Managerial Cost Accounting Practices
Departments of Labor and Veterans Affairs Gao ID: GAO-05-1031T September 21, 2005In the past 15 years, a number of laws, accounting standards, system requirements, and related guidance have emphasized the need for cost information in the federal government, establishing requirements and accounting standards for managerial cost accounting (MCA) information. Among them was the Federal Financial Management Improvement Act of 1996 (FFMIA), which required Chief Financial Officers Act agencies' systems to comply substantially with federal financial management systems requirements and federal accounting standards, including managerial cost accounting standards. In light of these requirements, the Chairman asked GAO to determine how federal agencies generate MCA information and how government managers use that information to support their decision making and provide accountability. GAO briefed subcommittee staff on its work at the Departments of Labor (DOL) and Veterans Affairs (VA) on July 15 and issued a report on its findings that included recommendations on September 2, 2005 (GAO-05-1013R).
The principal purpose of managerial cost accounting (MCA) is to determine the cost of achieving performance goals, delivering programs, and pursuing other activities. This allows the organization to assess whether the cost is reasonable or to establish a baseline for comparison with what it costs others to do similar work. Although the factors analyzed depend on the operations and needs of the organization, reliable financial and nonfinancial data are critical. Without reliable data, the analysis can be distorted. Strong leadership that provides a structure for good controls and assessments of system operations helps set the conditions for data reliability. GAO found that DOL and VA had different approaches to implementing MCA systems and that both had some control weaknesses with respect to the quality of certain of the data they used and documenting policy and procedures. DOL, under the direction of its Chief Financial Officer, implemented a departmentwide MCA system upon which 15 of its 18 component agencies built MCA models tailored to meet their respective needs. Component agencies continue to refine their models, and DOL is updating its policies and procedures to reflect the new system and processes. A formal post-implementation review of the system is not planned, however. While DOL has various controls in place over financial data, GAO found that controls over nonfinancial data need further attention to ensure reliability. DOL officials are taking additional steps to address these issues. VA adopted a different approach and does not have a departmentwide system. Instead, it has delegated this responsibility to the individual components. Of the two largest components, only the Veterans Health Administration (VHA) had an operating MCA system. The Veterans Benefits Administration had discontinued use of its MCA system in 2003 because of system credibility and personnel issues. GAO found that the VHA system uses data from nearly 50 feeder systems. Other auditors have raised data reliability concerns with respect to certain of these systems. Raising concerns about data reliability in one of the VHA systems, the VA Office of Inspector General stated that this might be a systemic problem. In addition, GAO found that VHA was unable to produce documentation of the system readily, which could inhibit efforts to determine whether costs are properly assigned. With no MCA system overall at VA, it uses manual cost-finding techniques for external reporting. VA's independent financial statement auditor found control weaknesses in this manual process, and VA officials stated that documentation of compilation procedures for its Statement of Net Costs was not current.
GAO-05-1031T, Managerial Cost Accounting Practices: Departments of Labor and Veterans Affairs
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Testimony:
Before the Subcommittee on Government Management, Finance, and
Accountability, Committee on Government Reform, House of
Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EDT:
Wednesday, September 21, 2005:
Managerial Cost Accounting Practices:
Departments of Labor and Veterans Affairs:
Statement of Robert E. Martin, Director, Financial Management and
Assurance:
GAO-05-1031T:
GAO Highlights:
Highlights of GAO-05-1031T, a report to Subcommittee on Government
Management, Finance, and Accountability, Committee on Government
Reform, House of Representatives:
Why GAO Did This Study:
In the past 15 years, a number of laws, accounting standards, system
requirements, and related guidance have emphasized the need for cost
information in the federal government, establishing requirements and
accounting standards for managerial cost accounting (MCA) information.
Among them was the Federal Financial Management Improvement Act of 1996
(FFMIA), which required Chief Financial Officers Act agencies‘ systems
to comply substantially with federal financial management systems
requirements and federal accounting standards, including managerial
cost accounting standards.
