Managerial Cost Accounting Practices
Leadership and Internal Controls Are Key to Successful Implementation Gao ID: GAO-05-1013R September 2, 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. In particular, the (1) Chief Financial Officers (CFO) Act of 1990, (2) Statement of Federal Accounting Standards No. 4: Managerial Cost Accounting Concepts and Standards for the Federal Government, and (3) Joint Financial Management Improvement Program's (JFMIP) Framework for Federal Financial Management Systems established requirements and accounting standards for managerial cost accounting (MCA) information at federal agencies. The Federal Financial Management Improvement Act of 1996 (FFMIA) 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 and its interest in financial management and accountability, 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.
DOL and VA have different strategies to implement MCA information systems. DOL implemented a departmentwide MCA system upon which 15 of its 18 component agencies have built MCA models tailored to their respective needs. At VA, responsibility for MCA implementation rested with individual component agencies. When we conducted our review, an MCA system was in operation at one of VA's two largest agency components. DOL and VA officials cited several existing and planned uses of MCA information by component agencies including budgeting, resource allocation, financial reporting, and other managerial decision-making purposes. At both agencies, we noted that MCA-related controls needed strengthening. Certain control weaknesses, such as not validating nonfinancial data and not documenting policy and MCA procedures, could limit the reliability of data used by management to analyze costs and to make decisions. We made recommendations to DOL and VA to address these weaknesses. Both agencies provided written comments on our briefing. DOL generally agreed with our report and recommendations. VA, however, generally did not agree with our overall conclusions and recommendations. After considering VA's comments, we continue to believe our conclusions and recommendations regarding VA are well-founded and our responses are provided. We have incorporated the comments from both agencies as appropriate.
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-05-1013R, Managerial Cost Accounting Practices: Leadership and Internal Controls Are Key to Successful Implementation
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September 2, 2005:
The Honorable Todd R. Platts:
Chairman:
Subcommittee on Government Management, Finance, and Accountability:
Committee on Government Reform:
House of Representatives:
Managerial Cost Accounting Practices: Leadership and Internal Controls
Are Key to Successful Implementation:
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. In particular, the (1) Chief Financial Officers (CFO) Act
of 1990,[Footnote 1] (2) Statement of Federal Accounting Standards No.
4: Managerial Cost Accounting Concepts and Standards for the Federal
Government, and (3) Joint Financial Management Improvement Program's
(JFMIP) Framework for Federal Financial Management Systems[Footnote 2]
established requirements and accounting standards for managerial cost
accounting (MCA) information at federal agencies. The Federal Financial
Management Improvement Act of 1996 (FFMIA)[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 and your interest in financial management and
accountability, 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. We provided the results of
our study of the Department of Labor (DOL) and the Department of
Veterans Affairs (VA) to your office in the form of a briefing on July
15, 2005. This report summarizes that briefing and adds comments from
VA that we had not received in time to incorporate in our briefing
slides. Copies of those slides are presented as enclosure I.
Summary of Results:
DOL and VA have different strategies to implement MCA information
systems. DOL implemented a departmentwide MCA system upon which 15 of
its 18 component agencies have built MCA models tailored to their
respective needs. At VA, responsibility for MCA implementation rested
with individual component agencies. When we conducted our review, an
MCA system was in operation at one of VA's two largest agency
components. DOL and VA officials cited several existing and planned
uses of MCA information by component agencies including budgeting,
resource allocation, financial reporting, and other managerial decision-
making purposes.
At both agencies, we noted that MCA-related controls needed
strengthening. Certain control weaknesses, such as not validating
nonfinancial data and not documenting policy and MCA procedures, could
limit the reliability of data used by management to analyze costs and
to make decisions. We made recommendations to DOL and VA to address
these weaknesses. Both agencies provided written comments on our
briefing. DOL generally agreed with our report and recommendations. VA,
however, generally did not agree with our overall conclusions and
recommendations. After considering VA's comments, we continue to
believe our conclusions and recommendations regarding VA are well-
founded and our responses are provided. We have incorporated the
comments from both agencies as appropriate. A more detailed discussion
of our findings, conclusions, and recommendations for each agency
follows.
Department of Labor:
DOL's mission is to foster and promote the welfare of job seekers, wage
earners, and retirees of the United States. For fiscal year 2005, DOL
has a budget of approximately $51 billion. It employs nearly 17,000
people at 10 mission agencies and 8 support agencies.
DOL's early MCA pilot efforts in 1999 were unsuccessful. Its current
efforts were spurred, in part, by Office of Inspector General (OIG)
findings reported as part of its opinion on the department's 2002 and
2003 financial statements that DOL's accounting system was not in
substantial compliance with FFMIA because it did not meet MCA
requirements. OIG recommended that DOL develop an implementation plan
for a comprehensive departmentwide MCA system. DOL disagreed with the
OIG's conclusions that its accounting system was not in substantial
compliance with FFMIA but did agree to focus more attention on MCA.
DOL's Office of the Chief Financial Officer (OCFO) was assigned
responsibility for MCA development. In its 2004 Financial Data
Integration Improvement Plan, DOL identified MCA as a way to address
its most pressing management challenges.
DOL's new MCA system, Cost Accounting Manager (CAM), which became
operational during 2004, uses commercial software designed to collect
and analyze agency financial, workload, and labor distribution data.
CAM has the capability to provide management with information and
reports concerning the costs (including substantially all direct and
indirect costs) of performance goals, activities, and outputs.
According to DOL officials, CAM has the capability to provide
integrated performance and financial information, trend analysis,
benchmarking data, and "what if" analysis. Component-specific CAM
models were developed by agency and OCFO personnel. Models are in place
at all 10 mission agencies and 5 of the 8 support agencies.[Footnote 4]
The CAM system became operational in September 2004. Labor's component
agencies continue to refine the models to meet their needs as they
learn about system capabilities while considering additional
applications for CAM. In the meantime, DOL's MCA policy and procedures
are being updated to reflect newly developed systems and processes. DOL
officials told us that component-specific cost model reference manuals
would be disseminated by the end of fiscal year 2005. The manuals are
to combine, in one resource, descriptions of the CAM methodology, cost
model assumptions, output catalogues, and activity dictionaries already
provided for the agencies in various other forms.
Planned systemwide refinements include (1) automating the data
extraction and import process, (2) integrating budget and performance
data, and (3) adding programs, activities, and outputs not included in
baseline models. Though DOL's department-level MCA staff discusses and
evaluates MCA activities in ongoing forums with component staffs, DOL's
plans did not include a post-implementation review (PIR) of the new CAM
system. A formal PIR would document the evaluation of differences
between estimated and actual costs and benefits of the CAM system and
document lessons learned and control process improvements identified to
assist in planning and implementing future projects.
DOL's CAM obtains financial information from its core accounting
system, while nonfinancial information, such as labor distribution and
performance data, is obtained from other sources. Various controls over
financial data are in place. These include (1) annual audits of
financial statements, which are prepared from the same core accounting
system data that is used by CAM and which have had unqualified opinions
from 1997 through 2004; (2) reconciliations of the CAM to the general
ledger system; and (3) quarterly attestations by component agencies'
senior officials concerning the adequacy of internal controls, the
accuracy of transaction recording, and regulatory compliance as they
relate to the quarterly financial closing and reporting practices.
