ML20207H867

Audit Rept OIG/98A-09, Independent Auditors Rept & Principal Statements for Year Ended 980930

ML20207H867
Person / Time
Issue date:	03/01/1999
From:	NRC OFFICE OF THE INSPECTOR GENERAL (OIG)
To:
Shared Package
ML20207H858	List: ML20207H852 ML20207H867
References
OIG-98A-09, OIG-98A-9, NUDOCS 9903160123
Download: ML20207H867 (51)

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i INDEPENDENT AUDITORS REPORT AND I I PRINCIPAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30,1998 OlG/98A-09 March 1,1999 I  !

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i INDEPENDENT AUDITORS' REPORT AND PRINCIPAL STATEMENTS FOR THE ll l

YEAR ENDED SEPTEMBER 30,1998 I

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I CONTENTS L REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Independent Auditors' Repon on the Principal Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Repon on Management's Assenion About the Effect'iveness of Internal Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Independent Auditors' Report on Compliance with Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 IL PRINCIPAL STATEMENTS B alan c e S heet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19.

S tatem ent of Net Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Statement of Changes in Net Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Statement of Budge.ry Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 I Statement of Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Notes to Principal Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 IIL APPENDIX Comments of the ChiefFinancial Officer -

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A. NAFMAO 2831 Camino DelRio South, Suite 306 4 Ass 0CIATES, fMC. San Diego, California 92108 ceareto rusue accouvr4urs (619) 298-8193 I '

REPORT OFINDEPENDENT AUDITORS I t I Chairman Shirley A. Jackson U.S. NUCLEAR REGULATORY COMMISSION Rockville, Maryland In our audit of the U. S. Nuclear Regulatory Commission for the year ended September 30,1998, we found:

The principal statements were fairly stated in all material respects; I .

Management stated, except for a significant deficiency related to managerial cost accosting, that NRC's systems of accounting and the internal control in place as of September 30,1998 are in compliance with the internal control objectives in Office of Management and Budget Bulletin No.

i 98-08, Audit Requirementfor FederalFinancialStatements, requiring that transactions be properly l recorded, processed, and summarized to enable the preparation of the principal statements in I

i accordance with Federal accounting standards, and safeguarding of assets against loss from unauthorized acquisition, use or disposal. Management did not identify the significant deficiency related to managerial cost accounting as a material weakness, therefore, management's assertion on intemal controls is not fairly stated.

Our audit identified four reportable conditions, Comment A, Managerial Cost Accounting, is I considered a material weakness. We also identified three conditions relating to compliance with laws and regulations, two of which are in substantial non-compliance with the Federal Financial Management Improvement Act (FFMIA).

The following sections outline our conclusions.

INDEPENDENT AUDITORS' REPORT ON THE PRINCIPAL STATEMENTS

' We have audited the U.S. Nuclear Regulatory Commission's (NRC) balance sheet, statements of net cost, I changes in net position, budgetary resources, and financing as of and for the year ended September 30,1998, herein referred to as the principal statements. The principal statements tre the responsibility of NRC's management. Our resmusibility is to express an opinion on the principal statements based on our audit.

SCOPE We conducted our audit in accordance with generally accepted auditing standards; Government Auditing Standards, issued by the Ccmptroller General of the United States; and, Office of Management and Budget (OMB) Bulletin No. 98-08, Audit Requirementsfor FederalFinancialStatements. Those standards require that we plan and perfona the audit to obtain reasonable assurance about whether the financial statements tre I free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial st:tements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

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MATIERS FOR Eh1PHASIS FinancialReporting by Program OMB Bulletin No. 97-01, Form and Content ofAgency Financial Statements, provides guidance to federal I

agencies for preparing the principal statements which an the subject of this audit. Consistent with the ,

requirements of the Government Performance and Results Act (GPRA) of 1993, the bulletin requires agencies to prepare the Statement afNet Cost (for a description oftheprincipalstatements refer to Note 1.B.,

in the Notes to Principal Statements) using programs that fully align to the agency's strategic, budget and performance plans. The NRC is in the process of moving to fully aligned strategic, budget and performance plans, therefore, the Statement of Net Cost in the cu-rent year includes programs as executed again:t the budget plan and not the strategic or pvformance plans. (Refer to the Report on Management's Assertion About the Effectiveness ofInternal Control, Comment B, FinancialReporting,for additionalinformation on this condition.)

Exchange Revenues Matched To Programs The Federal Accounting Standards Advisory Board (FASAB) issued Statement of Federal Financial Accounting Standards (SFFAS)No. 7, Accountingfor Revenue and Other Financing Sources and Concepts for Rect 4ciling Budgetary andFinancial Accounting, whereby agencies were directed to record and present exchange revenues matched against program costs on the Statement ofNet Cost. NRC cannot readily match exchange revenues by program in the current year. Therefore, NRC, with OMB concurrence, included on E the Statement ofNet Cost only the fee for services exchange revenue matched against its regulatory program. E The exchange revenue generated by annual fees was presented on the Statement ofNet Cost as "not directly assignable to programs." Although, this presentation does not fully incorporate the guidance in SFFAS No. g 7, the Statement of Net Cost, as a whole presents fairly the net cost of NRC programs. (Refer to Note 1.E. 3 in the Notes to Principal Statementsfor the agency'spolicy on revenues and otherfinancing sources.)

Classification of Costs OMB Bulletin No. 97-01, Form and Content ofAgercy FinancialStatements, provides guidance to federal g agencies for presenting program cost classified by intragovernmental and public components. The basis for 3 classification relies on the concept of who received the benefit of the cost Meurrer. (e.g. private sector licensees versus Federal licensees) rather than who was paid. However, following the ravice of OMB, NRC g '

classified the costs on the Statement of Net Cost using an underlying concept of who was paid. This E presentation does not entirely incorporate the guidance in the Bulletin, however, it enables the agency to t:ansition to the presentation required in the current year. (Refer to Note 1.B., Basis ofPresentation, in the Notes to PrincipalStatementsfor a discussion oftheprincipalstatements in the currentyear.)

U.S. Department ofEnergy Expenses NRC rprincipalstatementsincludereimbursableexpensesoftheU.S.DepartmentofEnergy(DOE) National Laboratories. The NRC's Statement ofNet Cost includes approximately 561 million ofreimbursed expenses, which represent approximately 12% of total expenses. Our audit included testing these expenses for s compliance with laws and regulations within NRC. The work placed with DOE is under the auspices of a Memorandum ofUnderstanding between NRC and DOE. The examination of DOE National Laboratories for compliance with laws and regulations is DOE's responsibility. This responsibility was further clarified by a memorandum of the GAO's Assistant General Counsel, dated March 6,1995, where he opined that 2

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DOE's inability to assure that its contractors' costs [ National Laboratories] are legal and proper...does not compel a conclusion that NRC has failed to comply with laws and regulations." DOE also has the ecgnizant  !

responsibility to assure audit resolution and should provide the results ofits audits to NRC. l l

l OPLNION  !

I In our opinion, the principal statements referred to above present fairly, in all material respects, the financial position of the NRC as of September 30,1998, and its net cost of progrmns, changes in net position, budgetary resources, and financing for the year then ended in conformity with generally accepted accounting principles.

i As discussed in Note 1.B., Basis ofPresentation, the form and content of the current year principal statements noticeably differ from the principal statements issued in the prior year. The change to the principal statemerts is required by OMB Bulletin No. 97-01, Form and Content ofAgency Financial Statements.

I REPORT ON MANAGEMENT'S ASSERTION ABOUT THE EFFECTIVENESS OF INTERNAL CONTROL We have examined management's assertion thatNRC's systems of accounting and internal control in place as of September 30,1998 are in compliance with the internal control objectives in OMB Bulletin No. 98-08, I Audit Requirementsfor FederalFinancialStatements. The Bulletin requires that transactions be properly recorded, processed, and summarized to enable the preparation of the principal statements in accordance with Federal accounting standards, and safeguarding of assets against loss from unauthorized acquisition, use or i l

disposal. l 1

Our examination was made in accordance with the standards established by the American Institute of l

, I Certified Public Accountants; the standards applicable to financial audits contained inGovernment Auditing Standards, issued by the Comptroller General of the United States; and, OMB Bulletin No. 98-08.

Accordingly, we consiocred NRC's internal control over financial reporting by obtaining an understanding l of the agency's internal controls, determined whether these internal controls had been placed in operation,

assessed control risk, and performed tests of controls and othar procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Our l examination was of the internal control in place as of September 30.1998.

Because of inherent limitations in internal control, errors or fraud may occur and not be detected. Also, projections of any evaluation of the intemal control over financial reporting to future periods are subject to I the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

l In our opinion, management's assertion that NRC's systems of accounting and the internal control in place as of September 30,1998 are in compliance with the internal control objectives in OMB Bulletin No. 98-08, requiring that transactions be properly recorded, processed, and summarized to enable the preparation of the principal statements in accordance with Federal accounting standards, and safeguarding ofassets against loss from unauthorized acquisition, use or disposal, is not fairly stated, because management did not identify tne lack of managerial cost accounting as a material weakness.

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Our consideration of management's assenion on internal control over financial reporting would not necessarily disclose all matters in the internal contro' over financial reporting that might be reportable conditions. Under standards issued by the American Institute of Certified Public Accountants, reportable conditions are matters coming to our attention relating to significant deficiencies in the design or operation of the intemal control that, in ourjudgment, could adversely affect the agency's ability to record, process, summarize, and report financial data consistent with the assertions by management in the financial statements. Material weaknesses are reportable conditions in which the design or operation of one or more of the intemal control components do not reduce to a relatively low level the risk that misstatements in .

amounts that would be material in relation to the 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. l We noted certain matters, discussed in the following paragraphs, involving the intemal control and its operation that we consider to be reportable conditions. Comment A, Managerial Cost Accounting, was ,

considered a material weakness and a substantial non-compliance with Federal Financial Management Improvement Act(FFMIA).

Current Year Comments A. Managerial Cost Accounting In 1995, the Federal Accounting Standards Advisory Board (FASAB) established requirements in Statement of Federal Financial Accounting Standards (SFFAS) No. 4, Managerial Cost Accounting g Concepts and Standards, whereby agencies were to develop and implement cost accounting 3 practices and techniques by fiscal year 1997. In 1997, the FASAB, based on input from a variety of sources including the Chief Financial Officers' Council, delayed the implementation of this standard until fiscal year 1998. NRC did not implement this standard during fiscal year 1998.

