7) 7,363,252 Other funded liabilities, non-Federal (Note 8) 10,908,033 Intragovernmental liabilities:

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Accounts payable, Federal (Note 6) 9,544,197 Other funded liabilities, Federal (Note 8) 61,645,846 Total funded liabilities 104.030.348 I

The accompanying notes to the principal statements are an integral part of this statement.

I Principal Statements - Continued U.S. NUCLEAR REGULATORY COMMISSION STATEMENT OF FINANCIAL POSITION - Continued September 30,1992 I',

Unfunded Liabilities (Note 9):

Accrued leave 22,888,672 Accrued workers' compensation 976,720 I

Total unfunded liabilities 23,865,392 Total liabilities 127.895.740 NET l vd! TION i

Fund balance (Note 11)

$203,893,147 Less: Future funding requirements (Note 12)

(23,865,392)

Net Position 180.027.755 Totalliabilities and net position

$307,923,495 I

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The accompanying notes to the principal statements are an integral part of this statement. *

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I Principal Statements - Continued r

U.S. NUCLEAR REGULATORY COMMISSION STATEMENT OF OPERATIONS AND CHANGES IN NET POSITION For the year ended September 30,1992 REVENUES AND FINANCING SOURCES I

Appropriations expensed (Note 13)

$ 7,979,272 Other revenues and financing sources (Note 14) 490,086,770 I

Excess current year receipts of fees over billings 4,965,236 Less: Receipts transferred to the Treasury or other agencies (4,349,146)

Total revenues and financing sources

$498,682,132 EXPENSES Salaries and expenses

$488,706,226 Office of inspector General 3,565,066 I

Total program (Note 15)

$492,271,292 I

Depreciation 8,428,661 Bad debts and write-offs 74,148 Interest 35,144 Total expenses

$500,809,245 I

Shortage of revenues and financing sources over total expenses

$ (2,127,113)

Plus: Unfunded expenses (Note 17) 2,127,113 Excess of revenues and financing sources over funded expenses S

0 Net position, beginning balance (unaudited) 164,151,360 Excess of revenues and financing sources over total expenses O

Plus noneperating changes (Note 18) 15,876,395 Net position, ending balance S180,027.755 The accompanying notes to the principal statements are an integral part of this statement.

I Principal Statements - Continued U.S. NUCLEAR REGULATORY COMMISSION STATEidENT OF CASH FLOWS Fe; the year ended September 30,1992 I

CASH PROVIDED (USED) BY OPERATING ACTIVITIES Cash Provided:

Fees for licensing and inspection and other services (Note 13)

S489,265,320 Sales of goods and services 394,037 Other operating cash provided 7,041,297 Total cash provided S496,700,654 Cash Used:

Personnel services and benefits (248,326,260)

Travel and transportation (16,640,412)

Rent, communications and utilities (29,632,170)

Printing and reproduction (E,079,223)

Other contractual services (197,610,387)

Supplies and rnaterials (13,206,125) g insurance claims and indemnities (142,624) g Grants, subsidies and contributions (1,338,807)

Other operating cash used (1,181,101)

Total cash used (510,157,109)

Net cash used by operating activities (13,456,455)

CASH PROVIDED (USED) BY INVESTING ACTIVITIES Purchase of property and equipment (12,860,251)

Net cash used by investing activities (12.860.251)

I The accompanying notes to the principal statements are an integral part of this statement. =.

Principal Statements - Continued U.S. NUCLEAR REGULATORY COMMISSION STATEMENT OF CASH FLOWS - Continued For the year ended September 30,1992 i

Cash Provided (Used) By Investing Activities - Continued Appropriations 23,234,680 l

Add: Transfers of cash from others 2,748,100 i

Net appropriations 25,982,780 Amounts transferred to others (Note 19)

(109,998,875)

Net cash used by financing activities (84,016,095)

Net cash used by operating, non-operating and investing activities (110,332,801)

Fund balances with Treasury and Cash, beginning (unaudited) 319.671.273 Fund balances with Treasury and Cash, ending

$209,338,472 I

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The accompanying notes to the principal statements are an integral part of this statement.

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i Ii Principal Statements - Continued U S. NUCLEAR REGULATORY COMMISSION STATEf4ENT OF BUDGET AND ACTUAL EXPENSES For the year ended September 30,1992 Budget Oblicatiores Actual Resources Direct Reimbursements.

Expenses Salaries and expenses

$544,208,264

$516,175,158 180,204 $497,244,179 E.'

Office of Inspector E

General 4,144,688 3,857,239 0

3,565,066 Totals

$548.352.952

$520.032,397 180,204 $500.809,245 Budget Reconciliation-Total expenses

$500,809,245 Add:

Capital acquisitions 12,860,251 Less:

Depreciation (8,428,661)

Unfunded annual leave expense (2,120,798)

Unfunded workers' compensation expense (6,315)

Accrued expenditures 503,113,722 g

Less reimbursements (1,437,540) g, Accrued expenditures, direct

.$501,676,182 i

I The accompanying notes to the principal statements are an integral part of this statement.

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Principal Statements - Continued NOTES TO PRINCIPAL STATEMENTS I

NOTE 1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES I

A.

Basis of Prosentation These principal statemota were prepared to report the financial position and results of operations of the U.S. Nuclear Regulatory Commission (NRC) as required by the Chief Financial Officers Act of 1990. The principal statements were prepared from the books and records of the NRC in accordance with the form and content for entity financial statements specified by the Office of Management and Budget (OMB) in OMB Buitetin 93-02 and the NRC's accounting policies which are summarized in this note. These statements are there-l fore different from the financial reports, also prepared by the NRC pursuant to OM3 direc-I tives, which are used to monitor and control NRC's use of budgetary sesources.

B.

Reporting Entity / Program Name The NRC is an independent agency of the Federal Government created by the Energy rlg Reorganization Act of 1974. Its purposes are defined by Ae Energy Reorganization Act of l 5 1974, as amerded, snd the Atomic Energy Act of 1954, as amended. The NRC was created by the U.S. Congress to ensure adequate protection for the public health and safety, common defense and security, and the environment in the civilian use of nuclear materials in the United States.

l The NRC has two appropriations:

31X0200 - Salaries and Expenses s

31XO300 - Office of Inspec*c; General i

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The 31X0200 a, npriation includes funds transferred from the Department of Energy, Nuclear Waste Fund, approximately $20 million, to the NRC in accordance with the pro-visions of PL 102-104.

f In addition, portions of the appropriation received by the General Services Administration j

(GSA) approximately $2.9 million, were transferred to the NRC for the operation and repair i

of certain buildings occupied by the NRC. The accompanying financial statements of the NRC include the accounts of all funds under NRC control.

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Budgets and Budgetary Accounting I

Congress, for the past 18 years, has adopted no-year appropriations which are available for obligation by the NRC until expended. The Omnibus Budget Reconciliation Act (OBRA) of 1990 requires the NRC to recover approximately 100 percent of its new budget authority, less the amount appropriated from the Nuclear Waste Fund, by assessing fees. At the end of the fiscal year NRC's appropriations are reduced by the amount of revenues collected during the fiscal year.

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U Principal Statements - Continued Notes to Principal Statements - Continued D.

Basis of Accounting Transactions are recorded on an accrual accounting basis and a budgetary basis. Under the accrual method, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to receipt or payment of cash. Budgetary l

accounting facilitates compliance with legal constraints and controls over the use of federal E

funds.

E.

Revenues and Other Financing Sources Ucensing fees and fees for inspections and other services assessed in accordance with E

OBRA are recognized as other financing sources when earned.

g For reporting purposes, appropriations are recognized as revenues at the time they are used to pay program and administrative expenses. At the end of the fiscal year, appro-priations recognized are reduced by the amount of assessed fees collected during the fiscal year. Appropriations expended for property and equipment are recognized as expenses when the asset is consumed in operations (depreciation). Appropriations expensed do not include appropriations used to purchase capital items or expenses incurred but not yet funded by Congress, such as workers' compensation benefits and annual leave expenses.

The differences between the accrual basis recognition of appropriations expensed and the budgetary basis recognition of outlays are presenteu.n the Statement of Budget and Actual Expenses.

Miscellaneous receipts cr>llected by the NRC are not available to NRC for obligation or expenditure. These receipts must be transferred to the U.S. Treasury when collected.

F.

Funds with the U.S. Treasury and Cash The NRC cash receipts and disburseme are s 'mssed by the U.S. Treasury. The Funds with U.S. Treasury and Cash ar9 prirr. :ty apo: wiated funds that are available to pay current liabilities and finance n.thorized pu,wi 3 'ommitments. Cash balances held outside the U.S. Treasury are nat material.