According to DOL, the process of building and updating the MCA models
includes the review of nonfinancial data, such as labor distribution
and performance data, by supervisors, line managers, senior managers,
and program administrators. However, DOL acknowledges that controls
over nonfinancial labor distribution and performance data need further
attention. In its fiscal year 2004 performance plan, DOL identified the
validation of such data as one of its challenges. Nonfinancial data is
equally important as financial data in determining reliable managerial
cost information because it provides the basis for allocating costs to
various programs, activities, or outputs. Unreliable nonfinancial data
will result in unreliable cost allocations. At DOL's largest component
agency, the Employment and Training Administration, the OIG noted high
error rates in grantee-reported performance data. In 2004, the OIG also
raised concerns about DOL using those data for decision making. DOL
officials responded that they were implementing additional data
validation systems to address these issues. Currently, the OIG is
assessing how it will audit CAM data in the future.
DOL's component agencies are focusing on further refining their
respective models to help manage programs and resources more
effectively. Even though CAM was implemented only recently, DOL
agencies identified many uses for CAM data. For example, DOL officials
said they have begun to use CAM data to identify and analyze (1)
program costs across regions; (2) comparative costs of grant management
activities by type of grant; (3) full administrative costs related to
the development of policies, regulations, and legislative proposals;
(4) unit costs of training and employment programs; and (5) budget
justifications and resource allocations.
Department of Veterans Affairs:
VA's mission is to administer laws that provide health care, financial
assistance, burial benefits, and other services for veterans, their
dependents, and their beneficiaries. For fiscal year 2005, VA's total
budget authorization is about $67 billion. Its two largest component
agencies, in terms of budget and staff size, are the Veterans Health
Administration (VHA) and the Veterans Benefits Administration (VBA).
Its third and smallest agency is the National Cemetery Administration
(NCA). With over 193,000 employees, VHA is VA's largest component. VHA
provides a broad spectrum of medical, surgical, and rehabilitative care
to veterans. VBA has about 13,000 employees who process claims for VA
benefits. NCA employs about 1,500 people and provides direction and
oversight for 120 cemeteries.
By design and policy, VA does not have an entitywide MCA model.
According to department officials, each of the VA agencies has
independently built a cost accounting system for identifying,
accumulating, and assigning the costs of its outputs, though VBA
discontinued use of its system in 2003. Officials told us that VA's
financial management priority has been the removal of a material
weakness that was identified by independent auditors and related to the
lack of an integrated financial management system at the department. VA
also stated that having a fully operational MCA model at each component
is important to VA's decision making.
VA has published cost accounting policy and guidance that delegate
implementation responsibility to component agencies. The VA officials
we interviewed, however, could not identify examples of proactive
department-level leadership to ensure implementation of MCA at
component agencies. In the absence of effective department-level
leadership, the extent of current MCA implementation and use varied at
VHA and VBA.
VHA uses the Decision Support System (DSS) for MCA. According to VHA
officials, DSS models significant VHA cost flows and activities. DSS
facilitates cost and workload analyses of VHA's locations, programs,
activities, and individual patients. It obtains data from 49 feeder
sources, including the VA's Financial Management System general ledger
and VHA's Veteran's Health Information Systems and Technology
Architecture (VistA).[Footnote 5] DSS includes direct and indirect
costs for VA hospitals and supporting organizations.
DSS was used to generate cost information to support internal
budgeting; resource allocation; performance measurement; fee reviews;
and cost findings for programs, activities, and outputs. For example,
officials told us that a chief pharmacist's request for additional
funds for high-cost providers and drugs used at a VA hospital was
supported by a DSS analysis of the local pharmacy costs for that
location.
DSS is also used to compare the costs among the hospitals to determine
where services can be provided at the lowest cost. In one case, this
kind of DSS information analysis was used in the decision-making
process to consolidate inpatient psychiatric services. DSS is also used
to determine the costs of services provided for individual customers,
as DSS records allow information to be tracked for individual patients.
VHA officials informed us that the extent and nature of DSS's use for
management decision making varied from one medical facility to the next
because of different levels of training among medical facility staff.
The completeness and accuracy of the data in DSS depend on the quality
of data from the feeder systems. Financial information included in DSS
is subject to controls that help ensure data reliability. VA officials
told us that they periodically reconcile DSS to the general ledger
system and provided an example of such a reconciliation. Audits of VA's
annual financial statements, which are based on the same financial
information that feeds DSS, have resulted in unqualified opinions for
fiscal years 1999 through 2004.
However, both the independent auditor and the OIG have raised concerns
about the quality of data from DSS nonfinancial feeder systems, such as
VistA. In their fiscal year 2004 management letter, the independent
auditors noted an increasing shortage of information technology (IT)
staff supporting VistA applications and related network infrastructures
at the medical centers. The independent auditor concluded that "[t]his
loss of human capital and knowledge in the IT organizational structure
places VA's information and its processing capabilities at risk."
In August 2004, the OIG reported that most of the legacy systems, such
as VistA, at VA's Bay Pines Medical Center contained inaccurate data.
The OIG further stated that this might be a systemic problem throughout
VHA. According to that report, VHA officials concurred with the OIG and
agreed to take corrective action.
Since DSS has 49 feeder sources, including VistA, the independent
auditor and OIG findings raise concerns about the quality of
nonfinancial data in DSS. Inaccurate nonfinancial data could skew cost
calculations and any resulting managerial decisions.
The VHA Decision Support Office was unable to readily produce
documentation of the mechanism used to assign indirect costs to cost
objects in DSS. The lack of readily available system documentation
could inhibit efforts to determine whether such costs are properly
assigned and precludes an opportunity to provide guidance for employees
using the system, especially new employees.
At VBA, use of its Activity Based Costing (ABC) system was discontinued
in March 2003 because of the loss of key personnel and the lack of
credibility among some managers concerning the indirect cost
distribution methodology, a central part of ABC systems. At the time of
our review, VBA was not funding or promoting MCA. During our review, we
suggested that VA implement an appropriate MCA approach at VBA.
Subsequently, VBA's CFO stated that VBA would seek funding in its 2007
budget request to develop cost accounting capabilities to support
measurement goals.
Concerning NCA, VA officials, advised us that NCA uses ABC. However,
because of NCA's relatively small size (less than 1 percent of VA's
2005 budget authority), we did not review its MCA processes.
With no MCA system at the department level, VA used manual cost-finding
techniques to accumulate cost information used for department-level
external financial reporting and budgeting. While manual cost finding
techniques are useful and appropriate in certain situations, they also
have drawbacks such as the time and effort required to prepare results
and to readjust results for appropriate changes, with the accompanying
inherent risk of errors. Accordingly, they are not recommended as a
surrogate for an automated cost accounting system when one is
warranted. VA's independent financial statement auditor reported
control weaknesses in the agency's manual process to prepare its annual
Statement of Net Costs for fiscal year 2004. VA uses Excel spreadsheets
to prepare its Statement of Net Costs. A consequence of using this
process is that end-of-year auditor adjustments and edits can cause the
roll-up process to be reperformed and thus be burdensome, time-
consuming, and error prone. Also, VA officials told us that the
documentation of its Statement of Net Cost compilation procedures,
needed to help ensure the process is completed as designed, was not
current. The Office of Management and Budget (OMB) requirement to
prepare the Statement of Net Cost by responsibility segment can be
satisfied by, and is an effective use of, a reliable, agencywide cost
accounting system.
