Managerial Cost Accounting Practices
Department of Agriculture and the Department of Housing and Urban Development Gao ID: GAO-06-1002R September 21, 2006Authoritative 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 (MCA), 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 Financial 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 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 to comply substantially with federal accounting standards and federal financial management systems requirements. 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 MCA 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 briefing to Congressional staff on September 7, 2006, concerning our review of MCA practices at the Department of Agriculture (USDA) and the Department of Housing and Urban Development (HUD). This was our fourth in a series of briefings concerning the status of MCA activities at large government agencies.
Similar to issues that surfaced in our earlier reports, we found that stronger leadership would be needed to enhance the development and use of managerial cost information at USDA and HUD. The departments generally had not developed policies on the development and use of cost information, were not promoting the benefits of identifying the cost of performance, and were not monitoring implementation in the components.
RecommendationsOur 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-06-1002R, Managerial Cost Accounting Practices: Department of Agriculture and the Department of Housing and Urban Development
This is the accessible text file for GAO report number GAO-06-1002R
entitled 'Managerial Cost Accounting Practices: Department of
Agriculture and the Department of Housing and Urban Development' which
was released on September 22, 2006.
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.
September 21, 2006:
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: Department of
Agriculture and the Department of Housing and Urban Development:
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 (MCA), 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 Financial 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 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 to comply substantially
with federal accounting standards and federal financial management
systems requirements.
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 MCA 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 briefing to your
staff on September 7, 2006, concerning our review of MCA practices at
the Department of Agriculture (USDA) and the Department of Housing and
Urban Development (HUD). The slides from that briefing are presented in
enclosure I. This was our fourth 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]. Our second
briefing covered the status of MCA activities at the Departments of
Education, Transportation, and the Treasury.[Footnote 5] The third
briefing covered the status of MCA activities at the Department of
Health and Human Services and the Social Security
Administration.[Footnote 6]
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, claims paid, grants managed, or time needed to perform
individual activities.
Status of Efforts to Implement Managerial Cost Accounting at USDA and
HUD:
Similar to issues that surfaced in our earlier reports, we found that
stronger leadership would be needed to enhance the development and use
of managerial cost information at USDA and HUD. The departments
generally had not developed policies on the development and use of cost
information, were not promoting the benefits of identifying the cost of
performance, and were not monitoring implementation in the components.
Department of Agriculture:
USDA has not shown strong leadership to promote, guide, and monitor MCA
implementation. USDA did not have a departmentwide MCA system in place
and, instead, has delegated responsibility for MCA implementation to
the component agencies. USDA, however, did not have procedures in place
to monitor component agency MCA initiatives, and had only limited
information on the status of MCA implementation at its 15 component
agencies at the time of our review.
USDA's current financial system, the Foundation Financial Information
System (FFIS), was not designed to provide in-depth MCA information.
FFIS analysis and reporting functions and its related data warehouses
allow users to conduct inquiries and execute ad hoc reports on, for
instance, the status of funds and open obligations. These analyses,
however, do not integrate nonfinancial data with financial data to
provide the cost of activities or outputs on an ongoing basis.
According to USDA officials, the Financial Management Modernization
Initiative (FMMI) system is scheduled to replace FFIS by the end of
fiscal year 2012. FMMI is expected to include a cost accounting module
which officials said will incorporate MCA functionalities required by
the Office of Federal Financial Management at OMB. Except for ongoing
initiatives at the Farm Services Agency, the Forest Service, and Rural
Development, USDA MCA planning initiatives did not set time frames or
requirements for other component agencies to improve cost management.
At USDA, we also selected for review larger component agencies in terms
of number of employees and outlays, and those with cost recovery
activities, such as working capital funds (WCF) and services with user
fees. USDA's WCF has 22 activity centers providing payroll, accounting,
and other administrative and support services to internal and external
customers. We reviewed MCA activities at four USDA component agencies:
the Animal and Plant Health Inspection Service (APHIS), the Farm
Service Agency (FSA), the Food and Nutrition Service (FNS), and the
Forest Service (FS).
WCF activity centers are intended to recover the full cost of goods and
services they provide. WCF officials told us that the activity centers
use a range of methodologies, from spreadsheets to more sophisticated
activity-based costing systems, to assign costs to customers. WCF
officials, however, did not have documented procedures to help ensure
appropriate cost accounting methodologies are used by the activity
centers to allocate costs to customers and set prices, and they could
not centrally confirm that all of the activity centers were charging
their customers the full cost of services rendered.
According to APHIS officials, they used ABC costing techniques to
manage around 10 percent of their budget, primarily for administrative
purposes. In addition, APHIS is developing the APHIS Cost Management
System (ACMS), a system to track spending to cost centers that is to be
implemented by fiscal year 2007. APHIS officials told us that ACMS has
several data fields that could be used to include nonfinancial data and
thus provide MCA information. However, an APHIS official said that
procedures for using the ACMS data fields for MCA are not finalized and
are still being documented.
FSA plans to implement its Budget and Performance Management System
(BPMS) by October 2008 to link and integrate FSA's budget, cost, and
performance management information. FSA reported that improvements are
needed in nonfinancial data quality and consistency, including the
nonfinancial data used in its current ABC system. FSA officials said
that planned upgrades to labor and workload systems through BPMS are
intended to address these issues.
FNS officials said that the agency designed its National Data Bank
system to integrate detailed cost and program performance information
with its state grantee program data reporting system, enhancing the
usefulness of cost data for FNS program managers. That information is
available by program at state, regional, and national levels at
monthly, quarterly, and annual reporting intervals.
FS, on the other hand, did not have a system in place with which it
could routinely analyze cost information. The FS can use cost-finding
techniques and FFIS data to prepare ad hoc cost information reports
that are generally at the program or budget line item level. Special
job codes required to track costs for specific projects below the
budget line item level can be established. The FS CFO stated that
implementation of MCA would not be a priority until outstanding
financial reporting issues have been resolved. He said that reliable
and timely financial information was necessary before pushing to
develop MCA information. FS management is focused on completing
implementation of a new centralized financial management system, and
building strong internal control systems to address outstanding
material weaknesses in financial management and reporting processes.
At the department level, USDA uses cost information to prepare the
Statement of Net Cost (SNC). Some component agency officials used cost
information and analyses to make staff hiring decisions, adjust user
fees, allocate administrative costs, investigate anomalies in program
participation rates, and prepare ad hoc cost studies.