G.

Accounts Receivable, Net of Allowance The amounts due for receivables are stated net of an allowance for uncollectible accounts.

The estimate of the allowence is based on an analysis of the outstanding balances.

H.

Advances NRC makes cash payments to other Federal agencies, employees, grantees, and con-tractors to provide for future NRC program expenditures. These advance payments are recorded as assets which are reduced when reports of expenditures are received by NRC cr accruals of cost estimates are made by MRC.. i.

Principal Statements - Continued Notes to Principal Statements - Continued I.

Propedy and Equipment The land and buildings in which NRC operates are provided by the GSA, which charges the NRC a Standard Level Users Charge (SLUC) that approxirnates the commercial rental rates I

for similar properties.

Equipment with a cost greater than $5,000 per unit and a useful life of two years or more and software having a minimum value of $25,000 and a useful life of two years or more are capitalized at cost and depreciated. Other equipment and software is expensed when purchased. Normal repairs and maintenance are charged to expense as incurred.

The straight-line method of depreciation is used. Depreciation on periods and salvage value for various classes of equipment are established by the GSA. Property and equip-ment is generally being depreciated over five to 25 years.

J.

Prepaid and Deferred Charges Payments in advance of the receipt of goods and services are recorded as prepaid charges at the time of prepayment and recognized as expenditures / expenses when the related goods and services are received.

K.

Liabilities Uabilities represent the amount of monies or other resources that are likely to be paid by NRC as the result of a transaction or event that has already occurred. However, no liability can be paid by NRC absent an appropciation. Uabilities for which an appropriation has not I

been enacted and there is no certainty that an appropriation will be enacted are classified as unfunded liabilities. Also, liabilities of NRC arising from sources other than contracts can be abrogated by the Government acting in its sovereign capacity.

L Contingencies NRC is a party in various administrative proceedings, legal actions, environmental suits, and claims brought by or against it. Based on the advice of legal counsel concerning the con-tingencies, it is the opinion of NRC management that the ultimate resolution of these pro-ceedings, actions, and claims will not materially affect the financial position or results of operations of NRC.

M.

Annual, Sick, and Other Leave Annual leave is accrued as it is earned and the accrual is reduced as leave is taken. Each year, the balance in the accrued annual leave liability account is adjusted to reflect current pay rates. To the extent current or prior year appropriations are not available to fund annual leave earned but not taken, funding will be obtained from future appropriations and assessments. Sick leave and other types of nonvested leave are expensed as takt.n.

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a Principal Statements - Continued Notes to Principal Statements - Continued N.

Retirement Plans NRC employees hired after December 31,1983, are automatically covered by the Federal Employees' Retirement System (FERS) which was implemented on January 1,1987.

Employees hired prior to that date could elect to join FERS or to remain in the Civil Service Retirement System (CSRS). Approximately 60 percent of the NRC employees belong to CSRS and 40 percent belong to FERS. For employees in FERS, NRC withholds.80 percent of base pay camings in addition to Federalinsurance Contribution Act (FICA) and matches the withholdings with a 12.9 percent contribution. The sum is transferred to the Federal Employees Retkement Fund. For employees covered by CSRS, NRC withholds 7.00 per-cent of their base pay eamings. This withholding is matched by NRC and the sum of the withholding and the match is transferred to the CSRS.

On April 1,1987, the Federal Government initiated the Thrift Savings Plan (TSP) which is a retirement savings and investment plan for employees covered by either FERS or CSRS.

For employees covered by FERS, NRC automatically contributes 1 percent of base prl tc their account and matching contributions up to an additional 4 percent. The maximurr par-centage that an employee participating in FERS may contribute is 10 percent of base pay.

Employees covered by CSRS may contribute up to 5 percent of their base pay but there is no NRC matching of the contribution. The maximum amount that either FERS or CSRS employees may contribute to the plan in a ca!cndar year is $8,728. The sum of the g

employee anc NRC contributions is transferred to the Federal Retirement Thrift investment E

Board.

NRC does not report on its financia! statements FERS and CSRS assets, accumulated plan benefits, or unfunded liabilities, if any, applicable to its employees. Reporting such amounts is the responsibility of the Office of Personnel Management.

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Net Position The NRC's net position consists of the following components:

1.

Unexpended appropriations include the undelivered orders and unobligated balances ol NRC's funds. All appropriations remain available for obligation until expended.

2.

Invested capital represents U.S. Government resources invested in the NRC's property and equipment. Increases to invested capital are recorded when assets are acquired with direct appropriations and decreases are recorded as a result of the consumption (depreciation) or disposition of capital assets.

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Future funding requirements represent (a) accumulated annual leave earned but not taken as of the financial statement date (b) accrued workers' compensation, and (c) accrual for litigation settlement. The expense for these accruals is not funded from j

current appropriations but rather will be funded from future appropriations and assessments.

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I Principal Statements - Continued Notes to Principal Statements - Continued P.

Comparative Data Comparative data for the prior year are not presented in this report because 1992 is the first year for which financial statements were prepared for NRO activities. In future years, com-I parative data will be presented to provide an understanding of changes in the financial position and operations of NRC.

NOTE 2. FUND BAl ANCES WITH U.S. TREASURY AND CASH Fund balances with U.S. Treasury and Cash consist of the following amounts as of September 30,1992:

Funds balances with Treasury:

Appropriated funds

$199,283,543 Other fund types 9.874.9 0 Total

$209,158,472 Cash 180.000 Fund balances and cash

$209,338,472 U.S. Government cash is handled on an overall consolidated basis by Treasury. " Funds with U.S.

I Treasury and Cash" represent the NRC's right to draw on Treasury for allowable expenditures.

NOTE 3. ACCOUNTS RECEIVABLE, NET Accounts receivable, net non-Federal is composed of the following amounts as of September 30,1992.

Materials and f acilities fees - billed

$17,308,179 Materials and facilities fees - unbilled 51,652,650 Other 424.189 I

Total accounts receivable - non-Federal 69,385,018 Less: Allowance for uncollectible accounts (6,269,257)

Accounts receivable, net - non-Federal S63,115,761 I-I

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Principal Statements - Continued Notes to Principal Statements - Continued Accounts receivable, non-Federal primarily represent amounts due for fees assessed related to licensing and inspections of nuclear facilities and radioactive materials and other services. In the year collected, the amounts will be used to offset NRC's appropriations.

Accounts receivable - Federal consist primarily of receivables and reimbursements due from other Federal agencies of $692,567 at September 30,1992.

NOTE 4. ADVANCES AND PREPAYMENTS Advances and prepayments as of September 30,1992, consist primarily of the following:

Non-Federal:

Travel advances

$ 616,136 Advances - other 733,908 Prepayments - other 1.290

$1,351,334 Federal:

Advances - other Federal agencies

$1297,918 Advances and prepayments are recorded as assets until receipt of the goods or services involved or until contract terms are met. When goods or services are received or contract terms are met, the advance or prepayment is reduced and the expense or acquired asset is recognized.

NOTE 5. PROPERTY AND EQUIPMENT, NET I

Property and equipment, net consists of the following as of September 30,1992:

Service Acquisition Accumulated Net Book Years Value Depreciation Value Fixed Assets Class Equipment 2-25

$22,007,069

$10,290,505

$11,716,564 ADP Software 5

32,466,671 15,883,261 16,583,410 Leasehold Improvements 5

1,165,477 463,677 701,800 Equipment under development 1,692,270 1,692,270 ADP Software Under Development 653.661 653.661 Total

$57 985.148 SP6 637.443

$31,347,705.

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Principal Statements - Continued I

l Notes to Principal Statements - Continued The straight line depreciation method is used for all classes of fixed assets. Depreciation I

expense for Fiscal Year 1992 was $8,428,661.

The land and buildings occupied by the NRC are provided by GSA. For fiscal year 1992, GSA I

charged the NRC $16,198,781 for the use of these facilities based on a SLUC which is to approximate the commercial rates for similar properties.

NOTE 6. ACCOUNTS PAYABLE Accounts payable consist of the following as of September 30,1992:

Non-Federal:

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Vendor payables

$11,641,331 Contract holdbacks 1,242,157 Litigation settlement 1.685.532

$14,669,020 Federal:

Department of Energy

$ 9.544,197 NOTE 7. ACCRUED PAYROLL AND BENEFITS I

Accrued payroll and benefits as of September 30,1992, consist of:

Accrued personnel services

$6,267,509 l

Accrued benefits 1.095.743

$7.363.252 1

Accrued payroll and benefits represent wages and benefits which have been earned but not paid i

as of the financial statements date.

