Managerial Cost Accounting Practices

Departments of Education, Transportation, and the Treasury Gao ID: GAO-06-301R December 19, 2005

Authoritative bodies have promulgated laws, accounting standards, information system requirements, and related guidance to emphasize the need for cost information and cost management in the federal government. For example, the Chief Financial Officers (CFO) Act of 1990, contains several provisions related to managerial cost accounting, one of which states that an agency's CFO should develop and maintain an integrated accounting and financial management system that provides for the development and reporting of cost information. Statement of Federal Accounting Standards No. 4, Managerial Cost Accounting Concepts and Standards for the Federal Government, and the Joint Financial Management Improvement Program's (JFMIP) Framework for Federal Financial Management Systems established accounting standards and system requirements for managerial cost accounting (MCA) information at federal agencies. The Federal Financial Management Improvement Act of 1996 built on this foundation and required, among other things, CFO Act agencies' systems to comply substantially with federal accounting standards and federal financial management systems requirements. MCA involves the accumulation and analysis of financial and nonfinancial data, resulting in the allocation of costs to organizational pursuits such as performance goals, programs, activities, and outputs. The data analyzed depend on the operations and needs of the organization. Nonfinancial data measure the occurrences of activities and can include, for example, the number of hours worked, units produced, grants managed, inspections conducted, people trained, or time needed to perform certain functions. In light of the requirements for federal agencies to prepare MCA information, Congress asked us to determine the extent to which federal agencies develop cost information and use it for managerial decision making. The objectives of our review were to determine how federal agencies generate managerial cost accounting information as well as how governmental managers use cost information to support managerial decision making and provide accountability.

At Education, 1 of 10 program offices had an MCA system in place at the time of our review. Education did not take a department-level leadership role to promote and monitor MCA implementation, nor did it have policies and procedures for implementing MCA departmentwide. Rather, according to Education officials, other priorities, such as improving controls over financial reporting, were taking precedence. Transportation has in recent years shown strong leadership in developing MCA systems both departmentwide and at the individual operating administrations (OA). According to Transportation officials, the 12 OAs were developing MCA systems tailored to their respective needs, which should be able to interface with Delphi--an integrated financial management system, a component of which could be used by OAs for cost accounting. One of the two largest OAs, the Federal Aviation Administration (FAA), was mandated to develop a cost accounting system in 1996, and had implemented MCA in two business lines covering over 80 percent of its budget. The other 11 OAs expected to have their MCA models in place by early fiscal year 2006. By policy, Treasury delegated to its bureaus responsibility to implement MCA systems and processes to meet federal standards. Treasury retained oversight responsibility to ensure consistent implementation of MCA departmentwide. Treasury officials, however, had no specific procedures in place to ensure that consistent, periodic department-level oversight was conducted, and they promoted MCA and monitored MCA implementation on an informal and sporadic basis. This contributed to widely disparate implementation and use of MCA among Treasury's operating bureaus and department-level offices. For example, the Bureau of Engraving and Printing and the Financial Management Service (FMS) had established MCA systems and practices, and management utilized cost information to make key decisions. However, at Treasury's largest component, the Internal Revenue Service (IRS), MCA capability was limited. The newly implemented MCA module had less than 1 full year of data, and could only account for costs by activity, output, or program when those activities, outputs, or programs were completely housed within a single cost center.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Team: Phone:


GAO-06-301R, Managerial Cost Accounting Practices: Departments of Education, Transportation, and the Treasury This is the accessible text file for GAO report number GAO-06-301R entitled 'Managerial Cost Accounting Practices: Departments of Education, Transportation, and the Treasury' which was released on December 20, 2005. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. December 19, 2005: The Honorable Todd R. Platts: Chairman, Subcommittee on Government Management, Finance, and Accountability: Committee on Government Reform: House of Representatives: Subject: Managerial Cost Accounting Practices: Departments of Education, Transportation, and the Treasury: Dear Mr. Chairman: Authoritative bodies have promulgated laws, accounting standards, information system requirements, and related guidance to emphasize the need for cost information and cost management in the federal government. For example, the Chief Financial Officers (CFO) Act of 1990,[Footnote 1] contains several provisions related to managerial cost accounting, one of which states that an agency's CFO should develop and maintain an integrated accounting and financial management system that provides for the development and reporting of cost information. Statement of Federal Accounting Standards No. 4, Managerial Cost Accounting Concepts and Standards for the Federal Government, and the Joint Financial Management Improvement Program's (JFMIP) Framework for Federal Financial Management Systems[Footnote 2] established accounting standards and system requirements for managerial cost accounting (MCA) information at federal agencies. The Federal Financial Management Improvement Act of 1996[Footnote 3] built on this foundation and required, among other things, CFO Act agencies' systems to comply substantially with federal accounting standards and federal financial management systems requirements. MCA involves the accumulation and analysis of financial and nonfinancial data, resulting in the allocation of costs to organizational pursuits such as performance goals, programs, activities, and outputs. The data analyzed depend on the operations and needs of the organization. Nonfinancial data measure the occurrences of activities and can include, for example, the number of hours worked, units produced, grants managed, inspections conducted, people trained, or time needed to perform certain functions. In light of the requirements for federal agencies to prepare MCA information, you asked us to determine the extent to which federal agencies develop cost information and use it for managerial decision making. The objectives of our review were to determine how federal agencies generate managerial cost accounting information as well as how governmental managers use cost information to support managerial decision making and provide accountability. This report summarizes information provided during our November 8, 2005, briefing to your staff concerning our review of MCA practices at the Department of Education (Education), the Department of Transportation (Transportation), and the Department of the Treasury (Treasury). This was our second in a series of briefings concerning the status of MCA activities at large government agencies. Our first briefing covered the status of MCA activities at the Department of Veterans Affairs and the Department of Labor.[Footnote 4] The November 8, 2005, slides are presented in enclosure I. Status of Departmental Efforts to Implement Managerial Cost Accounting: Similar to issues that surfaced in our earlier assessment at the Department of Veterans Affairs and the Department of Labor, we found uneven progress in MCA implementation and a need for enhanced controls over MCA data at Education, Transportation, and Treasury. Department of Education: At Education, 1 of 10 program offices had an MCA system in place at the time of our review. Education did not take a department-level leadership role to promote and monitor MCA implementation, nor did it have policies and procedures for implementing MCA departmentwide. Rather, according to Education officials, other priorities, such as improving controls over financial reporting, were taking precedence. Federal Student Aid (FSA), the one Education program office with an operational MCA system, independently developed its MCA system after being statutorily designated as a performance-based organization in 1998. FSA managers, however, still did not have direct access to the system and had to rely on a team of cost accounting personnel to provide system outputs. In addition, FSA had not completed development of a training strategy for current and potential users of the data. Also, FSA had not documented the design of controls or completion of those control procedures when performed to help ensure the reliability of nonfinancial data. Adequately designed controls and properly implemented procedures are key when determining the cost of work outputs. Further, FSA had not performed and documented a comprehensive post-implementation review of its MCA system which would have determined how well the system met expectations and cost estimates, and would have documented lessons learned for current and future stakeholders. Department of Transportation: Transportation has in recent years shown strong leadership in developing MCA systems both departmentwide and at the individual operating administrations (OA). For example, two staff members from the Office of the Secretary provided daily support to the OAs in the area of MCA and monitored their progress in implementing MCA. In addition, MCA was discussed at CFO Group meetings, and at meetings of the Cost Accounting Steering Group. According to Transportation officials, the 12 OAs were developing MCA systems, tailored to their respective needs, which should be able to interface with Delphi --the department's integrated financial management system, a component of which could be used by OAs for cost accounting. One of the two largest OAs, the Federal Aviation Administration (FAA), was mandated to develop a cost accounting system in 1996, and had implemented MCA in two business lines covering over 80 percent of its budget. The other 11 OAs expected to have their MCA models in place by early fiscal year 2006. While Transportation supported and monitored implementation of MCA, and had issued related procedures in 2002, it did not have a written departmentwide MCA policy. At FAA, officials cited several controls to help ensure the reliability of nonfinancial data, and stated that system improvements for assigning labor costs related to the maintenance of older National Airspace System equipment were planned. Department of the Treasury: By policy, Treasury delegated to its bureaus responsibility to implement MCA systems and processes to meet federal standards. Treasury retained oversight responsibility to ensure consistent implementation of MCA departmentwide. Treasury officials, however, had no specific procedures in place to ensure that consistent, periodic department- level oversight was conducted, and they promoted MCA and monitored MCA