Department of Housing and Urban Development:
The absence of continual strong leadership to promote and monitor MCA
implementation across HUD programs has contributed to HUD's lack of
reliable, comprehensive MCA information on its activities and outputs
that is widely and routinely used. HUD had not issued departmentwide
policy guidance on MCA, and did not accumulate the full costs of its
activities or outputs for day-to-day managerial decision making.
Instead, a HUD official stated that HUD is a budget-driven organization
primarily focused on oversight of its programs, and manages its
operations principally with required budgetary data.
Although expanding the range of MCA information could help HUD better
manage its programs and operations on a daily basis, HUD's plans for
current and future systems lack broad application of MCA
functionalities. For example, management indicated that its Total
Estimation and Allocation Mechanism-Resource Estimation and Allocation
Process (TEAM-REAP) has the potential for supporting activity based
costing, but during our review HUD management said it had no plans for
using the system for MCA purposes beyond quarterly cost allocation for
the SNC, management of staffing levels, and an ABC pilot project. In
response to OMB concerns about the lack of management information at
the Federal Housing Administration (FHA), HUD recently agreed to start
an ABC pilot project to obtain the costs of activities, including loan
origination, monitoring, and servicing. However, an FHA official
commented that ABC and MCA were of limited benefit to FHA. Finally, in
2002, the department began the HUD Integrated Financial Management
Improvement Project (HIFMIP)--an enterprisewide initiative to develop
and implement an integrated financial accounting system. According to
HUD officials, however, HIFMIP requirements were based upon current
system functionalities and do not include a more comprehensive MCA
system.
Agencies with nonintegrated financial systems expend major effort and
resources to develop information that should be provided on a recurring
basis. HUD's OIG reported in November 2005 that the department relied
on extensive compensating procedures that were costly, labor intensive,
and not always effective to prepare its annual financial statements.
Further, the OIG reported that HUD's financial management systems did
not enable it to generate and report accurate, timely information
needed to manage operations on an ongoing basis. Improvement of
internal control over financial and nonfinancial information will
enhance the reliability of data available for MCA purposes at HUD.
HUD MCA activities included preparation of the SNC, accumulation of
project costs for IT systems financed through a HUD WCF, analysis and
reporting of financial and operational data accumulated in Data Mart (a
repository for selected financial and nonfinancial information that is
primarily used as a cash management and financial reporting tool), and
ad hoc, manual accumulation of costs to respond to external federal
oversight parties, including OMB and the Congress.
Recommendations for Executive Action:
We are making eight recommendations to the Secretary of the Department
of Agriculture and five recommendations to the Secretary of the
Department of Housing and Urban Development.
Recommendations to the Secretary of the Department of Agriculture:
To promote the implementation and use of reliable MCA methodologies to
better inform managerial decision making in USDA and its components, we
recommend that the Secretary direct appropriate officials to:
² take an active leadership role to promote the benefits and uses of
MCA,
² develop procedures to monitor the implementation of its MCA policy at
its components,
² finalize appropriate USDA-specific functional specifications to
ensure that the cost accounting module of the FMMI will provide MCA
information to support decision making at USDA and its component
agencies, and:
² expand ongoing MCA planning efforts to include time frames and
requirements for all component agencies to help improve cost
management.
To promote the use of proper cost accounting methodologies to inform
pricing and other managerial decisions at USDA WCF activity centers, we
recommend that the Secretary of Agriculture direct appropriate WCF
officials to design, document, and implement procedures to periodically
review those methodologies.
To promote the implementation and use of MCA methodologies at APHIS, we
recommend that the Secretary of Agriculture direct appropriate APHIS
officials to finalize and document procedures for using ACMS data
fields for MCA as a step toward better informed managerial decision
making.
To enhance the reliability of MCA data at FSA, we recommend that the
Secretary of Agriculture direct appropriate FSA officials to continue
efforts to improve and upgrade workload systems as they implement BPMS.
We agree that the FS should continue to place a high priority on
addressing its remaining financial management and reporting problems.
At the same time, we recommend that the Secretary of Agriculture direct
appropriate FS officials to assess FS MCA needs and require that they
are appropriately addressed in any new systems that are implemented.
Recommendations to the Secretary of the Department of Housing and Urban
Development:
To improve HUD's implementation and use of reliable MCA methodologies,
we recommend that the Secretary of HUD direct appropriate officials to:
² take an active leadership role to promote the benefits and uses of
MCA;
² establish and document a department-level policy for MCA;
² develop potential uses of current systems (e.g. TEAM-REAP) to derive
MCA functionalities;
² develop financial system requirements that will fully address MCA
capabilities needed for managerial decision making throughout the
organization using appropriate, integrated financial and nonfinancial
information systems; and:
² strengthen internal controls over financial and nonfinancial data in
MCA systems.
Agency Comments and Our Evaluation:
We requested comments on a draft of our briefing presentation from the
Secretary of Agriculture and the Secretary of Housing and Urban
Development or their designees. We considered and incorporated, as
appropriate, the comments in HUD's letter and the technical comments we
received by e-mail from each department's Office of the Chief Financial
Officer. The comment letter from HUD is reprinted in enclosure II.
Comments from the Department of Agriculture:
In an e-mail from the Office of the Chief Financial Officer, USDA
generally agreed with our findings and eight recommendations and stated
that subsequent to our audit, its CFO modified the WCF budget review
and approval process to require annual review of activity center
costing methodologies, with the first review to be completed as part of
the fiscal year 2008 budget formulation cycle.
Comments from the Department of Housing and Urban Development:
HUD's Chief Financial Officer, in a letter commenting on a draft of
this briefing, generally agreed with our findings. He neither agreed
nor disagreed with our five recommendations but described actions HUD
would take on four of the five.
In response to our recommendations about promoting the benefits and
uses of MCA and developing an MCA policy for the department, the letter
indicated that a new Executive Financial Management Advisory Committee
would address both of these issues.
Concerning our recommendation to develop existing systems to derive MCA
functionalities, the letter indicated the TEAM/REAP system was being
modified to cost staffing data at the activity level and that the
benefits of HUD's pilot ABC project would be assessed to consider
applying it more broadly.
Concerning our recommendation that HUD develop financial system
requirements that will fully address HUD MCA capabilities needed at
HUD, HUD said that Data Mart and TEAM/REAP would be used for any
increased MCA application, but not HIFMIP. We modified our
recommendation to focus on the development of MCA capabilities
generally, rather than specifying the use of HIFMIP.
