Veterans Health Administration
Inadequate Controls over Miscellaneous Obligations Increase Risk over Procurement Transactions Gao ID: GAO-10-307T December 16, 2009In September 2008, GAO reported internal control weaknesses over the Veterans Health Administration's (VHA) use of miscellaneous obligations to record estimates of obligations to be incurred at a future date. GAO was asked to testify on its previously reported findings that focused on (1) how VHA used miscellaneous obligations, and (2) the extent to which the Department of Veterans Affairs' (VA) related policies and procedures were adequately designed. GAO also obtained an update on the status of VA's activities to improve controls over its use of miscellaneous obligations. GAO's testimony is primarily a summary of its prior report (GAO-08-976), and also includes follow-up work to obtain information on the status of VA's efforts to implement our prior recommendations.
In September 2008, GAO reported that VHA recorded over $6.9 billion of miscellaneous obligations for the procurement of mission-related goods and services in fiscal year 2007. VHA officials stated that miscellaneous obligations were used to facilitate payment for goods and services when the quantities and delivery dates are not known. According to VHA data, almost $3.8 billion (55.1 percent) of VHA's miscellaneous obligations was for fee-based medical services for veterans and another $1.4 billion (20.4 percent) was for drugs and medicines. The remainder funded, among other things, state homes for the care of disabled veterans, transportation of veterans to and from medical centers for treatment, and logistical support and facility maintenance for VHA medical centers nationwide. In 2008, GAO found that VA policies and procedures were not designed to provide adequate controls over the authorization and use of miscellaneous obligations with respect to oversight by contracting officials, segregation of duties, and supporting documentation for the obligation of funds. Collectively, these control design flaws increased the risk of fraud, waste, and abuse. These control design flaws were confirmed in GAO's case studies at VHA medical centers in Pittsburgh, Pennsylvania; Cheyenne, Wyoming; and Kansas City, Missouri. For example, in all of the 42 obligations reviewed, GAO found no documented approval by contracting officials. The systems used did not have a mechanism for contracting officials to electronically document their review of miscellaneous obligations and no manual documentation procedures had been developed. Furthermore, in 30 of the 42 obligations reviewed, one official performed two or more of the following functions: requesting, creating, approving or obligating funds for the miscellaneous obligation, or certifying delivery of goods and services and approving payment. Without proper segregation of duties, risk of errors, improper transactions, and fraud increases. Lastly, GAO found a lack of adequate supporting documentation at the three medical centers we visited. In 8 of 42 instances, GAO could not determine the nature, timing, or the extent of the goods or services being procured from the description in the purpose field. As a result, GAO could not confirm that these miscellaneous obligations were for bona fide needs or that the invoices reflected a legitimate use of federal funds. In January 2009, VA issued volume II, chapter 6 of VA Financial Policies and Procedures--Miscellaneous Obligations which outlines detailed policies and procedures aimed at addressing the deficiencies GAO identified in the September 2008 report. Full and effective implementation of this new guidance will be critical to reducing the government's risks associated with VA's use of miscellaneous obligations. GAO has not yet evaluated the extent to which these new policies have been fully and effectively implemented.
GAO-10-307T, Veterans Health Administration: Inadequate Controls over Miscellaneous Obligations Increase Risk over Procurement Transactions
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Testimony:
Before the Subcommittee on Oversight and Investigations, Committee on
Veterans' Affairs, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EST:
Wednesday, December 16, 2009:
Veterans Health Administration:
Inadequate Controls over Miscellaneous Obligations Increase Risk over
Procurement Transactions:
Statement of Kay L. Daly, Director:
Financial Management and Assurance:
GAO-10-307T:
GAO Highlights:
Highlights of GAO-10-307T, a testimony before the Subcommittee on
Oversight and Investigations, Committee on Veterans' Affairs, House of
Representatives.
Why GAO Did This Study:
In September 2008, GAO reported internal control weaknesses over the
Veterans Health Administration‘s (VHA) use of miscellaneous obligations
to record estimates of obligations to be incurred at a future date. GAO
was asked to testify on its previously reported findings that focused
on (1) how VHA used miscellaneous obligations, and (2) the extent to
which the Department of Veterans Affairs‘ (VA) related policies and
procedures were adequately designed. GAO also obtained an update on the
status of VA‘s activities to improve controls over its use of
miscellaneous obligations.