SFFAS No. 4, Paragraph 4, states," Managerial cost accounting should be a fundamental part of the g financial management system and, to the extent practicable, should be integrated with other parts g of the system." Paragraph 5, further states, "Each reporting entity should report the costs ofits activities on a regular basis for management information purposes." Statement of Recommended g Accounting Standards No. 9, Deferral of the Efective Date of Managerial Cost Accounting Standa-dsfor the Federal Government in SFFASNo. 4, states in paragraph 9, "The Board thus l

urges Federal entities to give implementation of SFFAS No. 4 a high priority and take immcdiate actions to define and structure responsibility segments and develop costing methodologies."

The Federal Financial Management Improvement Act, Section 803(a) states, "Each agency shall ,

implement and maintain financial management systems that comply substantially with Federal fimmcial management system requirements (OMB Circular Nos. A-127, A-130 and Joint Financial Management Improvement Program (JFMIP) requirements), applicable Federal accounting standards [ Statements on Federal Financial Accounting Standards issued by FASAB), and the United States Govemment Standard General ledger (SGL) at the transaction level."[ Criteria clarifications providedin brackets].

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l l Cost accounting standards and concepts, as described in SFFAS No. 4, are designed to complement the financial accounting practices already in place at NRC. Managerial cost accounting focuses on l the information needs of agency managers in order to support agency functions for planning, l controlling costs, decision making and evaluating performance. Cost accounting is the process for tracing various input costs (i.e. direct labor, contract and indirect costs) to the outputs and outcomes realized by the agency. Implementation of cost accounting techniques and practices is essential to l

an agency's ability to prepare cost performance evaluations under the Government Performance and Results Act (GPRA) in fiscal year 1999.

In fiscal year 1998, the agency continued to use obligation data for decision making and assessment lBl l of the adequacy of managers' use of federal resources. A report detailing the allowr.nce holders obligated, unobligated and liquidated amounts is produced monthly to enable managers to understand how they performed throughout the most current month end and year-to-date against their respective financial operating plans. During fiscal year 1998, cost finding techniques, studies or other methodologies were not used to provide agency managers routine, reliable and timely

.E information on the full costs of NI C programs, activities or functions. Management did, however, E employ cost finding techniques and allocation methodologies at year end to compile the data needed to prepare the current year's Statement of Net Cost.

During fiscal year 1998, NRC began a process for replacing its core financial management system.

Implementation of the core system is planned for late fiscal year 1999. A cost accounting module

,I is contemplated for the new core system (STARFIRE) as an integral part of the NRC's overall financial management system. At the end of fiscal year 1998, the agency contracted for services to begin an assessment of the needs of agency managers for cost accounting information.

Recommendation i

The Chief Financial Officer (CFO) should assess the immediate needs of NRC managers to receive reliable and routine cost accounting information in light of performance and results mandates l

Meluded in GPRA. Additionally, the CFO in preparing a remediation plan should develop a i strategy, including milestones, to incorporate cost management standards and concepts throughout the agency. The plan developed could serve to identify, develop and implement those metrics that

! managers need now in order to best manage resources and assess performance agair.st the agency's

strategic and performance plans.

l CFO's Comments

" Implementation of managerial cost accounting has been incorporated into a larger agency initiative ofimplementing an integrated, agency wide resource management system, STARFIRE. STARFIRE l will include cost accounting and labor-cost distribution modules which will provide necessary tools I ig for reporting costs and implementing cost accounting. Corrective action conceming the l5 implementation of managerial cost accounting will be addressed in the remediation plan required by FFMIA. OCFO expe. cts to complete this plan by July 1,1999. An agency manager responsible lg for implementation will be anncunced at that time." ,

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Auditors' Position We disagree with the CFO's position that "...the lack of managerial costs accounting system did not I'

have a material impact on the NRC's ability to perform its mission and to provide managers with the financial information they needed to manage.. " The approach taken by the CFO precludes agency managers from having the tools to make informed decisions on the usage of resources and improvements needed to gain operating economies and efficiencies. NRC is a service organization, funded by its regulated community, that provides rulemaking, regulatory licensing, and inspection services. Therefore, it is essential that NRC management recognize the importance of " Reliable and timely costs information that helps them ensure that resources are spent to achieve expected results and outputs, and alerts them to waste and inefficiency..." [ Cited excerpt from SFFAS No. 4, Paragraph 19]

The underlying premist, stated by the FASAB in its concepts and standards is that financial managers should develop processes and systems to provide routine, reliable information to all managers. The NRC has not made significant progress in identifying the needs of managers, nor discussing what should be tracked and measured, nor what metrics will be used for measuring costs. E Therefore, it seems premature for the CFO tojudge implementation of this standard [SFFAS No. 4] E as not having " ..a material impact on the NRC's ability to perform its mission.. " as indicated in his response. We firmly believe the lack of agency wide cost information or costs finding techniques 3 to support agency managers' needs, causes the NRC to lose step with mandated financial 5 management improvements for federal agencies. Additionally, we reiterate that the lack of cost accounting information undermines the agency's ability to demonstrate its readiness to fully comply g with the requirements of GPRA in FY 1999. 5 However, we commend the CFO's STARFIRE initiative since it may provide the foundation to g develop cost accounting and labor cost distribution. The CFO should assure that the new system has 3 the flexibility to incorporate those metrics which will be necessary to provide managers routine, relevant and reliable data in future years. The remediation plan provided by the CFO should include g the milestones planned for implementing the new system and the related modules, along with a 3 discussion of the strategy that will be used to define the needs of managers and the capacity of Ge new system to be responsive to such needs. During a subsequent audit, OlG will assess the adequacy of the agency's actions.

B. Financial Reporting OMB Bulletin No. 97-01, Form and Content ofAgency FinancialStatements, provides guidance to 4deral agencies for preparing the principal statements. Consistent with the requirements of the Government Performance and Results Act (GPRA) of 1993, the bulletin requires agencies to prepare the Statement ofNet Cost using programs that fully align to the agency's strategic, budget and annual performance plan. During fiscal year 1998, NRC did not have fully aligned strategic, budget and g performance plans. OMB Bulletin No. 97-01, states on page 26, Instructions for the Preparation of E the Statement of Net Cost, " Preparers...should decide the exact classification of... major programs based on the missions and outputs described in its GPRA strategic and annual plans, the entity's budget structure... "

NRC management understood that the requirement for having the three plans fully aligned would come into effect for fiscal year 1999, in accordance with the GPRA. The guidance in OMB Bulletin No. 97-01, was not considered, by NRC management, sufficiently clear to move the requirement 6

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r I for full alignment of the plans into fiscal year 1998. Therefore, the agency executed and classified transactions along budget plan programs without consideration for mission based programs which more closely align with the strategic plan and/or v.ith the planned resource usage described in the annual performance plan.

For example, the budget plan was developed using five programs; the fiscal year 1998 initial I strategic plan had seven programs; a subsequent proposed strategic plan had four programs; and the performance plan had eight programs. This lack of congruity between plans made it challenging for the agency to use one streamlined approach for planning, executing and reporting transactions.

The Statement of Net Cost, for the current year, was prepared using the budget plan programs.

Recorded transactions and other financial information available dictated using this approach.

Additionally, using a variety of cost finding techniques (e.g. surveys, allocations, data mapping) at year end, the agency assigned two budgetary programs-management and support and inspector j general-to the remaining three budgetary programs. He allocations facilitated the agency's development of costs by budget plan program included on the Statement of Net Cost.

Recommendation ne ChiefFinancial Officer should assure that the budget, strategic and performance plans are fully aligned. Employing such a concept would present one cohesive philosophy for agency managers to plan, record, process, and summarize fh ancial activities; thus, enabling managers to evaluate their performance against financial operating plans, strategic goals and performance plans.

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"The NRC's structure for budgeting and strategic and performance planning have been in an evolutionary development phase over the past 2 years as the agency has been transitioning to full alignment as required by GPRA for FY 1999. While the agency was in this transition period, it was not possible to implement the guidance in the Office ofManagement and Budget Bulletin No. 97-01, which required the full alignment of budget, strategic plan, and performance plan earlier than I required by GPRA. As planned for FY 1999, NRC has fully aligned its budget, strategic plan, and performance plan. %e Budget Estimates andPerformance Plan - Fiscal Year 2000 contains the budget and performance plan structure that the agency is executing for FY 1999 which is aligned with the current working draft of the strategic plan,"

Auditors' Position While we commend the CFO for moving forward with his planned action to align the agency's budget, strategic and performance plans, we re-emphasize the need to incorporate the results ofits plan into the financial reporting model that will be used for the FY 1999 financial statements. During a subsequent audit, OIG will assess the adequacy of management's actions.

C. CISSCO Obligations The Information Technology Management Reform Act of 1996 provided authority to OMB to designate an agency (General Services Administration (GSA) was selected) to procure govemment-wide contracts which other federal agencies could u,e. He NRC, through a Basic Agreement (BA) with GSA, gained access to the services of an information technology (IT) contractor. He NRC 7

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program used for IT services is known as the Comprehensive Information System Support Contract (CISSCO).

Management Directive 4.2, FinancialManagement Administrative Control ofFunds, Part IV, states, "The NRC's fimds control system is based on complementary and integrated fiduciary responsibilities for both the Chief Financial Officer (CFO) and the NRC officials who receive allowances of agency funds. OCFO is responsible for maintaining the NRC accounting system that contains the of2icial E balances of funds ... committed, obligated and paid. NRC allowance holders are responsible for E intemal records and controls in their organizational units," Part VI further states,"An ' obligation of funds' is an action that creates a liability or definite promise on the part of the Government to make a payment at some later date.... Obligations must be supported by appropriate documentation, such as g written binding agreements...."

NRC did not follow established fund control policy and issued obligations to GSA without recording them in the NRC's general ledger system. Additionally, fund controls were set at thejob code level, thereby precluding effective management control at the lowest functional level. The lowest functional level in the CISSCO program is known as a Task Assignment Control (TAC). Examples follow:

Representations to GSA The CISSCO program used by NRC, within the Office of the ChiefInformation Officer (OCIO),

included providing GSA Basic Agreement Amendments (BAA). These documents amended, as necessary, the obligation ceiling of the agreement. Intemally, however, NRC considered the BAA a commitment. Although the documents provided to GSA stated that an obligation was being provided, no corresponding obligations were recorded in the Federal Financial System (FFS). Based on these documents, GSA directed their contractor to provide cost estimates and/or other services. This practice put the NRC at risk ofincurring expenses without a valid obligation.