Finally, concerning our recommendation that HUD strengthen internal
controls over financial and nonfinancial data in MCA systems, HUD
stated that it was not aware of any significant data quality problems
in HUD's existing MCA practices. We were referring to concerns raised
by the HUD OIG and independent auditors about the reliability of
financial data due to control weaknesses in HUD's financial management
systems. These weaknesses could negatively affect data integrity and
indicate uncertain data reliability during the year. Such conditions
would affect MCA data reliability as well as other financial reporting.
Scope and Methodology:
Our methodology was consistent with the one employed in our prior
reviews of MCA practices.[Footnote 7] To obtain an understanding of how
MCA systems at USDA and HUD generate cost information, we reviewed
documentation and interviewed officials 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 entitywide cost management
practices. Using the Standards for Internal Control in the Federal
Government [Footnote 8] 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 decision
making and provide accountability for government resources, we obtained
an understanding of how USDA and HUD use cost accounting data for
budgeting, costing services or products, preparing the Statement of Net
Cost, managing contractors' reimbursable costs, and other managerial
uses through a review of documentation provided by the agencies and
interviews of agency officials.
During our review, we visited USDA and HUD headquarters in Washington,
D.C. At USDA, we visited four component agencies - the Animal and Plant
Health Inspection Service (APHIS) in Riverdale, Maryland; the Farm
Service Agency (FSA) and the Food and Nutrition Service (FNS) in
Alexandria, Virginia; and the Forest Service (FS) in Washington, D.C. -
and the Departmental Working Capital Fund (WCF) in Washington, D.C. We
also held teleconferences with APHIS policy and program development
officials in Minneapolis, Minnesota; and FS staff in Custer, South
Dakota, and in Albuquerque, New Mexico. At HUD, we reviewed MCA
practices at the Federal Housing Administration (FHA) and the Office of
Federal Enterprise Housing Oversight (OFHEA), an independent office
within HUD, in Washington, D.C.
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,
independent public accountant, 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 from March 2006 through July 2006
in accordance with U.S. generally accepted government auditing
standards.
We are sending copies of this report to the Secretary of the Department
of Agriculture and the Secretary of the Department of Housing and Urban
Development; the Director of the Office of Management and Budget; 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 III.
Sincerely yours,
Signed by:
Robert E. Martin:
Director, Financial Management and Assurance:
[End of Section]
Enclosure I: Managerial Cost Accounting Practices:
Managerial Cost Accounting Practices:
Department of Agriculture and Department of Housing and Urban
Development:
Briefing to the staff of the Subcommittee on Government Management,
Finance, and Accountability, Committee on Government Reform, House of
Representatives:
September 7, 2006:
Briefing Agenda:
Introduction and Objectives
Scope and Methodology:
Results in Brief
Background:
Department of Agriculture:
Department of Housing and Urban Development
Conclusions:
Recommendations for Executive Action
Agency Comments and Our Evaluation:
Introduction and Objectives:
Authoritative bodies have promulgated laws, accounting standards,
system requirements, and related guidance to emphasize the need for
cost information and cost management in the federal government,
including:
* Congress:
* Federal Accounting Standards Advisory Board (FASAB):
* Joint Financial Management Improvement Program (JFMIP):
* Office of Management and Budget (OMB):
In light of these requirements, 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 (MCA)
information and:
* government managers use cost information to support managerial
decision making and provide accountability for government resources.
This is the fourth in a series of briefings concerning the status of
MCA activities at large government agencies; we reported on our reviews
at seven other agencies in previous phases of this work.
This briefing summarizes our observations at the Department of
Agriculture (USDA) and the Department of Housing and Urban Development
(HUD).
Scope and Methodology:
To determine how USDA and HUD generate MCA information, we reviewed
documentation and interviewed officials at the USDA and HUD
headquarters and at selected component agencies and offices on:
* the status of MCA system implementation;
* departmental guidance, leadership, and commitment to the
implementation of cost management practices entitywide;
* departmental internal controls to help ensure the reliability of
financial and nonfinancial information used in MCA; and:
* any obstacles to managerial costing.
To determine how USDA and HUD managers use cost information to support
decision making and provide accountability for government resources, we
reviewed documentation provided by the agencies and interviewed
officials at USDA and HUD headquarters and at selected USDA components
on the use of MCA data for:
* budgeting; costing activities, services, or products; monitoring
operations; and enhancing performance measures and operational
efficiency; and:
* preparing the Statement of Net Cost (SNC).
We selected for review the agencies' larger components and programs in
terms of number of employees and outlays, and those with cost recovery
activities, such as working capital funds and services with user fees.
We conducted our reviews at USDA and HUD headquarters in Washington,
D.C. At USDA, we visited four component agencies-the Animal and Plant
Health Inspection Service (APHIS) in Riverdale, Maryland; the Farm
Service Agency (FSA) and the Food and Nutrition Service (FNS) in
Alexandria, Virginia; and the Forest Service (FS) in Washington, D.C.-
and the Departmental Working Capital Fund (WCF) in Washington. We also
held teleconferences with APHIS policy and program development
officials in Minneapolis, Minnesota; and FS staff in Custer, South
Dakota , and Albuquerque, New Mexico.
At HUD, we reviewed MCA practices at HUD's Federal Housing
Administration (FHA) and the Office of Federal Enterprise Housing
Oversight (OFHEO), an independent office within HUD, in Washington,
D.C.
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
(OIG), independent public accountant (IPA), and GAO reports regarding
MCA activities, systems, and data.
We performed this work from March 2006 through July 2006 in accordance
with U.S. generally accepted government auditing standards.
Results in Brief:
At the department level, USDA did not have an MCA system focused on
managerial decision making. USDA assigned responsibility for MCA
implementation to its components, but did not take an active leadership
role to promote MCA or monitor its implementation at its components.
USDA officials told us that the departmentwide Financial Management
Modernization Initiative, a program to replace the current USDA
financial system, is currently in the early planning stages, is
expected to be implemented in 2012, and is to include a cost accounting
module.
None of the four USDA component agencies that we reviewed had
integrated, agencywide MCA systems, although they used cost finding
techniques.
FNS maintained a system that combines state grantee program data with
its cost and benefit data to produce unit cost and trend information
for program management.
At WCF, management identified weaknesses in its oversight of WCF
activity centers and is taking steps to improve activity center
financial systems and reporting.
USDA used cost information at the department level to prepare the SNC.
At the component agencies we reviewed, uses of cost information
included comparing program costs by location, making staffing
decisions, identifying program participation anomalies, and determining
rates for user fees and reimbursable agreements.
HUD does not have an MCA system in place that is routinely used to
accumulate full costs of its activities or outputs for periodic
managerial decision making. Instead, HUD management stated that HUD is
a budget-driven organization with sufficient information to effectively
support budget formulation and management of enacted programs.