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• 5m Principal Statements - Continued Notes to Principal Statements - Continued NOTE 8. OTHER FUNDED LIABILITIES Other funded liabilities as of September 30,1992, include:

Non-Federal:

Uability for deposit funds

$10,487,250 Advances from others 420.783

$10.908 033 I

Federal:

Uability to offset net accounts receivable fees assessed

$61,384,122 Uability to offset net miscellaneous accounts receivable 14,738 Advances from other Federal agencies 246.986

$61,645,846 The Uability for Deposit Funds consist of special fund advances from other govemments under cooperative research agreements and liabilities arising from payroll deductions and tax with-holdings.

The net accounts receivable for fees assessed represent amounts which, when collected will be used to offset NRC's appropriations in the year collected.

The net miscellaneous accounts receivable represent amounts which will be reverted to the U.S.

Treasury when collected.

NOTE 9. UNFUNDED LIABILITIES Unfunded liabilities consist of the following as of September 30,1992:

Accrued annual leave

$22,888,672 Accrued workers' compensation 976.720 I

S23.865.392 I

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I Principal Statements - Continued Notes to Principal Statements - Continued Accrued annualleave represents the amount of annualleave earned by NRC employees but not I

yet taken. Accrued workers' compensation represents Federal Employees Compensation Act (FECA) benefits paid by the Department of Labor on NRC's behalf which had not been billed to or paid by NRC as of September 30,1992. The actuarial amounts for future disability benefits I

are not included in the principal statements.

Accrued annual leave and accrued workers' compensation are not funded by current or prior years' appropriations and assessments.

Funding will be provided from future years' appropriations and assessments (see Note 12).

I NOTE 10.

INTRAGOVERNMENTAL ACTIVITIES I

The NRC reporting entity's financial activities interact with and are dependent upon those of the Federal Government as a whole. Other Federal agencies make financial decisions and report certain financial matters on behalf of all Federal agencies. The practice of having Federal agen-I cies record or report only those govemment-wide financial matters for which they are directly responsible is consistent with generally accepted accounting principles for Federal agencies which seek to identify financial matters to the department or agency that has been granted budget authority and resources to manage them. Activities which are performed or reported by I

other Federal agencies in which NRC is indirectly involved are as follows:

NRC funds a portion of its employee pension benefits under the CSRS and the FERS I

a but does not disclose actuarial data with respect to accumulated plan benefits, plan assets, or the unfunded pension liability relative to its employees. Reporting of these amounts is the responsibility of the Office of Personnel Management.

In addition, NRC makes contributions to the TSP on behalf of its employees. NRC does not have control over the plan's assets. The TSP is administered by the National I

Finance Center of the Department of Agriculture.

Certain legal matters to which NRC may be a named party are administered and in m

some cases litigated by other Federal agencies. Amounts paid under any decision, settlement, or award pertaining thereto are generally funded through the Treasury.

In most cases, claims (including personalinjury claims) are administered and resolved by the Department of Justice and any amounts necessary for resolution are obtained from a special fund maintained by the Treasury. Any legal actions for workers' com-pensation claims brought by NRC employees fall under the FECA which is admin-istered by the Employment Standards Administration of the U.S. Departrnent of Labor.

The cost of administering, litigating, and settling these legal matters has not laen allocated to individual Federal agencies.

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Ea Principal Statements - Continued Notes to Principal Statements - Continued Interest on borrowings of the U.S. Treasury is not included as a cost to NRC's pro-g u

grams and is not included in the accompanying financial statements.

I NOTE 11.

FUND BALANCE Fund balance consists of the following as of September 30,1992:

I' Unexpended appropriations:

Unobligated

$ 18,505,726 Undelivered orders 153,274,716 Invert?d capital 32.112.705

$203.893,147 Unexpended appropriations include (1) uncbligated appropriation balances and (2) undelivered E

orders which are amounts which have been obligated but not yet expended. The unobligated B

appropriations balance does not include $4,428,949 in unfilled customer orders - unobligated.

Invested capital represents the net investment of the U.S. Government appropriations expended for NRC's capitalized property, equipment and supplies inventory.

NOTE 12.

FUTURE FUNDING REQUIREMENTS Future Funding Requirements represent the amount of future funding needed to pay the following accrued unfunded expenses as of September 30,1992:

Accrued Annual Leave

$22,888,672 Accrued Workers' Compensation 976.720

$23 865.392 1

The above accruals are not funded from current or prior appropriations and assessments, but rather should be funded from future appropriations and assessments. Accordingly, future funding requirements have been recognized for those expenses that will be paid from future appropriations. See also Note 9.

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I-Principal Statements - Continued Notes to Principal Statements - Continued NOTE 13.

APPROPRIATIONS EXPENSED Appropriations expensed, a financing source, is recognized to the extent appropriated funds have been consumed less the amount collected from fees assessed for licensing, inspections and other services. During Fiscal Year 1992 $489,265,320 was collected from fees assessed for licensing, inspections and other services. OBRA requires the NRC to recover approximately 100 percent of its new budget authority, less the amount appropriated from the Nuclear Waste Fund, by assessing fees. The NRC's appropriations are reduced at year end by the amount of revenues collected during the fiscal year.

Appropriated funds consumed

$497,244,592 Less: Collection from fees assessed (489.265.320)

S 7.979.272 NOTE 14.

OTHER REVENUES AND FINANCING SOURCES l

Fees for licensing, inspection and other services

$484,300,084 I

Other miscellaneous receipts 4,349,146 Appropriation reimbursement 1.437.540

$490,086,770 NOTE 15.

OPERATING EXPENSES Operating expenses by object class are as fe! lows:

Personnel services and benefits

$244,228,597 Travel and transportation 16,063,251 Rent, communication and utilities 28,388,992 Printing and reproduction 2,061,288 Contractual services 187,222,989 Supplies and materials 13,019,847 Grants, subsidies and contributions 1,144,256 Insurance claims and indemnities 135,191 Other 6.881 I

$492 271292 I

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5m Principal Statements - Continued Notes to Principal Statements - Continued NOTE 16.

EMPLOYEE RETIREMENT PLANS Total NRC contributions for employee retirement plans for Fiscal Year 1992 were as follows:

Civil Service Retirement System (CSRS)

$ 9,561,487 Federal Employees' Retirement System (FERS) 8,723,304 FederalInsurance Contribution Act (FICA) 6,970,662 Thrift Savings Plan (TSP) 2.616.062 S27,871,515 I

Data on the actuarial present value of accumulated benefits, assets available for benefits, and unfunded pension liability are maintained by other Federal agencies and are not allocated to individual departments and agencies.

NOTE 17.

UNFUNDED EXPENSES Unfunded expenses as of September 30,1992, consist of:

Accrued annual leave

$2,120,798 Accrued workers' compensation 6.315 Total S2,127,113 Unfunded expenses are not funded from current appropriations but are to be funded from future g

appropriations and assessments.

3 NOTE 18.

NON-OPERATING CHANGES Non-operating changes for the fiscal year ended September 30,1992, consist of the following:

increase in unobligated balance and undelivered orders over prior years

$18,003,508 I;

Unfunded expenses (2,127,113)

$15,876,395 I

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I Principal Statements - Continued Notes to Principal Statements - Continued NOTE 19.

AMOUNTS TRANSFERRED TO OTHERS The amounts transferred to others consist of:

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Fees for licensing, inspection and other services -

pre-Fiscal Year 1992

$ 86,392,670 High Level Waste Fund 23.606.205

$109,998,875 I

The S86,392,670 represents fees for licensing, inspection and other services which were collected prior to Fiscal Year 1991. These monies were remitted to Treasury in Fiscal year 1992.

The $23,606,205 represents receipts received from the Department of Energy for Fiscal Years 1988 and 1989 for expenses related to the licensing of geologic repositories for disposal of high-I level radioactive waste and spent nuclear fuel. Because these funds were not available for NRC to obligate or expend, the funds were remitted to Treasury in Fiscal Year 1992.

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I INDEPENDENT AUDITORS' REPORT ON I

INTERNAL CONTROL STRUCTURE 1

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R. NA VARRO 2831 Camino Del Rio South Suite 306

& ASSOCfATES, INC.