Funds Control During fiscal year 1998 the OCFO reconciled obligations and costs and reclassified transactions from job codes to TAC numbers in order to gain accounting control over the program at the lowest functional level. While performing the reconciliation, OCFO identified the following funds control  ;

conditions in 30 of the 43 job codes reviewed with fiscal year 1996 and 1997 obligations: j Percent of Total Job Amount of Variance Condition Encountered No. ofJob Codes Nos. l Obligations byjob number which exceeded the related TACs 18 41.8 % S 1,187,404 1 Obligations byjob number which under-funded the related TACs 12 28.0 % $ (1,275,525) ll m '

Approximately 70% of thejob codes included in the CISSCO reconciliation were either over or underobligated. However, the exceptions identified do not rise to an antideficiency exception since the appropriations, allotments and allowances in total for the agency were not exceeded. 1 Il 1

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I For example, one job code (J1075) required approximately $238,000 in fiscal year 1998 funds to cover $480,000 that was overexpended. The $242,000 balance was made up by fiscal year 1996 and 1997 job codes that had excess obligations.

I The Office of the Inspector General has an audit of the CISSCO program underway, which will assess the adequacy of funds control.

Recommendation I The ChiefFinancial Officer (CFO) should reaffinn to senior managers that funds control policies are critical elements for managing agency resources. At a minimum all appropriate obligating documents should be provided to OCFO for recording obligations.

The CFO should ensure that new programs mant ged by the agency conform to established funds control practices embodied in the agency's respective management directives.

Furthermore, the CFO should clarify to senior managers agency policy for making funds control representations to other agencies. At a minimum, the information provided externally should be consistent with the official transactions recorded to the agency's accounting records.

CFO's Comments "The agency's administrative control of funds policies and procedures are depicted in Management Directive and Handbook 4.2, Administrative Control of Funds. In addition, senior managers responsible for funds management are required to take two NRC developed training courses (1)

I Introduction to Federal Financial Management which reviews the concepts, processes, and procedures for Federal financial management and (2) Administrative Control of Funds which covers the NRC's system of administrative control of funds that is defined in Management Directive and Handbook 4.2.

However, the OCFO will reaffirm to senior managers the agency's funds control policies and the necessity to provide to OCFO all appropriate obligating documents. Conective action in the form of a memorandum to allowance financial managers is expected to be completed by April 1,1999."

"The OCFO will ensure that new programs managed by the agency conform to established agency funds control guidance by requiring the program manager of the new activity to attend the two NRC training courses, Introduction to Federal Financial Management and Administrative Control [of]

Funds. Allowance financial managers will be advised of this new requirement by memorandum by April 1,1999."

"OCFO will clarify with senior managers the agency policy for making fund control representations to other agencies. Corrective action in the form of a memorandum to allowance financial managers is expected to be completed by April 1,1999. In addition, future sessions of the Administrative Control of Funds training course will address this issue."

Auditors' Position l The actions described by the CFO should raise the awareness of agency personnel over the importance l

of funds control. During a subsequent audit, OIG will assess the improvements made by the agency.

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I D. Revenue from Reimbursable Agreements Reimbursable agreements are a component of exchange revenue included in the Statement ofNet Cost. These agreements are between NRC and other federal agencies, licensees and foreign governments. The services performed include inspections, research, and serving as a conduit for obtaining criminal and background checks on behalf oflicensees.

Statement of Federal Financial Accounting Standards (SFFAS) No. 7, Accountingfor Revenue and Other Financing Sources, and Conceptsfor Reconciling Budgetary and Financial Accounting, provides the standards to account for inflows of resources from revenues and other financing sources. g SFFAS No. 7, states in paragraph 34," Revenue from exchange transactions should be recognized 3 when goods or services are provided to the public or another Government entity at a price." In other words, on the accrual basis of accounting. ,

The revenue from reimbursable agreements was not consistently recorded using accrual based revenue recognition principles. In some cases, revenue was recorded as contract support expenses were paid.

In other cases, such as agreements with DOE, revenue was recorded as NRC employees performed services on the related projects, which is appropriate. Additionally, revenue from the foreign cooperative rer earch program was recorded as research expenses were paid. Generally, revenue was recognized at the time when the related expenses were paid, on the cash basis of accounting.

Examples of the revenue recognition practices follow:

CooperativeAgreements In fiscal year 1998, revenue related to the foreign cooperative agreements was originally recorded as

$3.5 millien based on payments made to DOE laboratories and other contractors for research. At year- g end, the balance sheet reflected advances of $2.7 million consisting of payments received in prior 5 years and not applied to research ccsts. liowever, this treatment was not appropriate because there is no connection, using accrual based revenue recognition principles, between incurring research g expenses and caming revenue. 3 The revenue from cooperative agreements should have been recognized based on the annual g contributions specified in the agreements, net of an allowance for uncollectible amounts. As a result, g we proposed a prior period adjustment of $3.9 million to adinst fiscal year 1998 revenue and to reclassify contributions recorded as advances in prior years.

Other Reimbursable Agreements The exchange revenue from other agreements, such as the criminal history and information programs was also improperly recognized. Revenue was recorded as payments to the FBI, OPM and other contractors were made rather than as the services were provided. Also, the surcharges imposed by NRC to recover administrative costs were recorded when payments were made to the contractor rather than when the background checks were completed.

Recommendation The Chief Financial Officer shnuld implement procedures to ensure that revenue from reimburcable agreements is reflected on the principal statements on the accrual basis of accounting.

10 I

CFO's Comments "OCFO will perform an analysis ofits reimbursable work and revenue recognition and establish the necessary procedures to ensure that revenue is appropriately recognized on the financial statements.

Corrective action will be implemented by June 1,1999."

Auditors' Position ne actions described by CFO appear appropriate. During a subsequent audit, OIG will assess the adequacy of actions taken.

Status of Prior Year Comments Segregation of Duties - FFS In the prior year, we found that employees holding " lead accountant" pofiles and preparing reconciliations were perfonning incompatible functions in their normal duties. In his response, the CFO indicated that compensating controls would be instituted by requiring additional supervisory review and certification of data reconciliations performed by lead accountants. The described controls were implemented. His condition is resolved and closed.

)

l Assurance on Performance Measures With respect to internal controls related to performance measures, the Office of the Inspector General performed those procedures and will report this issue separately. Our procedures were not designed to i I provide assurance over reported performance measures, and, accordingly, we do not provide an opinion on such information.

INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS We conducted our audit in accordance with: generally accepted auditing standards; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and, Office of Management and Budget (OMB) Bulletin No. 98-08, Audit Requirementsfor FederalFinancialStatements.

NRC management is responsible for complying with laws and regulations applicable to the agency. As part of obtaining reasonable assurance about whether the agency's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws and regulations.

Noncompliance with these provisions could have a direct and material effect on the determination of financial statement amounts and certain other laws and regulations specified in OMB Bulletin No. 98-08, and the Federal Financial Management Improvement Act (FFMIA) of 1996. Providing an opinion on compliar..e with certain provisions of laws and regulations was not an objective of our audit and, accordingly, we do not express such an opinion.

The results of our tests of compliance with the laws and regulations described in the preceding paragraph exclusive of FFMIA, disclosed instances of noncompliance with the following laws and regulations that are I required to be reponed under Government Auditing Standards and OMB Bulletin No. 98-08, are described below.

I1 I . . -. . . . . . _.. .- - . - - . . ..

l I!

l Current Year Comment-Non-FFMIA l Part 170 Hourly Rates ne Omnibus Budget Reconciliation Act (OBRA) of 1990 requires the NRC to recover approximately 100% .

ofits budget authority by assessing fees. Accordingly, NRC assesses two types of fees to its licensees and l applicants. One type, specified in 10 CFR Part 171, consists of annual fees assessed to power reactors, i materials and other licensees. He other type, specified in 10 CFR Pan 170 and authorized by the Independent Offices Appropriation Act (IOAA) of 1952, is assessed to specific licensing actions, inspections and other senices provided to licensees and applicants.

He IOAA in 31 U.S.C. Section 9701(b) states "...each charge shall be (1) fair and (2) based on (A) the costs  !

to the Govemment..." OMB Circular A-25, User Charges, provides guidance for assessing fees under the 10AA. Circular A-25 states in paragraph 6(aX2Xa), "... user charges will be sufficient to recover the full cost to the Federal Govemment ofproviding the service, resource, or good when the Government is acting in its capacity as sovereign..." and paragraph (6XdXI) states, " full cost includes all direct and indirect costs to any part of the Federal Government of providing a good, resource, or service."

Each year, the OfIice of the ChiefFinancial Officer (OCFO) computes the hourly rates used to charge for the time incurred by NRC personnel in providing Pan 170 services. The rates are based on budgetary data and are g used to price individually identifiable Pan 170 services. He following table displays the basis for the fiscal 5 year 1998 hourly rates.

Components ofPart 170 Hourly Rates Reactors Materials Direct salaries and benefits - program offices $103.9 S20.5 g Overhead salaries, benefits and support costs - program offices Allocated indirect management and suppon costs 55.3 14.8 g

.l.0L2 22a Total budgeted program costs (in $000s) 260.9 57.3 Divided by direct program FTEs 1,186.4 267.3 Costs by FTE S219,900 $214,400 Divided by productive annualhours 1,776 1,776 Part 170 hourly rates - effective 08/10/98 $124.00 $121.00 I

he fiscal year 1998 rates were not developed in accordance with applicable laws and regulations because they are not based on the full cost of providing Part 170 services. For example, the calculations did not include certain contract support costs of approximately $70 million, net ofcontract support costs directly billable to licensees and applicants. He excluded contrace suppon costs, $70 million, primarily consisted of research projects. He $70 million represents approximately 15% of the fiscal year 1998 NRC appropriation of $472.8 million.

He contract suppon costs were excluded because, based on the OBRA conference agreement, the OCFO classified these costs as " generic activities" that ber.efit licensees generally. Rus, NRC recovered these costs through the Part 171 annual fees.

I 12 l

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L Recommendation The Chief Financial Officer should initiate an analysis of all contract support costs that were classified as

" generic activities" and were excluded from the rate. The analysis should seek to determine the portion of those costs that benefit specific classes oflicensees (i.e. power reactor or materials) and should, therefore, be included in the computation of Part 170 hourly rates.

CFO's Comments "While OCFO believes its development of the license fee rates is compliar.t with applicable laws and l regulations, it will initiate a study to analyze those activities currently characterized as " generic activities" ,

for license fee development purposes. A multi-office team will be established by May 1,1999, to conduct ]

a study to determine whether the costs currently identified as " generic" continue to meet the definition contained in the Conference Report to the Omnibus Budget Reconciliation Act. The results of this analysis will be incorporated in the development of the FY 2000 fee rule."

Auditors' Position On the first page of his comments, the CFO indicated disagreement with this condition. The condition i remains as initially stated.