GAO‘s testimony is primarily a summary of its prior report (GAO-08-
976), and also includes follow-up work to obtain information on the
status of VA‘s efforts to implement our prior recommendations.
What GAO Found:
In September 2008, GAO reported that VHA recorded over $6.9 billion of
miscellaneous obligations for the procurement of mission-related goods
and services in fiscal year 2007. VHA officials stated that
miscellaneous obligations were used to facilitate payment for goods and
services when the quantities and delivery dates are not known.
According to VHA data, almost $3.8 billion (55.1 percent) of VHA‘s
miscellaneous obligations was for fee-based medical services for
veterans and another $1.4 billion (20.4 percent) was for drugs and
medicines. The remainder funded, among other things, state homes for
the care of disabled veterans, transportation of veterans to and from
medical centers for treatment, and logistical support and facility
maintenance for VHA medical centers nationwide.
In 2008, GAO found that VA policies and procedures were not designed to
provide adequate controls over the authorization and use of
miscellaneous obligations with respect to oversight by contracting
officials, segregation of duties, and supporting documentation for the
obligation of funds. Collectively, these control design flaws increased
the risk of fraud, waste, and abuse. These control design flaws were
confirmed in GAO‘s case studies at VHA medical centers in Pittsburgh,
Pennsylvania; Cheyenne, Wyoming; and Kansas City, Missouri. For
example, in all of the 42 obligations reviewed, GAO found no documented
approval by contracting officials. The systems used did not have a
mechanism for contracting officials to electronically document their
review of miscellaneous obligations and no manual documentation
procedures had been developed. Furthermore, in 30 of the 42 obligations
reviewed, one official performed two or more of the following
functions: requesting, creating, approving or obligating funds for the
miscellaneous obligation, or certifying delivery of goods and services
and approving payment. Without proper segregation of duties, risk of
errors, improper transactions, and fraud increases. Lastly, GAO found a
lack of adequate supporting documentation at the three medical centers
we visited. In 8 of 42 instances, GAO could not determine the nature,
timing, or the extent of the goods or services being procured from the
description in the purpose field. As a result, GAO could not confirm
that these miscellaneous obligations were for bona fide needs or that
the invoices reflected a legitimate use of federal funds.
In January 2009, VA issued volume II, chapter 6 of VA Financial
Policies and Procedures”Miscellaneous Obligations which outlines
detailed policies and procedures aimed at addressing the deficiencies
GAO identified in the September 2008 report. Full and effective
implementation of this new guidance will be critical to reducing the
government‘s risks associated with VA‘s use of miscellaneous
obligations. GAO has not yet evaluated the extent to which these new
policies have been fully and effectively implemented.
What GAO Recommends:
In its September 2008 report, GAO made four recommendations to VA to
develop and implement policies and procedures to improve internal
control. VA agreed with GAO‘s recommendations and has since taken
action to develop the recommended policies and procedures. GAO will
monitor the effectiveness of VA‘s implementation of these new policies
and procedures.
View [hyperlink, http://www.gao.gov/products/GAO-10-307T] or key
components. For more information, contact Kay L. Daly at (202) 512-9095
or dalykl@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the findings from our prior
work on the Veterans Health Administration's (VHA)--a component of the
Department of Veterans Affairs' (VA)--use of miscellaneous obligations,
[Footnote 1] and steps VA is taking to address our prior
recommendations. VHA provides a broad range of primary health care,
specialized health care, and related medical and social support
services through a network of more than 1,200 medical facilities. In
carrying out its responsibilities, VHA uses "miscellaneous obligations"
to obligate, or administratively reserve estimated funds against
appropriations for the procurement of a variety of goods and services
for which specific quantities and time frames are uncertain. VHA
officials said that they have been using miscellaneous obligations for
over 60 years to record estimates of obligations to be incurred at a
later time.[Footnote 2] According to VA policy,[Footnote 3]
miscellaneous obligations can be used to record estimated obligations
to facilitate the procurement of a variety of goods and services,
including fee-based medical and nursing services and beneficiary
travel.
The large dollar amount of procurements recorded as miscellaneous
obligations in fiscal year 2007--$6.9 billion--raised questions about
whether proper controls were in place over the authorization and use of
those funds. In September 2008 we reported[Footnote 4] that
improvements were needed in VHA's design of controls over miscellaneous
obligations.