In light of these requirements, the Chairman asked GAO to determine how
federal agencies generate MCA information and how government managers
use that information to support their decision making and provide
accountability. GAO briefed subcommittee staff on its work at the
Departments of Labor (DOL) and Veterans Affairs (VA) on July 15 and
issued a report on its findings that included recommendations on
September 2, 2005 (GAO-05-1013R).
What GAO Found:
The principal purpose of managerial cost accounting (MCA) is to
determine the cost of achieving performance goals, delivering programs,
and pursuing other activities. This allows the organization to assess
whether the cost is reasonable or to establish a baseline for
comparison with what it costs others to do similar work. Although the
factors analyzed depend on the operations and needs of the
organization, reliable financial and nonfinancial data are critical.
Without reliable data, the analysis can be distorted. Strong leadership
that provides a structure for good controls and assessments of system
operations helps set the conditions for data reliability. GAO found
that DOL and VA had different approaches to implementing MCA systems
and that both had some control weaknesses with respect to the quality
of certain of the data they used and documenting policy and procedures.
DOL, under the direction of its Chief Financial Officer, implemented a
departmentwide MCA system upon which 15 of its 18 component agencies
built MCA models tailored to meet their respective needs. Component
agencies continue to refine their models, and DOL is updating its
policies and procedures to reflect the new system and processes. A
formal post-implementation review of the system is not planned,
however. While DOL has various controls in place over financial data,
GAO found that controls over nonfinancial data need further attention
to ensure reliability. DOL officials are taking additional steps to
address these issues.
VA adopted a different approach and does not have a departmentwide
system. Instead, it has delegated this responsibility to the individual
components. Of the two largest components, only the Veterans Health
Administration (VHA) had an operating MCA system. The Veterans Benefits
Administration had discontinued use of its MCA system in 2003 because
of system credibility and personnel issues. GAO found that the VHA
system uses data from nearly 50 feeder systems. Other auditors have
raised data reliability concerns with respect to certain of these
systems. Raising concerns about data reliability in one of the VHA
systems, the VA Office of Inspector General stated that this might be a
systemic problem. In addition, GAO found that VHA was unable to produce
documentation of the system readily, which could inhibit efforts to
determine whether costs are properly assigned. With no MCA system
overall at VA, it uses manual cost-finding techniques for external
reporting. VA‘s independent financial statement auditor found control
weaknesses in this manual process, and VA officials stated that
documentation of compilation procedures for its Statement of Net Costs
was not current.
What GAO Recommends:
www.gao.gov/cgi-bin/getrpt?GAO-05-1031T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Robert Martin at (202)
512-6131 or martinr@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to talk about managerial cost accounting
practices (MCA) at the Department of Labor and Department of Veterans
Affairs. This topic is all about efficiency, productivity, and the best
use of resources. Taxpayers expect us to act in their best interests in
managing their money, and managerial cost accounting can help us to do
so. To that end, over the past 15 years, a number of laws, accounting
standards, system requirements, and related guidance have emphasized
the need for cost information and cost management in the federal
government, establishing requirements and accounting standards for MCA
at federal agencies.
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 and the systematic
measurement of performance. The Federal Financial Management
Improvement Act of 1996 (FFMIA)[Footnote 2] required CFO Act agencies'
systems to comply substantially with federal accounting standards and
federal financial management systems requirements. Federal managerial
cost accounting standards,[Footnote 3] which became effective in fiscal
year 1997, provide a conceptual framework and standards for MCA
implementation. The Joint Financial Management Improvement Program's
(JFMIP)[Footnote 4] System Requirements for Managerial Cost
Accounting,[Footnote 5] published in 1998, builds upon, and provides an
approach to implement requirements for cost accounting set forth in the
CFO Act and federal MCA standards.
MCA essentially entails answering a very simple question: How much is
it costing to do something, be it some extensive overall or program
effort or the incremental and iterative efforts associated with a
project or activity? As such, it involves accumulating and analyzing
both financial and nonfinancial data[Footnote 6] to determine the costs
of achieving performance goals, delivering programs, and pursuing other
activities. The principal purpose, of course, is to assess how much it
is costing to do whatever is being measured, thus allowing assessments
of whether that seems reasonable, or perhaps establishing a baseline
for comparison with what it costs others to do similar work or achieve
similar performance. The factors analyzed and the level of detail
depends on the operations and needs of the organization. As
cornerstones of this type of analysis, reliable financial and
nonfinancial data are critical, because if either is wrong the
resulting analysis can give a distorted view of how well an
organization is doing.
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 how federal agencies generate
MCA information and how government managers use that information to
support their decision making and provide accountability. We will be
looking at 10 agencies in a four-phase study of this issue. DOL and VA
are the first agencies we reviewed.
To respond to this first phase of your request, we interviewed
officials at DOL and VA and reviewed documentation on the status of MCA
system implementation including successes and obstacles to managerial
costing. We also reviewed departmental guidance and looked for evidence
of 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 7] 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 used cost information to support managerial decision making
and provide accountability, we interviewed agency officials, identified
examples, and reviewed documentation provided by the departments. We
briefed your staff on the results of our review of these departments on
July 15, 2005, and issued a report to you highlighting that work on
September 2, 2005.
We found that DOL and VA adopted different approaches for pursuing MCA.
DOL implemented a departmentwide system upon which 15 of its 18
component agencies have built MCA models tailored to their respective
needs. At VA, responsibility for MCA implementation has been vested
with individual component agencies. I will talk first about DOL and
then about VA.
Department of Labor:
As you know, DOL's mission is to foster and promote the welfare of our
country's job seekers, wage earners, and retirees. 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 initial MCA efforts in the form of pilots in 1999 were
unsuccessful. Its current efforts were spurred, in part, by its Office
of Inspector General's (OIG) findings in 2002 and 2003 that DOL's
accounting system was not in substantial compliance with FFMIA because
it did not meet the accounting standards regarding MCA requirements.
The OIG recommended that DOL develop a comprehensive departmentwide MCA
system implementation plan. Although DOL disagreed with the OIG
conclusions, it did agree to focus more attention on MCA. DOL's Office
of the Chief Financial Officer (OCFO) was assigned responsibility for
MCA development.
DOL's new MCA system, referred to as Cost Analysis Manager (CAM), uses
commercial software designed to collect and analyze agency financial,
and labor distribution,[Footnote 8] and performance data. According to
DOL officials, CAM can provide management with information and reports
concerning the costs, including most direct and indirect costs, of
performance goals, activities, and outputs. They also said that CAM can
provide integrated performance and financial information, trend
analysis, benchmarking data, and "what if" analysis. Agency and OCFO
personnel developed component-specific CAM models. These models are in
place at all 10 mission agencies and 5 of the 8 support
agencies.[Footnote 9] DOL officials told us that the Secretary of Labor
had discussed CAM regularly in monthly meetings with agency managers to
emphasize the importance of MCA implementation.
The CAM system became operational in September 2004. DOL's component
agencies continue to refine the models to meet their needs. In doing
so, they learn about system capabilities while considering additional
applications for CAM. DOL is updating its MCA policy and procedures to
reflect newly developed systems and processes. DOL officials told us
that component-specific cost model reference manuals would be
distributed to components by the end of fiscal year 2005. The manuals
will combine, in one resource, descriptions of the CAM methodology and
assumptions and other documentation.
Planned systemwide refinements include (1) automating the data
extraction and import process, (2) integrating budget and performance
data, and (3) adding programs and outputs not included in baseline
models. However, a post-implementation review (PIR) of the new CAM
system was not planned. A formal PIR would document the evaluation
criteria and differences between estimated and actual costs and
benefits as well as opportunities for management to extract "lessons
learned" and improve control processes.
DOL's CAM incorporates financial information from its core accounting
system, while nonfinancial information, such as hours worked on
particular projects or the number of people trained, is obtained from
other sources. There are various controls over financial data in place,
including (1) annual audits of financial statements, which have had
unqualified opinions beginning with fiscal year 1997; (2)
reconciliations of 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.
According to DOL, the process of building and updating the MCA models
includes supervisory review of nonfinancial data, such as labor
distribution and performance data, as well as review by line managers,
senior managers, and program administrators. Controls over nonfinancial
labor distribution and performance data need further attention,
however. In its fiscal year 2004 performance plan, DOL identified
validation of such data as one of its challenges. In the DOL 2004
Performance and Accountability Report, the Inspector General stated
that prior year audit work identified high error rates in grantee-
reported performance data at the Employment and Training
Administration.[Footnote 10] The OIG also raised concerns about DOL
using those data for decision making. DOL officials recognize the
importance of this type of data to cost analysis and told us that they
are implementing additional data validation systems to address these
issues.
DOL's component agencies are focusing on further refining their
respective models to help manage programs and resources more
effectively. Even though CAM was only recently implemented, 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.
VA, as I will discuss now, has taken a different approach.
Department of Veterans Affairs:
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. For fiscal year 2005, VA's net
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 administration is the National Cemetery
Administration (NCA). With over 193,000 employees, VHA is VA's largest
component. VHA health care facilities provide a broad spectrum of
medical, surgical, and rehabilitative care. VBA has about 13,000
employees who process claims for VA benefits. NCA's staff of about
1,500 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 the independent auditors related to the
lack of an integrated financial management system at the department.
VA did state that having a fully operational MCA model at each
component was important to managerial decision making. Although VA has
published cost accounting policy and guidance delegating implementation
responsibility to component agencies, VA officials we interviewed could
not identify examples of proactive department-level leadership to
ensure that MCA systems were in place in the component agencies. Not
surprisingly, the degree to which MCA had been embraced varied at VHA
and VBA, the two component agencies we reviewed.[Footnote 11]
VHA, VA's largest component in terms of number of employees, provides
medical care to our country's veterans. It should be expected to
routinely know its cost of care and has a system, referred to as the
Decision Support System (DSS), for that purpose. 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 VA's Financial Management System general ledger and
VHA's Veteran's Health Information Systems and Technology Architecture
(VistA).[Footnote 12] DSS includes direct and indirect costs for VA
hospitals and supporting organizations.
According to VA officials, DSS was used to generate cost information to
support internal budgeting, resource allocation, performance
measurement, fee reviews, and cost analysis 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. They said DSS was 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.
VA 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.
VA's independent auditor found that some VHA medical centers were
continuing to use cost data from Cost Distribution Report, an outdated
cost accounting system, which was replaced by DSS and is not reliable
because it is no longer maintained. According to the independent
auditor, the data from these systems were used for a variety of
purposes, including setting fees, budgeting and cost control, and
contracting out decisions.[Footnote 13]
As in any MCA system, 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. Annual 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, in its report on the audit of VA's fiscal year 2004 financial
statements, the OIG stated that extensive efforts were required after
the fiscal year end to overcome control weaknesses and produce
auditable information. The OIG also stated that although these efforts
resulted in materially correct financial statements, reliable
information was not readily available during the year. These concerns
about financial information reliability could extend to DSS financial
data.
Further, both VA's OIG and independent auditor raised concerns about
the quality of data from DSS nonfinancial feeder systems. 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
also 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 VistA is among the 49 feeder
sources for DSS, the independent auditor and OIG findings raise
concerns about the quality of nonfinancial data in that system.
In addition, in its fiscal year 2004 management letter, the independent
auditor 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." As
mentioned previously, reliable financial and nonfinancial data are both
critical in cost analysis because if either is wrong the resulting
analysis can be distorted.
The VHA Decision Support Office, which is responsible for operating
DSS, 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.
VBA, VA's second largest component, discontinued the use of its
Activity Based Costing (ABC) system in March 2003 because of the loss
of key personnel, and because the ABC indirect cost distribution
methodology, a central part of the ABC system, lacked credibility with
some managers. Because VBA was not funding or promoting MCA at the time
of our review, we pointed out to VBA officials the requirements for
pursuing MCA and highlighted potential benefits of doing so, including
some examples of using cost information at VHA. Subsequently, according
to VA officials, the VBA CFO informed them that he would seek funding
in VBA's 2007 budget request to develop cost accounting capabilities.
At the department level, VA used manual cost-finding techniques to
accumulate cost information to prepare the Statement of Net Cost and to
support budgeting. This process, which uses Excel spreadsheets, can be
burdensome, time consuming, and error prone when the roll-up process
must be redone because of end-of-year auditor adjustments and edits. VA
officials told us that the documentation of its Statement of Net Cost
compilation procedures was not current. VA's independent financial
statement auditor reported control weaknesses in the agency's manual
process to prepare its annual financial statements.
Conclusions:
In closing, Mr. Chairman, I want to emphasize that strong leadership in
the departments will be required to implement managerial cost
accounting across government. This is true regardless of whether the
department wants a department-wide system or delegates responsibility
for system development to component agencies. In either case, the
leadership will need to focus on promoting the benefits of managerial
cost accounting, monitoring its implementation, and establishing a
sound system of controls to help ensure the reliability of the data
used.
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 not taken steps that ensured 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 data require
attention in order to enhance the reliability of information for
managerial decision making.
Our report made recommendations to the Secretary of Labor and the
Secretary of Veterans Affairs that if fully implemented, should help
improve data reliability, documentation, and implementation of
appropriate MCA methodologies.
Mr. Chairman, this concludes my statement. I would be happy to answer
any questions you or members of the subcommittee may have.
Contact and Acknowledgments:
For information about this statement, please contact Robert Martin at
(202) 512-6131 or by e-mail at MartinR@gao.gov . Key contributors to
this testimony 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.
FOOTNOTES
[1] Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).
[2] Pub. L. No. 104-208, div. A., § 101(f), title VIII, 110 Stat. 3009,
3009-389 (Sept. 30, 1996).
[3] Statement of Federal Financial Accounting Standards No. 4,
Managerial Cost Accounting Concepts and Standards for the Federal
Government.
[4] In 2005, JFMIP's responsibilities for financial management and
policy oversight were realigned to the Office of Management and Budget,
the Office of Personnel Management, and the Chief Financial Officers
Council.
[5] Joint Financial Management Improvement Program, System Requirements
for Managerial Cost Accounting (Feb. 1998).
[6] Nonfinancial data measure the occurrences of activities and can
include, for example, hours worked, units produced, grants managed,
inspections conducted, or people trained.
[7] GAO, Standards for Internal Control in the Federal Government, GAO/
AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[8] Labor distribution is essentially the number of hours worked
pursuing a particular performance goal, program, or other activity.
[9] The three agencies without MCA models represent approximately 0.1
percent of the department's budget. Initially, implementing MCA at the
three smaller support agencies was not deemed a priority because of
their small size and the nature of the support services they provide.
[10] The Employment and Training Administration's fiscal year 2005
budget authority represented nearly 91 percent of DOL's total.
[11] VHA and VBA accounted for 43 percent and 54 percent of VA's 2004
budget outlays, respectively.
[12] VistA is VHA's nonfinancial workload information system for
hospitals.
[13] This concern was reported to VA management in the IPA's letter
dated November 4, 2004. In that letter, the IPA noted that this was a
continuing issue that had been previously observed.