Our review disclosed that in response to OBRA 1990, the agency developed the methodology used for the ,

current Part 170 fee structure. That methodology, among other things, had exclusions consistent with the l

l Conference Report, such as generic, OlG and Commission costs. Since that time NRC has studied and included in the rate previously excluded costs, thus moving away from the initial interpretation adopted in g the C,onference Report. However, no initiatives have been undertaken to study the agency's practice for

E blanket exclusion of generic costs from the rate. Our point is that a complete review of the pricing policy is necessary to assess whether the costs included assure compliance with the full costs provisions of OMB

g A-25. Generic costs, like any other cost, may impact the computation of a full cost rate and enable NRC to

E define a more compliant methodology than the blanket exclusion practice currently in place.

We believe that the steps desenbed by the CFO relating to the multi-office team to study this policy will

' enhance the agency's pricing practices. During a subsequent audit, OlG will assess the adequacy of the actions taken. Presently the OIG has a review of this process underway.

Current Year Comments - FFhBA Under FFMIA, we are required to report whether the agency's financial management systems substantially comply with the Federal financial management systems requirements, Federal accounting standards, and the United States Government Standard General Ledger at the t:ansaction level.

To meet this requirement, we performed tests cf compliance using the implementation guidance for FFMIA included in Appendix D of OMB Bulletin No. 98-08.The results of our tests disclosed instances, described below, wher: the agency's financial management systems did not substantially comply with the three requirements discussed in the preceding paragraph.

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A. Managerial Cost Accounting Refer to the Report on Management's Assertion About the E.[fectiveness ofInternal Control, Comment A, Managerial Cost Accounting, for a detailed discussion of the condition, recom-mendation. This condition was considered a material weakness and a Federal Financial Management Improvement Act substantial non-compliance.

B. Accounts Receivable Classifications The agency's billing system is dependent on a series of interfaces to assure that information maintained in subsidiary data bases and systems is properly recorded at the transaction level and uploaded to the general ledger (FFS). We noted that information being uploaded for posting to the general ledger was not properly classified, thereby precluding the core accounting system from properly capturing, at the transaction level, ~ 2 formation to support the intragovernmental and public information necessary to prepare the balance sheet at September 30,1998.

Section 803(a) of the Federal Financial Management Improvement Act (FFMIA), states, "Each agency shall implement and maintain financial management systems that comply substantially with Federal financial management system requirements [OMB Circular A-127, A-130 and Joint Federal Management Improvement Program (JFMIP) requirements], applicable Federal accounting standards [ Statements on Federal Financial Accounting Standards issued by FASAB], and the United States Government Standard Geneml Ledger (SGL) at the transaction level." [ Criteria clartfcations 3 providedin brackets]. E At our request, the Office of the Chief Financial Officer personnel performed an assessment of g transaction level classifications and found a technical error in the interface's " file transfer 5 protocols." Apparently when data interfaced with the general ledger, the program protocol which triggers the system to set the correct classification from the data files was inoperable. The amounts on the balance sheet, however, have been adjusted to reflect the proper financial line item classifications.

The lack of edits to detect errors in the data transfer protocols and the lack of proper transaction level review of the resulting uploaded data results in a substantial noncompliance as it relates to both the financial management system requirements under JFMIP and the U.S. Standard General Ledger at the transaction level.

Recommendation The Chief Financial Officer should pursue technical enhancemen.ti; to the file transfer protocols that are in place. The enhancements should be tested to ensure that the change made properly addresses the file transfer protocols between the subsidiary transactions and information uploaded to the core accounting system.

CFO's Comments "The technical enhancements to the file transfer protocols have been completed and are in the process of being tested. We expect the enhancements to be implemented and operational by April l 1,1999; therefore, a remediation plan will not be developed for this finding." E 14 I

I Auditors' Position We commend the CFO for the interim steps taken since the issue was brought to his attention.

Additionally, we concur that ifresolution of the condition is reached prior to the development of the July 1,1999 remediation plan, that this item should not be included. During a subsequent audit, OIG will assess the t.dequacy of the actions taken.

Prior Year Status - FFMIA Business Continuity During the prior year, our assessment ofNRC's management control program included a review of the agency's business continuity practices for major financial management systems. The major systems identified included (1) the core general ledger - Federal Financial System (FFS) operated by Treasury's Financial Management Service (FMS), (2) accounts receivable, and (3) the payroll system.

The remediation plan, dated June 1,1998, prepared by the CFO described the strategy to design a i I solution and provided a timetable for resolving the substantial non-compliance. The plan was reviewed and accepted by the Office of the Inspector General and has been acted upon by NRC management as follows:

j

1. General Ledger - FFS: NRC contacted the Treasury's Financial Management Service  ;

(FMS) expressing concern about the lack of a plan that is fully tested and restated that the responsibility for maintaining and testing the plan rests with FMS and not NRC. FMS replied that action was being taken, however, the reasonable assurance letter issued to NRC by FMS at September 30,1998, indicated that little to no progress has been made on this issue. The substantial non-compliance remains unresolved. NRC is dependent on FMS to resolve this condition.

CFO's Comments "NRC is dependent on Treasury's Financial Management Service to resolve this condition.

We do not expect, however, for Treasury to complete corrective action before FFS is replaced by NRC's new agency wide resource management system, STARFIRE, within the next 6 months."

Auditors' Position None.

2. Fee Systems: The strategy developed in the remediation plan for this system has not been implemented. In December 1998, NRC accepted a technical proposal from a contractor to develop and test a continuity ph for the fee systems. On January 29,1999, the contractor delivered a work plan that describes the work to be performed, the milestones and the deliverables. The substantial non-compliance remains unresolved.

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! 15 I

CFO's Comments l "While implementation of corrective action for this system has been delayed, it is expected that a fully tested business cor.tiauity plan will be in place by April 1,1999."

Auditors' Position During a subsequent review OIG will assess corrective actions taken to resolve this I condition.

3. Payroll System: Durmg the prior audit, we recognized that NRC had an outdated business continuity plan for the Automated Payroll System. We reported that management planned to move to a new payrol! system effective April 1998 (PAY /PERS) and that business continuity efforts should address the new system. PAY /PERS did not become the system of record during fiscal year 1998, therefore, management devoted resources to developing a contingency plan for the Automated Payroll System. Since a plan was developed and the Automated Payroll System is no longer the system of record, the substantial non-compliance is resolved and closed.

Consistency of OtherInformation NRC's overview of program performance goals and results, and other supplemental financial and manage-ment information contain a wide range of data, some of which is not directly related to the principal statements. We do not express an opinion on this information. We have, however, compared this information for consistency with the principal statements and discussed the measurement and presentation 3 methods with NRC management. Based on this limited effort, we found no material inconsistencies with 3 the principal statements or noncompliance with OMB guidance.

Objectives, Scope and Methodology NRC management is responsible for (1) preparing the principal statements in conformity with the basis of accounting described in Note I to the Notes to Principal Statements, (2) establishing, maintaining, and assessing intemal controls to provide reasonable assurance that FMFIA's broad control objectives are met, and (3) complying with applicable laws and regulations including the requirements referred to in FFMIA.

We are responsible for expressing an opinion on whether (1) the principal statements are free of material misstatement and presented fairly, in all material respects, in conformity with the basis of accounting described in Note 1 to the principal statements, and (2) for obtaining reasonable assurance about whether management's assertion about the effectiveness of intemal control is fairly stated, in all material respects, based upon criteria established by FMFIA and OMB Circular A-123, Management Accountability and Control. As of the date of our report, NRC management had completed its evaluation of financial controls.

We are also responsible for testing compliance with selected provisions of laws and regulations and for performing limited procedures with respect to certain other information in the principal statements. In order to fulfill these responsibilities, we:

examined, on a test basis, evidence supporting the amounts and disclosures made in the principal statements; 16

assessed the accounting prine' es used and significant estimates made by management; evaluated the overall presentation of the principal statements; e

obtained an understanding ofintemal controls related to safeguarding of assets, compliance with laws and regulations including execution of transactions in accordance with budget authority and finaneir.1 reponing, in the principal statements; i

assessed control risk and tested relevant internal controls over safeguarding of assets, compliance, and financial reporting, and evaluated management's assenion about the effectiveness ofinternal control; I .

tested compliance with selected provisions of the following laws and regulations: Anti-Deficiency Act (Title 31 U.S.C.), National Defense Appropriation Act (PL 101-510), Omnibus Budget Reconciliation Act of1990 (PL 101-508), Debt Coilcetion Act of1982 (PL 97-365), Prompt Pay Act (PL 97-177), Civil Service Retirement Act of 1930, Civil Service Reform Act (PL 97-454), Federal Managers' Financial Integrity Act (PL 97-255), Chief Financial Officers' Act (PL 101-576), Budget and Accounting Act, Federal Financial Management Improvement Act (PL 104-208); and, reviewed compliance and reported in accordance with FFMIA whether the agency's financial management systems substantially comply with the Federal financial management system I requirements, applicable accounting standards and the U.S. Standard General Ledger at the transaction level.

'I We did not evaluate all intemal controls relevant to operating objectives as broadly as defined in FMFIA, such as those controls for preparing statistical repons and those for ensuring efficient and effective operations. We limited our internal control tests to those controls necessary to achieve the objectives described in our opinion on management's assertion about the effectiveness of internal controls. We

performed our work in accordance with generally accepted auditing standards, Government Auditing Standards and OMB Bul1etin No. 98-08, Audit Requirementsfor FederalFinancialStatements.

Agency Comments On February 25,1999, the CFO responded to the Inspector General on our draft repon and addressed the recommendation noted in the report. However, the CFO did not provide specific remedial actions for the FFMIA exceptions noted in the report. De CFO indicated that a [remediation) plan will be prepared by July l 1,1999. Comment B, Accounts Receivable Classifications, an FFMIA condition, will not be included in the  !

i I remediation plan since the CFO expects to have this condition resolved by April 1,1999. Based on our review of the CFO's comments, we are satisfied that the actions described meet the intent of our I recommendations and FFMIA guidelines. He CFO's comments are appended to this report in their entirety.

! Under separate cover, comments will be provided to NRC management outlining opportunities for strengthening intemal control and operating efficiency. We appreciate h1C staffcooperation and continued interest in improving financial management within the agency.

17 I

1 i

This repcit is intended for the management of the U.S. Nuclear Regulatory Commission, OMB, Congress j and the NRC Office of the Inspector General (OIG). "Ihis restriction is not intended to limit the distribution of this report, which upon acceptance by the OIG, is a matter of public record.

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IL PRINCIPALSTATEMENTS I

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i PrincipalStatements 1

l BALANCE SHEET As of September 30,1998 (in dollars) . I l

ASSETS Entity Assets:

Intragovernmental assets:

I Fund balances with Treasury (Note 2) $165,219,307 Accounts receivable, net (Note 4) 1,993,974 Advances and prepayments (Note 5) 2.091.378  ;

Totalintragovernmental assets 169,304,659 l Cash (Note 3) 50,000 Accounts receivable, net (Note 4) 26,324,300 l Advances and prepayments (Note 5) 218,772 l Property and equipment, net (Note 6) __12, 32.602 Total Entity Assets 231330.333 I

l l Non-Entity Assets:

Accounts receivable, net (Note 4) 36.606 Total Non-Entity Assets 36.606 TOTAL ASSETS $235.366.939 I

The accompanying notes to the principal statements are an intepal pan of these statements.

