Managerial Cost Accounting Practices
Departments of Education, Transportation, and the Treasury Gao ID: GAO-06-301R December 19, 2005Authoritative 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.
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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).