San Diego. Cahfornia 92108 cearinto evauc accousraurs (619)298-8193 b

To the Commissioners U.S. NUCLEAR REGULATORY COMMISSION Bethesda, Maryland I

INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL STRUCTURE I

We have audited the principal statements of the U.S. Nuclear Regulatory Commission (NRC), as of and for the year ended September 30,1992, and have issued our report thereon dated May 28,1993.

I We conducted our audit in accordance with generally accepted auditing standards, Govemment Auditina Standards, issued by the Comptroller General of the United States, and Office of Man-agement and Budget Bulletin 93-06, Audit Reauirements for Federal Financial Statements. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the principal financial statements are free of material misstatements.

I in planning and performing our audit of the principal financial statements of NRC for the year ended September 30,1992, we considered its internal control structure in order to determine our auditing procedures for the purpose of expressing our opinion on the principal statements and to determine whether the internal control structure meets the objectives of the preceding paragraph. This included obtaining an understanding of the internal control policies and L

procedures and assessing the level of control risk relevant to all significant cycles, classes of I

transactions, or account balances; and for those significant control policies and procedures that have been properly designed and placed in operation, performing sufficient tests to provide rea-I-

sonable assurance that the controls are effective and working as designed.

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I NRC management is responsible for establishing and maintaining an internal control structure.

In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of internal control structure policies and procedures. The objectives of an intemal control structure are to provide management with reasonable, but not absolute, assurance that obligations and costs are in compliance with applicable laws; funds, property and other assets are safeguarded against waste, loss, unauthorized use, or misappropriation; and revenues and expenditures applicable to agency operations are properly recorded and accounted for to permit the preparation of accounts and reliable financial and statistical reports to maintain accountability over assets.

For the purpose of this report, we have classified NRC's significant intemal control structure cycles in the following categories:

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Funds with U.S. Treasury, I

o Accounts receivable and advances, o

Fixed asset management, o

Accounts payable and accrued liabilities, I

o Fees assessment, o

Expenses - Perconnel, o

Expenses - Non-personnel, I

o Fund control, o

Financial reporting, and o

Performance Measures.

I For all the intemal control cycles listed above, except performance measures, we obtained an I

understanding of the design of relevant policies and procedures and whether they have been placed in operation, and we assessed control risk. The review of the performance measures and the related assessment thereto, was performed by the Office of inspector General. The inspector General's assessment and tne related management letter were issued under separate cover and

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are not part of this report. We considered NRC's Federal Managers' Financial Integrity Act (FMFIA) reports, as well as the Office of Inspector General's (OlG) reports on financial matters and internal accounting control policies and procedures, in making our risk assessment.

We noted certain matters involving the internal control structure and its operation that we consider to be reportable conditions under standards established by the American Institute of I

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Certified Public Accountants and Office of Management and Budget (OMB)Bulletin 93-06.

Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the intemal control structure that, in our judgment, could adversely affect the entity's ability to ensure that obligations and costs are in compliance with applicable laws; funds, property, and other assets are safeguarded against waste, loss, unauthorized use, or misappropriation; and revenues and expenses applicable to agency operations are properly recorded and accounted for to permit the preparation of accounts and reliable financial and statistical reports in accordance with applicable accounting standards and to maintain accountability over assets.

Reportable Conditions The following matters involving the design or operation of the internal control structure warrant disclosure as material weaknesses in this report; l.

General accounting controls at the general ledger level not maintained; 11.

Interagency responsibilities over reimbursement to Department of Energy (DOE) work not adequate; I

111.

Lack of timely billing of fees; and IV.

Capitalization policies for supplies inventory, leasehold improvements and Automated Data Processing (ADP) software were nonexistent.

In addition, we noted two other matters involving NRC's internal control structure and its operation that we are presenting in this report as reportable conditions. These matters involved weaknesses in NRC's intemal control procedures related to:

V.

Accounting system does not provide object class and program information; and I

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Accounting records for reversionary interest in property, plant and equipment not maintained.

I A material weakness is a reportable condition in which the design or operation of the specific intemal control element does not reduce to a relatively low level the risk that errors or irregularities, in amounts that would be material in relation to the principal financial statements being audited, may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.

I Our consideration of the intemal control structure would not necessarily disclose all matters in the intemal control structure that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. However, we believe conditions I through IV are material weaknesses. The I

reportable conditions listed above are discussed in detail in the Reportable Conditions and Recommendations section immediately following this report.

Comments of the Chief Financial Officer i

I The Chief Financial Officer (CFO) responded to our report findings in memoranda to the Inspector General on June 23,1993. The responses included general comments on the report's findings, I

as well as specific comments to the report's recommendations. The CFO's specific comments are included at the conclusion of our discussion of each reportable condition in this report and i

I summary comments of the CFO are appended to this report in their entirety.

This report is intended solely for the use of NRC management and should not be used for any other purpose. This restriction is not intended to limit the distribution of this report, which, upon acceptance by the NRC,is a matter of public record.

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e w 4 ha.h San Diego, California May 28,1993 I

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I Reportable Conditions and Recommendations 1.

GENERAL ACCOUNTING CONTROLS AT THE GENERAL LEDGER LEVEL NOT MAIN-TAINED The NRC general ledger as maintained during fiscal year 1992 did not include all of the necessary general accounting controls to produce timely and accurate financial infor-mation needed to prepare complete financial reports as required by OMB Bulletin 93-02, g

Form and Content of Aaency Financial Statements. As a result, extensive compilation g

procedures were undertaken to produce the Agency's financial statements.

The NRC OlG initiated internal control review projects prior to the fiscal year end. The projects were designed to develop an assessment of the intemal control structure and the reliability of the Agency's financial management information. The reviews generally disclosed that the internal control structure was susceptible to errors and irregularities due to the lack of strong control procedures.

NRC has recognized the shortcomings of its general ledger system and is implementing FFS, a n3w accounting system, during fiscal year 1993 and has retained the services of an outside contractor to assist in addressing this condition.

Examples of the conditions noted during our examination follow:

A.

General Ledger Compatibility and Integration NRC's accounting system consisted of a general ledger and three subsystems to process payroll, travel, and property management transactions. The general led-E ger was also supported by manual record systems and other data base and 5

spreadsheet applications covering accounts receivable and billings, and bud-geting activities.

None of the NRC subsystems and other recordkeeping programs were fully com-patible nor integrated into NRC's general ledger. Thus, the input of information g

into the NRC general ledger was primarily on a manual basis increasing the risk g

of errors.

1.

The NRC payroll subsystem is a stand alone system used to make three categories of payments: bi-weekly regular payroll for NRC ernployees; awards to NRC employees; and, the semi-monthly Commissioner payroll.

The regular bi-weekly payroll and semi-monthly Commissioner payroll are summarized and input into the general ledger by the payroll office on a recurring basis. Awards, however, were processed and input into the payroll and general ledger as they were authorized and paid.

2.

The travel subsystem was a stand alone system, as well, covering the authorization of advances and payment of travel expenses. The travel l

subsystem was electronically linked, in summary forrn, with the general ledger through a conversion program eliminating the need for manual i

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input. However, once the conversions were made and entered into the general ledger, it was difficult to trace and verify the general ledger recorded activity back to the amounts recorded in the travel subsystem.

3.

The NRC property and inventory subsystem operated independently from the generalledger. Due to accounting coding errors made in the NRC I

general ledger, information from this single entry system was used to make and support year end entries to NRC's general ledger accounts for capitalized property and related depreciation allowances.

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Reconciliation Procedures Not Followed Reconciling the general ledger control information with subsidiary detail informa-tion is an essential accounting control procedure. The purpose of these recon-ciliations is to assure that all transactions are recorded, classified and adjusted as I

necessary. Differences between the generalledger control accounts and the sub-sidiary records must be researched arid appropriately adjusted to reflect the items identified during reconciliation. NRC procedures generally provided for this pro-I cess, but in practice information from the subsystems and other recordkeeping programs were generally not reconciled to the NRC generalledger.

One of the principle reasons reconciliations were not being performed was man-I agement's overreliance on subsidiary system information versus general ledger information. Management generally relied on the information derived from the subsidiary systems to discharge their responsibilities. Additionally, the general I

ledger system did not readily provide information by object class codes to facilitate reconciliation. For example, a special one time computer program was written to extract information from the general ledger files to prepare year end I

detailed expenditures by object class required to be submitted as part of the Agency's financial statements.

The general non-availability of information by object class codes was a major deterrent to the performance of reconciliations for expense accounts. These codes are needed to readily compare information recorded in the general ledger and the subsystem. Fcr example, a reconciliation of Funds with U.S. Treasury identified $1.1 million of reconciling items which management included as advances in the Agency's statements. Management has indicated that adjust-I ments will be made in FY 93 SF-224, Statements of Transactions, to clear the identified differences.