19

I PrincipalStatements BALANCE SHEET (Continued)

As of September 30,1998 (in dollars)

LIABILITIES ,

Liabilities Covered by Budgetary Resources:

Intragovernmentalliabilities:

Accounts payable and advances (Note 7) $ 11,715,665 l Accrued benefits (Note 8) 2,094,961 Otherintragovernmentalliabilities (Note 9) 31.983.981 Total intragovernmental liabilities 45,794,607 ,

Accounts payable (Note 7) 17,968,182 Other liabilities (Note 9) 1,769,829 .

Accrued payroll and benefits (Note 8) 11.614.850 Total Liabilities Covered by Budgetary Resources 77.147.468 Liabilities Not Covered by Budgetary Resources:

Intragovernmentalliabilities:

Otherintragovernmentalliabilities (Note 10) 6,404,812 Otherliabilities (Note 10) 26.049.638 Total Liabilities Not Covered by Budgetary Resources 32.454.450 TOTAL LIABILITIES 109.601.918 NET POSITION Unexpended appropriations (Note 12) 116,022,952 Cumulative results of operations (Note 13) 9.742.069 TOTAL NET POSITION 125.765.021 Total Liabilities and Net Position $235.366.939 The accompanying notes to the principal statements are an integral part of these statements.

20 I,

I Principa! Statements STATEMENT OF NET COST For the year ended September 30,1998 (in dollars) .

l l Costs:

)

Regulatory Program Intragovernmental $ 94,919,617 i

With the public 259.985.218 Total 354,904,835 Less directly assignable revenue (Note 16) (96.718.258)

Regulatory Program costs, net of assignable revenue $258,186,577 '

Regulatory Efrectiveness Program Intragovernmental 75,606,111 l

With the public 76.N .100 Regulatory Effectiveness Program costs 151,889,311 I Regulation ofDOE Program

g Intragovernmental 714,039 l

g With the public 3.668.313 l 1

! Regulation ofDOE Program costs 4.382.352 l i Total program costs, net ofdirectly I assignable earned revenues 414,458,240 Less carned revenues not directly assignable to programs (Note 16) (365.619.349)

Net Cost of Operations s 48.838.891 l

The accompanying notes to the principal statements

. are an integral part of ther,e statements.

21 ll l

PrincipalStatements STATEMENT OF CHANGES IN NET POSITION I

For the year ended September 30,1998 g (in dollars) - E I

Net Cost of Operations S (48,838,891)

Financing sources (other than exchange revenues): ,

Appropriations used, net (Note 14)

Non-exchange revenue (Note 1.B.)

37,516,139 7,015,287 l

Imputed financing (Note 15) 17,961,303 Transfers - out (7.015.287) l Total financing sources 55.477.442 Net results of operations 6,638,551 Decrease in unexpended appropriations (13.262.129)

Change in Net Position (6,623,578)

Net Position -Beginning of Period 128,447,809 Prior-period adjustment (Note 18) 3.940.790 ,

Net Position - Restated Beginning of Period !32.388.599 Net Position-End of Period $125.765.021 I

I I

The accompanying notes to the principal rtatements I

are an integral part of these statements.

22 =

I.

PrincipalStatements 1

l STATEMENT OF BUDGETARY RESOURCES For the year ended September 30,1998 l

l (in dollars) i Budgetary Resources (Note 19):

l Budget authority Unobligated balances - beginning of period

$481,125,000 29,370,393 Spending authority from offsetting collections I Adjustments (Note 19) 4,908,396 9.895.274 I

j Total Budgetary Resources $525.299.063 Status of Budgetary Resources:

Obligationsincurred $490,118,464 Unobligated balances - available 35.180.599 Total Status of Budgetary Resources $525.299.063 Outlays:

l Obligations incurred $490,118,464 Less: Spending authodty from offsetting l collections and adjustments (14.803.670)

Subtotal 475,314,794 I

Obligated balances, net - beginning of period 145,827,462 Less: obligated balances, net - end of period (124.700.809)

Total Outlays I $496.441.447 ,

1 The accompanying notes to the principal statements are an integral pan of these statements.

23

=

I

Il PrincipalStatements I

j STATEMENT OF FINANCING For the year ended September 30,1998 (in dollars)

Obligations and Nonbudgetary Resources Obligations incurred Less: Spending authority for offsetting

$490,118,464 g'i collections and adjustments (14,803,670)

Imputed financing (Note 15)

Exchange revenues not in the budget (Note 16) 17,961,303 (456.251.634) l Total Obligations and Nonbudgetary Resources 37.024.463 l 1 Resources That Do Not Fund Net Cost of Operations l Change in amount of goods, services, and I

benefits ordered but not yet received or provided 18,452,978 g Costs capitahzed on the balance sheet (Note 6) (9,674,767) g Financing sources that fund costs of prior periods (4,325,044)

Other 1.646.170 Total Resources That Do Not Fund Net Cost of Operations - 6.099.337 Costs That Do Not Require Resources Depreciation and amortization 5.571.440 Total Costs That Do Not Require Resources 5.571.440 Financing Sources Yet to be Provided 143.651 Net Cost of Operations S 48.838.891 l

Il

'Ihe accompanying notes o t the principalstatements are an integral part of these statements. l 24

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i PrincipalStatements \

NOTES TO PRINCIPAL STATEMENTS

September 30,1998 NOTE I.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES A. Reporting Entity ne U. S. Nuclear Regulatory Commission (NRC) is an independent regulatory agency ofthe Federal Government that was created by the U. S. Congress to regulate the Nation's civilian use of byproduct, ig source, and special nuclear materials to ensure adequate protection of the public health and safety, to l3 promote the common defense and security, and to protect the environment. Its purposes are defined by the Energy Reorganization Act of 1974, as amended, along with the Atomic Energy Act of 1954, as amended, which provide the foundation for regulating the Nation's civilian uses of nuclear l materials.

The NRC has two appropriations:

,1 1'

. 31X0200 - Salaries and Expenses e 31X0300 - Office ofInspector General l l He NRC is under budget functional classification 276 - Energy information, policy, and regulation and ,

l departmental code 31. I l

l He 31X0200 appropriation includes approximately $19 million of funds derived from the Nuclear  ;

l Waste Fund ($15 million appropriated for Nuclear Waste Policy Act work and $4 million for licensing l

a multi-purpose canister design) and $3 million from the General Fund for assistance provided to the U. S. Department of Energy (DOE).

I In addition, $8.1 million was available for obligation from appropriations provided by the U. S. Agency for International Development. The transfer was for the Nuclear Safety Assistance Prop.uii in Russia, Armenia, Kazakhstan and the Ukraine.

He accompanying financial statements ofNRC include the accounts of all funds under NRC control.

B. Basis ofPresentation I These principal statements were prepared to report the financial position and results ofoperations of the NRC as required by the ChiefFinancial Officers Act of 1990 and the Government Management Reform Act of 1994. These financial 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 l Management and Budget (OMB) in Bulletin No. 97-01, Form and Content ofAgency Financial lE Statements, and NRC accounting policies which are summarized in this note. These statements are, B therefore, different from the financial reports, also prepared by the NRC pursuant to OMB directives, which are used to monitor and control NRC's use of budgetary resources.

I

I PrincipalStatements NOTES TO PRINCIPAL 3TATEMENTS September 30,1998 l The principal financial statements are noticeably different from last year's statements, ne Federal E Accounting Standards Advisory Board's Statement of Federal Financial Accounting Concepts Number E 2, Entity and Display, recommended new principal financial statements. Based on this Concept Statement, OMB Bulletin No. 97-01 now requires the following statements: Statement of Net Cost, Statement of Changes in Net Position, Statement of Budgetary Resources, and the Statement of Financing. The Statement ofFinancial Position contained in prior reports has been renamed the Balance Sheet. He NRC has not prepared a Statement of Custodial Activity because the amounts involved are immaterial and are incidental to its operations and mission.

He NRC assesses two types of fees to recover its budget authority: (1) fees assessed under 10 CFR g Part 170 for licensing, inspection, and other services under the authority of the Independent Offices g Appropriation Act of 1952 to recover the NRC's costs of providing individually identifiable services to specific applicants and licensees; and (2) annual fees assessed for nuclear facilities and materials licensees under 10 CFR Part 171. All fees, with the exception of civil penalties, are considered exchange revenues in accordance with Statement of Federal Financial Accounting Standards Number 7, Accountingfor Revenue and Other Financing Sources and Conceptsfor Reconciling Budgetary and FinancialAccounting. Non-exchange revenue ofS7,015,287 consists ofS6,501,603, received from civil penalties, and $513,684 of miscellaneous receipts, which includes interest on delinquent debt, late penalties, Freedom ofInformation Act fees, and indemnity fees.

In the Statement of Net Cost, fees assessed under 10 CFR Part 170 are shown as revenues under the Regulatory Program. Fees assessed under 10 CFR Part 171 are shown as revenues not directly assignable to programs. Revenue from reimbursable agreements is included in this statement, as well.

He programs as presented on the Statement ofNet Cost were based on the FY 1998 budget structure.

Other budget line items, such as Management and Support and the OfEce of the Inspector General, were allocated using cost-finding techniques consistent with Statement of Federal Financial Accounting Standards Number 4, Managerial Cost Accounting Concepts and Standards for the Federal Government. He NRC's three programs are described as follows:

1. Regulatory Program encompasses all NRC efforts to ensure that the operation of commercial and nonpower nuclear reactor facilities and all NRC-regulated aspects of nuclear fuel cycle facilities; nuclear materials licensing; nuclear waste transport, storage, and disposal; and decommissioning activities are conducted in a manner that provides reasonable assurance of adequate protection of public health and safety, as required by the Atomic Energy Act of 1954 and other relevant laws.

2. Regulatory Effectiveness Program helps ensure adequate protection of the public health and safety, as required by the Atomic Energy Act of 1954, by providing the Commission with the technical bases for regulatory decisions for all regulatory programs.

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PrincipalStatements

'I NOTES TO PRINCIPAL STATEMENTS September 30,1998

3. Regulation ot' DOE Program involves the continued commitment ofDOE and NRC to resolve issues of concem to either agency that relate to the regulation of nuclear facilities, projects, and activities in the protection of public health and safety and the environment.

I C Budgets andBudgetary Accounting For the past 24 years, Cong ess ha; enacted no. year appropriations which are available for obligation by NRC until expended. The Omnibus Budget Reconcilianon Act (OBRA) of 1990, as amended, requires the NRC to recover approximately 100 percent ofits new budget authority of $472.8 million, l less the amounts derived from the Nuclear Waste Fund of $15 million, by assessing fees. In addition, lg3 l

for FY 1998, Congress appropriated $3 million from the General Fund. At the end of the fiscal year, l

l NRC's appropriations were reduced by $454.8 million, which is the amount of collections made durmg ,

g ti,e fiscal year. I E  !

D. Basis ofAccounting l l j l Transactions are recorded on both an accrual accounting basis and on a budgetary basis. Under the '

accrual method, revenues are recognized when camed and expenses am recognized when a liability is incurred, without regard to receipt or payment ofcash. Budgetary accounting fad!itates compliance with l legal constraints and control over the use of Federal funds. Interest on borrowings of the U. S. Treasury l

is not included as a cost to NRC's programs and is not included in the accompanying financial  !

statements

I l E. Revenues and Other Financing Sources l l Licensing fees and fees for inspections and other services, assessed in accordance with 10 CFR l

'E Parts 170 and 171, are recognized as revenue when earned. In accordance with Federal Government accounting guidance, the NRC classifies revenues as either exchange revenue or non-exchange revenue.

Exchan;e revenues are those that are derived from *iansactions in which both the Government and the public receive value. These revenues are presented on the Statement of Net Cost and serve to reduce the reported cost of NRC's programs. Non-exchange revenues are derived from the Government's sovereign right to demand payment, including fmes for violation oflaws or regulations. These financing

! sources do not reduce the cost ofNRC's programs and are reported on the Statement of Changes in Net l Position.

For accounting purposes, appropriations are recognized as financing sources (approyiations used) at l the time expenses are accrued. At the end of the fiscal year, appropriations imgded are reduced by l the amount of assessed fees collected during the fiscal year to the extent of new budget authority for the

, year. Collections which execed the new budget authority are held to offset subsequent years' appropriations. Appropriations expended for property and equipment are recognized as expenses when the asset is consumed in operations (depreciation and amorti2.ation). Appropriations used does not include (a) expenses incurred but not yet funded by Congress, such as workers' compensation benefits 27 I

I PrincipalStatements NOTES TO PRINCIPAL STATEMENTS September 30,1998 l

and annual leave expenses; and (b) expenses which are paid by other Federal agene'es, such as retirement benefits.

F. Fund- with the U. S. Treasury and Cash The NRC's cash receipts and disbursements are processed by the U.S. Treasury. The fund balances with the Treasury and cash are primarily appropriated funds that are available to pay current liabilities and g to finance authorized purchase commitments. Cash balances held outside the U.S. Treasury are not g material.

G. Accounts Receivable, Net ofAllowance "Ihe amounts dre for r eceivables, except those due from Federal agencies, are stated net of an allowance for uncollectible accounts. Since receivables from Federal agencies are expected to be codued, there is no allowance for uncollectible accounts. The estimate ofthe allowance is based on an analysis of the outstanding balances and the application of estimated uncollectible percentages to categories of aged receivable balances.

H. Advances andPrepayments The NRC makes cash payrnents to other Federal agencies, emplo~ ees, grantees, and contractors to provide for future NRC program expenditures. These ady we paynte.cs arc recorded as assets which are reduced when NRC receives reports of expenditures c: vhen accruals of cost estimates are made.

I. Propesty andEquipment P;yo md equipe econsists primarily cf typical office fwmishings, nuclear reactor simulators, and cc ?y er hardware had software. The agency has no real property.

The land and buildings in which NRC operates are provided by the U. S. General Services Administration (GSA), which charges NRC rent that approximates the commercial rental rates for similar properties.

Property with a cost of $50,000 or more per unit and a useful life of2 years or more is capitalized at cost I' and depreciated. Other property items are evpen=*A when purchased Normal repairs and maintenance are charged to expense as incurred.

J. Accounts Payable andAdvances Accounts payable represent vendor invoices for services received by NRC that will be paid (liquidated) in the next fiscal year. Advances represent collections received in advance of performing services under a varie;y of reimbursable agreements. The services will be provided and the revenue earned in the g subsequent fiscal year. 31 28 l 1 1

Il l

I PrincipalStatements I NOTES TO PRINCIPAL STATEMENTS September 30,1998 L Liabilities Not Covered by Budget Resources Liabilities represent the amount of monies or other resources that are likely to be paid by NRC as the I result of a transaction or event that has already occurred. No liability can be paid by NRC absent an appropriation. Liabilities for which an appropriation has not been enacted and for which there is no certainty that an appropriation will be enacted are classified as Liabilities Not Covered by Budgetary I Resources. Also, NRC liabilities arising from sources other than contracts can be abrogated by the Govemment acting in its sovereign capacity.

L Contingencies The NRC is a party to various administrative proceedings, legal actions, environmental suits, and claims I brought by or against it. Based on the advice oflegal counsel conceming contingencies, it is the opinion of management that the ultimate resolution of these proceedings, actions, suits, and claims will not materially affect the agency's financial position or results of operations.

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.

Sick leave and other types of nonvested leave are expensed as taken.

N. RetirementPlans I The 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 tojoia FERS or to remain in the Civil Service Retirement System (CSRS).

I Approximately 51 percent ofNRC employees belong to CSRS and 49 percent belong to FERS. In FY 1998, for employees in FERS, the NRC withkid 0.8 percent of base pay camings in addition to Federal Insurance Contribution Act (f!CA) withholdings and matched the withholding with an 10.7 percent contribution. The sum was transferred to the Federal Employees Retirement Fund. For employees covered by CSRS, NRC withholds 7 percent of their base pay earnings. This withholding is matched by NRC with an 8.51 percent contribution, and the sum of she withholding and the match is transferred I

to the CSRS.

l l On April 1,1987, the Federal govemment 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 one percent of base pay to their account and matches l contributions up to an additional four percent. The maximum percentage that an employee participating i

in FERS may contribute is 10 percent of base pay. Employees rovered by CSRS may contribute up to

, five percent of their base pay, but there is no NRC matching of the contribution. "Ihe maximum amount that either FERS or CSRS employees may contribute to the plan in a calendar year is $ 10,000. The sum 29 l

I

PrincipalStatements NOTES TO PRINCIPAL STATEMENTS September 30,1998 of the employees' and NRC's contributions is transferred to the Federal Retirement Thrift Investment Board.

The NRC does not repon on its financial statements FERS and CSRS assets, accumulated plan benefits, or unfunded liabilities, ifany, applicable to its employees. Reporting such amounts is the responsibility of the U. S. Office of Personnel Management. The ponion of the current and estimated future outlays for CSRS not paid by NRC is included in NRC's financial statements as an imputed financing source (see Note 15).

O. U. S. Department ofEne.qy Charges Financial transactions between the DOE and NRC are fully automated through the U. S. Treasmy's On-Line Payment r.nd Collection (OPAC) System. The OPAC System allows DOE to collect amounts due g from NRC directly from NRC's account at the U. S. Treasury for goods and/or services rendered. m Project manager verification of gooc't and/or services received is subsequently accomplished through a system-generated voucher approval system. The vouchers are returned to the Office of the Chief Financial Officer documenting that the charges have been accepted. For the year en<'ed September 30, 1998, NRC had expenses of approximately $61 million for research conducted by the DOE National Laboratories.

P. Pricing Policy The NRC provides goods and services to the public and other Government entities. In accordance with OMB Circular No. A-25 and the Independent Offices Appropriation Act of 1952, NRC assesses fees under 10 CFR Part 170 for licensing and inspection activities to recover the full cost of providing individually identifiable services. In accordance with the Omnibus Budget Reconciliation Act of 1990, annual fees are assessed to licensees under 10 CFR Part 171 to recover approximately 100 percent of new budget authority,less amounts excluded from fee recovery and those recovered under 10 CFR Part 170.

The NRC's policy is to recover the full cost ofgoods and services provided to other Govemment entities where (1) the services performed are not pan ofits statutory mission and (2) NRC has not received appropriations for those services. Fees for reimbursable work are assessed at the 10 CFR Pan 170 rate l a

with minor exceptions for programs that are nominal activities of the NRC.

Q. Use ofManagementEstimates The preparation of the accompanying financial statements requires management to make certain B

estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates.

g I

30

I PrincipalStatements NOTES TO PRINCIPAL STATEMENTS l September 30,1998 NOTE 2. FUND BALANCES WITH THE U. S. TREASURY Fund balances with the U. S. Treasmy consist of the following amounts as of September 30,1998:

Appropriated funds:

Obligated $131,051,246 Unobligated 28.826.389 159,877,635 Other fund types 5.341.672

$165.219.307 U. S. Government cash is handled on an overall consolidated basis by the U. S. Treasury. Funds with Treasury represent NRCs right to draw on the U. S. Treasury for allowable expenditures. All amounts are available to I NRC for current use. 'Ihe obligated and unobligated balances exclude amounts related to unfilled customer orders.

I NOTE 3. CASH Cash consists of an imprest fund of $50,000 as of September 30,1998.

NOTE 4. ACCOUNTS RECEIVABLE, NET Accounts receivable, net, is composed of the following as of September 30,1998:

Entity Assets Intragovemmental accounts receivable consists primarily of receivables and reimbursements due from other Federal agencies which were $1,993,974 at September 30,1998.

The non-Federal accounts receivable is comprised of the following amounts as of September 30,1998:

Materials and facilities fees - billed S 6,126,004 Materials and facilities fees - unbilled 21,404,719 I Other Total accounts receivable Less: Allowance for uncollectible accounts 136.805 27,667,528 (1.343.228)

Accounts receivable, net M l Other accounts receivable represent amounts due for fees assessed for licensing and inspections of nuclear facilities, the handling of nuclear materials, and other services. In the year collected, the amounts will be

,I used to offset NRCs appropriations.

2 31 l

l 1 . . . . . . . . . . _ . . .

PrincipalStatements NOTES TO PRINCIPAL STATEMENTS September 30,1998 l

Non-Entity Assets Accounts receivable represents miscellaneous penalties and interest due from the public of $36,606 at September 30,1998, which, when collected, must be transferred to the U. S. Treasury.  ;

The NRC's methodology to estimate the allowance for uncollectible accounts is based on an analysis of the outstanding balances and the application ofestimated uncollectible percentages to categories ofaged receivable balances.

NOTE 5. ADVANCES AND PREPAYMENTS Advances and prepayments as of September 30,1998, consist primarily of the following-Intragovernmental:

Advances - other Federe' agencies 52.091 3 78 l Aovances and prepayments S 218.772 Advances and prepayments are recorded as assets until receipt of the goods or services involved or until E contract terms are met. When goods or services are received or contract terms are met, the advance or 5 prepayment is reduced and the expense or acquired asset is recognized.