HUD's MCA activities include the allocation of salary and expense costs
to its major programs reported on the SNC, allocation of project costs
for its information technology (IT) systems, review of other budget-
based cost and human capital reports and data, and manual accumulation
of costs for special studies reported to external parties.
An integrated financial management system being phased in at HUD from
2009 to 2013 is expected to generate program and performance measures
upon completion. HUD officials told us the system is not expected to
provide more MCA functionalities than HUD's current systems.
To address our findings, we made eight recommendations to USDA and five
recommendations to HUD. We provided a draft of these briefing slides to
the agencies. We received a comment letter from HUD and technical
comments by e-mail from both agencies. We have incorporated the
agencies' comments herein, as appropriate.
Background:
The Chief Financial Officers (CFO) Act of 1990 calls for the
development and reporting of cost information and the systematic
measurement of performance. FASAB Statement of Federal Financial
Accounting Standards (SFFAS) No. 4, Managerial Cost Accounting Concepts
and Standards for the Federal Government, and JFMIP's Framework for
Federal Financial Management Systems establish accounting standards and
requirements for MCA at federal agencies.[Footnote 9]
The Federal Financial Management Improvement Act of 1996 builds on the
foundation provided by the CFO Act and includes requirements for CFO
Act agencies to comply with federal accounting standards and for the
agencies' systems to comply substantially with, among other things,
federal financial management systems requirements.
MCA involves accumulating and analyzing financial and nonfinancial data
to allocate costs to organizational pursuits, such as performance
goals, programs, activities, and outputs, to establish cost and
performance baselines in support of managerial decision making. The
data analyzed depend on the operations and needs of the organization.
Financial data include the costs of all activities associated with a
given output, including direct and indirect costs.
Nonfinancial data measure the occurrences of activities and outputs to
which costs are assigned.
* Nonfinancial data could include, for example, information on the
number of hours worked, units produced, grants managed, inspections
conducted, or people trained or the amount of time needed to perform
activities.
USDA Background:
USDA's mission is to provide leadership on issues related to nutrition,
agriculture, natural resources, and quality of life in rural America.
In fiscal year 2005, USDA reported net outlays of about $85 billion and
had approximately 99,400 employees.
USDA has 15 component agencies organized in distinct mission areas,
including food nutrition and consumer services, farm and foreign
agricultural services, and natural resources and environment. It also
has a WCF with 22 activity centers that provide various support
services to internal and external customers.
USDA: MCA Systems in Place:
USDA does not have a departmentwide MCA system in place.
USDA delegated responsibility for MCA implementation to the component
agencies because of their mission differences but did not have
procedures in place to monitor component agency MCA initiatives.
The department's Agriculture Financial Standards Manual required
agencies to develop MCA capabilities to satisfy their unique needs in
accordance with departmentwide standards, to the extent practicable.
USDA had only limited information on the status of MCA implementation
at the 15 components. USDA officials referred us to components and a
2002 study on 10 of the agencies for information on the status and
application of MCA at major programs and activities.
Other than issuing its Agriculture Financial Standards Manual and
updating a user fee biennial reporting directive, USDA did not provide
the component agencies with guidance or leadership on implementing MCA.
Two component agency officials stated that managers focused on budget
authority and obligations data, instead of using cost data to achieve
efficiencies and manage expenses.
USDA's current financial system, the Foundation Financial Information
System (FFIS), is a financial accounting and reporting tool, which,
according to USDA officials, provides all of the financial reporting
necessary to meet government mandates. However, it was not designed to
provide in-depth MCA information.
* Officials at two of the four component agencies that we visited told
us that FFIS generally does not provide cost information below program
or budget line item level.
* FFIS analysis and reporting functions and its related data warehouses
allow users to conduct inquiries and execute ad hoc reports on, for
instance, the status of funds, detailed transaction registers, and open
obligations. However, these analyses do not integrate nonfinancial data
with financial data to provide the cost of activities or outputs on an
ongoing basis.
Although USDA obtained an unqualified audit opinion on its financial
statements in 2005, the OIG reported that stronger internal controls
are needed to improve the timeliness and accuracy of financial data
available to managers and cited material weaknesses related to overall
financial management across USDA. For example, the auditor identified
"abnormal balances" in more than 90 accounts, totaling over $1 billion,
that had not been fully researched or corrected before the end of the
fiscal year.
Weaknesses in internal control can result in inaccurate cost data
throughout the year, which may adversely affect any decision based on
these data.
USDA's draft Financial Data Integration Improvement Plan (FDIIP) refers
to incorporating MCA into the department's financial management
improvement efforts only in general terms, not clearly defining its
future MCA system.
The FDIIP includes the Financial Management Modernization Initiative
(FMMI) system to replace FFIS. FMMI is scheduled to be implemented by
the end of fiscal year 2012 and is expected to include a cost
accounting module. According to USDA officials, they intend to
incorporate into FMMI the MCA functionalities required by the Office of
Federal Financial Management (OFFM).[Footnote 10]
However, except for FMMI and ongoing initiatives at FSA, FS, and Rural
Development, the FDIIP did not set time frames or requirements for
other component agencies to improve cost management.
USDA's WCF has 22 activity centers that provide payroll, accounting,
and other administrative and support services to internal and external
customer agencies.
For fiscal year 2005, the WCF reported total gross costs of $498
million and 2,412 employees at the activity centers.
The WCF activity centers are intended to recover the full cost of goods
and services they provide. WCF officials told us that the activity
centers use a range of methodologies, from spreadsheets to more
sophisticated activity based costing (ABC) systems, to assign costs to
customers.
WCF officials identified areas for improving internal controls over WCF
activities. For example, they are taking steps to improve activity
center financial systems and reporting as well as divisional oversight
of activity center costing methodologies.
However, the WCF did not have documented procedures to help ensure
appropriate cost accounting methodologies are used by the activity
centers to allocate costs to customers and set prices for services.
* Therefore, WCF officials could not centrally confirm that all of the
activity centers were charging their customers the full cost of
services rendered.
* Those officials told us WCF did not routinely review and monitor MCA
techniques used by activity centers.
APHIS helps ensure the health and care of animals and plants and
improve agricultural productivity. For fiscal year 2005, APHIS had
outlays of $1.1 billion, 1.3 percent of USDA's net outlays, and 7,078
(7.1 percent) of USDA's employees. APHIS administered over 300 types of
user fees, according to agency officials.
APHIS does not have an agencywide MCA system.