The lack of appropriate reconciliations and adjustments of the agency's records resulted in the following adjustments:

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S 9.8 million to record the value of property having a value of $5,000 or more which was not recorded as an asset in the general ledger capi-talized property account. A comparison of the recorded general ledger balances with information contained in the Property and Supply System (PASS) maintained by the Division of Contracts and Property Management I I

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disclosed the generailedger capitalized property account did not include all property having a value in excess of $5,000.

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$8.6 million was adjusted to the DOE accounts payable to reflect the costs reported by DOE for FY 92.

I Complete reconciliations and appropriate adjustments to the general ledger or subsidiary accounts would have negated the need for these adjustments.

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Accounting Policies for inventories and Software l

Under NRC accounting policies, purchases of software and inventories were expensed at the time of purchase. This practice reflects the agency's use of budgetary or appro-priation accounting. The Agency's statements, however, were prepared using the accrual basis of accounting. This accounting basis provides for property items over $5,000 to be capitalized by NRC.

The Agency's statements were lacking information which resulted in the following adjustments to the information contained in PASS:

1.

$701,800 to record the net book value of Leasehold improvements. The general ledger did not include the value of leasehold improvements recorded in a manu-g ally maintained record of procurements made by the Division of Contracts and E

Property Management.

2.

$765,000 to record the value of inventories on hand on September 30,1992.

3.

$16.6 millicn to record the net book value of software developed intemally and/or acquired through September 30,1992.

The CFO Act, Section 902, directs the Agency CFO to develop and maintain an integ-rated agency accounting and financial management system including financial reporting and intemal controls, which:

o comply with applicable accounting principles and internal control standards; o

comply with the policies and requirements of the OMB Director, o

provide for complete, reliable, consistent and timely information, and o

the development and reporting of cost information.

Recommendation The CFO should develop policy statements which provide for an integrated accounting system, routine review and reconciliation of accounting information between control and subsidiary accounts, and a review of policies to capture all basic accounting data needed to prepare CFO E

reports.

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Additionally, the CFO should continue to direct senior agency management to maintain a sup-portive attitude toward an enhanced financial management system that ensures the reliability and completeness of reports prepared by the Agency.

Comments of the Chief Financial Officer The NRC accounting policies are contained in the NRC Manual Chapter 1101, Accountina Policy and Practices. and are currently in the process of being updated to be reissued under the new Manaaement Directive System. The CFO policy to provide for integration of accour. Lng systems and capture all basic accounting data is reflected in the effort to implement a new accounting system. The policy to routinely reconcile between subsidiary and control accounts is also realized with the integration of subsystems directly with the general ledger. The Agency com-I mitment to reconciliation was further demonstrated in the effort to prepare for the production of financial statements for FY 1992.

Our general approach for improving internal controls over the general ledger has been the ongoing project to implement an accounting system, the Federal Financial System (FFS) and a Payroll / Personnel System (PAY /PERS).

Auditors' Conclusion The CFO's comments provide a basis upon which to move toward improved financial manage-ment. The Agency's current implementation initiatives for an integrated accounting system should further improve the reliability of basic accounting data and reconciliation processes.

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INTERAGENCY RESPONSIBILITIES OVER REIMBURSEMENT TO DOE WORK NOT ADEQUATE NRC is responsible for maintaining a system of internal controls to assure the Agency is compliant with accounting and program specific regulations. The internal controls currently in place do not provide adequate assurance that the cost reported and relm-g bursed to DOE meet applicable laws and regulations. Approximately twenty-two percent g

of the cost incurred by NRC for FY 92 were incurred by the DOE or its contractors under a Memorandum of Understanding (MOU) between NRC and DOE.

Under the Energy Reorganization Act of 1974 which established the NRC as an inde-pendent agency, the Agency was charged with the responsibility not to build or duplicate research and development facilities possessed by the DOE. The NRC was instructed to draw upon DOE and other Federal agencies for research finding and assistance in per-forming the Agency's research and development responsibilities.

In furtherance of this direction, the NRC has entered into the MOU with the DOE. Under this agreement the NRC may:

o obtain mutually agreeable services from DOE and DOE's nationallaboratories on a reimbursable basis; o

have DOE construct NRC dedicated facilities at DOE sites on a reimbursable basis; and have independent access to DOE facilities to review and monitor the scope, o

schedule, and funding of NRC projects.

For FY 92, NRC reimbursements to DOE exceeded $109 million. The adequacy of NRC's fiscal and administrative controls over the services obtained from DOE and DOE labora-tories has been the subject of two OlG audits and an internal review made by NRC's Office of Administration.

OlG/92A-08 Improvements Needed in NRC's Process for Approvina Payments to the Department of Enerov, August 31,1992 OlG/92A-20 Improvements Needed in Financial and Administrative Accountability for Office of Nuclear Regulatory Research Funded Work at Department of Enerov Laboratories, March 5,1993 In the first report the finding, DOE Cost Voucher Not Reviewed. Approved. or Verified, was classified in the Agency's 1992 FMFIA report as a material weakness. The second report contained eight administrative findings including:

o Untimely Project Closure Result in Funds Unnecessarily Tied Up.

o NRC Funded Property and Equipment is not Properly Tracked or Disposed. E

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o Funds Improperly Transferred between Projects.

o Project Manager did not Review DOE Laboratory Costs.

The 1991 NRC internal review by the Office of Administration disclosed that NRC offices failed to develop independent govemment cost estimates, did not analyze or negotiate I

costs proposed by the DOE laboratories, routinely authorized work to begin before tech-nical or cost proposals were received from the laboratories, funded laboratory cost over-runs without challenging the need or the amounts, failed to monitor and compare tech-nical progress with contract cost, did not draft adequate statements of work for projects and in some cases relied instead on laboratory work statements, and collaborated with the laboratories in the establishment of contractual projects in a manner that prevented the agency from maintaining an objective, prudent, arms-length business posture.

These OlG reports and the report prepared by the NRC Office of Administration clearly I

demonstrate the lack of NRC's controls over the administration of the DOE projects and the costs incurred by DOE. In addition, the MOU did not contain any reference to which agency had the responsibility to assess and evaluate the adequacy of compliance with laws and regulations for the cost of NRC projects performed at DOE contractor operated laboratories or for services performed by these laboratories on NRC's behalf.

The lack of assurances relating to evaluation of compliance with laws and regulations for DOE costs is a significant consideration, since the reimbursement to DOE represents approximately twenty-two percent of NRC's total expenses for FY 92. To determine whether the DOE costs have been audited and incurred in accordance with applicable I

laws and regulations, the NRC's Chief Financial Officer requested assurance from the DOE Inspector General.

The response of the DOE IG provided no assurance relating to audit coverage for the

$109 million included in the NRC principal financial statements. The DOE IG proposed in his response that a qualification may be necessary. The absence of audit assurance and verification of any such assurance precludes us from expressing any assurances that DOE costs were incurred in accordance with applicable laws and regulations. 'he Reports on the Principal Statements and on Compliance with Laws and Regulations pro-vide a restriction to our scope relating to this issue.

The CFO Act of 1990 provides for an annual audit of financial statements. The audit, as prescribed by GAO audit standards and OMB'sBulletin 93-06, must include an evaluation of management's system of financial and compliance internal controls. The assessment of compliance controls for the funds expended by DOE could not be performed.

Recommendation The CFO in consultation with the NRC IG should pursue revisions to the existing MOU in order to assure audit responsibilities between NRC and DOE are clearly identified. The revisions should at a minimum include the requirements imposed by the CFO Act for financial manage-I ment and the reporting requirements imposed by OMB. The CFO should also initiate a dialogue with the DOE OlG to determine the extent of audit coverage given to NRC costs incurred under DOE's direction in the current fiscal year.

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Comments of the Chief Financial Officer We agree that dialogue and possible negotiations on what is required to satisfy audit assurance on DOE [NRC] funds should be initiated. We do not agree that a modification to the existing MOU is the only vehicle that may achieve mutually acceptable results. The concept of receiving audit assurance from another agency surfaces additional questions which also must be addressed. We believe that specific actions should be formulated only after these discussions take place.

Auditors' Conclusion We concur with the CFO's comments. We acknowledge that a variety of approaches may be taken to address clarifying the existing MOU. However, it is in the Agency's best interest to initiate action soon. The CFO's early actions on this matter will not only improve the level of information available on DOE activities and provide the assurances associated with the audit process, but it will also improve the opinion of NRC's principal statements in future years.

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LACK OF TIMELY BILLING OF FEES I

Public Law 101-508, the Omnibus Budget Reconciliation Act of 1990, requires NRC to I

recover approximately 100 percent of its budget authority, less appropriations from the Nuclear Waste Fund, for FY 91 through FY 95 by assessing fees to NRC licensees. The amount to be recovered for FY 92 was approximately $492.5 million.

The principal source of fees from licensees comes from annual fees assessed against i

entities holding nuclear power reactor licenses. These fees are assessed under 10 CFR 171 with the fees being billed and collected on a quarterly basis. Billing and collection of annual fees from holders of nuclear power reactor licenses is adequately managed and controlled.

I NRC six-month billing provisions contained in 10 CFR 170.12 and the untimely pro-cessing of billing information has adversely affected the timeliness of NRC's billing and collection of receivables. The billing and collection of fees recovered under 10 CFR 170.12 needs improvement. Under 10 CFR 170, NRC licensees are charged various fees based on the time taken in providing services and inspections of the licensee's opera-I tions. FY 1992 billings for these services were untimely. For example, $51.65 million of fees for services provided during the third and fourth quarter of FY 92 were not billed or recorded as an account receivable until FY 93.

NRC accounting and reporting methods of billing and collections were also incorrect.

The Agency's statements were prepared on an accrual basis, but revenue was being reflected on these statements on a statutory basis. The receivable account and related revenue was established at the time of the billing rather than at the time the service was rendered.

Untimely billing of 10 CFR 170 services was due primarily to three reasons:

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Section 10 CFR 170.12, Payment of Fees, generally provides for six-month billings.

The normal commercial practice would be to bill the client on completion of the service. Thus, NRC's regulations precluded timely billings for the services pro-vided to licensees.

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The Office of Nuclear Reactor Regulation (NRR) was allowed up to 38 working i

days to review, approve, and certify reports showing the services and activities were performed before submitting the reports to the Ucense Fee Debt Collection Branch. NRR was late in submitting the third quarter billing information. The report was not submitted until after the end of the fiscal year. The late submittal of the third quarter report precluded NRC from billing these services in the fourth j

quarter.

o The billing process used by the License Fee Debt Collection Branch involved 1

manual review of cost obtained from the NRC Regulatory Information Tracking System (RITS). Manual processing also affected the timeliness of billing of services.

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Tables 1 shows the billing intervals and fees not billed at September 30,1992 for completed services and activities recoverable under 10 CFR 170. $27.01 mi!! ion of the

$51.65 million of the earned, but unbilled, fees at September 30,1992 were for com-pleted third quarter services. Information for these billings was delayed and was not received by the Ucense Fee Debt Collection Branch until October 22,1992. The Ucense Fee Debt Co!!ection Branch was notified that the October 22nd data contained errors further delaying the 3rd quarter billing. Billings for the third quarter services were made during December 1992.

The billing intervals established under Section 10 CFR 170.12 precluded the billing of the fourth quarter completed services until after the end of the fiscal year. Fourth quarter completed services and activities amounted to $24.64 million of the $51.65 million.

TAstt t U.S. NUCtf.AR REGULATORY CoMutSSION EARNED REVENUE NoT Bit. LED SEPTEMBER 30,1992 TYPE OF REVENW DESCRIPTION Bit 1ED CFR REF.

AMOUNT I

Mat inspectons Horptals. Doctas As Race &4 17012 (g)

$1.991.114 and Fecsarm Mat. Amendmerits Fwed Cyde Facaties Quarterly 170.12 (c)@

1.589,423 Assues Cast facity Amend, Poew Piants and Quarterty 170.12 (c)(2) 8.997.934 Research Peactors Actuni Coat Part 55 Operstars tsamenuans Quasierty 173.12 (D 5.546.376 Arsuelcast OLS Opers urensees 170.12 tel 2.234,469 Tomcain R

eviews 170.12(r, 1.818.766

$TD Pieres Dwgn at Nuc6 ear Quanarty 988.354 Power Ptards Actual Cost F6e. Inspecuane bispectane et k.sdear Quarterly 17012 (g) 26.585,540 P._ P_

u.t. uc.n F.ee Consa.o *,en w y rw r Paw

$70,2 mm en E

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Recommendation The Chief Financial Officer should review the current billing practices and streamline the process to ensure the timeliness of billings. The review should be performed at two levels: 1) a review of the regulations covering these activities, and 2) a review of the transaction flow within the agency where delays can be minimized. Additionally, the Agency should develop year end closing procedures which address the completeness of billing information for purposes of pre-paring the Agency's principal financial statements. Ea

I Comments of the Chief Financial Officer The CFO and the Controller reviewed the billing practice in FY 1992 as part of ongoing efforts to improve financial management practices and modified its regulations in 10 CFR 170 effective May 18,1992, to change from six-month billing intervals to quarterly. By the end of FY 1992, all Part 170 billings are issued quarterly or more frequently. In addition, based on the Controller's I

request, the major program offices reduced their review and edit time from 90 work days to 38 work days. Additionally, OC, IRM and the maior program offices are developing system tech-nology to enable the automatic downloading of data from program offices and Regions directly to LFDCB* bi!!ing systems. The facilities inspection fee program was converted to automatic download in December 1992 and efforts continue on other systems. The Controller will assess year-end closing procedures to address the issue of unbilled costs to licensees wit!; regard to preparation of principal financial statements.

Auditors' Conclusion We concur with the CFO's comments. We do not, however, agree that this condition should be classified as less than a material weakness. NRC is required by OBRA to recover approximately I

100% of its budget authority and the lack of a timely billing process and therefore the lack of a timely collection process affects this requirement. We commend the CFO for reducing some review and edit processes and are pleased that the Controller will assess year end closing procedures, as well.

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CAPITALIZATION POLICIES FOR SUPPLIES INVENTORY, LEASEHOLD IMPROVE-MENTS AND ADP SOFTWARE WERE NONEXISTENT NRC does not have a policy to ensure that supplies inventory, leasehold improvements and acquired or developed ADP software are capitalized. Under NRC accounting poli-cies, leasehold improvements, software and inventories are expensed at acquisition. The g

agency, however, prepared accrual basis financial statements which did not include l

these assets. OMB Bulletin 93-02 requires inclusion of all agency assets on the State-ment of Financial Position.

The Agency's statements issued on March 31,1993 did not include a significant amcunt of NRC assets. Subsequent to the issuance of the Agency's statements, records related to these assets were summarized by management and the related amounts were recorded to the principal financial statements. Because of the lack of conip!ete historical records, the recorded amounts were not sufficiently complete or supported to enable us to perform sufficient alternative audit procedures resulting in restriction tc the scope of our work and a qualification to the Independent Auditors' Report on the Principal Statements.

The following adjustments were made based on information contained in the PASS and in the IFMIS general ledger:

o S752,000 was recorded for the net book value of leasehold improvements. The general ledger did not include the value of leasehold improvements recorded in a manually maintained record of procurements made by the Division of Contracts and Property Management.

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$765,000 was recorded for the value of inventories on hand at September 30, g

1992. This amount was derived from the Agency's perpetualinventory manage-3 ment system.

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$16.6 million was recorded for the net book value of software acquired and/or developed through September 30,1992. This information was derived from con-tracts and IFMIS reports. The costs were derived from these two sources, how-g ever, management did not provide sufficient support documentation to assure the g

costs were complete and reliable. For mmple, some of the costs were taken from IFMIS without the benefit of assest /ig the reliability of the information back to invoices paid.

The lack of a policy to record and capitalize these costs precluded management from maintaining contemporaneous historical records to account for the completeness and reliability of these

assets, The Federal Property and Administrative Services Act of 1949 and the Budget and Accounting Act of 1950 in general require Agencies to maintain adequate inventory controls and accounta-bility systems for property. The JFMIP has guidance for developing such systems. E n

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Recommendation The Chief Financial Officer should direct the Controller to perform a review of the Agency's finan-I cial management policies to assure that accounting policies and practices provide for the recording of all agency assets. Special emphasis should be placed in areas relating to property, plant, equipment, leases and related improvements, and software. The policies should provide

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thresholds (dollar amounts) for capitalization of types of equipment, depreciation and ainortization periods, cost centers for accumulating development costs, etc. Additionally, the information should be recorded and capitalized as the transactions occur to assure that the I

Agency's general ledger is complete and reliable.