Conclusions:
Leadership and strong internal controls are necessary for the
successful implementation and operation of MCA. We found that DOL's
recent efforts to implement CAM were significantly boosted by its
departmental leadership. At the same time, maximizing CAM's
contribution to improved management will require continuing
improvements to system data reliability, system documentation, and
assessments of system effectiveness.
At VA, implementation and continuation of MCA practices were largely
abandoned at its VBA component. Also, while the DSS system is in place
at VHA, documentation of system processes and controls and other
auditors' concerns about the quality of nonfinancial data require
attention in order to enhance the reliability of information for
managerial decision making. Having a MCA system in place at all of VA's
significant component agencies could facilitate the automation and
integration of the agency's Statement of Net Cost preparation process
with its other financial management systems, which would reduce the
risk of errors and improve efficiency.
Recommendations for Executive Action:
We are making recommendations to the Secretaries of the Departments of
Labor and Veterans Affairs.
In order for DOL to develop MCA information sufficiently reliable for
ongoing managerial decision-making, leveraging the substantial efforts
already undertaken by the agency, we recommend that the Secretary of
Labor direct the Chief Financial Officer of the Department of Labor to:
* Continue steps to verify the accuracy of nonfinancial data used for
MCA and assess related internal controls over nonfinancial data quality
to help ensure data reliability.
* Complete the planned update of MCA policies and procedures to ensure
that department-level guidance is comprehensive and current.
* Complete the compilation and dissemination of component-specific CAM
reference materials so that the documentation is in a consolidated
resource that is readily available to system users, managers, and
auditors.
We also recommend that the Secretary of Labor direct appropriate
personnel to perform and document a post-implementation review of CAM
to evaluate whether managerial cost information meets organizational
objectives and users' needs. This review should also determine and
document the extent to which managers use CAM-generated data in
managing day-to-day operations.
To help ensure that VA components implement and use reliable MCA
methodologies, we recommend that the Secretary of Veterans Affairs
direct appropriate department-level officials to exercise more
effective leadership and oversight in order to:
* Develop, implement, and operate an appropriate MCA system at VBA to
improve managerial decision-making.
* Periodically validate the nonfinancial data used by VHA's DSS team
for MCA and assess related internal controls.
* Document the DSS processes and controls for assigning indirect costs
to cost objects to help ensure that costs are properly assigned.
* Provide adequate numbers of properly trained staff at field locations
to administer DSS to maximize system availability and utilization.
In an effort to reduce the risks of errors and delays inherent with
manual processes, we also recommend that the Secretary of Veterans
Affairs direct appropriate VA officials to:
* Further automate the Statement of Net Cost preparation process.
* Update the Statement of Net Cost compilation procedure documentation.
Agency Comments and Our Evaluation:
DOL generally agreed with our findings and recommendations and provided
technical comments. In contrast, VA did not agree with our overall
conclusions and four of our recommendations and provided their
rationale for their positions as well as technical comments. We
considered and have incorporated both agencies' comments, as
appropriate.
Although DOL agreed with the thrust of our recommendation to perform a
PIR on its CAM system, it claimed to have already fulfilled the intent
of a PIR by performing various separate evaluative activities in
ongoing forums. While discussions among CAM users and the department-
level CAM team can provide insight about CAM use and its benefits, a
PIR has a formal structure that includes documenting the validation of
the estimated benefits and costs of information systems and the lessons
learned to provide effective management practices for broader use. We
believe that a comprehensive PIR undertaken in accordance with OMB
Circular No. A-130, Management of Federal Information Resources,
documents the activities performed and their results in a report that
would be available for the benefit of current and future stakeholders.
We modified the language regarding the form and documentation required
for a PIR to be more explicit but made no change to our recommendation.
VA disagreed with our recommendation that it exercise more effective
departmental leadership to help ensure the implementation of
appropriate MCA methodologies at VA components. VA stated that, by
design and policy, it had not implemented a department-level cost
accounting system because of "broad differences in size, mission, and
need" of its constituent agencies. It said that its MCA system was not
meant to be the sole source in making management decisions but, rather,
was to be "used in conjunction with other factors in determining how
resources are utilized."
We agree that entities should design their systems to meet their
mission and operation needs. Our concern is that departmental
leadership has not effectively encouraged VBA to implement an
appropriate alternative system since VBA discontinued using its ABC
system. A more proactive department-level effort is needed to promote
effective MCA at VA's constituent agencies to improve informed
managerial decision making and accountability. Presently, VBA, which
provides a broad spectrum of non-medical services and benefits to
veterans and their families, does not utilize a MCA system to support
decision-making.
VA also disagreed with our recommendation that it periodically validate
the nonfinancial data used for MCA and periodically assess the related
internal controls over nonfinancial data quality. VA stated that it had
established a standardized and comprehensive audit guide identifying
the audits that should be done to address data reliability. While
providing guidance is of significant importance, solely establishing
comprehensive audit guides does not ensure that the guides are followed
or that the procedures are completed. The department should obtain
assurance that the audits are conducted and that the data extracts are
reconciled to feeder systems. Further, to establish MCA data
reliability, the department should have ongoing procedures in place
that test and establish the reliability of the data in the nonfinancial
feeder systems.
VA disagreed with our recommendation that it document the DSS processes
and controls for assigning indirect costs to cost objects. VA said that
it documents processes and controls for assigning direct and indirect
costs to cost objects and that its guidance for assigning direct and
indirect costs is updated yearly. This is not what we found when we
visited officials with the VHA Decision Support Office. During our
audit, VA officials were unable to produce documentation of its
processes used to assign costs to cost objects.
VA also disagreed with our recommendation that it take steps to ensure
that enough IT staff are onboard in field locations to administer DSS.
Their response was that such an approach was unnecessary, since very
few, if any, IT staff are involved in the hands-on operation of DSS.
They believe that providing written and on-the-job technical training
for its financial and clinical personnel on the technical portions of
DSS is sufficient. However, the lack of IT staff with appropriate
skills increases the risk that information systems and processing
capabilities will fail or will be unreliable. We believe it is
essential that sufficient well-trained IT staff be available for the
administration and maintenance of all systems from which financial and
nonfinancial data are derived for use in DSS throughout VHA.
Lastly, VA agreed with our recommendation that it further automate its
Statement of Net Cost preparation process and update its compilation
procedure documentation. VA said that it would continue to look at and
implement, where appropriate, mechanisms to streamline these processes.
To this end VA indicated that it had an initiative under way to
automate the preparation of its consolidated financial statements. This
is also to include the establishment of a financial data warehouse. We
applaud these efforts. If successfully implemented and linked to the
financial reporting compilation processes, the financial data warehouse
and automated compilation procedures should reduce the time, burden,
and risk of errors inherent in VA's current compilation efforts.