According to APHIS officials, they used ABC costing techniques to
manage around 10 percent of their budget, primarily for administrative
purposes rather than routine program management. They said that each
ABC project stands alone and is not routinely linked to any other
financial or nonfinancial system.
Financial data come from a data warehouse that is populated from FFIS.
Nonfinancial data are drawn from personnel and procurement systems and
a quarterly survey where employees report their time by type of
activity. APHIS ABC officials rely on controls in place over the
personnel, procurement, and other sources to ensure the reliability of
nonfinancial data used by the ABC systems.
APHIS is developing the APHIS Cost Management System (ACMS), a system
to track spending to cost centers that is to be implemented by fiscal
year 2007.
* APHIS officials told us that ACMS has several data fields that could
be used to include nonfinancial data and thus provide MCA information.
* However, an APHIS official said that procedures for using these ACMS
data fields for MCA are not finalized and are still being documented.
FSA administers credit and loan programs and manages conservation,
commodity, and disaster relief programs through a national network of
offices. For fiscal year 2005, FSA had outlays of $23.1 billion, 27
percent of USDA's net outlays, and 5,577 (5.6 percent) of USDA's
employees.
FSA does not have an agencywide MCA system.
FSA does, however, have an ABC system to track costs related to
reimbursable agreements at the two locations that administer those
agreements, covering about $100 million, or 10 percent of FSA's
administrative budget. Officials said that financial data come from the
FFIS. Nonfinancial data come from ABC online surveys related to
employee time charges and FSA's Work Status Reporting System, a labor
activities data collection system.
FSA plans to implement its Budget and Performance Management System
(BPMS) by October 2008 to link and integrate FSA's budget, cost, and
performance management information. Officials told us that in 2003,
after significant budget cuts, FSA determined that an MCA system could
help it defend its budget. Until then, FSA officials said that having
an MCA system was not a priority, as the emphasis was on executing the
initiatives of the President's Management Agenda.
FSA expects the BPMS MCA module to improve existing labor and workload
data systems.
FSA reported that BPMS is expected to provide the full cost of services
and activities, including FSA and department-level indirect costs. The
MCA model in BPMS is intended to formalize cost management practices
for FSA and help decision makers answer questions concerning the full
cost of programs, expenditure trends, and activity locations.
FSA reported that improvements are needed in nonfinancial data quality
and consistency, including the nonfinancial data used in its current
ABC system. Planned upgrades to its labor and workload systems are
intended to address these issues.
FNS helps provide low-income people access to a healthy diet and
nutrition education. For fiscal year 2005, FNS reported having
budgetary outlays of $50.2 billion, 58.7 percent of USDA's outlays, and
1,451 (1.4 percent) of USDA's employees.
FNS officials said the agency designed its National Data Bank (NDB)
system to integrate detailed cost and program performance information
with its state grantee program data reporting system, enhancing the
usefulness of cost data for its program managers. That information is
available by program at state, regional, and national levels at
monthly, quarterly, and annual reporting intervals.
* States submit financial and nonfinancial data online for NDB.
According to FNS officials, NDB includes both FNS and department-level
direct and indirect costs.
FNS officials said the agency uses state auditors and CPA firms under
the OMB Circular No. A-133 single audit process to determine whether
state program and administrative costs charged to FNS are allowable.
FNS also performs edit checks, analytical reviews, and comparisons of
the data submitted by the states.
FS sustains the health, diversity, and productivity of the nation's
forests and grasslands to meet the needs of present and future
generations. For fiscal year 2005, FS had outlays of $5 billion, 5.9
percent of USDA's net outlays, and 36,631 (36.9 percent) of USDA's
employees.
FS does not have an MCA system with which it can routinely analyze cost
information.
FS can use cost finding techniques and FFIS data to prepare ad hoc cost
information reports. However, for the majority of FS dollars, these
reports are limited to data at the program or budget line item level.
Special job codes required to track costs for specific projects below
the budget line item level can be established.
FS received an unqualified opinion on its fiscal year 2005 financial
statements after making 177 accounting adjustments with an absolute
value of $1.9 billion. Year-end adjustments of this magnitude indicate
impaired reliability of data during the year and of the cost analyses
based on those data.
The FS CFO stated that implementation of MCA would not be a priority
until outstanding financial reporting issues have been resolved and
that reliable and timely financial information was necessary before
pushing to develop MCA information. Instead, FS management is focused
on:
* completing implementation of a new centralized financial management
system at its Albuquerque Finance Center,
* continuing to obtain an unqualified audit opinion, and:
* building strong internal control systems to address outstanding
material weaknesses in financial management and reporting processes.
USDA: Uses of MCA Information:
At the department level, USDA uses cost information to prepare the SNC.
* The USDA SNC is broken down by strategic goal. Some component
agencies support more than one goal.
* Component agencies submit cost information by performance goal using
a template provided by USDA.
APHIS managers used ABC analyses to help
* make staff hiring decisions,
* adjust user fees at the National Veterinary Services Laboratory, and:
* set a new user fee for Plant Protection and Quarantine permits.
However, APHIS user fees did not recover the full cost of providing
some services because they did not include certain indirect and imputed
costs incurred by other federal entities for its benefit. For example,
in 2005, APHIS fees recovered $122 million of the reported $147 million
cost for agricultural quarantines and inspections and $5 million of the
reported $12 million cost for issuing plant health certificates.
APHIS stated that those indirect and imputed costs were not included in
user fees because it believed that it did not have legal authority to
recover those costs and transfer the collections to the agency that
incurred them.
USDA policy requires its agencies to impose user charges consistent
with the full cost principles of SFFAS No. 4 and section 6 of OMB
Circular No. A-25. Section 6(d) of Circular No. A-25 provides that a
user charge will recover the direct and indirect costs to any part of
the federal government for providing a service. According to 31 U.S.C.
3302(b), APHIS's collections of costs incurred by other agencies need
to be credited to the general fund of the Treasury if not otherwise
specified in statute.
FSA officials said they used an ABC system to allocate administrative
costs at the two locations that administer reimbursable agreements.
FNS used NDB data to investigate anomalies in program participation
rates and cost.
* FNS officials told us they used NDB data to identify declining Food
Stamp Program participation rates and costs in one state.
* FNS officials also used NDB data to analyze Women, Infants, and
Children (WIC) program cost increases. One reason for increased program
costs was the proliferation of WIC-only stores, which often charged
higher prices than stores that sell to the general public as well as
WIC participants. Subsequent legislation required that average payments
to WIC-only stores not be higher than average payments to other stores.
FS used cost finding techniques and FFIS data in preparing the
following ad hoc cost studies:
* An outsourcing study under OMB Circular No. A-76 concerning
information technology functions.