My testimony today summarizes the findings of our September 2008 report
that are most relevant to the subject of today's hearing. Specifically,
I will focus on our findings concerning (1) how VHA used miscellaneous
obligations during fiscal year 2007, and (2) the extent to which VA's
policies and procedures were designed to provide adequate controls over
their authorization and use. I will also discuss the results of our
limited review of the status of VA's actions to implement our
recommendations.
To achieve the first objective, we obtained and analyzed a copy of
VHA's Integrated Funds Distribution, Control Point Activity, Accounting
and Procurement (IFCAP) database of miscellaneous obligations.[Footnote
5] According to VA, the IFCAP database provided the best available data
on VHA miscellaneous obligations created in fiscal year 2007. We
determined that the IFCAP data were sufficiently reliable for the
purposes of our report based on (1) testing various required data
elements, (2) performing walkthroughs of the system, and (3) tracing
selected transactions from source documents to the database. To achieve
the second objective, we compared VA policies and procedures governing
the use of miscellaneous obligations with federal appropriations law
[Footnote 6] and internal control standards,[Footnote 7] interviewed
VHA officials in Denver, Colorado, and Washington, D.C., and conducted
three case studies at VHA medical centers in Cheyenne, Wyoming; Kansas
City, Missouri; and Pittsburgh, Pennsylvania. As part of the case
studies, we interviewed VHA financial management and procurement
officials, and reviewed a nongeneralizable sample of miscellaneous
obligations to provide more detailed data on the extent and nature of
any control design deficiencies. We did not review VHA's procurement or
service authorization processes. Additional details on our scope,
methodology, and findings are included in our September 2008 report.
[Footnote 8] To assess the status of our prior recommendations, we
reviewed volume II, chapter 6 of VA Financial Policies and Procedures--
Miscellaneous Obligations (dated January 2009) which outlines detailed
policies and procedures aimed at addressing the deficiencies we
identified in our September 2008 report. We have not tested whether or
to what extent VA has effectively implemented these policies and
procedures.
We conducted the work for the September 2008 report on which this
testimony was based from November 2007 through July 2008 in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives. We also conducted a limited review of
VA's actions to address our recommendations intended to improve its use
of miscellaneous obligations.
Miscellaneous Obligations Used Extensively for Mission-Related
Activities in Fiscal Year 2007:
In fiscal year 2007, VHA used miscellaneous obligations to record over
$6.9 billion against its appropriations for the procurement of mission-
related goods and services at 129 VHA stations throughout the
country.[Footnote 9] As shown in figure 1, $3.8 billion of this total
(55.1 percent) was for fee-based medical and dental services for
veterans, and another $1.4 billion (20.4 percent) was for drugs,
medicines, and hospital supplies. The remainder covered, among other
things, state homes for the care of disabled veterans,[Footnote 10]
transportation of veterans to and from medical centers for treatment,
and logistical support and facility maintenance for VHA medical centers
nationwide.
Figure 1: VHA Miscellaneous Obligations for Fiscal Year 2007:
[Refer to PDF for image: pie-chart]
Other, such as dietetic provisions, operating supplies, cleaning
services, and data processing: 3%; $210 million;
Transportation of persons/things: 4.4%; $301 million;
State homes and homeless veteran support: 8%; $553 million;
Rent, communications, and utilities including gas, electricity, water,
sewer, and phone: 9.1%; $628 million;
Supplies including drugs, medicines, hospital supplies, blood products,
and prosthetic supplies: 20.4%; $1,412 million;
Services including fee-basis physician, nursing, dental,
hospitalization stays, research, and prosthetic repair: 55.1%; $3,805
million.
Source: GAO analysis of VHA data.
[End of figure]
VHA officials said they used miscellaneous obligations to
administratively reserve estimated funds required to facilitate the
payments for goods and services for which specific quantities and time
frames were uncertain. Specifically, a miscellaneous obligation can be
created for an estimated amount and then modified as specific
quantities are needed or specific delivery dates are set. In contrast,
when a purchase order is used to obligate funds, the obligated amount
cannot be changed without a modification of the purchase order.
According to VHA officials, the need to prepare numerous modifications
to purchase orders could place an undue burden on the limited
contracting personnel available at individual centers and could also
require additional work on the part of fiscal services personnel.
Therefore, VHA officials view the use of miscellaneous obligations as
having the benefit of reduced workload.