NOTE 6. PROPERTY AND EQUU' MENT,IET I

Property and equipment, net, consists of the following as of September 30,1998:

l Service Acquisition Accumulated Net Book a l Years Value Depreciation Value g; Fixed Assets Claae Equipment 5-8 $24,215,428 S(20,148,650) S 4,066,778 ADP software 5 38,010,869 (34,526,507) 3,484,362 ADP software under development 17,106,701 - 17,106,701 Leasehold improvements 20 19,504,015 (4,777,216) 14,726,799 Leasehold improvements in progress 47.962 47.962 l

Total M S(59ti2373) m B Property with a cost of $50,000 or more per unit and a useful life of 2 years or more are capitalized at cost and g depreciated. During FY 1998, the NRC capitalized $9,674,767 in property and equipment. 3 The land and buildings occupied by the NRC are pmvided by GSA. The GSA charged NRC $19,368,097 for the use of these facilities based on a rental fee which approximates the commercial rates for similar properties.

32 lli I l

PrincipalStatements NOTES TO PRINCIPAL STATEMENTS I September 30,1998 l

NOTE 7. ACCOUNTS PAYABLE AND ADVANCES l I Accounts payable and advances consist of the following as of September 30,1998:

Intragovernmental:

l l Accounts payable l

Department of Energy $5,632,116 l Other Federal agencies 6.078.057 l 11,710,173 i

l Advances 5.492 i =

S11.715.665 The non-Federal accounts payable include:

Accounts payable

.g Vendors payable 15,983,576 l3 Contract holdbacks 1.984.606 '

S17.968.182 The vendors payable are all currem. Current payables represent amounts which are expected to be paid within the fiscal year following the reporting date.

I NOTE 8. ACCRUED PAYROLL AND BEhTFITS Accrued payroll and benefits as of September 30,1998, consists of:

, Intragovernmental:

Accrued benefits 5 2.094.961 The non-Federal accrued personnel services include

W Accrued payroll and benefits $11.614.fil 3 Accrued payroll and benefits represent wages and benefits which have been earned but not paid as of the lE financial statement date.

I I >>

I . ..

I PrincipalStatements NOTES TO PRINCIPAL STATEMENTS g September 30,1998 E NOTE 9. OTHER LIABILITIES COVERED BY BUDGETARY RESOURCES Other liabilities as of September 30,1998, include:

Intragovernmental:

Liability to offset net accounts receivable I

for fees assessed $27,764,482 Liability related to fees collected which will offset subsequent years' appropriations 4,182,693 Liability to offset nizellaneous accounts receivable 36.806

$31.983.981 The liability to offset the net accounts receivable for fees assessed represents amounts which, when collected, will be transferred to the U. S. Treasury to offset NR.C's appropriations in the year collected. The liability related to fees collected which will be used to offset subsequent years' appropriations represents amounts g which will be transferred to the U. S. Treasury to offset subsequent years' appropriations. The liability to g offset miscellaneous accounts receivable represents amounts which will be reverted to the U. S. Treasury when collected.

Other liabilities as of September 30,1998, include:

Liability for deposit funds $1,111,270 Advances from others 658.559 M

The liability for deposit funds consists primarisy of liabilities arising from payroll deductions and tax withholdings.

All other liabilities except advances from otheu are current. Current liabilities represent amounts which are expected to be paid within the fiscal year following the reporting date. Advances from others may not be liquidated in the fiscal year following the reporting date.

34 I

I PrincipalStatements NOTES TO PRINCIPAL STATEMENTS September 30,1998 1

NOTE 10. OTHER LIABILITIES NOT COVERED BY BUDGETARY RESOURCES l Unfunded liabilities as of September 30,1998, include:

Intragovernmental:

Accrued workers' compensation:

Benefits paid $1,609,812 Estimated future benefits 4.795.000

$6.404.812 Accrued annualleave $26.049.638 l Accrued annual leave represents the amount of annual leave earned by NRC employees but not yet taken.

, l Accrued workers' compensation includes: (a) FECA benefits paid by the U. S. Department ofLabor (DOL)

, E on NRC's behalf which had not been billed to or paid by NRC as of June 30,1998, and (b) an actuarial l

estimate for future disability benefits. He future workers' compensation estimate was generated by DOL from l3 an application of actuarial procedures developed to estimate the liability for FECA, which includes the lE expected liability for death, disability, medical, and miscellaneous costs for approved compensation cases. He liability was calculated using historical benefit payment patterns related to a ::pecific incurred period to predict I the ultimate payments related to that period. Rese projected annual benefit payments were discounted to present value.

Accrued annual leave and accmed workers' compensation are not funded by current or prior years' appropriations and assessments. Funding will be provided from future years' appropriations.

i NOTE 11. LEASES iI A description oflease agreements as of September 30,1998, follows:

I Capital Leases Future payments due:

i Fiscal Year Lease Payments 1999 $127,358 2000 60215 2001 63,139 2002 66,204 l 2003 51,754 lg 2004 and thereafter -

E Total future lease payments $368,670 Less: imputed interest (35.5561 Total capitallease liability I $333.114 35 I . .. .. ..

I PrincipalStatements l

i NOTES TO PRINCIPAL STATEMENTS September 30,1998 He total capital lease liability is considered unfunded as of September 30,1998.

He NRC's capital leases are for personal property consisting of reproduction equipment, which is installed in various NRC facilities. The length ofthe leases vary from 4 to 5 years and the imputed interest rate, based on rates paid, was 4.75 percent. The reproduction equipment is depreciated over 5 years using the straight-line method with no salvage value.

Operating Leases Future payments due:

Fiscal Year Lease Payments 1999 $ 19,868,835 2000 20,033,846 2001 19,739,445 20s2 19,527,849 2003 19,429,474 2004 and thereafter 178.143.462 Total future lease payments $276.742.911 Operating leascs consist of real property leases with GSA. The leases are for NRC's headquarters offices, regional offices, and the Washington, DC, reading room. De leases have terms over 2 years and annual lease payments of $25,000 or more. The GSA charges NRC lease rates which approximate commercial rates for comparable space.

NOTE 12. UNEXPENDED APPROPRIATIONS 4

He unexpended appropriations consist of the following as of September 30,1998:

Unexpended appropriations:

Unobligated S 31,396,370 Undelivered orders 84.626.582

$116.022.952 Unexpended appropriations include (a) unobligated appropriation balances and (b) undelivered orders, which are amounts which have been obligated but not yet. expended. The unobligated appropriations balance does not include $3,784,228 in unfilled customer orders - unobligated as of September 30,1998. He undelivered orders balance does not include $2,569,983 in unfilled customer orders - obligated as of September 30,1998.

36

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I l PrincipalStatements I NOTES TO PRINCIPAL STATEMENTS September 30,1998 NOTE 13. CUMULATIVE RESULTS OF OPERATIONS ne cumulative results of operations as of September 30,1998, consist of the following:

Future funding requirements S(32,454,450)

Investment in property and equipment, net 39,432,603 I Accounts receivable- refunds, net Revenue from foreign cooperative agreements 27,900 2.736.016 S 9.742.069 Future funding requirements represent the amount of future funding needed to pay the accrued unfunded expenses as of September 30,1998. Rese accruals are not funded from current or prior-year appropriations and assessments, but rather should be funded from future appropriations and assessments. Accordingly, future funding requirements have been recognized for the expenses that will be paid from future appropriations.

NOTE 14. APPROPRIATIONS USED Appropriations Used, a financing source, is recognized to the extent that appropriated funds have been consumed less the amount collected from fees assessed for licensing, inspections, and other services. During the year ended September 30,1998, $458,982,693 was collected from fees assessed for licensing, inspections, and other services. At the end of the fiscal year, appropriations recognized are reduced by the amount of I assessed fees collected during the fiscal year to the extent of new budget authority for the year. Collections which exceed the new budget authority are held to offset suosequent years' appropriations. Included in the

$458,982,693 of fees collected is $4,182,693 available to offset subsequent years' appropriations.

For the year ended September 30,1998, $454,800,000 of collections were used to reduce the fiscal year's appropriations recognized:

Appropriated funds consumed S 493,767,773 Less: Collection from fees assessed (454.800.000)

I Collection to offset subsequent years' appropriations 38,967,773 (1.451.634)

$ 37.516.139 Appropriations Used includes $29,370,393 of available funds from prioryears.

37 I

PrincipalStatements NOTES TO PRINCIPAL STATEMENTS September 30,1998 NOTE 15. IMPUTED FINANCING In accordance with Statement ofFederal Financial Accounting Standards Number 5, AecountingforLiabilities ofthe Federal Government, the Statement of Changes in Net Position includes an . imputed financing source 3 of $17,961,303. The imputed financing source represents the service costs related to NRC employees' post- E employment benefits which are paid by the U. S. Office of Personnel Management, as follows:

Civil Service Retirement System $11,164,423 Federal Employee Health Benefit 6,753,062 Federal Employee Group Life Insurance 43.818 g 7.961.303 NOTE 16. EXCHANGE REVENUES Exchange revenues for the year ended September 30,1998, were:

Fees for licensing, inspection, and other services $456,251,634 Revenue from reimbursable work 6.085.973

$462.337.607 The exchange revenue assigned to programs and revenue not assignable to programs, is as follows:

Regulatory program revenue S 96,718,258 Revenue not assignable to programs 365.619.349

$462.337.607 NOTE 17. EMPLOYEE RETIREMENT PLANS en l The NRC's contributions for employee retirement plans were as follows:

E' i Civil Service Retirement System $10,479,550 Federal Employees' Retirement System 10,416,742 FederalInsurance Contribution Act 8,879,543 Thrift Savings Plan 4.305.298

$34.081.133 I

I 38 Ii

. . . .. -. l

I PrincipalStatements NOTES TO PRINCIPAL STATEMENTS

l. September 30,1998 I Data on the actuarial present value ofaccumulated benefits, assets available for benefits, and unfunded pension liability are maintained by other Federal agencies and are not allocated to individual departments and agencies.

The portion of the current and estimated future outlays for CSRS not paid by NRC is included in NRC's I financial statements as an imputed financing source (see Note 15).

NOTE 18. PRIOR.-PERIOD ADJUSTMENT ne prior-period adjustment of $3,940,790 consists of the following:

Reimbursable revenue earned in prior years $3,896,137 Correction of expenditure refunds 44.653

$3.940.790 He $3,896,137 represents reimbursable revenue from foreign cooperative agreements applicable to prior years. Consistent with Statement of Federal Financial Accounting Standards Number 7, Accountingfor I Revenue and Other Financing Sources and Conceptsfor Reconciling Budgetary and Financial Accounting, this revenue should have been recognized as revenue in prior years. He impact of this adjustment is to increase the cumulative results of operations as of September 30,1997, by $3,896,137.