* Reports on the cost of road maintenance, brush clearing, and other
activities by region.
HUD: Background:
HUD's mission is to increase home ownership, support community
development, and increase access to affordable housing free from
discrimination.
HUD reports costs for eight major programs, including the Federal
Housing Administration (FHA), Section 8 Rental Assistance, Community
Development Block Grants, and the Government National Mortgage
Association (GNMA).
HUD's mission support activities include OFHEO, which oversees two
government-sponsored enterprises-the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association.
In fiscal year 2005, HUD had approximately 9,100 employees with a
salary and expense budget of about $1.1 billion and reported net
outlays of about $42.7 billion. HUD bears the risk of a portfolio of
over $900 billion in FHA-insured loans and GNMA mortgage-backed
securities.
HUD: MCA Systems in Place:
HUD senior management had not promoted the benefits of MCA activities
beyond current basic uses.
Over the past 5 years, HUD did not have sustained department-level
senior financial management whose responsibility was to develop and
maintain financial management activities, one of which is MCA.
* The CFO position had been filled by three confirmed and three acting
CFOs during this time frame.
* Although HUD issued procedures for specific systems and processes, it
had not issued departmentwide policy guidance on MA as required by
federal accounting standards.
HUD did not accumulate full costs of its activities or outputs for day-
to-day managerial decision making. Instead, the full costs (including
direct costs, such as labor, administrative, and other costs, and
indirect costs allocated from other segments and entities) of HUD's
outputs were accumulated only to comply with federal reporting
requirements, for example, in its annual performance and accountability
report.
A HUD official stated that HUD is a budget-driven organization
primarily focused on oversight of its programs, and manages its
operations principally with required budgetary data, such as:
* the status of budgetary funds and resource data, including
obligations incurred and outlays, and:
* human capital utilization as measured by expected and expended full-
time equivalents (FTE) at the activity level.[Footnote 11]
Furthermore, HUD management stated it has sufficient information needed
for managing the department. However both the President's Management
Council (PMC) and OMB have indicated the need for HUD to develop more
robust MCA information.
* PMC's 2005 report on the extent to which federal agencies have
established efficiency measures, a key element of which is determining
the costs of delivering services to improve program performance, showed
that HUD lagged behind other federal agencies. HUD has agreed with OMB
to establish additional efficiency measures.
* Because of OMB's concerns about the lack of management information at
FHA, HUD recently agreed to start an ABC pilot project to obtain costs
of activities, including loan origination, monitoring, and servicing.
However, an FHA official commented that ABC and MCA were of limited
benefit to FHA.
Information that HUD could use for cost analyses must be accumulated
and integrated from a number of financial and nonfinancial data sources
that included:
* a workload survey;
* the Total Estimation and Allocation Mechanism-Resource Estimation and
Allocation Process (TEAM-REAP);
* the Project Cost Accounting System (PCAS);
* Financial Data Mart (Data Mart); and:
* other cost finding techniques, such as manual, ad hoc systems
queries.
According to HUD management, a workload survey was used prior to fiscal
year 2006 to allocate costs to its major programs reported on the SNC.
The survey is a spreadsheet-based allocation methodology summarized by
an outside contractor.
TEAM-REAP, designed and currently used to provide a basis for staffing
requests for budget development and human resource management, will
partially replace the workload survey for fiscal year 2006.
* However, FHA (one of HUD's largest programs), OFHEO, and the OIG
decided to continue using an annual survey to allocate their costs to
programs reported on the SNC.
* Management indicated that TEAM-REAP has the potential for supporting
activity based costing, but during our review, HUD management said it
had no plans for using the system for MCA purposes beyond quarterly
cost allocation for the SNC, the ABC pilot project, and management of
staffing levels.
PCAS is used expressly to track working capital funds appropriated for
IT systems costs, inform program managers of the progress and costs of
over 100 projects, and provide the basis for allocating systems costs
to various users.
Data Mart is HUD's repository for selected information extracted from
its general ledger and other sources of financial and nonfinancial
data. Data Mart has been used primarily as a cash management and
financial reporting tool.
Additionally, HUD employed other cost finding techniques that used
spreadsheets and informal procedures to provide ad hoc analyses. These
included reporting about conference-type activities to Congress and
calculating budgetary costs for counseling activities.
In 2002, the department began the HUD Integrated Financial Management
Improvement Project (HIFMIP)-a four-phase, enterprisewide initiative to
develop and implement an integrated financial accounting system.
* HUD asserted that the system, currently being implemented, will
ensure full OFFM compliance, correct material weaknesses, strengthen
financial system data integrity, and improve controls when fully
implemented in 2013.
* However, when questioned about future system capabilities specific to
MCA, HUD management said that, while HIFMIP is expected to enable
improved MCA information, HIFMIP requirements were based upon current
system functionalities and do not include a more comprehensive MCA
system.
* GAO previously reported that HUD had not sufficiently planned for the
implementation of HIFMIP.[Footnote 12]
GAO has reported that agencies with nonintegrated financial systems
expend major effort and resources to develop information that should be
provided on a recurring basis, increasing the likelihood for errors in
that information.[Footnote 13]
* HUD's OIG reported in November 2005 that the department relied on
extensive compensating procedures that were costly, labor intensive,
and not always effective to prepare its annual financial statements.
Key reported information had to be manually posted, verified,
reconciled, and traced.
* Further, the OIG reported that HUD's financial management systems did
not enable it to generate and report accurate, timely information
needed to manage operations on an ongoing basis.
HUD: Uses of MCA Information:
HUD management stated that HUD is a budget-driven agency with a focus
on the oversight of its programs. MCA activities included the
following:
* A spreadsheet-based allocation of salary and expense costs to its
major programs on the SNC.
* Accumulation of project costs for its working-capital-funded IT
systems.
* Analysis and reporting of financial and operational data accumulated
in Data Mart.
* Ad hoc, manual accumulation of costs to respond to external federal
oversight parties, including OMB and Congress.
* Review of other budgetary reports and data, including FTE effort and
workload information at the activity level.
Conclusions:
Strong leadership and commitment by top management is required to
achieve the cultural change needed to implement MCA across government.
This is true regardless of whether a departmentwide system is selected
or responsibility for system development is delegated to component
agencies. In either case, sound systems of internal control and
implementation monitoring are required to help ensure that data used by
the system, and therefore, data provided by the system, are reliable.