Comments of the Chief Financial Officer I

NRC financial management policies for capitalization were updated and revised during the process of implementing the FFS to allow for contemporaneous capture of the cost of assets.

I The revised criteria was used in the preparation of the FY 1992 financial statements and the current capitalization policy is stated in the notes to the principal financial statements. The NRC policy for capitalization contained in the NRC Manual Chapter 1101, Accountino Policy and I

Practices, will be updated and cover all classes of assets and will be reissued under the new Manaaement Directive System.

I The accounting transactions in the FFS are designed to capture all property, plant and equiprrcnt including leasehold improvements and software in the appropriate general ledger accounts at the time of acquisition. The accounts will then be reconciled monthly with inventories set up in subsidiary systems to track detailed information. Supplies will not be I.

capitalized as acquired. A supplies inventory will be taken at least as of the end of the fiscal year and the supplies asset account adjusted accordingly.

Auditors' Conclusion We concur with the CFO's comments and the capitalization policies that have been developed I

and embodied in the notes to the principal statements.

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ACCOUNTING SYSTEM DOES NOT PROVIDE OBJECT CLASS AND PROGRAM INFORMATION The accounting systern in use during FY 92 could not readily provide object class infor-mation and was incapable of providing program information for the Agency's financial statements. The inability of the accounting system to readily produce object class infor-mation was discussed under Finding I, General Accounting Controls at the General Led-ger Level Not Maintained. Tnese accounting design deficiencies precluded NRC from reporting its expenses in the recommended financial reporting formats on the principal financial statements. OMB Bolletin 93-02, Form and Content of Aaency Financial Statements, requires the presentation on an object class and program basis.

OMB Bulletin 93-02 states in general:

Reportino Operatino Expenses By Proaram. Expenses incurred by the reporting entity in conducting its activities should, to the extent possible, be classified and reported by major type of program. Agencies that are able to do so should also disclose operating expenses by object classification in the notes to the principal statements.

Bulletin 93-02 further provides that the agency's financial statements shall be comprised of:

1.

Overview of the reporting ertity.

2.

Principal Statements and related notes.

3.

Combined statements (when feasible and appropriate).

4.

Supplemental financial and management information.

The overview of the reporting entity should provide a brief description of the reporting entity; should provide program and administrative highlights; should highlight critical financial and management improvement areas; should disclose financial and program performance; and whenever possible, should relate financial data to performance mea-sures on a program-by-program basis. NRC was not able to provide an integrated picture of the Agency's program objectives and the related costs associated since the accounting information to support that discussion is not available from their general ledger.

To facilitate reporting for FY 92, the Agency redefined its programs in the principal l

statements along appropriation lines such as salaries and expenses. For example, object class reports for reactor inspections, nuclear material inspections and other program elements were not available from the NRC accounting system.

Both OMB and the Congress need object class and program data for analysis purposes.

As discussed under Finding 1. General Accounting Controls at the General Ledger Level Not Maintained, object class information was not readily available. After some difficulties, object class information covering the entire agency was produced but it was virtually impossible to breakdown the object class data by program office or any other meaningful detail. The inability of the NRC to provide object class and program data needed by OMB and the Congress for analysis is a reportdcle condition..

I The CFO Act, Section 902, directs the Agency CFO to develop and maintain an integrated I

agency accounting and financial rr anagement system including financial reporting and internal controls, which:

o comply with applicable accounting principles and internal control standards; o

comply with the policies and requirements of the OMB Director; and l4 o

provide for complete, reliable, consistent and timely information, and the development and reporting of cost information.

Recommendation The Chief Financial Officer should assure that the system being implemented provide reports on I

a object class and program basis. These requirement are reflected in the Joint Financial Management improvement Program (JFMlP) guidance and in the U.S. standard general ledger.

The monthly reporting of this activity to management will facilitate the reconciliation process I

between subsidiary system and generalledger control accounts such as payroll, travel, contract services, etc. Additionally, the information by program should be usefulto the CFO in overseeing the overall effectiveness and efficiency of the agency along programmatic lines.

I Comments of the Chief Financial Officer With the implementation of the new accounting system, FFS, expense and other data by object class and program, as currently defined by the NRC, is captured and routinely available in monthly reports. The Commission's definition of program is consistent with the requirements I

contained in OMB Bulletin 93-02. The U.S. Standard General Ledger (SGL) guidance does not address capturing information by object class or program. We note that the JFMIP does not issue government " requirements" as indicated in the recommendation.

As part of FFS implementation, program reports derived from the accounting data in the general ledger were completed and routine issuance began at mid-year FY 1993. These reports are used I

by program managers to carry out their daily responsibilities.

Accounting data is also summarized in periodic internal Agency reports prepared by the Office of the Controller for the CFO and distributed quarterly by the CFO to the Commission and senior NRC Managers. The internal monthly report is used by senior Agency management, with ovarsight by the CFO, to I

monitor the effectiveness and efficiency of program operation. This report, was initiated in FY 1992.

Auditors' Conclusion Based on the comments of the CFO, the FFS should capture and provide information by object class. Information at this level is needed in the Agency's financial systems to assure that object class information provided for the President's Budget can be reliable and supported by the Agency's general ledger.

Information by program is also essential to move toward the I

assessment of program costs and measurements as proposed by developing trends in government.

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VI.

ACCOUNTING RECORDS FOR REVERSIONARYINTERESTIN PROPERTY, PLANT AND EQUIPMENT NOT MAINTAINED The NRC has not established management information systems to control NRC's rever-sionary interest in DOE property, plant, and equipment acquired with NRC funds nor does it appear that NRC has a policy to assure NRC funds are not used to fund purchases more properly funded by DOE. As a result, we were unable to obtain financial disclosure information on NRC's reversionary interest in the DOE plant, property and equipment. Prudent management of NRC's resources should include a means for assuring that NRC's reversionary interest in plant, property and equipment funded by NRC is properly recorded and controlled.

As discussed under Finding II, Interagency Responsibilities Over Reimbursement to DOE Work is Not Adequate, NRC and DOE have entered into a Memorandum of Understand-l ing (MOU) governing services obtained by NRC from DOE and its national laboratories.

5 The MOU specifies that any plant, property and equipment obtained under the NRC funded projects becomes the property of DOE with NRC having a reversionary interest g

in the property at the time of disposal. The MOU also specified that DOE would provide 3

NRC with billing listings of the property funded by NRC.

In an August 1992 report, the NRC Inspector General reported that since 1986, NRC had paid about one-half billion dollars to DOE without the required review, approval, and verification as to the correctness of the payments (OlG/92A-08). This OlG report followed g

an earlier 1991 internal report in which the NRC Director of the Office of Administration E

reported on a review of NRC project files.

The O!G audit covered the review of 167 project files and ather NRC records. Findings and comments relating to NRC's control over DOE property funded by NRC included the following:

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NRC funded property and equipment were not properly tracked or disposed.

o Project Manager did not review DOE laboratory costs.

o The acquisition value of all NRC-funded property and equipment at DOE laboratories was approximately $76 million.

NRC's comments on the March 5,1993 OlG report were included as an enclosure to the report. NRC made the following comments on the NRC-funded property and equipment findings:

o As described in the draft report, RES (Office of Nuclear Regulatory Research) g developed and put in place interim procedures for the closecut of DOE laboratory a

projects and the disposition of equipment. The requirements contained in the interim procedures were taught to all Project Managers who attended the RES g

Project Managers' Course. RES is now in a position to finalize those procedures, 3

and an Office Letter on this subject is scheduled for issuance in March 1993. The Office Letter will give specific instructions necessary to ensure the proper E

deobligation of funds, provide for the identification and disposal of NRC-funded g

equipment and property.

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I With regard to the $76 million which is attributed by the draft report to the acquisi-o I

tion value of DOE's annual 'oventory of NRC-funded property and equipment, it should be recognized that much of the equipment listed is old and obsolete with its current depreciated value maybe much lower than $76 million.

I Further, this listing continues to include about $30 million of equipment and facill-ties associated with the Loss-of-Fluid Test (LOFT) program, the facility and equip-ment were transferred from NRC to DOE on October 1,1982, by the *NRC DOE Interagency Agreement on LOFT Program Responsibility". Because of this trans-fer, the LOFT facilities and equipment to not belong in the DOE annualinven-tory.

The $76 million property listing was not audited for reliability and completeness.

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Therefore, no reliable information was provided for inclus on in the financial state-monts relating to the value of the reversionary interest in equipment or the net book value of such reversionary interest.

The Federal Property and Administrative Services Act of 1949 and the Budget and Accounting Act of 1950 in general require Agencies to maintain adequate inventory controls and accounta-bility systems for property. The JFMIP has guidance for developing such systems.

Recommendation The Chief Financial Officer should establish a policy to assure that information is maintained and tracked relative to the equipment items that have been acquired by DOE. This information should assist project managers in assessing the need to acquire duplicate unused, or under-utilized I

items that are already available to DOE from prior procurement actions. Additionally, this infor-mation will assist NRC to safeguard its interest in DOE acquired equipment.

Comments of the Chief Financial Officer We have previously initiated work to improve the equipment reportin, and accountability of equipment purchased through NRC laboratory agreements based on 1992 OlG audit reports.

Our current policy requires (1) a receiving report be sent to us for every piece of equipment purchased (2)... annual [ly] a listing be provided of all equipment in DOE inventory on active lab I

agreements and (3) that prior to the close-out of a lab agreement, that an inventory list be provided to a!!ow us to determine which items of equipment we desire to retain. A six month pilot project implementing Management Directive 11.7, "NRC Procedures and Management I

Controls for Placement and Monitoring of Work with the Department of Energy"will be completed shortly.

The final Management Directive will incorporate policies on the reporting and accountability of equipment purchased through NRC laboratory agreements and is expected to be published on September 30,1993. The tracking and monitoring of equipment purchased is I

an accountability issue and not a financial statement issue. We believe that this equipment should be reported in the appropriate DOE financial statements until the equipment is transferred to the NRC.

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i Auditors' Conclusion I

We concur with the comments of the CFO and encourage expedient issuance of the Management Directive mentioned. However, we disagree that reversionary interest is not a financialissue. Congress entrusts NRC to manage and account for all funds appropriated to the Agency. This includes assets acquired and the related value of that investment whether it be physically located at NRC or DOE.

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I INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS I

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PL\\/

.NAVARRO I

R 2831 Cam:no Del Rio South, Suite 306

& ASSOCIATES, INC.

San Diego, Cahfornia 92108

)

(619)298-8193 uarmto eus,,c 4ccouvrests I

To the Commissioners U.S. NUCLEAR REGULATORY COMMISSION Bethesda, Maryland I

INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS We have audited the principal financial statements of the U.S. Nuclear Regulatory Commission (NRC), as of and for the year ended September 30,1992, and have issued our report thereon dated May 28,1993. As part of our audit, we tested the NRC's compliance with certain laws and regulations that, if not followed, could have a direct and material effect on the financial statements. This report pertains only to our consideration of compliance with laws and regu-lations for the year ended September 30,1992.

I We conducted our audit in accordance with generally accepted auditing standards, Government Auditina Standards, issued by the Comptroller General of the United States, and Office of Man-agement and Budget Bulletin 93-06 Audit Requirements for Federal Financial Statements. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the principal financial statements are free of material misstatements.

NRC's principal financial statements for the fiscal year ended September 30,1992 include $109 million of reimbursable expenses incurred by the Department of Energy (DOE), which represents approximately 22% of the agency's total expenses. The funds were transferred under the provisions of the Energy Reorganization Act (P.L. 95-91) which are embodied in a Memorandum of Understanding (MOU) between NRC and DOE dated February 24,1976. The MOU establishes guidelines for the program planning, implementation, control, funding, and management of NRC funds. The responsibility to design, implement and evaluate the system of controls to assure 1

i compliance with laws and regulations rests with the Department of Energy.

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Our assessment of compliance with laws and regulations, which could have a material and direct effect on the NRC financial statements, did not provide for a review of DOE's extent of compliance with laws and regulations for the NRC funds they expended. Our assessment of compliance with laws and regulations over the funds transferred to DOE was limited to testing the controls maintained at NRC over the disbursing and recording of these funds.

I Compliance with laws and regulations applicable to NRC is the responsibility of agency manage-ment. As part of obtaining reasonable assurance as to whether the principal financial statements are free of material misstatement, we tested NRC's compliance with laws and regulations that may directly affect the financial statements and certain other laws and regulations designated by OMB as listed below. However, our primary objective was not to provide an opinion on overall compliance with such provisions. Accordingly, we do not express such an opinion:

o Anti-Deficiency Act (Title 31 U.S.C.),

o National Defense Appropriations Act (PL 101-510),

o Omnibus Budget Reconciliation Act of 1990 o

Debt Collection Act of 1982 (PL 97-365),

o Prompt Pay Act (PL 97-177),

o Civil Service Retirement Act, o

Civil Service Reform Act (PL 95-454),

o Federal Managers Financialintegnty Act (PL 97-255),

o Chief Financial Officers' Act (PL 101-576), and o

Budget and Accounting Act.

I' As part of our audit, we relied on the Office of Inspector General's review of management's reporting of internal control and accounting systems as required by the Federal Managers' FinancialIntegrity Act (FMFIA) and compared the agency's most recent FMFIA reports with the evaluations we conducted of the entity's internal control systern.

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The results of our test indicate that with respect to the items tested, NRC complied in all material respects with the provisions referred to above. With respect to the items not tested, nothing came to our attention that caused us to believe that NRC had not complied, in all material respects, with those provisions.

This report is intended solely for the use of management of the U.S. Nuclear Regulatory Commission. This restriction is not intended to limit the distribution of this report, which, upon acceptance by the NRC,is a matter of public record.

I R " &" " 'L' I

San Diego, California I

May 28,1993 I

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I COMMENTS OF THE CH!EF FINANCIAL OFFICER I

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I Comm:nts of the Chl:f Financi:1 Officer Appendix

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t UNITED STATES i

E NUCLEAR REGULATORY COMMISSION I

I wAsniwoTow, o.c. 2asswoot t

+*p June 23, 1993 I

I MEMORANDUM FOR:

David C. Williams I

Inspector General FROM:

James M. Taylor Chief Financial Officer

SUBJECT:

DRAFT REPORTS ON: NRC'S INTERNAL CONTROL I

STRUCTURE; COMPLIANCE WITH LAWS AND REGULATIONS; AND, THE PRINCIPAL STATEMENTS -

FY 1992 AUDIT OF FINANCIAL STATEMENTS This memorandum provides my comments on the subject reports.

We have no comments on the Reoort on compliance with Laws and I

RecrulatinD.g or the Report on Princloal Statements.

Attached are detailed comments on the Report on Internal control Structure.

I The Report on Internal Control Structure identifies four material weaknesses as Reportable Conditions.

Reportable Conditions I and II.

Our FY 1992 FMFIA Report identified general accounting controls at the general ledger level and the management of work done at the DOE laboratories as material weaknesses.

We will make appropriate adjustments to our I

work plan for these existing material weaknesses to address Reportable Conditions I and II.

Reportable Condition III.

We disagree that lack of timely I

billing should be characterized as a material weakness.

We have a system, process, and controls in place to capture costs that should be billed under 10 CFR 170.

Further, we bill and recover these costs.

We recognize that the audit did identify $51.6 million of work in process that was not posted at the end of the year as an accounts receivable.

We believe that the lack of I

posting work in process is an accounting policy issue more appropriate for inclusion as a part of the general ledger material weakness.

Reportable Condition IV.

We agree that the capitalization policies for supplies inventory, Icaschold improvements and Automated Data Processing (ADP) sof tware should be identified as I

a new material weakness. I

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Comments of the Chief Financial Officer - Continued Appendix In general we agree with the intent of the recommendations and have attached some specific comments.

With regard to the recommendation on the general ledger, the NRC is in the process of implementing a new accounting system and the inadequacies of the former accounting system are being addressed.

We agree with the recommendations on the capitalization of assets.

Supplies will be recorded as an asset and adjusted at fiscal year end based upon a physical inventory and leasehold improvements will be capitalized.

ADP software costs will be routinely captured beginning in Fiscal Year 1994 by identifying each system which meets the criteria for capitalization and a central inventory will be maintained for management purposes.

Although we agree that we should strive for continued improvements to the management oversight of work at DOE labs, the recommendation regarding audit of DOE labs involves very complex questions and 3

issues with respect to the laws and regulations governing 3

interagency agreements.

I will be contacting you in the near future to explore options to address the audit issues that may be feasible and are consistent with Federal requirements.

With respect to the timely billing of fees, we will continue to look for cost effective measures to reduce the time required to bill for services rendered.

We note, however, that during the year audited (FY 1992), the NRC significantly reduced the billing time for Part 170 bills.

My staff and I are available to discuss these comments if you desire.

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ief Financial Officer Attachment-1 As Stated I

cc:

Thomas Barchi i

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