Scope and Methodology:
To enhance our understanding of how MCA systems at DOL and VA 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 the DOL and VA leadership and commitment to the
implementation of entitywide cost management practices. Using the
Standards for Internal Control in the Federal Government[Footnote 6] as
a guide, we examined DOL and VA internal controls over the reliability
of financial and nonfinancial information used in MCA. To determine how
DOL and VA managers use cost information to support managerial decision
making and provide accountability, we obtained an understanding of how
DOL and VA 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 DOL and VA headquarters in Washington,
D.C. We interviewed officials about their MCA activities at the
departmental level, at selected DOL component agencies, and at VA's two
largest component agencies --VHA and VBA. When possible, we
corroborated information obtained in interviews with agency documents
such as policies, procedures, system descriptions, and flowcharts. We
also reviewed prior OIG and GAO reports regarding MCA activities,
systems, and data. We requested comments on a draft of our briefing
presentation from the Secretaries of Labor and Veteran's Affairs or
their designees. We received written comments from the Chief Financial
Officer of the Department of Labor and the Deputy Secretary of Veterans
Affairs and incorporated their comments as appropriate. Their comments
are reprinted as enclosures II and III, respectively. We performed this
work in accordance with U. S. generally accepted government auditing
standards from March through June 2005.
We are sending this report to the Secretaries of Labor and Veterans
Affairs; Director, OMB; and other interested parties. Should you or
your staff have any questions on the matters discussed in this
correspondence, please contact me on (202) 512-6131 or by e-mail at
[Hyperlink, MartinR@gao.gov]. Contact points for our Offices of
Congressional Relations and Public Affairs can be found on the last
page of this report. Key contributors to this assignment were Jack
Warner, Paul Begnaud, Lisa Crye, Dan Egan, Barbara House, Jerrica
Kahle, Paul Kinney, Lisa Knight, Miguel Lujan, James Moses, Lori Ryza,
Glenn Slocum, and Bill Wright.
Sincerely yours,
Signed by:
Robert E. Martin:
Director, Financial Management and Assurance:
Enclosures - 3:
[End of section]
Enclosure 1:
Managerial Cost Accounting Practices:
Department of Labor:
Department of Veterans Affairs:
Leadership and Internal Controls Are Key to Successful Implementation:
Briefing to the Subcommittee on Government Management, Finance, and
Accountability, Committee on Government Reform, House of
Representatives:
July 15, 2005:
Table of Contents:
Introduction and Objectives:
Scope and Methodology:
Results in Brief:
Background:
Department of Labor:
* Background:
* MCA Systems in Place:
* Uses of MCA Information:
Department of Veterans Affairs:
* Background:
* MCA Systems in Place:
* Uses of MCA Information:
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:
* 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.
This briefing covers the results of our review at the Department of
Labor (DOL) and the Department of Veterans Affairs (VA).
This is the first in a series of briefings concerning the status of MCA
activities at large government agencies.
Scope and Methodology:
To determine how MCA systems at DOL and VA generate cost information,
we interviewed officials and obtained documentation on:
* the status of MCA system implementation;
* departmental guidance, leadership, and commitment to the
implementation of cost management practices entitywide;
* departmental internal controls ensuring the reliability of financial
and nonfinancial information used in MCA; and:
* obstacles to managerial costing.
To determine how DOL and VA managers use cost information to support
managerial decision making and provide accountability, we interviewed
officials and obtained documentation on:
* the use of cost accounting data for budgeting and costing services or
products,
* preparing the Statement of Net Cost, and:
* any other uses.
During our review, we visited DOL and VA headquarters in Washington,
D.C., and interviewed officials about their MCA activities at the
department level, at selected DOL component agencies, and at VA's two
largest components.
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)
and GAO reports regarding MCA activities, systems, and data.
We performed this work from March through June 2005 in accordance with
U.S. generally accepted government auditing standards.
Results in Brief:
DOL and VA adopted different strategies to implement MCA.
DOL implemented a departmentwide MCA system upon which 15 of 18
component agencies have built MCA models tailored to their respective
needs.
At VA, responsibility for MCA implementation rested with individual
component agencies, and at the time of our review an MCA system was in
operation at one of VA's two largest agency components.
DOL and VA officials cited existing and planned uses of MCA information
by component agencies for budgeting, resource allocation, financial
reporting, and other managerial decision-making purposes.
MCA-related internal controls need strengthening at both DOL and VA.
Certain control weaknesses, such as not validating nonfinancial data
and documenting policy and procedures, could limit the reliability of
data used by management to analyze costs and make decisions.
We received and incorporated comments from DOL, as appropriate. We did
not receive comments from VA in time to evaluate and present them in
this briefing. We made recommendations to both agencies to address our
findings.
Background:
The Chief Financial Officers (CFO) Act of 1990, Statement of Federal
Financial Accounting Standards No. 4: Managerial Cost Accounting
Concepts and Standards for the Federal Government, and JFMIP's
Framework for Federal Financial Management Systems establish
requirements and accounting standards for managerial cost accounting
information at federal agencies.[NOTE]
The Federal Financial Management Improvement Act of 1996 (FFMIA) builds
on the foundation provided by the CFO Act and requires CFO Act
agencies' systems to comply substantially with federal accounting
standards and federal financial management systems requirements.
[NOTE] In 2005, JFMIP's responsibilities for financial management and
oversight were transferred to OMB, OPM, and the Chief Financial
Officer's Council.
MCA is the accumulation and analysis of financial and nonfinancial data
resulting in the allocation of costs to units of activity, outputs, or
programs.
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;
people trained; or time needed to perform certain functions
- depending on the program, agency, or both.
Department of Labor:
Background:
DOL's mission is to foster and promote the welfare of job seekers, wage
earners, and retirees of the United States.
For FY 2005, DOL has a budget of approximately $57 billion and employs
approximately 1,000 people.
DOL consists of 10 mission agencies and 8 support agencies.
Department of Labor:
MCA Systems in Place:
Early MCA pilot efforts in 1999 were unsuccessful. DOL's current
efforts were spurred, in part, by 2002 and 2003 OIG findings that DOL's
accounting system was not in substantial compliance with FFMIA due to
no meeting managerial cost accounting requirements. OIG recommended
that DOL develop a comprehensive departmentwide managerial cost
accounting system implementation plan.
DOL disagreed and the Secretary attested that the systems were fully
compliant. DOL did agree to focus more attention on MCA.
DOL's Office of the Chief Financial Officer (OCFO) was assigned
responsibility for MCA development.
In its 2004 Financial Data Integration Improvement Plan, DOL identified
managerial cost accounting as a way to address its most pressing
management challenges.
According to DOL officials, their new MCA system, Cost Analysis Manager
(CAM), has the capability to identify, accumulate, and assign costs
(including substantially all direct and indirect costs) to outputs.
Component-specific CAM models were developed by agency and OCFO
personnel. Models are in place at all 10 mission agencies and 5 of the
8 support agencies. [NOTE]
DOL officials told us that they had invested approximately $2.6 million
to date in CAM.
The Secretary of Labor discussed CAM in meetings with agency heads,
according to DOL officials.
NOTE: According to DOL, the three agencies without MCA models represent
approximately 0.1 percent of the department's budget.
CAM uses commercial software designed to collect financial, agency
workload, and labor distribution data and to analyze the data.
According to DOL officials, CAM has the capability to provide
management with:
* information/reports concerning the costs of performance goals,
activities, and outputs and:
* integrated performance and financial information, trend analysis,
benchmarking data, and "what if" analysis.