He $44,653 represents a correction to the beginning balance of unexpended appropriations and cumulative results ofoperations for the recording ofreceivables for expenditure refunds and the associated allowance for I uncollectible accounts in prior years. Here is no effect on net position.

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PrincipalStatements NOTES TO PRINCIPAL STATEMENTS September 30,1998 NOTE 19.

SUMMARY

OF BUDGETARY RESOURCES The budgetary resources by major fund follows:

Budgetary Resources: X0200 X0300 Funds Total Budget authority $ 472,025,000 $ 4,800,000 $ 4,300,000 $ 481,125,000 Unobligated balances - '

beginning ofperiod 24,048,047 1,632,146 3,690,200 29,370,393 Spending authority from offsetting collections 4,908,396 - - 4,908,396 l Adjustments 9.672.512 98.667 124.095 9.895.274 ,

Total Budgetary Resources S 510.653.955 - $ 6.530.813 $ 8.114.295 } 525.299.063 i Status of Budgetary Resources:

Obligations incurred S 482,034,605 $ 5,328,929 $ 2,754,930 $ 490,118,464 Unobligated balances - available 28.619.350 1.201.884 5.359.365 35.180.599 g Total Status of Budgetan 3 Resources S 510.653.955 $ 6.530.813 $ 8.114.295 $ 525.299.063 Outlays:

Obligations incurred S 482,034,605 $ 5,328,929 $ 2,754,930 $ 490,118,464 Less: Spending authority from offsetting collections and adjustments (14.580.908) (98.667) (124.095) (14.803.670)

Subtotal 467,453,697 5,230,262 2,630,835 475,314,794 Obligated balances, net-beginning ofperiod 141,162,720 1,350,282 3,314,460 145,827,462 Less: obligated balance, net-end ofperiod (121.515.836) (1.385.322) (1.799.651) (124.700.809)

Total Outlays $ 487.100.581 $ 5.195.222 $ 4.145.644 $ 496.441.447 The adjustments of $9,895,274 to budgetary resources above consist of recoveries of prior-year obligations.

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a Comment of the Chief Financial Officer Appendix pseg y *.

UNITED STATES y j NUCLEAR REGULATORY COMMISSION

$ WASHINGTON, o.C.30806 0001

/g-February 25, 1999 I MEMORANDUM TO: Thomas J. Barchi Assistant inspector General for Audits FROM: Jesse L Funches ICI' --

Chief Financial car

SUBJECT:

DRAFT AUDIT REPORT- AUDIT OF THE NUCLEAR REGULATORY COMMISSION'S FISCAL YEAR 1998 FINANCIAL STATEMENTS We have reviewed the draft audit report of the Nuclear Regulatory Commission's FY 1998 e

financial statements. There are two areas in which we disagree with auditors statements contained in the draft report. '~

fn the first area, wts disagree with the auditors conclusion that management's assertion on the I agency's system of accounting and intemal controlin place as of September 30,1998, was not fairly stated because management did not identify the lack of managerial cost accounting as a material weakness (page 1). In the management representation letter, dated February 5,1999, management identified managerial cost accounting as a significant weakness pursuant to the I Federal Managers' cinancial integrity Act (FMFIA) and as a substantial noncompliance with the Federal Financial Management improvement Act (FFMIA).

While the auditors may conclude for financial statement audit purposes that lack of implementation of managerial cost accounting is a material weaknesses, it is not a material weakness under FMFIA. For FMFIA purposes, agency management determined that lack of managerial cost accounting did not have a materia! impact on the NRC's ability to perform its I mission and to provide its managers with the financial information they needed to manage their programs. Under FMFLA, if the head of the agency determines a deficiency is significant enough to merit the attention of the Executive Office of the President or the relevant

' congressional oversight committees, then a material weakness exists. This definition is different than the one used by Govemment auditors to identify management control weaknesses that, in their opinion, pose a risk or a threat to the intemal control systems of an audited entity, such as a program or operation.

\

in the second area, we disagree with the auditors statement that the FY 1998 license fee rates were not developed in accordance with applicable laws and regulations (page 11). As was i I discussed with the suditors, on several occasions, the conclusion of NRC's Office of the General Counselis that the Independent Offices Appropriation Act does not authorize the NRC to charge licensees for generic costs under 10 CFR Part 170. This position is reaffirmed by a U. S. Fifth Circuit Court case and is further supported by the Conference Report accompanying the Omnibus Budget Reconciliation Act of 1990. We request that the statement contained in paragraph 1 on pa0e 11 of the draft report be deleted.

I CONTACT: Barbara K. Gusack, OCFO/DAF/ GAB 415-6054 I

Comment of the ChiefFinancial Officer Appendix T. Barchi 2 Our specific comments on the recommendations contained in the draft audit report are as follows.

' Recommendation 1: The Chief Financial Officer (CFO) should assess the immediate needs of NRC managers to receive reliable and routine cost accounting information in light of performance and result mandates included in the Govemment Performance and Results Act.

Additionally the CFO, in preparing a remediation plan, should develop a strategy, including milestones, to incorporate cost management standards and cencepts throughout the agency.

The plan developed could serve to identify, develop, and implement those metrics that l managers need now in order to best manage resources and assess performance against the 3

age'1cy's strategic and performance plans.

Response: Implementation of managerial cost accounting has been incorporated into a larger agency initiative of implementing an integrated, agencywide resource management system, STARFIRE. STARFIRE w'lline!ude cost accounting anc labor-cost distribution modules which will provide necessary tools for reporting costs and impl2menting cost accounting. Corrective E

action conceming the implementation of managerial cot t accounting will be addressed in the E

remediation plan required by FFMlA. OCFO expects to complete this plan by July 1,1999. An agency manager responsible for implementation will be announced at that time.

' Recommendation 2: The CFO should assure that the budget and strategic and performance plans are fully aligned. Employing such a concept would present one cohesive philosophy for agency managers to plan, record, process, and summarize financial activities, thus enabling l 5

managers to evaluate their performance against financial operating plans, strategic goals, and performance plans.

Response: The NRC's structure for budgeting and strategic and performance planning have been in an evolutionary development phase over the past 2 years as the agency has been transitioning to full alignment as required by GPRA for FY 1999. While the agency was in this transition period, it was not possible to implement the guidance in the Office of Management and Budget Bulletin No. 97-01, which required the full alignment of budget, strategic plan, and performance plan earlier than required by GPRA. As planned for FY 1999, NRC has fully aligned its budget, strategic plars, and performance plan. The Budget Estimates and g

Performance Plan - Fiscal Year 2000 contains the budget and performance plan structure that g

the agency is executing for FY 1999 which is aligned with the current working draft of the strategic plan.

Recommendation 3: The CFO should reaffirm to senior managers that funds control policies are critical elements for managing agency resources. At a minimum, all appropriate obligating documents should be provided to OCFO for recording obligations. E E

Response: The agency's administrative control of funds policies and procedures are depicted in Management Directive and Handbook 4.2, Administrative Controlof Funds. In addition. a senior managers responsible for funds management are required to take two NRC-developed l training courses (1) Introduction to Federal Financial Management which reviews the concepts, processes, and procedures for Federal financial management and (2) Administrative Control of 4

I Comment of the Chief Financial Officer Appendix T. Barchi 3 Funds which covers the NRC's system of administrative control of funds that is defined in I Management Directive and Handbook 4.2. However, the OCFC will reaffirm to senior managers the agency's funds control policies and the necessity to provide to OCFO all appropriate obligating documents. Corrective action in the form of a memorandum to s!!owance financial managers is expected to be completed by April 1,1999.

Recommendadon 4: The CFO should ensure that new programs managed by the agency conform to established funds control practices embodied in the agency's respective management directives.

Response: The OCFO will ensure that new programs managed by the agency conform to I established agency funds control guidance by requiring the program manager of the new activity to attend the two NRC training courses, introduction to Federal Financial Management and Administrative Control Funds. Allowance financial managers will be advised of this new requirement by memorandum by April 1,1999.

Recommendation 5: The CFO should clarify to senior managers agency policy for making funds control representations to other agencies. At a minimum, the information provided I extemally should be consistent with the official transactions recorded to the agency's accountirg records. '

Response: OCFO will clarify with senior managers the agency policy for making funds control I representations to other agencies. Corrective action in the form of a memorandum to a!!owance financial managers is expected to be completed by April 1,1999. In addition, future sessions of the Administrative Control of Funds training course will address this issue.

Recommendefion 6: The CFO should implement procedures to ensure that revenue from reir.nbursable agreements is reflected on the principal statements on the accrual basis of accounting. --

Response: OCFO will perform an analysis ofits reimbursable work and revenue recognition and establish the necessary procedures to ensure that revenue is appropriately recognized on the financial statements. Corrective action will be implemented by June 1,1999.

Recommendation 7: The CFO should initiate an analysis of all contract support costs that I

were classified as " generic activities" and were excluded from the rate. The analysis should seek to determine the portion of those costs that benefit specific classes of licensees (i.e., power reactor or materials) and should, therefore, be included in the computation of Part 170 hourty rates.

Response: While OCFO believes its development of the license fee rates is compliant with applicable laws and regulations, it will initiate a study to analyze those activities currently I characterized as " generic activities" for license fee development purposes. A multi-office team will be established by May 1,1999, to conduct a study to determine whether the costs currently I"" '~ '~ ~' ~ '

I Comment of the Chief Financial Officer Appendix T. Barchi 4 identified as " generic" continue to meet the definition contained in the Conference Report to the Omnibus Budget Reconciliation Act. The results of this analysis will be incorporated in the development of the FY 2000 fee rule.

Recommendation 8: The CFO should pursue technical enhancements to the file transfer protocols that are in place. The enhancements should be tested to ensure that the change made property addresses the file transfer protocols between the subsidiary transactions and information uploaded to the core accounting system. i Response: The technical enhancements to the file transfer protocols have been completed and are in the process of being tested. We expect the enhancements to be implemented and operational by April 1,1999; therefore, a remediation plan will not be developed for this finding.

5tatus of Prior-YearRecommendation: Business Continuity

1. General Ledger - FFS: NRC is dependent on Treasury's Financial M,anagement Service to resolve this condition. We do not expect, however, for Treasury to complete corrective  :

action before FFS is replaced by NRC's new agencywide resource management system, STARFIRE, within the next 6 months.

2. Fee Systems: While implementation of corrective action for this system has been delayed, it is expected ihst a fu!!y tested business continuity plan wi!! be in place by April 1,1999.

We appreciate the opportunity to respond to the draft audit report and are available to discuss j our commentt.

cc: A. Galante, ClO 1

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