USDA:
Although USDA has delegated responsibility for MCA to its components,
it has not shown strong leadership to promote, guide, and monitor MCA
implementation. As a result, most components that we reviewed lacked
reliable cost information to routinely inform managerial decisions
concerning the reasonableness of costs for performing activities,
providing programs, or pursuing department goals on an ongoing basis.
Further, it has resulted in managers continuing to focus on budget
management rather than improved cost management. Clearly defined MCA
information needs and implementation time frames are lacking at some
components and in USDA's current financial systems plan, putting at
risk the opportunity to better inform agency decision-making processes
and improve program efficiency.
HUD:
The absence of continual strong leadership to promote and monitor MCA
implementation across HUD programs has contributed to HUD's lack of
reliable, comprehensive MCA information on its activities and outputs
that is widely and routinely used. Developing a department-level MCA
policy and strengthening internal controls over financial and
nonfinancial data would improve the reliability of MCA information.
Although expanding the range of MCA information beyond current
rudimentary practices could help HUD better manage its programs and
operations on a daily basis, HUD's plans for current and future systems
lack broad application of MCA functionalities.
Recommendations for Executive Action:
Recommendations to the Secretary of Agriculture:
We recommend that the Secretary of Agriculture take the following eight
actions to promote the implementation and use of reliable MCA
methodologies to better inform managerial decision making in USDA and
its components. We recommend that the Secretary direct appropriate
officials to:
* take an active leadership role to promote the benefits and uses of
MCA,
* develop procedures to monitor the implementation of its MCA policy at
its components,
* finalize appropriate USDA-specific functional specifications to
ensure that the cost accounting module of the FMMI will provide MCA
information to support decision making at USDA and its component
agencies, and:
* expand ongoing MCA planning efforts to include time frames and
requirements for all component agencies to help improve cost
management.
* To promote the use of proper cost accounting methodologies to inform
pricing and other managerial decisions at USDA WCF activity centers, we
recommend that the Secretary of Agriculture direct appropriate WCF
officials to design, document, and implement procedures to periodically
review those methodologies.
* To promote the implementation and use of MCA methodologies at APHIS,
we recommend that the Secretary of Agriculture direct appropriate APHIS
officials to finalize and document procedures for using ACMS data
fields for MCA as a step toward better informed managerial decision
making.
* To enhance the reliability of MCA data at FSA, we recommend that the
Secretary of Agriculture direct appropriate FSA officials to continue
efforts to improve and upgrade workload systems as they implement BPMS.
* We agree that the FS should continue to place a high priority on
addressing its remaining financial management and reporting problems.
At the same time, we recommend that the Secretary of Agriculture direct
appropriate FS officials to assess FS MCA needs and require that they
are integrated in any new systems that are implemented.
Recommendations to the Secretary of Housing and Urban Development:
To improve HUD's implementation and use of reliable MCA methodologies,
we recommend that the Secretary of HUD direct appropriate officials to
take the following five actions:
* take an active leadership role to promote the benefits and uses of
MCA;
* establish and document a department-level policy for MCA;
* develop potential uses of current systems (e.g.,TEAM-REAP) to derive
MCA functionalities;
* develop financial system requirements that will fully address MCA
capabilities needed for managerial decision making throughout the
organization using appropriate, integrated financial and nonfinancial
information systems; and:
* strengthen internal controls over financial and nonfinancial data in
MCA systems.
Agency Comments and Our Evaluation:
We requested comments on a draft of our briefing presentation from the
Secretary of Agriculture and the Secretary of Housing and Urban
Development or their designees. We considered and incorporated, as
appropriate, the comments in HUD's letter and the technical comments we
received by e-mail from each department's Office of the Chief Financial
Officer.
In an e-mail from the Office of the Chief Financial Officer, USDA
generally agreed with our findings and eight recommendations and stated
that subsequent to our audit, its CFO modified the WCF budget review
and approval process to require annual review of activity center
costing methodologies, with the first review to be completed as part of
the fiscal year 2008 budget formulation cycle.
HUD's Chief Financial Officer, in a letter commenting on a draft of
this briefing, generally agreed with our findings. He neither agreed
nor disagreed with our five recommendations but described actions HUD
would take on four of the five.
In response to our recommendations about promoting the benefits and
uses of MCA and developing an MCA policy for the department, the letter
indicated that a new Executive Financial Management Advisory Committee
would address both of these issues.
Concerning our recommendation to develop existing systems to derive MCA
functionalities, the letter indicated the TEAM/REAP system was being
modified to cost staffing data at the activity level and that the
benefits of HUD's pilot ABC project would be assessed to consider
applying it more broadly.
Concerning our recommendation that HUD develop financial system
requirements in the HIFMIP that will fully address MCA capabilities
needed for managerial decision making throughout the organization,
HUD's comments did not indicate a commitment to expanding its use of
MCA but said Data Mart, TEAM/REAP, and other data sources would be used
for any increased MCA application.
* During our review, HUD management had indicated the department would
use HIFMIP, its future integrated core financial management system,
rather than Data Mart and TEAM/REAP, for any expansion of MCA.
* We continue to believe that HUD could improve efficiency of its
programmatic operations through use of a well-planned MCA system
departmentwide, regardless of the systems employed. We modified our
recommendation to focus on development of MCA capabilities generally,
rather than specifying the use of HIFMIP.
Concerning our recommendation for HUD to enhance the reliability of
data in MCA systems by continuing to assess internal control over
financial and nonfinancial information, HUD stated it was not aware of
any significant data quality problems in HUD's existing MCA practices.
* MCA involves the accumulation and integration of financial and
nonfinancial information. As such, we were referring to the concern
that HUD's OIG and independent auditors have raised over the
reliability of financial data due to control weakness in HUD's
financial management systems.
* For example, the OIG reported, for fiscal year 2005 that HUD relied
on extensive compensating procedures to prepare its annual financial
statements. This indicates uncertain data reliability during the year.
In its report on HUD's fiscal year 2005 financial statements, an IPA
stated that financial information system control weaknesses could
negatively affect data integrity. Such conditions would affect MCA data
reliability as well as other financial reporting.
In HUD's comments, they advised that HUD disagreed that its limited
application of MCA was due to a lack of leadership.
Our conclusion was based on the fact that we found no evidence that
senior leadership had actually promoted the benefits and uses of MCA or
developed a department-level policy for MCA. HUD's comment letter says
it will take steps to address these issues. Specifically, it says HUD
has now established an executive committee that will consider enhanced
MCA practices and is taking steps to develop a department-level policy
for MCA. These leadership initiatives, taken following our review,
should help facilitate the development of MCA in the future. Continuing
leadership such as this will be crucial to the implementation of MCA at
HUD, and throughout government.