DOL declared the CAM system operational in September 2004.
Components continue to refine the models to meet their needs as they
learn about system capabilities and consider additional applications
for CAM.
* DOL's MCA policy and procedures are being updated to reflect newly
developed systems and processes.
* DOL officials told us that component-specific cost model reference
manuals would be disseminated by the end of fiscal year 2005. The
manuals will combine, in one resource, descriptions of the CAM
methodology, cost model assumptions, output catalogs and activity
dictionaries a ready provided for the agencies in various other forms.
Planned systemwide refinements include:
* automating the data extraction/import process,
* integrating budget and performance data, and:
* adding programs and outputs not included in baseline models.
DOL's action plans did not include post-implementation review (PIR) of
the new CAM system. A formal PIR would document:
* evaluation of differences between estimated and actual costs and
benefits and:
* opportunities for management to extract "lessons learned" and improve
control processes.
CAM incorporates financial information from DOL's core accounting
system. Nonfinancial information, such as labor distribution and
workloads, is obtained from other sources.
Various controls over financial data are in place.
* Annual audits of financial statements have resulted in unqualified
opinions from 1997 through 2004.
* DOL officials provided an example of a reconciliation of CAM to the
general ledger system.
* Senior component officials attest in writing to the adequacy of
internal controls, accuracy of transaction recording, and regulatory
compliance on a quarterly basis.
According to DOL, in the process of building and updating the MCA
models, nonfinancial data such as labor distribution and performance
data are reviewed by supervisors, line managers, senior managers, and
program administrators.
Controls over nonfinancial workload and performance data, however, need
further attention.
* In its fiscal year 2004 Performance Plan, DOL identified validation
of data as one of its challenges.
* At DOL's largest component agency, the OIG noted high error rates in
grantee-reported performance data, and raised concerns about DOL using
those data for decision making.
* DOL officials said they are implementing additional data validation
systems to address these issues.
The OIG is assessing how it will audit CAM data in the future.
Department of Labor:
Uses of MCA Information:
Components are focusing on further refining their respective models to
help manage programs and resources more effectively.
Even though CAM was only recently implemented, DOL components
identified many uses for CAM data, the results of which are expected to
lead to more sound managerial decisions. For example, DOL officials
said they have begun to use CAM data to identify and analyze:
* program costs across regions;
* comparative costs of grant management activities, by type of grant;
* full administrative costs related to the development of policies,
regulations, and legislative proposals;
* unit costs of training and employment programs; and
* budget justifications and resource allocations.
Department of Veterans Affairs:
Background:
VA's mission is to administer laws that provide health care, financial
assistance, burial benefits, and other services to veterans, their
dependents, and their beneficiaries.
In fiscal year 2004, VA had total outlays of $65 billion. Its two
largest component agencies, in terms of budget and staff size, are the
Veterans Health Administration (VHA) and the Veterans Benefits
Administration (VBA). Its third and smallest agency is the National
Cemetery Administration (NCA).
VHA has over 193,000 employees and is the largest VA component agency.
VHA health care facilities provide a broad spectrum of medical,
surgical, and rehabilitative care.
VBA has about 13,000 employees who receive and process claims for VA
benefits. NCA provides direction and oversight for 120 cemeteries.
Department of Veterans Affairs:
MCA Systems in Place:
By design and policy, VA does not have an entitywide MCA model. Each
administration has built a cost accounting system for identifying,
accumulating, and assigning the costs of its outputs. However, VBA had
stopped using its Activity Based Costing system in March 2003.
According to department officials, VA's financial management priority
has been the removal of a material weakness that was identified by
independent auditors and related to the lack of an integrated financial
management system at the department.
VA stated that having a fully operational MCA model at each component
was important to VA decision making.
VA has published cost accounting policy and guidance that delegate
implementation responsibility to component agencies.
VA officials we interviewed, however, could not identify examples of
proactive department-level leadership or coordination to implement MCA
at all components or to foster an organizational culture conducive to
MCA.
In the absence of effective department-level leadership, the extent of
current MCA implementation and use varied at VHA and VBA.
VHA uses the Decision Support System (DSS) for MCA.
According to VHA officials, DSS is intended to be a comprehensive model
of significant VHA cost flows and activities, as follows:
* enables cost and workload analyses of locations, programs,
activities, and individual patients;
* gets data from 49 feeder sources, including VA's Financial Management
System (FMS) general ledger and VHA's Veteran's Health Information
Systems and Technology Architecture (VistA); and:
* includes direct and indirect costs for VA hospitals and supporting
organizations.
In March 2003, VBA discontinued its use of its Activity Based Costing
(ABC) system due to loss of key personnel and the indirect cost
distribution methodology's lack of credibility with some managers.
VBA was not funding or promoting MCA at the time of our review.
During our review, we suggested that VA implement an appropriate MCA
approach at VBA.
* Subsequently, VBA's CFO stated that VBA would seek funding in its
2007 budget request to develop cost accounting capabilities to support
performance measurement goals.
According to VA officials, NCA uses ABC. Because of NCA's relatively
small size, we did not review its MCA processes.
The independent auditor reported control weaknesses in VA's manual
process to prepare its annual Statement of Net Costs (SNC). VA uses
Excel spreadsheets to prepare the SNC.
* End-of-year auditor adjustments and edits can cause the roll-up
process to be reperformed and thus be burdensome, time-consuming, and
error-prone.
* VA officials told us the documentation of its SNC compilation
procedures was not current.
The VHA Decision Support Office was unable to readily produce
documentation of the mechanisms used to assign indirect costs to cost
objects in DSS. Lack of readily available system documentation could
inhibit efforts to determine whether such costs are properly assigned.
Financial information included in DSS is subject to controls that help
ensure data reliability.
* VA officials told us that they periodically reconcile DSS to the
general ledger system, and they provided an example of a
reconciliation.
* Annual audits of financial statements have resulted in unqualified
opinions for fiscal years 1999 through 2004.
Both the independent auditor and OIG raised concerns about the quality
of data from DSS nonfinancial feeder systems, such as VistA.
* In their fiscal year 2004 management letter, the independent auditors
noted an increasing shortage of information technology (IT) staff
supporting VistA applications and related network infrastructures at
the medical centers and concluded that "This loss of human capital and
knowledge in the IT organizational structure places VA's information
and its processing capabilities at risk."
* In August 2004, the OIG found that most of the legacy systems at Bay
Pines Medical Center contained inaccurate data. The OIG further stated
that this may be a systemic problem throughout VHA.
* According to the report, VHA officials concurred with the OIG's
recommendation and agreed to take corrective actions.
Since DSS has 49 feeder sources, including VistA, the above findings
from the OIG and the independent auditor raise concerns about the
quality of nonfinancial data in DSS.
Inaccurate nonfinancial data could skew cost calculations and any
resulting managerial decisions.
Department of Veterans Affairs:
Uses of MCA Information:
With no MCA system at the department level, VA used manual cost-
finding techniques for external financial reporting, and budgeting.
Using DSS, VHA generated information to support internal budgeting;
resource allocation; performance measurement; fee reviews; and cost
finding for programs, activities, and outputs. For example, VA
officials told us:
* A chief pharmacist's request for additional funds at a VA hospital
was supported by a DSS analysis of the local pharmacy's costs, showing
that high-cost providers and drugs had to be used at that location.
* DSS is used to compare the costs among hospitals to determine where
services can be provided at the lowest cost. In one case, DSS
information was used in the decision process to consolidate inpatient
psychiatric services.
* DSS is used to determine the costs of services provided to individual
customers. DSS records allow information to be tracked for individual
patients.
Officials informed us that the extent and nature of DSS use for
management decision making varied from one medical facility to the next
because of different levels of training among medical facility staff.
Conclusions:
* Leadership and strong internal controls are necessary for successful
implementation and operation of MCA.
* Although DOL's recent efforts to implement CAM were significantly
boosted by its departmental leadership, maximizing CAM's contribution
to improved management will require continuing improvements to system
data reliability, system documentation, and assessments of system
effectiveness.
* VA's department level leadership has been ineffective concerning the
implementation and continuation of MCA practices at VBA. While the DSS
system is in place at VHA, documentation of system processes and
controls and other auditors' concerns about the quality of nonfinancial
data require attention in order to enhance the reliability of
information for managerial decision-making. Lack of a MCA system at all
components departmentwide could inhibit integration of VA's SNC
preparation process with its other financial management systems, a
process which could reduce the risk of error.
Recommendations for Executive Action:
Recommendations to the Secretary of Labor:
1. In response to the OIG's reported concerns about error rates in
certain nonfinancial data and DOL's assessment of data validation as
one of its 2004 challenges, DOL should continue steps to verify the
accuracy of nonfinancial data used for MCA and assess related internal
controls over nonfinancial data quality to help ensure data
reliability.
2. DOL should complete the update of MCA policies and procedures to
ensure department level guidance is comprehensive and current.
3. DOL should complete the compilation and dissemination of component-
specific CAM reference manuals so the documentation is in a
consolidated resource that is readily available to system users,
managers, and auditors.
4. DOL should perform and document a post-implementation review of CAM
to evaluate whether managerial cost information meets organizational
objectives and users' needs. This review should also determine the
extent to which managers use CAM-generated data in managing day-to-day
operations.
Recommendations for Executive Action:
Recommendations to the Secretary of Veterans Affairs:
1. VA should exercise more effective department-level leadership to
help ensure the implementation and continued use of appropriate MCA
methodologies at VBA.
2. To enhance the reliability of data, VA should periodically validate
the nonfinancial data used for MCA and assess related internal
controls.
3. To help ensure that costs are being properly assigned, VHA should
document the DSS processes and controls for assigning indirect costs to
cost objects.
4. In order to help maximize the utilization of DSS, VHA should take
steps to ensure that there are adequate numbers of properly trained
staff at field locations to administer DSS.
5. To reduce the risks of errors and delays from manual efforts, VA
should further automate the SNC preparation process and update SNC
compilation procedure documentation.
Agency Comments and Our Evaluation:
We received written comments from DOL on a draft of this briefing. DOL
generally agreed with our findings, providing a number of technical and
substantive comments that we have considered and incorporated, as
appropriate.
* DOL commented that its agencies have already built models on its
departmentwide MCA system. We clarified our briefing to more fully
recognize the implementation progress DOL has made.
* DOL highlighted that the three agencies without MCA models represent
approximately 0.1 percent of the department's total budget. To better
indicate the relative significance of DOL components that have no MCA
model, we added that information in a footnote.
DOL agreed with our recommendation about verifying nonfinancial data
and assessing related controls. DOL also stated that it recognizes the
importance of data quality and that it will continue to implement
additional procedures as necessary, while describing some of the steps
it is taking to improve nonfinancial data reliability. We clarified our
briefing and our recommendation by recognizing DOL's ongoing efforts to
improve those data.
Agreeing with our recommendation on distributing component-specific
cost model reference manuals, DOL also commented that the agencies have
already received, in various forms, information to be included in the
manuals. We clarified our briefing by acknowledging the information DOL
previously provided to agencies. We also described the breadth of the
information included in these manuals and incorporated in our
recommendation, the importance of providing that information in a
consolidated resource.
Although DOL agreed with the thrust of our recommendation to perform a
PIR of its CAM system, it claimed to have already fulfilled the intent
of a PIR by performing various separate evaluative activities in
ongoing forums. However, a PIR has a formal structure that includes
documenting the validation of estimated benefits and costs of
information systems and the lessons learned to provide effective
management practices for broader use. We believe that a comprehensive
PIR undertaken in accordance with OMB Circular No. A-130 documents the
activities performed and their results in a report that would be
available for the benefit of current and future stakeholders. We
clarified our briefing regarding the form and documentation required
for a PIR but made no change to our recommendation.
[End of section]
Enclosure 2:
U.S. Department of Labor:
Office of the Chief Financial Officer:
Washington, D.C. 20210:
JUL 8 2005:
Mr. Robert E. Martin:
Director:
Financial Management and Assurance:
Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Martin:
Thank you for affording the Department of Labor the opportunity to
review and comment on the Government Accountability Office's (GAO)
draft report, Managerial Cost Accounting Practices. Leadership and
Internal Controls Are Key to Successful Implementation. This letter
provides the Department's substantive comments to the report. Any
technical comments will be forwarded electronically, under separate
cover, directly to you and your staff.
We thank you for acknowledging Secretary Elaine L. Chao's and other
Department officials' leadership on the Managerial Cost Accounting
(MCA) initiative called Cost Analysis Manager, or CAM. We agree with
GAO's conclusion that "leadership and strong internal controls are
necessary for successful implementation and operation of MCA." We
believe that the report provides a good overview of the Department's
MCA efforts and status. However, we would like to provide clarification
on several of the comments and recommendations GAO outlined in the
report.
The report describes the Department's MCA system as a department-wide
system "upon which the agencies are building MCA models tailored to
their respective needs." The Department's MCA system is more accurately
described as a department-wide system upon which agencies have already
built MCA models. These include MCA models for FY 2003 and FY 2004.
Some agencies have also completed quarterly updates for FY 2005. GAO
notes that "models are in place at all mission agencies and 5 of the 8
support offices." It is important to note that the three agencies
without MCA models represent approximately 0.1% of the Department's
total budget.
The GAO report states that "certain control weaknesses, such as not
validating nonfinancial data and documenting policy and procedures, may
limit the reliability of data used by management to analyze costs and
make decisions" and that "DOL lacks assurance that the non-financial
data in CAM for all components is reliable, which in turn affects
reliability of CAM's cost information." To support this assertion, GAO
notes that "At DOL's largest agency, the OIG noted high error rates in
grantee-reported performance data." Nonfinancial data has two major
components, labor distribution data and performance data, such as
output units like the number of participants trained or audits
completed. We recognize the importance of data quality and are aware of
the issues raised by the OIG relating specifically to performance data
and have taken steps to verify this data to the extent possible. As we
have discussed with the GAO audit staff, in the process of building and
updating the MCA models, labor distribution data and performance data
is reviewed at several levels within each agency, starting with the
line managers, their supervisors, senior managers, and program
administrators. In addition, the Department has been implementing
additional performance data validation systems at its largest agency.
We will continue to address this issue and implement additional
procedures as necessary and as may be recommended by the OIG.