implementation on an informal and sporadic basis. This contributed to widely disparate implementation and use of MCA among Treasury's operating bureaus and department-level offices. For example, the Bureau of Engraving and Printing and the Financial Management Service (FMS) had established MCA systems and practices, and management utilized cost information to make key decisions. However, at Treasury's largest component, the Internal Revenue Service (IRS), MCA capability was limited. IRS's newly implemented MCA module had less than 1 full year of data, and could only account for costs by activity, output, or program when those activities, outputs, or programs were completely housed within a single cost center. Controls to ensure the reliability of MCA data needed improvement in two of the three Treasury bureaus we reviewed. Specifically, at FMS and IRS, formal MCA policies and procedures had not been finalized, approved, or disseminated. Further, improved department-level oversight of bureaus is needed to ensure appropriate systems that provide reliable information are implemented departmentwide. Recommendations for Executive Action: We are making 17 recommendations to the Secretaries of the Departments of Education, Transportation, and the Treasury. Recommendations to the Secretary of Education: To help ensure that Education components implement and use reliable managerial cost accounting methodologies, we recommend that the Secretary of Education direct the Chief Financial Officer of the Department of Education to develop and issue: * a policy for implementing MCA departmentwide and: * procedures for monitoring implementation of its departmentwide managerial cost accounting policy and for establishing a sound system of controls. To help ensure cost data reliability, more efficient utilization of the agency's cost accounting system, and adequate staff knowledge of that system, we also recommend that the Secretary of Education direct the Chief Operating Officer of Federal Student Aid to: * document the design of controls that are being used to help ensure the reliability of the nonfinancial data, * document the proper completion of these control procedures, * provide all appropriate staff direct access to cost accounting system output information, and: * develop adequate training plans for all staff who could effectively utilize managerial cost accounting information. We also recommend that the Secretary of Education direct the Chief Operating Officer of Federal Student Aid to perform and document a post- implementation review to evaluate whether managerial cost information meets organizational objectives and users' needs. This review should also determine the extent to which managers use or plan to use cost data in managing day-to-day operations. Recommendations to the Secretary of Transportation: To help ensure that Transportation components implement reliable cost accounting methodologies for use in managerial decision making in accordance with departmental objectives, we recommend that the Secretary of Transportation direct appropriate department officials to finalize and issue: * a policy for implementing MCA departmentwide, and: * formal procedures, revised as necessary, to monitor implementation of that policy and establish a sound system of controls. In order for FAA to develop cost accounting information that is sufficiently reliable for ongoing managerial decision making, consistent with FAA-identified concerns and ongoing efforts, we also recommend that the Secretary of Transportation direct the Administrator of FAA to: * implement the planned system improvement for assigning labor costs to National Airspace System maintenance projects, with appropriate internal controls to help ensure data reliability, and: * implement managerial cost accounting in its two lines of business that have not completed implementation. Recommendations to the Secretary of the Treasury: To help ensure that Treasury components implement and use reliable managerial cost accounting methodologies, we recommend that the Secretary of the Treasury direct the Chief Financial Officer of the Department of the Treasury to develop and implement written procedures, including a sound system of controls, to better carry out Treasury's policy to oversee the implementation and continued use of appropriate cost accounting methodologies at its bureaus and departmental offices. To help ensure that the Internal Revenue Service implements and uses reliable cost accounting methodologies in accordance with management objectives, we recommend that the Secretary of Treasury require the Commissioner of Internal Revenue to direct the Chief Financial Officer of IRS to finalize and issue: * an Internal Revenue Service policy to carry out Treasury's managerial cost accounting policy and: * formal procedures, including a sound system of controls to implement that policy. We also recommend that the Secretary require the Commissioner of Internal Revenue to direct the Chief Financial Officer of IRS to finalize development and implementation of a cost accounting system capable of determining the cost of activities, services, or products at levels of detail suitable to assist managerial decision making. Similarly, we recommend that the Secretary require the Commissioner of Financial Management Service to direct the Chief Financial Officer of the Financial Management Service to finalize and issue: * a Financial Management Service policy to carry out Treasury's managerial cost accounting policy and: * formal procedures, including a sound system of controls, to implement that policy. Agency Comments and Our Evaluation: We requested comments on a draft of our briefing presentation from the Secretaries of Education, Transportation, and the Treasury or their designees. We received written comments from the Chief Financial Officer of the Department of Education and from the Acting Deputy Chief Financial Officer of the Department of the Treasury. Transportation elected not to provide written comments, but did provide technical comments. We incorporated the agencies' comments, as appropriate. Education and Treasury comments are reprinted as enclosures II and III, respectively. Comments from the Department of Education: Education agreed with six of our seven recommendations. In particular, it agreed with our four recommendations pertaining to data reliability and MCA utilization and said it would address these issues when implementing a new MCA system. Further, Education agreed with our two recommendations pertaining to departmentwide MCA policies and procedures for implementing that MCA policy, but said other priorities, such as improving controls over financial reporting, currently take precedence. Regarding our seventh recommendation concerning the need to perform and document a post-implementation review for the managerial cost information system, Education stated that it conducted a post- implementation review of its activity-based costing system on an ongoing basis, but that the results of the review were not documented. While the review process used by Education has benefits, a comprehensive post-implementation review undertaken and documented in accordance with Office of Management and Budget (OMB) Circular A-130, Management of Federal Information Resources, would provide a broader range of information about FSA's system and how it is achieving its organizational objectives. This information could benefit current and future stakeholders. Accordingly, we made no change to our recommendation. Comments from the Department of Transportation: Transportation provided comments concerning MCA implementation at FAA and several other technical issues in two e-mails, but neither agreed nor disagreed with our four recommendations. We considered its technical comments and incorporated them, as appropriate. Comments from the Department of the Treasury: Treasury agreed with our six recommendations and stated that it recognizes the importance of addressing its cost accounting needs. However, Treasury stated that resource constraints limit the department's ability to oversee MCA activities and that the cost of MCA should be weighed against its benefits and other competing priorities. We agree that the costs and benefits of an activity are important considerations but believe that MCA, conceptually, is what is needed to help promote efficiency, productivity, and the best use of limited resources. In our view, properly functioning MCA capabilities, as envisioned in laws and regulations, could help Treasury meet its mission needs in an era of constrained resources. Treasury also made several comments regarding specific information in the report. Treasury commented that information we presented about current MCA efforts at IRS and the status of its MCA system were not accurate. It said that the IRS system allocates costs to over 13,000 IRS-defined cost centers. While IRS may have cost-center-level accounting, we remain concerned that according to IRS officials, IRS can only account for costs by activity, output, or program when those activities, outputs, or programs reside completely within a single cost center, thus not allowing IRS an enterprise-wide perspective on costs. Treasury also said that once sufficient data are collected, the current system along with information from other systems, such as performance data, will be used to obtain cost data in greater detail to support decision making. However, during our review, IRS officials told us that such analysis was not possible with the current system without implementing certain system upgrades. We believe that this perceived difference in position between Treasury and IRS officials about the capabilities of the current IRS system and the agency's MCA requirements needs to be resolved. In any event, we continue to believe that the ability to generate more detailed cost information could be enhanced if an upgraded and integrated cost module or similar system was in place. Accordingly, we did not modify our position on this topic. In addition, Treasury said that the disparate implementation of MCA across the department is not solely the result of informal and sporadic departmental oversight. We clarified our briefing to instead acknowledge that the informal and sporadic oversight was a contributing factor to disparate MCA implementation, and also noted that the sophistication, extent, and cost of implementing MCA would depend on the operations and needs of the organization. Scope and Methodology: Our methodology was consistent with the one employed in our prior review of MCA practices at the Department of Labor and the Department of Veterans Affairs.[Footnote 5] To obtain an understanding of how MCA systems at Education, Transportation, and Treasury generate cost information, we interviewed officials and reviewed documentation on the status of MCA system implementation and the related obstacles to managerial costing. We also examined departmental guidance and looked for evidence of leadership and commitment to the implementation of entity-wide cost management practices. Using the Standards for Internal Control in the Federal Government[Footnote 6] as a guide, we identified internal controls over the reliability of financial and nonfinancial information used in MCA. To determine how managers use cost information to support managerial decision making and provide accountability, we obtained an understanding of how Education, Transportation, and Treasury use cost accounting data for budgeting, costing services or products, preparation of the Statement of Net Cost, and other managerial uses through interviews of agency officials and a review of documentation provided by the departments. During our review, we visited Education, Transportation, and Treasury headquarters in Washington, D.C. We interviewed managers and senior- level officials about their MCA activities at the departmental level and at selected component agencies. When possible, we corroborated information obtained in interviews with agency documents such as policies, procedures, system descriptions, and flowcharts. We also reviewed prior office of inspector general and GAO reports regarding MCA activities, systems, and data. The agencies provided comments on a draft of this report, which we considered and incorporated as appropriate. We performed this work in accordance with U.S. generally accepted government auditing standards from May 2005 through October 2005. We are sending this report to the Secretaries of Education, Transportation, and the Treasury; the Director of OMB; and other interested parties. Should you or your staff have any questions on the matters discussed in this correspondence, please contact me at (202) 512-6131 or martinr@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this report. GAO staff who made major contributions to this report are listed in enclosure IV. Sincerely yours, Signed by: Robert E. Martin: Director, Financial Management and Assurance: Enclosure I: [See PDF for images] [End of slide presentation] [End of section] Enclosure II: Comments from the Department of Education: UNITED STATES DEPARTMENT OF EDUCATION: OFFICE OF THE CHIEF FINANCIAL OFFICER: THE CHIEF FINANCIAL OFFICER: November l, 2005: Mr. Robert E. Martin: Government Accountability Office: Director, Financial Management and Assurance: 441 G Street, NW: Washington, DC 20548: Dear Mr. Martin: We are in receipt of your proposed report entitled Managerial Cost Accounting (MCA) Practices: Departments of Education, Transportation, and the Treasury. Thank you for the opportunity to review the draft report. Written comments to be reflected in the final report follow. I. Background: The Department of Education manages a loan portfolio of over $90 billion, makes new loans of $27.5 billion annually, administers a budget of $71.5 billion, made grants of over $58 billion last year and operates some 150 programs that ensure equal access to education and promote educational excellence throughout the nation. Although Education has the smallest workforce of the 15 cabinet-level departments (4,366 employees), it manages the third highest annual appropriation of discretionary funds. Education's student loan portfolio is exceeded in total loan volume, education related or otherwise, by only two American banks. Administrative overhead comprises a mere 2 percent of the Department's appropriated funding. The Department of Education has made significant progress in recent years. In 1998 the Department faced a number of serious challenges including the fact that the Department's independent auditor was unable to express an opinion on our financial statements. The Department failed three consecutive financial audits receiving qualified opinions that featured three material weaknesses and four reportable conditions. Management met these challenges and spearheaded initiatives to correct the problems. One of the critical steps in the Department of Education's transformation was the implementation of a new accounting system in FY 2002. However the implementation of the new system alone did not resolve the significant challenges the Department had to overcome to get its financial house in order. These challenges included implementing effective processes for reconciling fund balances with Treasury Department records, reconciling feeder systems and the general ledger, and identifying and resolving budget and proprietary account relationship issues. The fundamental processes required to address these issues were ineffective or non-existent. A major step taken by the Department to address the challenges was to reengineer many of its business processes. In the past, these ineffective processes had created the need for many reconciliations that were not effective or not performed. By reducing the number of transactions posted to certain accounts, the Department was able to significantly reduce the effort required to analyze and reconcile those accounts. In addition, the Department assessed the validity of every accounting event and modified the accounting where appropriate. As part of the reengineering, the Department has performed monthly "flux analyses" for all significant account balances to identify and correct unnatural balances and abnormal activity, with special attention toward correcting systemic problems. In order to ensure that the new monthly analysis and reconciliation processes were effective, a management review process was put in place to monitor the quality of the reconciliations and analysis, and to ensure that issues raised are quickly addressed and that actions taken to resolve the issues are effective. This is accomplished through monthly validation and codification of key statistical and other financial data. These data are then published in the Department's monthly Executive Fast Facts brief, which gives key executives the ability to make informed management decisions using real-time financial information. As a result of the processes initiated in FY 2002 and refined in succeeding years, the Department is now able, on a monthly basis, to produce financial statements, reconcile all control and subsidiary accounts and test the budgetary and proprietary account relationships for its over 200 appropriations. Monthly, quarterly and daily financial information is now readily available from the system. In FY 2002 the Department received the first of its three consecutive clean audit opinions with no material