Another cited benefit was that miscellaneous obligations simplify the
procurement process when no underlying contract or purchase order
exists. For example, providing medical care on a fee-basis to veterans
outside of VHA medical centers may involve the services of thousands of
private physicians nationwide. Attempting to negotiate a separate
agreement or contract with each of these individuals would be a
difficult task for VHA's contracting staff. Under the policies and
procedures in place during fiscal year 2007, VHA centers could use
miscellaneous obligations as umbrella authorizations for fee-based
medical services performed by a number of different physicians. In
effect, in cases for which there is no preexisting contract, the
miscellaneous obligation form becomes the record of an obligation.
[Footnote 11]
Deficiencies in Design of Controls over Miscellaneous Obligations
Increase the Risk of Fraud, Waste, and Abuse:
In September 2008, we reported that VA policies and procedures were not
designed to provide adequate controls over the use of miscellaneous
obligations. The use of miscellaneous obligations carries inherent risk
due to a lack of a negotiated contract. Without effectively designed
mitigating controls, the use of miscellaneous obligations may also
expose VHA to increased risk of fraud, waste, and abuse. VHA did not
have effective basic internal controls nor mitigating controls with
respect to oversight by contracting officials, segregation of duties,
and supporting documentation for recording the obligation of funds. Our
Standards for Internal Control in the Federal Government[Footnote 12]
state that agency management is responsible for developing detailed
policies and procedures for internal control suitable for its agency's
operations and ensuring that they provide for adequate monitoring by
management, segregation of duties, and supporting documentation for the
need to acquire specific goods in the quantities purchased. We
identified control design flaws in each of these areas, and we
confirmed that these weaknesses existed in our case studies of VA
fiscal year 2007 transactions at Pittsburgh, Cheyenne, and Kansas City,
as shown below in table 1. Collectively, these control design flaws
increase the risk of unauthorized procurements, overpayments for
services rendered, and the conversion of VHA assets for personal use
without detection.
Table 1: Summary of Case-Study Results:
Station: Pittsburgh;
Number of obligations reviewed: 14;
Dollar value of obligations reviewed: $6,694,853;
No documented approval by contracting officials: 14;
Inadequate segregation of duties[A]: 9;
Inadequate supporting documentation: Incomplete purpose description[B]:
3;
Inadequate supporting documentation: Blank vendor field: 6;
Inadequate supporting documentation: Blank contract field[C]: 3.
Station: Cheyenne;
Number of obligations reviewed: 11;
Dollar value of obligations reviewed: $2,076,648;
No documented approval by contracting officials: 11;
Inadequate segregation of duties[A]: 11;
Inadequate supporting documentation: Incomplete purpose description[B]:
1;
Inadequate supporting documentation: Blank vendor field: 6;
Inadequate supporting documentation: Blank contract field[C]: 4.
Station: Kansas City[D];
Number of obligations reviewed: 17;
Dollar value of obligations reviewed: $27,274,395;
No documented approval by contracting officials: 17;
Inadequate segregation of duties[A]: 10;
Inadequate supporting documentation: Incomplete purpose description[B]:
4;
Inadequate supporting documentation: Blank vendor field: 8;
Inadequate supporting documentation: Blank contract field[C]: 9.
Station: Total;
Number of obligations reviewed: 42;
Dollar value of obligations reviewed: $36,045,896;
No documented approval by contracting officials: 42;
Inadequate segregation of duties[A]: 30;
Inadequate supporting documentation: Incomplete purpose description[B]:
8;
Inadequate supporting documentation: Blank vendor field: 20;
Inadequate supporting documentation: Blank contract field[C]: 16.
Source: GAO analysis of VHA data.
[A] In 30 of the 42 obligations we reviewed, one official performed two
or more of the following functions: requesting, creating, approving, or
obligating funds for the original miscellaneous obligations, or
certifying delivery of goods and services and approving payment.
[B] In 8 of 42 instances, we could not determine the nature, timing, or
the extent of the goods or services being procured from the description
in the purpose field without reference to supporting invoices.
[C] In these instances, we confirmed that contracts existed, but no
contract number was listed on the miscellaneous obligation document.
[D] Includes facilities located in Kansas City, Kansas; Wichita,
Kansas; Columbia, Missouri; and eastern Kansas.
[End of table]
Inadequate Oversight of Miscellaneous Obligations:
The 42 miscellaneous obligations we reviewed at three VHA stations had
no evidence of approval by contracting officials. The systems used did
not have a mechanism for contracting officials to electronically
document their review of miscellaneous obligations, and no manual
documentation procedures had been developed.[Footnote 13] Furthermore,
none of the three sites we visited had procedures in place to document
review of the miscellaneous obligations by the appropriate contracting
authorities. As a result, VHA lacks assurance that miscellaneous
obligations are being reviewed and that related policies are being
followed. Effective oversight and review by trained, qualified
officials is a key factor in helping to assure that funds are used for
their intended purposes, in accordance with laws, while minimizing the
risk for fraud, waste, or abuse. Without control procedures to help
ensure that contracting personnel review and approve miscellaneous
obligations prior to their creation, VHA is at risk that procurements
do not have the necessary safeguards.
For example, in our case study at the VA Pittsburgh Medical Center, we
found 12 miscellaneous obligations, totaling about $673,000, used to
pay for laboratory services provided by the University of Pittsburgh
Medical Center (UPMC). The Chief of Acquisition and Materiel Management
for the VA Pittsburgh Medical Center stated that she was not aware of
the UPMC's laboratory testing service procurements and would review
these testing services to determine whether a contract should have been
established for these procurements. Subsequently, she stated that VISN
4--the Veterans Integrated Service Network (VISN) that oversees the
operations of the VA Pittsburgh Medical Center--would revise procedures
to procure laboratory testing services through purchase orders backed
by reviewed and competitively awarded contracts, instead of funding
them through miscellaneous obligations.
In the absence of review by contracting officials, controls were not
designed to prevent miscellaneous obligations from being used for
unauthorized purposes, or for assets that could be readily converted to
personal use. Our analysis of the IFCAP database for fiscal year 2007
identified 145 miscellaneous obligations for over $30.2 million that
were used for procurement of such items as passenger vehicles;
furniture and fixtures; office equipment; and medical, dental, and
scientific equipment. Although VA's miscellaneous obligation policy did
not address this issue, VA officials stated that acquisition of such
assets should be done by contracting rather than through miscellaneous
obligations. Without adequate controls to review miscellaneous
obligations and prevent them from being used for the acquisition of
such assets, it is possible that VHA may be exposing the agency to
unnecessary risks by using miscellaneous obligations to fund the
acquisitions of goods or services that should have been obtained under
contract with conventional controls built in.
Inadequate Segregation of Duties:
VA policies and procedures and IFCAP's control design allowed a single
official to perform multiple key roles in the process of creating and
executing miscellaneous obligations. Control point officials were
authorized to create, edit, and approve requests for miscellaneous
obligations. In addition, these same individuals could certify the
delivery of goods and services and approve payment. Similar weaknesses
have been reported by agency auditors as well.[Footnote 14] Federal
internal control standards provide that for an effectively designed
control system, key duties and responsibilities need to be divided or
segregated among different people to reduce the risk of error or
fraud.[Footnote 15] These controls should include separating the
responsibilities for authorizing transactions, processing and recording
them, reviewing the transactions, and accepting any acquired assets.
Without proper segregation of duties, risk of errors, improper
transactions, and fraud increases. The lack of segregation could allow
for improper expenditures to occur without detection.
Our case studies showed inadequate segregation of key duties in 30 of
the 42 obligations we reviewed. In these instances, controls were not
designed to prevent one official from performing two or more of the
following key functions:
* requesting the miscellaneous obligation,
* approving the miscellaneous obligation,
* recording the obligation of funds, or:
* certifying delivery of goods and services and approving payment.
For example, in one case in Pittsburgh, one official requested and
approved a miscellaneous obligation of over $140,000 for medical
services and then certified receipt and approved payment for at least
$43,000 of those services. In another case in Cheyenne, we found one
miscellaneous obligation for utilities where one official requested,
approved, and certified receipt and approved payment of over $103,000
in services. Such weak control design could enable a VHA employee to
convert VHA assets to his or her personal use, without detection.
Lack of Adequate Supporting Documentation:
Control design flaws in VA's policies and procedures resulted in
several instances of insufficient documentation to determine whether
the miscellaneous obligations we reviewed as part of our case-study
analysis represented a bona fide need. Specifically, VA policies and
procedures were not sufficiently detailed to require the type of
information needed such as purpose, vendor, and contract number that
would provide crucial supporting documentation for the obligation.