The GAO report properly states that "DOL's MCA policy and procedures
are being updated to reflect newly developed systems and processes" and
"that component-specific cost model reference manuals would be
disseminated by the end of fiscal year 2005." The Department's cost
accounting policies and procedures are outlined in the Department of
Labor Manual Series (DLMS). Due to the changes required by the
implementation of the MCA system, the chapter that outlines the
Department's MCA policy is in the process of being revised and will be
disseminated before the end of FY 2005, as originally planned.
Regarding the reference manuals, it is important to note that agency
personnel have been trained on the MCA system and have been provided
with training manuals that outline its procedures as well as
information covering their agency's models. The only pending
documentation that remains to be disseminated is the agency specific
reference manuals, which will be distributed at the end of FY 2005.
However, these reference manuals are a compilation of data that the
agencies have already received in various forms. These reference
manuals are in no way hindering the use of or any additional
enhancements to the Department's MCA system.
DOL does not agree with GAO's comment that the Department did not
include a post implementation review of the MCA system that would
include "an evaluation of differences between estimated and actual
costs and benefits and opportunities for management to extract `lessons
learned' and improve control processes." Although a specific report
outlining a post implementation review of its MCA system was not
generated, there are ongoing multiple forums that provide management
with the opportunity to extract "lessons learned," improve processes,
and evaluate the Department's efforts in this initiative. The ongoing
communications at all levels throughout the Department have been the
key to the success of this initiative. These forums were discussed with
the GAO staff during the meetings with Department officials.
* The Office of the Chief Financial Officer (OCFO) hosts periodic user
group meetings. User groups consist of each agency's dedicated staff
assigned to work on the development and implementation of the
Department's MCA system. User groups include program and finance
managers responsible for the development of their agency's cost model.
During the user group meetings agency personnel discuss and present to
other system users "lessons learned" and ways in which they are using
the MCA data in their agencies. The OCFO also provides an update on the
progress, status, any outstanding issues, and next steps for the
project. There were nine user group meetings held during the last 18
months.
* From May 2004 through January 2005, each agency's system users along
with OCFO representatives provided an executive briefing to the Agency
Head in which the agency's cost model was presented and discussed.
* There are various ad-hoc meetings between OCFO representatives and
each agency's system users in which the cost models are reviewed,
analyzed, and changed, if needed. The MCA initiative is also discussed
with top agency officials during the quarterly certification process.
* In December 2004, a CAM Initiative Questionnaire was distributed to
all agencies. The questionnaire asked system users to evaluate the
Department's MCA initiative. System users requested additional training
in their questionnaire responses. The OCFO has responded with agency
specific ad-hoc training and has expanded the training classes to
include regional agency personnel. The Department will continue to
provide training as needed.
Our comments on GAO's three recommendations are as follows:
As discussed above, to ensure data reliability, management has been
reviewing each agency's non-financial data each time the agency's cost
model is updated. We agree with the recommendation that this validation
is needed and will continue our efforts to verify the accuracy of non-
financial data and assess its related controls. As previously
mentioned, the Department is implementing additional data validation
systems. We will continue to address this issue and implement
additional procedures as necessary and as may be recommended by the
OIG.
The Department will complete the updating and dissemination of MCA
documentation by the end of FY 2005, as we had originally planned. As
previously mentioned, agency specific reference manuals will be a
compilation of training materials and other MCA system related
information, which have already been disseminated to the agencies. As
such, it is not having a negative impact on the ability to use the
system.
As to the third recommendation to "evaluate whether managerial cost
information meets organizational objectives and user needs," we believe
that we have already done this throughout the process as previously
discussed. We agree with the thrust of the recommendation that this
needs to be a continuous process. The Department will continue its
evaluation through user group meetings and executive briefings as well
as continue to improve its MCA system to meet the demands and needs of
its users. Specific emphasis will be placed on ensuring that agency
personnel use the Department's MCA system in managing day to day
operations to the extent possible.
Again, thank you for the opportunity to submit comments on the report.
Sincerely,
Signed by:
Samuel T. Mok:
Chief Financial Officer:
[End of section]
Enclosure 3:
[End of section]
THE DEPUTY SECRETARY OF VETERANS AFFAIRS:
WASHINGTON:
July 13, 2005:
Mr. Robert E. Martin:
Director:
Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Martin:
The Department of Veterans Affairs (VA) has reviewed the Government
Accountability Office's (GAO) draft report, Managerial Cost Accounting
Practices: Leadership and Internal Controls Are Key to Successful
Implementation (GAO Job 197004). The Department does not agree with
GAO's overall conclusions and recommendations. The enclosure discusses
this in more detail and provides technical comments to the report.
VA appreciates the opportunity to comment on your draft report.
Sincerely yours,
Signed by:
Gordon H. Mansfield:
Enclosure:
THE DEPARTMENT OF VETERANS AFFAIRS (VA) COMMENTS TO GOVERNMENT
ACCOUNTABILITY OFFICE (GAO) DRAFT REPORT:
Managerial Cost Accounting Practices: Leadership and Internal Controls
Are Key to Successful Implementation:
(GAO 05-NNN):
* VA should exercise more effective department-level leadership to help
ensure the implementation of appropriate MCA methodologies at VBA and
other components.
Do Not Concur - The Department of Veterans Affairs (VA) does not agree
with GAO's recommendation. VA has been involved in Managerial Cost
Accounting (MCA) since it was first considered by the Federal
Accounting Standards Advisory Board. VA worked on the development and
implementation of Statement of Federal Financial Accounting Standards
(SFFAS) #4. Subsequent to its adoption, VA formed, staffed and chaired
the Federal workgroup that developed the "Managerial Cost Accounting
Implementation Guide" that was adopted by the Federal CFO Council. VA
was one of the first departments to publish a comprehensive MCA policy
that met the requirements of SFFAS #4 and required MCA implementation
in all its major components. To re-energize its commitment to MCA and
other federal financial requirements, in FY 2004, VA leadership
established a Finance and Logistics Council to address among other
issues the implementation and use of cost accounting in VA's decision-
making processes. This council is chaired by the Department CFO and all
VA Administration CFOs are members.
In addition, in FY 2004, VA added the ability to distribute labor costs
to enhance the proper alignment of employees' time worked and
associated salary and benefit costs with the correct appropriations,
cost centers, and fund control points. Since salary and benefit costs
represent the majority of VA's operating expenses, being able to better
distribute VA's labor costs will provide management with important data
to use in cost analyses, budget preparation and operations evaluations,
particularly within VA's ten business lines. VA will continue its full
support and commitment to MCA and to all other federal financial
requirements.
By design and policy, VA does not have a Department-level cost
accounting system. Due to the broad differences in size, mission and
need, the three VA Administrations (Veterans Health Administration
(VHA), Veterans Benefits Administration (VBA) and National Cemetery
Administration (NCA)) were directed to establish independent cost
accounting systems to meet the specialized requirements of their
individual organizations. VHA uses the Decision Support System (DSS),
while VBA and NCA use Activity Based Costing. MCA is not the sole
source for making management decisions, but is used in conjunction with
other factors in determining how resources are utilized. VHA and NCA
continue to use their MCA systems while VBA used theirs through early
FY 2004. The Department does, however, prepare a unified Statement of
Net Costs (SNC). The SNC is audited and is a component of VA's Annual
Consolidated Financial Statements.
VA does agree that leadership and strong internal controls are
necessary for successful implementation and operation of MCA. The
Department anticipates implementing an annual certification process
that will require VHA, VBA and NCA to state that they are meeting all
the Federal requirements. These statements will be presented to VA's
Finance and Logistics Council for review and approval.
* To enhance the reliability of data, VA should periodically validate
the nonfinancial data used for MCA and should assess related internal
controls over nonfinancial data quality.
Do Not Concur - The Decision Support Office (DSO) provides, to all
Veterans Affairs Medical Centers (VAMC) and Networks, a standardized
and comprehensive audit guide (with worksheets). This document
identifies the audits to be conducted with a goal of ensuring that the
data is complete and accurate in terms of the quantity of product
(workload) and total dollars and hours (financial) captured in the
system. This guide is attached to this response. Included in the
processes described are monthly audits of DSS extracts back to VISTA
feeder systems. The DSO has two FTEE, who are exclusively dedicated to
assisting the Site Teams in the proper conduct of the mandatory audit
process.
* To help ensure that costs are being properly assigned, VHA should
document the DSS processes and controls for assigning direct and
indirect costs to cost objects.
Do Not Concur - VHA does document processes and controls for assigning
direct and indirect costs to cost object. Each year the DSO issues an
Annual Fiscal Year Conversion document (a detailed set of processes for
assigning direct and indirect costs) to the DSS Teams at every VAMC.
Refresher training is provided, telephonically, through a series of bi-
weekly Teaching Calls that the DSO provides to those same site teams.
* In order to help maximize the utilization of DSS, VHA should take
steps to ensure that there are adequate numbers of properly trained IT
staff at field locations to administer DSS.
Do Not Concur - Because their primary function is the capture and
reporting of MCA data, DSS Site Teams are composed of professionals
with financial and clinical backgrounds. Once assigned, these personnel
complete written and on-the-job training on the technical portion of
the DSS. Currently, DSO is sponsoring a workgroup that will provide
staffing criteria to include recommended professional background,
training and required staffing level for all VAMCs. Very few, if any,
field Information Technology (IT) staff are involved in the hands-on
operation of the DSS.
* To reduce the risks of errors and delays from manual efforts, VA
should further automate the SNC preparation process and update SNC
compilation procedures.
Concur - VA will continue to look at and implement, where appropriate,
mechanisms to streamline and automate the SNC process. In fact, VA has
an initiative already underway to automate the preparation of
consolidated financial statements, which includes the SNC, as well as
the establishment of a financial data warehouse. While there have been
errors and delays as a result of problems with the current systems
(both manual and automated) that provide the data for the SNC process,
it is not with the SNC process itself.
While VA currently does not have a central repository for its
accounting data, VA does consolidate costs for the three
Administrations and staff offices in the SNC along ten lines of
business. End-of-year auditor adjustments are a normal function in
preparing the Departments' Consolidated Financial Statements. They are
not unique to the preparation of the SNC. VA uses a network of Excel
spreadsheets in preparing the SNC, which allows adjustments to flow
through all the appropriate lines of business. VA is implementing a
data warehouse to store its accounting data. This will assist in
further automating the preparation of all VA's financial statements.
Technical Comments:
Slide #8: 1st Bullet: MCA systems are established in all of VA's major
components (VHA, VBA and NCA). VHA and NCA continue to use their MCA
systems while VBA used its system through early FY 2004.
Slide #12, 1st Bullet: This bullet implies that no functionality
exists, which is not accurate. Each Administration currently has its
own capability to identify, accumulate and assign the costs of its
outputs.
Slide #12, 2nd Bullet: While eliminating the audit material weakness
related to the lack of an integrated financial management system is a
top VA priority, having an MCA system/model fully operational and
compliant within its components is similarly important to ensure VA
makes sound decisions based on valid costs. This bullet appears to
imply that VA does not view MCA as a priority. VA has and will continue
to stress and use MCA in its decision-making process.
Slide #13, 1st Bullet: VA has been involved in MCA since it was first
considered by the Federal Accounting Standards Advisory Board. VA has
worked on the development and implementation of Statement of Federal
Financial Accounting Standards (SFFAS) #4. VA formed, staffed and
chaired the workgroup that developed the "Cost Accounting
Implementation Guide", which was adopted by the Federal CFO Council. VA
was one of the first departments to publish a comprehensive MCA policy
that met the requirements of the SFFAS #4 and required MCA
implementation in all its major components. In FY 2004, VA leadership
established a Finance and Logistics Council, chaired by the Department
CFO. This council has all the Administration CFOs as members. VA has
and will continue to fully support MCA and all other federal financial
requirements.
Slide #13, 4th Bullet: Department-level leadership ensured that VHA,
VBA and NCA established cost accounting systems. All three
administrations implemented cost accounting systems and dedicated staff
to ensure the systems were being used.
Slide 15, 1st Bullet: This is not accurate. VBA did not abandon its MCA
efforts. In March 2003, VBA discontinued the use of the Activity Based
Costing (ABC) system in place due to reasons outlined in the GAO
report. VBA identified alternative data sources to provide cost
accounting information to the Department and to use as part of our
annual financial audit.
Slide #16, 1st Sub-Bullet: VA does not have a central repository for
its accounting data; however, costs for the Administrations and staff
offices are consolidated in the SNC along VA's 10 lines of business.
End-of-year auditor adjustments are a normal function in preparing the
Consolidated Financial Statements. They are not unique to the
preparation of the SNC. VA uses a network of Excel spreadsheets in
preparing the SNC, which allows adjustments to flow through all the
appropriate lines of business. VA is in the process of implementing a
data warehouse to store accounting data. This will assist in further
automating the preparation of all VA financial statements.
Slide #16, 2nd Sub-Bullet: VA does have documentation of current SNC
compilation procedures. Recent revisions were made to reflect current
VA procedures.
Slide #16, 2nd Bullet: This is not accurate. The Fiscal Year Conversion
Guidelines, which are revised and published on an annual basis,
provides detailed information on assigning indirect costs to cost
objects.
Slide #20, 1st Sub-Bullet: The last sentence does not reflect what was
stated in the GAO/DSO interview. Recommend GAO reword as follows:
"Because of the information provided via DSS, actual data was utilized
in the analysis process that supported the funding request."
Slide 21, 1st Bullet: Recommend GAO delete "Information Technology
(IT)". The IT staff is typically not involved in DSS utilization.
Slide #22, 1st Bullet: VA agrees that leadership and strong internal
controls are necessary for successful implementation and operation of
MCA. The Department anticipates implementing an annual certification
process that will require VHA, VBA, and NCA to state that they are
meeting all federal requirements for a MCA. This will include how the
MCA is being used in managerial decision-making and will be presented
to VA's Finance and Logistics Council for review and approval.
Slide #22, 2nd Bullet: VA does not agree that it has a lack of
leadership regarding MCA. The Department has a history of strong
leadership in this area, which includes preparing the Government-wide
Managerial Cost Accounting Handbook.
[End of section]
(197004):
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] The three agencies without MCA models represent approximately 0.1
percent of the department's budget.
[5] VistA is VHA's nonfinancial workload information system for
hospitals.
[6] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