weaknesses. Other major accomplishments include receipt of the President's Quality Award for Improved Financial Performance Agency-wide for FY 2004; being the first cabinet-level agency and one of only five agencies in FY 2003 to receive a green status on the President's Management Agenda Score Card for Improved Financial Performance; receipt of Treasury and Risk Management Magazine's Alexander Hamilton Award for using technology to ensure the effective and timely management of cash assets; being one of the FY 2004 and FY 2003 recipients of the Certificate of Excellence in Accountability Reporting awarded by the Association of Government Accountants for a clearly articulated, comprehensive and integrated report on the financial and performance status of the agency; and submitting FY 2005 financial statements to the independent auditors in twelve calendar days. II. Management Focus and Leadership Approach: The Department of Education, like many entities, faces the challenge of maximizing organizational capabilities while minimizing the impact of administrative activities on budget resources and ensuring the timely delivery of services and satisfactory program performance. This challenge requires that Department executives set and implement priorities that create the most value to the public. To that end, the Department has elected to undertake numerous major initiatives that address critical needs to ensure integrity and accountability, and enhance the public trust. Several of these initiatives are described below: - In January 2002, the Department implemented Oracle 11.0.3, which significantly improved financial management functions and allowed the Department to focus on performance data. The project was the first fully integrated, department-wide implementation of Oracle Financials for a cabinet level agency, and since its start the Department has received three consecutive unqualified audit opinions. - The Department is implementing the next version of Oracle Federal Financials, also known as Oracle 11 i. The Oracle 11 i implementation seeks to consolidate the financial management systems of the Department and Federal Student Aid (FSA) by tightening integration between the two current systems, improving the efficiency of the Department's financial systems and operations, validating assumptions and decisions made during the previous implementation, taking advantage of business process reengineering opportunities, and continuing the Department's track record of successful, effective Oracle Federal Financials implementation. - The Office of the Chief Financial Officer (OCFO) has developed the Executive Fast Facts Information Summary, which is a report designed to provide summary information for managers to use in implementing plans and measuring performance. Executive Fast Facts provides a monthly comprehensive overview of financial and program performance and is used as a tool throughout the Department to measure effectiveness and efficiency of program operations and assist managers in making management decisions. Included in Executive Fast Facts is the monthly Statement of Net Cost, by reporting group. - The Office of Federal Student Aid created a management report - The Federal Student Aid Executive Dashboard - that is specific to its operations. The Executive Dashboard provides current data on student aid applications, program disbursements, default collections, program performance measures, and system performance. It is provided to all managers weekly and is used at weekly senior officers meetings to track progress and determine if specific actions are required to address identified issues. - The Department is in the process of a total redesign of our Grants and Administrative Payments System. - The Department is implementing a new procurement management system. - The Department is implementing a new web-based travel management system. - The Department is currently implementing the requirements of OMB Circular A-123. These new requirements involve extensive review, documentation and potential modification of internal controls throughout the Department. This project will require substantial resources and may take several years of effort. Management focus at all levels of the Department will be required to ensure that goals are met and that resources are employed in the most efficient manner. III. Specific Areas of Concern: The GAO draft report included comments and recommendations specific to the Department in general and to the Federal Student Aid (FSA) implementation of MCA. Our responses to these comments and recommendations are as follows: GAO Comments: * "Education Management did not take a leadership role to promote the benefit of cost accounting policies or systems departmentwide, and presently has a cost accounting system in only one of 10 program offices - Federal Student Aid... Response: In FY 2005, 61 percent of Education's administrative cost was attributable to FSA and hence was subject to analysis using MCA methodologies. Additionally, in FY 2004, 62 percent of the Department's administrative cost was attributable to FSA and was subject to analysis using MCA methodologies. In sum, although only one of our 10 program offices uses an MCA system, the great majority of our administrative costs were subject to MCA methodologies. The final GAO report should reflect that fact. * "Education does not have a departmentwide managerial cost accounting system, nor does it have managerial cost accounting policies. Education has not demonstrated leadership and commitment to cost accounting concepts throughout the Department. " Response: While the Department does not have a department-wide managerial cost accounting system, the Department collects data on workload and grants to reflect the full costs of operating our programs. These data, including data on personnel and other administrative costs, are used in internal and external budget documents and in the Department's decision-making. GAO Recommendation: "..develop and issue a departmentwide policy that focuses on the benefits of MCA.. " Response: We concur in principle with the goal of establishing a department-wide MCA policy. We intend to further MCA efforts in the future. However, at this time we are focusing on competing priorities that have moved ahead of MCA (described in Section 11 above). GAO Recommendation: "..develop and issue procedures for monitoring implementation of its departmentwide MCA policy and for establishing a sound system of controls. " Response: We concur in principle with the objective of establishing procedures for monitoring implementation of a department-wide MCA policy and for establishing a sound system of controls. However, at this time we are focusing on competing priorities that have moved ahead of MCA (described in Section 11 above). GAO Recommendation: "To help ensure MCA data reliability, more efficient utilization of FSA's MCA system, and adequate staff knowledge in using FSA 's MCA system, we also recommend that the Secretary of Education direct appropriate FSA officials to: * Document the design of controls that are being used to help ensure the reliability of the nonfinancial data. * Document the proper completion of these control procedures." Response: We agree that it is necessary to continue to further refine and document FSA controls, where appropriate, around the non-financial data used in FSA's ABC (Activity-Based Costing) model. FSA currently has controls over some pieces of the non-financial data applied in the model. However, these controls need to be reinforced and fully documented after the new ABC software system is procured and implemented. GAO Recommendation: * Provide all appropriate staff direct access to MCA system output information. Response: We agree that managers or end users of the cost accounting data should have direct access to the data and that the computer model should have reporting capabilities for those users. But implementing that access to the current model, which will be replaced in the near future, would not be cost effective. The new model will offer that access. GAO Recommendation: * Develop adequate training plans for all staff who could effectively utilize information from MCA. Response: We concur with GAO's recommendations regarding the development of training plans for FSA staff; however, this would not be cost beneficial if applied to the current computer model and ABC environment. As GAO recognizes in the report, FSA is acquiring a new software system to provide end-user reporting and interfaces to other FSA systems. As part of that procurement, FSA will develop a training strategy for FSA staff that could utilize the ABC data. The new system will be end-user friendly, providing managers the direct access to the data they need in managing day-to-day operations. GAO Recommendation: "We also recommend that the Secretary of Education direct appropriate FSA personnel to perform and document a post implementation review to evaluate whether managerial cost information meets organizational objectives and users' needs. This review should also determine the extent to which managers use or plan to use cost data in managing day-to-day operations. " Response: The Department views the ABC model, current and future, as a tool that produces information used to manage, improve delivery and reduce costs in targeted aspects of our business operation. Managers have used information from the current model to derive specific performance measures included in our Five Year Plan. Post- implementation review is an ongoing process for ABC, unlike a one-time system implementation review. IV. Conclusion: The Department of Education takes its fiduciary responsibility to the public and the children of this nation very seriously. As such, it continues to take steps to ensure that its funds are properly managed and reported. Metrics that are key to how well the Department is executing its mission include the ability to provide assurance of sound fiscal practices, adequate internal controls and timely financial reporting. The Department continues to strive for excellence in financial management, which has been an iterative process. For each of the last four years, the Department has focused its energies and resources on the fundamental building blocks of Financial Reporting, such as data cleanup, reconciliations, validations of posting models, sub-ledger interface integrity, and accuracy of general ledger data. Now, management's key focus is on furthering the institution of internal controls and strengthening its commitment to the control environment. In FY 2005, we continued to improve financial reporting and transparency. As part of this effort, our energies are focused on refining and documenting our internal control over financial reporting and assessing our overall internal control framework. In FY 2006, management will be required to provide its assurance to both the external auditors and to OMB that our internal control over financial reporting is adequate and operating effectively. This will provide additional assurance to the President and the American taxpayer. The Department understands the importance of cost accounting policies and systems. While there are several existing MCA practices and systems in place, further work needs to be done. We intend to further MCA efforts in the future. However, we believe that at present we must remain focused on competing priorities, as mentioned above, that have moved ahead of MCA. We believe that although our current systems need strengthening we have made significant strides in the early stages of MCA implementation. We will continue to explore methods for moving our MCA practices to full implementation in the future. Sincerely, Signed by: Jack Martin: cc: Theresa S. Shaw, COO, Federal Student Aid, Victoria Bateman, CFO, Federal Student Aid: [End of section] Enclosure III: Comments from the Department of the Treasury: DEPARTMENT OF THE TREASURY: WASHINGTON, D.C. 20020: October 28, 2005: Mr. Jack Warner: Assistant Director, Financial Management and Assurance: U.S. Government Accountability Office: 441 G Street, N.W.: Washington, D.C. 20548: Dear Mr. Warner: We are writing to provide our comments on Treasury's portion of the proposed Government Accountability Office (GAO) report entitled, "Managerial Cost Accounting Practices: Departments of Education, Transportation, and the Treasury." The Department appreciates the need to more fully develop our managerial cost accounting capabilities, as described in the proposed report; and agrees with its recommendations. To the extent possible, however, we would appreciate GAO acknowledging that resource constraints at the Departmental level generally restrict the level of oversight we can provide to bureau activities. It would likewise be beneficial to recognize that significant costs often need to be incurred to install managerial cost accounting systems, and that these costs must be weighed against the projected benefits and competing priorities for shrinking budgetary resources. We do not want the audience for GAO's report to get the impression that the Department does not recognize the importance of addressing its cost accounting needs. Our specific comments on the proposed report follow: * The Financial Management Service (FMS) agrees with the GAO recommendation and has already begun the process of developing the necessary FMS Managerial Cost Accounting (MCA) policy and procedures to implement Treasury's MCA policy. FMS plans to publish the MCA policy and procedures in its Manual of Administration by the end of the first quarter of FY 2006. FMS will prepare a corrective action plan with targets and milestones in response to the applicable findings and recommendations identified by GAO. * The third bullet on page 8 regarding MCA-related internal controls could be expanded to clarify where the strengthened controls are needed. * Several of the bullets mention specific software vendors by name. We prefer that specific references to vendor names be deleted. * The Internal Revenue Service (IRS) only recently implemented a cost accounting module as part of its new Integrated Financial System (IFS). The integrated MCA system will provide more detailed and accurate cost information to all levels of the organization. The ability to have cost data down to the group level will provide more robust information to facilitate decision-making. * The third bullet on page 17 does not accurately reflect IRS' current efforts in relation to MCA. The bullet states that IRS' system only links costs to upper level cost centers. However, the cost module allocates costs to over 13,000 IRS-defined cost centers and includes information on hours worked for each cost center. * The second bullet on Page 18 that discusses future enhancements to IFS does not accurately reflect the IRS situation and should be clarified. We agree that an integrated work management module would routinely provide a greater level of detail for costing purposes. However, the current system allows IRS to implement an MCA program. Once sufficient data has been collected, IRS will use cost data from IFS with information from other systems, such as performance data, to enhance the quality and detail of data to support decision making. * IRS expects to issue the final IRS MCA policy by the end of December 2005. The policy will define the roles and responsibilities of IRS business organizations. Once fully implemented, the system, policy, and controls will provide tools to assist managers with decision-making. * The bullet on page 24 notes that implementation of MCA among Treasury's bureaus is widely disparate. We do not think this is solely the result of our "informal and sporadic" oversight efforts. Rather, in part this is by design, as our policy encourages our bureaus to proceed cautiously in this area and recognizes that our bureaus have widely disparate MCA needs. Of course, we realize that all the bureaus need some level of MCA. Thank you for the opportunity to respond to this draft GAO report. We appreciate GAO's work in this area and also appreciate the professionalism and thoroughness of the GAO audit team. If you have any questions or wish to discuss these comments further, please contact me at (202) 622-1450. Sincerely, Signed by: James R. Lingebach: Acting Deputy Chief Financial Officer: Enclosure IV: GAO Contact and Staff Acknowledgments: GAO Contact: Robert E. Martin (202) 512-6131 or martinr@gao.gov: Acknowledgments: In addition to the contact named above, key contributors to this assignment were Jack Warner, Assistant Director; Paul Begnaud; Lisa Crye; Dan Egan; Fred Evans; Barry Grinnell; Barbara House; Jerrica Kahle; Paul Kinney; Lisa Knight; James Moses; Lori Ryza; Glenn Slocum; and Bill Wright. (197011): FOOTNOTES [1] Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990). [2] In 2005, JFMIP's responsibilities for financial management and policy oversight were realigned to the Office of Management and Budget, the Office of Personnel Management, and the Chief Financial Officer's Council. [3] Pub. L. 104-208, div. A., 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996). [4] GAO, Managerial Cost Accounting Practices: Leadership and Internal Controls Are Key to Successful Implementation, GAO-05-1013R (Washington, D.C.: Sept. 2, 2005). [5] GAO-05-1013R, 12. [6] GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

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