HUD also disagreed that a lack of a more widespread application of MCA
deprives the department of essential management information.
We continue to believe that implementing MCA to help inform the
department's day-to-day managerial decision making could increase the
efficiency of delivering the department's programs and pursuing its
performance goals under its more than $40 billion program budget, as
well as its $1.1 billion administrative budget. We are encouraged by
HUD's expanded use of TEAM/REAP and Data Mart as MCA tools, and
implementation of an MCA pilot program, as discussed in HUD's letter.
[End of Section]
Enclosure II: Comments from the Department of Housing and Urban
Development:
U.S. Department Of Housing And Urban Development:
Washington, DC 20410- 3000:
Chief Financial Officer:
August 24, 2006:
Mr. John C. Warner:
Assistant Director:
Financial Management and Assurance:
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548-0001:
Dear Mr. Warner:
Thank you for the opportunity to comment on the draft GAO report
entitled Managerial Cost Accounting Practices: Department of
Agriculture and Department of Housing and Urban Development. While we
agree in concept that increased managerial cost accounting practices
could provide better information for management decision-making
purposes, there are considerable costs associated with developing and
maintaining managerial cost accounting (MCA) systems that federal
managers must weigh against the potential benefits in deciding what to
implement. We find that the draft GAO report accurately depicts HUD
management's past decisions on the limited application of MCA practices
in the Department. However, we disagree with both the draft report's
contention that HUD's limited application of MCA is due to a lack of
leadership on the issue and the erroneous implication that the lack of
a more widespread application of MCA deprives the department of
essential information necessary for managing the Department.
Nevertheless, as HUD embarks upon a major core financial management
systems modernization effort through the HUD Integrated Financial
Management Improvement Project (HIFMIP), we agree it is an opportunity
to reassess the application of MCA practices at HUD.
The Department plans to take appropriate action on each of GAO's five
recommended actions as follows:
1. Take an active leadership role to promote the benefits and uses of
MCA.
HUD has established an "Executive Financial Management Advisory
Committee" to direct and support financial management improvement
efforts such as HIFMIP and the implementation of the new OMB Circular A-
123 requirements for assessing internal controls over financial
reporting. As HUD's CFO, I chair that committee and will work to assure
that the consideration of enhanced MCA practices is on the committee's
agenda. Consideration will be given to creation of a standing sub-
committee working group on MCA practices.
2. Establish and document a department-level policy for MCA.
As CFO, I will draft an MCA policy document for review and approval by
HUD's Executive Financial Management Advisory Committee as a means of
directing the future consideration and implementation of MCA practices
at HUD.
3. Develop potential uses of current systems (e.g. TEAM-REAP) to derive
MCA functionalities.
In the current HUD operating environment, most program activities are
directly delivered by third parties and HUD's primary role is one of
program policy, funding and oversight. As such, the principal resource
for which HUD is directly accountable is its staff. The Resource
Estimation and Allocation Process-Total Estimation and Allocation
Mechanism (REAP-TEAM) was developed as a result of a Congressionally
mandated study for the purpose of providing a systemic means of
improving the management of HUD's staffing and workload. The system
provides a valuable management tool in that it accounts for the
utilization of HUD's total available staffing effort at the activity
level, and allows for consideration of "what if' scenarios. In support
of the President's Management Agenda, and subsequent to GAO's review,
the system was recently modified to enable HUD to cost out REAP-TEAM
data at the activity level. Additionally, HUD plans to pilot a full
activity-based costing effort in its Single Family Housing Mortgage
Insurance Programs area under the Credit Program Management Initiative
of the President's Management Agenda. Upon assessment of the benefits
of that pilot effort, HUD will consider the benefits of applying
activity-based costing in other areas.
4. Develop financial system requirements in the HIFMIP that will fully
address MCA capabilities needed far managerial decision making
throughout the organization.
As indicated above, we agree that the HIFMIP effort presents an
opportunity to reassess the cost-benefit of an expanded application of
MCA practices as part of HUD's overall financial management systems
modernization effort. However, it is expected that any increased
application of MCA will be done through HUD's Financial Data Mart,
which provides the capability to combine accounting/cost data with REAP-
TEAM and other data sources to produce automated reports on MCA- type
information for management's use.
5. Enhance the reliability of data in MCA systems by continuing to
assess internal control over financial and non-financial information.
While we are unaware of any significant data quality problems in HUD's
existing MCA practices, and the draft GAO report provides no specific
evidence of such problems, HUD will continue to assess internal control
over financial and non-financial information through its OMB Circular A-
123 and other evaluation processes.
Additional technical comments on the draft report are being forwarded
electronically for your consideration under separate cover. If you or
your staff have any questions regarding this response or our technical
comments, please contact James M. Martin of my staff at: (202) 708-
1946.
Sincerely,
Signed by:
John W. Cox:
[End of Section]
GAO Contact and 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; Lisa Crye; Dan Egan;
Fred Evans; Barry Grinnell; Tom Hackney; Barbara House; Jeff Isaacs;
Paul Kinney; Lisa Knight; James Moses; and Glenn Slocum.
(197012):
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 Officers
Council.
[3] Pub. L. No. 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, Managerial Cost Accounting Practices: Departments of
Education, Transportation, and the Treasury, GAO-06-301R (Washington,
D.C.: Dec. 19, 2005).
[6] GAO, Managerial Cost Accounting Practices: Department of Health and
Human Services and Social Security Administration, GAO-06-599R
(Washington, D.C.: Apr. 18, 2006).
[7] GAO-05-1013R, p.12; GAO-06-3O1R, p. 7; GAO-06-599R, p. 5.
[8] GAO, Standards for Internal Control in the Federal Government, GAO/
AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[9] In 2005, JFMIP's responsibilities for financial management and
oversight were realigned to the Office of Management and Budget, the
Office of Personnel Management, and the CFO Council.
[10] Responsibilities of OFFM, an office within OMB, include
establishing financial management policies for executive branch
agencies.
[11] FTEs are a workforce estimate based on the number of work years to
achieve an agency mission or objective used as a substitute for the
cost of employee salaries and benefits. Salaries and benefits represent
approximately 2 percent of HUD's total budget.
[12] GAO, Department of Housing and Urban Development: Status of
Efforts to Implement an Integrated Financial Management System, GAO-03-
447R (Washington, D.C.: Apr. 9, 2003).
[13] GAO, Financial Management: Achieving FFMIA Compliance Continues to
Challenge Agencies, GAO-05-881 (Washington, D.C.: Sept. 20, 2005).
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548:
