ES, IG-00-023, H. Larry Jordan Review of Stennis Space Center Exchange Financial Statements for Fiscal Year Ended September 30, 1998

H. LARRY JORDAN REVIEW OF
STENNIS SPACE CENTER EXCHANGE
FINANCIAL STATEMENTS FOR FISCAL YEAR
ENDED SEPTEMBER 30, 1998
IG-00-023

Executive Summary

Background

The NASA Office of Inspector General (OIG) performed a quality control review of the H. Larry Jordan Review of the Stennis Space Center Exchange (Stennis Exchange) fiscal year (FY) 1998 Financial Statements. Mr. H. Larry Jordan is a retired accountant, retained by the Stennis Exchange to conduct the FY 1998 review of Exchange operations. The Exchange is Mr. Jordan's only client. The Stennis Exchange is a Government instrumentality, operating under NASA's control for the benefit of Agency employees. It operates and generates revenues from the gift shops and concessionaire agreements. For the year ended September 30, 1998, the Stennis Exchange reported a cash balance of $938,706⁽⁵⁾ and a net income of $272,222.
The Inspector General Act of 1978, as amended, mandates Inspectors General to ensure that work performed by non-Federal auditors complies with government auditing standards (GAS) issued by the Comptroller General of the United States. The GAS incorporate, by reference, the American Institute of Certified Public Accountants (AICPA) standards of field work and reporting.⁽⁶⁾ Compliance with GAS provides reasonable assurance that:

Financial statements present fairly the financial condition and results of operations of the Exchange in accordance with established accounting principles.
Internal controls are in place and operating as intended.
The Exchange is complying with applicable laws and regulations.

Objectives

The quality control review objectives were to determine whether the independent, external auditor performed the audit in accordance with GAS and whether the Stennis Exchange had taken corrective actions on recommendations resulting from the audit. Appendix A contains additional details on our objectives, scope, and methodology.

Results of Review

The Stennis Exchange inadequately managed Exchange financial reporting activities. Specifically, the Exchange retained H. Larry Jordan to conduct a review,⁽⁷⁾ rather than an audit of the Exchange FY 1998 Financial Statements in accordance with GAS. The accountant neither conducted the review in accordance with standards established by the AICPA nor completed it by the December 31, 1998, due date (Finding A). In addition, Exchange management did not provide adequate financial statement disclosures in accordance with generally accepted accounting principles (Finding B). As a result, Exchange management and other financial statement users have little assurance regarding the fair presentation of the Exchange financial statements, its internal controls, or compliance with laws and regulations.
During the quality control review, we also noted two matters related to Exchange operations. Specifically, the Stennis Exchange inappropriately used $5,500 in appropriated funds⁽⁸⁾ to pay for the fee of the financial statement review (Finding C). Such expenses are the responsibility of the Exchange and should be paid with revenue generated by Exchange operations. Consequently, the Exchange was not paying for all recurring expenses, and appropriated funds used for those expenses could have been put to better use. Also, the Stennis Exchange does not have a constitution or bylaws which is in noncompliance with Agency policy governing Exchange activities⁽⁹⁾ (Finding D). The accountant, as part of his review, issued to Exchange management reports that contained recommendations for improvement (see Appendix B). The Stennis Exchange has resolved all the recommendations.

Recommendations

We recommend that the Stennis Exchange:

Require that annual audits be performed in accordance with government auditing standards by the established due date and that the engagement for the audit be competitively awarded to Certified Public Accountants licensed to practice in the State of Mississippi.
Follow established accounting principles in providing adequate disclosures in the notes accompanying the financial statements.
Reimburse NASA for all appropriated funds previously spent on accounting fees and use its own funds (that is, nonappropriated funds⁽¹⁰⁾) to pay for all future operating expenses.
Establish a constitution and bylaws at the Exchange.

Management's Response

Management agreed to provide adequate disclosures but provided no specific corrective actions or completion dates. Management partially concurred with two recommendations, stating that it would continue to (1) have an annual review of its financial statements performed by a NASA retiree, who is an unlicensed accountant, instead of contracting with a licensed CPA to perform an audit and (2) rely on its existing guidance as the official constitution and bylaws. Management disagreed that it should not use appropriated funds to pay for the accounting fees. The complete text of management's response is in Appendix C.

Evaluation of Management's Response

Management's comments are generally not responsive. We ask management to provide the specifics on planned, ongoing, and completed corrective actions with regard to providing adequate disclosures including milestone dates for completing action. For management's partial concurrences, we consider the proposed actions to be nonresponsive and request that management reconsider its position and provide additional comments in response to the final report. The issue related to the use of appropriated funds to pay for the accounting fees is covered in OIG Report IG-00-019,⁽¹¹⁾ which contains a recommendation to the Associate Administrator for Management Systems and includes all NASA Exchanges. Therefore, we deleted the related recommendation from this report, and resolution and disposition of the recommended action will be completed under Report IG-00-019.

FOOTNOTES

5. The cash balance includes money market accounts and certificates of deposit.

6. GAS prescribe minimum hours of continuing education requirements and additional standards for field work and reporting.

7. The scope of a review is substantially less than the scope of an audit and provides no opinion on the fair presentation of the financial statements, internal controls, or compliance with laws and regulations.

8. Federal funds authorized (that is, appropriated) by Congress for an agency's operations. As required by the United States Code, appropriated funds may be used only for their intended purpose and for a definite period of time.

9. The activities are described in NASA Policy Directive 9050.6E, "NASA Exchange Activities," dated December 2, 1997.

10. Fund received from sources other than congressional appropriations.

11. Report IG-00-19, "Audit of Johnson Space Center Exchange Use of Appropriated Funds for Exchange Activities," dated March 27, 2000, discusses the same issue and contains a similar recommended action regarding the use of appropriated funds to pay accounting fees.

View Complete Report.

Background	The NASA Office of Inspector General (OIG) performed a quality control review of the H. Larry Jordan Review of the Stennis Space Center Exchange (Stennis Exchange) fiscal year (FY) 1998 Financial Statements. Mr. H. Larry Jordan is a retired accountant, retained by the Stennis Exchange to conduct the FY 1998 review of Exchange operations. The Exchange is Mr. Jordan's only client. The Stennis Exchange is a Government instrumentality, operating under NASA's control for the benefit of Agency employees. It operates and generates revenues from the gift shops and concessionaire agreements. For the year ended September 30, 1998, the Stennis Exchange reported a cash balance of $938,706⁽⁵⁾ and a net income of $272,222. The Inspector General Act of 1978, as amended, mandates Inspectors General to ensure that work performed by non-Federal auditors complies with government auditing standards (GAS) issued by the Comptroller General of the United States. The GAS incorporate, by reference, the American Institute of Certified Public Accountants (AICPA) standards of field work and reporting.⁽⁶⁾ Compliance with GAS provides reasonable assurance that: Financial statements present fairly the financial condition and results of operations of the Exchange in accordance with established accounting principles. Internal controls are in place and operating as intended. The Exchange is complying with applicable laws and regulations.
Objectives	The quality control review objectives were to determine whether the independent, external auditor performed the audit in accordance with GAS and whether the Stennis Exchange had taken corrective actions on recommendations resulting from the audit. Appendix A contains additional details on our objectives, scope, and methodology.
Results of Review	The Stennis Exchange inadequately managed Exchange financial reporting activities. Specifically, the Exchange retained H. Larry Jordan to conduct a review,⁽⁷⁾ rather than an audit of the Exchange FY 1998 Financial Statements in accordance with GAS. The accountant neither conducted the review in accordance with standards established by the AICPA nor completed it by the December 31, 1998, due date (Finding A). In addition, Exchange management did not provide adequate financial statement disclosures in accordance with generally accepted accounting principles (Finding B). As a result, Exchange management and other financial statement users have little assurance regarding the fair presentation of the Exchange financial statements, its internal controls, or compliance with laws and regulations. During the quality control review, we also noted two matters related to Exchange operations. Specifically, the Stennis Exchange inappropriately used $5,500 in appropriated funds⁽⁸⁾ to pay for the fee of the financial statement review (Finding C). Such expenses are the responsibility of the Exchange and should be paid with revenue generated by Exchange operations. Consequently, the Exchange was not paying for all recurring expenses, and appropriated funds used for those expenses could have been put to better use. Also, the Stennis Exchange does not have a constitution or bylaws which is in noncompliance with Agency policy governing Exchange activities⁽⁹⁾ (Finding D). The accountant, as part of his review, issued to Exchange management reports that contained recommendations for improvement (see Appendix B). The Stennis Exchange has resolved all the recommendations.
Recommendations	We recommend that the Stennis Exchange: Require that annual audits be performed in accordance with government auditing standards by the established due date and that the engagement for the audit be competitively awarded to Certified Public Accountants licensed to practice in the State of Mississippi. Follow established accounting principles in providing adequate disclosures in the notes accompanying the financial statements. Reimburse NASA for all appropriated funds previously spent on accounting fees and use its own funds (that is, nonappropriated funds⁽¹⁰⁾) to pay for all future operating expenses. Establish a constitution and bylaws at the Exchange.
Management's Response	Management agreed to provide adequate disclosures but provided no specific corrective actions or completion dates. Management partially concurred with two recommendations, stating that it would continue to (1) have an annual review of its financial statements performed by a NASA retiree, who is an unlicensed accountant, instead of contracting with a licensed CPA to perform an audit and (2) rely on its existing guidance as the official constitution and bylaws. Management disagreed that it should not use appropriated funds to pay for the accounting fees. The complete text of management's response is in Appendix C.
Evaluation of Management's Response	Management's comments are generally not responsive. We ask management to provide the specifics on planned, ongoing, and completed corrective actions with regard to providing adequate disclosures including milestone dates for completing action. For management's partial concurrences, we consider the proposed actions to be nonresponsive and request that management reconsider its position and provide additional comments in response to the final report. The issue related to the use of appropriated funds to pay for the accounting fees is covered in OIG Report IG-00-019,⁽¹¹⁾ which contains a recommendation to the Associate Administrator for Management Systems and includes all NASA Exchanges. Therefore, we deleted the related recommendation from this report, and resolution and disposition of the recommended action will be completed under Report IG-00-019.