Internal control standards provide that transactions should be clearly
documented and all documentation and records should be properly managed
and maintained.[Footnote 16] Adequate documentation is essential to
support an effective funds control system; is crucial in helping to
ensure that a procurement represents a bona fide need; and reduces the
risk of fraud, waste, and abuse. When a legal obligation is recorded,
it must be supported by adequate documentary evidence of the liability.
[Footnote 17] An agency should use its best estimate to reserve an
amount for future obligation when the amount of the government's final
liability is undefined. Further, the basis for the estimated liability
and the computation must be documented.
We found that 8 of the 42 miscellaneous obligations had insufficient
data to determine whether the miscellaneous obligation represented a
bona fide need. This level of documentation was not sufficient for an
independent reviewer to determine what items were procured and whether
the appropriate budget object code was charged. As a result of these
deficiencies, in several cases we had to rely on invoices to determine
the probable purpose of the miscellaneous obligation and whether it
represented a bona fide need.
For example, in Kansas City, we found one miscellaneous obligation for
over $1.3 million whose purpose was listed as "To obligate funds for
the Oct 06 payment," while the associated invoices showed that the
miscellaneous obligation was used to cover the services of medical
resident staff. In Pittsburgh, we found a miscellaneous obligation for
over $45,000 whose purpose was listed as "LABCORP 5/1-5/31/07," while
the associated invoices showed that the obligation was for laboratory
testing services. Without procedures calling for more definitive
descriptions of the purpose, we could not confirm that these
miscellaneous obligations were for bona fide needs or that the invoices
reflected a legitimate use of federal funds. Other instances of
inadequate supporting documentation we found during our case-study
analysis included the absence of vendor names for 20 of the 42
miscellaneous obligations, and missing contract numbers for 16 of the
42 miscellaneous obligations.
Inadequate control requirements for supporting documentation and
completing data fields concerning the purpose of the obligation, vendor
information, and contract numbers can hinder oversight by senior VA
management officials. The Deputy Assistant Secretary for Logistics and
Acquisition[Footnote 18] said that he and other VHA officials use the
IFCAP database to monitor the extent and nature of miscellaneous
obligations nationwide, including analyzing the number and dollar
amounts of miscellaneous obligations and identifying the types of goods
and services procured using miscellaneous obligations. He told us that
he was concerned with the extent and nature of the use of miscellaneous
obligations at VA, that he lacked adequate oversight or control over
procurements made through miscellaneous obligations, and that he often
did not know what was being bought or whom it was being bought from.
Our analysis of the IFCAP database found that over 88,000 (69 percent)
of 127,070 miscellaneous obligations did not include vendor
information, accounting for over $5 billion of the $6.9 billion in
recorded miscellaneous obligations in fiscal year 2007. Similarly, the
IFCAP database did not contain a description of what was purchased or
information on the quantities purchased. As a result, important
management information was not available to senior VA procurement
officials.
VA Has Made Improvements in Its Policies and Procedures, but
Implementation Has Not Been Assessed:
Our September 2008 report included four recommendations to VA to
develop and implement policies and procedures intended to improve
overall control. These recommendations focused on the need to better
ensure adequate oversight of miscellaneous obligations by contracting
officials; segregation of duties from initiation through receipt of the
resulting goods and services; maintaining supporting documentation for
miscellaneous obligations; and establishing an oversight mechanism to
ensure control policies and procedures are fully and effectively
implemented. In comments on a draft of that report, VA concurred with
our recommendations and has since taken action to develop policies and
procedures to address them. Specifically, in January 2009, VA issued
volume II, chapter 6 of VA Financial Policies and Procedures--
Miscellaneous Obligations which outlines detailed policies and
procedures aimed at addressing the deficiencies we identified in our
September 2008 report.
Key aspects of the policies and procedures VA developed in response to
our four recommendations were the following:
* Oversight of miscellaneous obligations by contracting officials--VA
issued procedures regarding the review of miscellaneous obligations by
contracting officials. Specifically, the request and approval of
miscellaneous obligations by contracting officials are to be reviewed
by the Head of Contracting Activity or delegated to the Local Head of
Contracting Activity. In addition, the obligation document will be
returned to the initiating office if the miscellaneous obligation is
not appropriately signed off by the Head of Contracting Activity.
* Segregation of duties--VA issued procedures that require that no one
official may control all key aspects of a transaction or event.
Specifically, no one official may perform more than one of the
following key functions: requesting the miscellaneous obligation;
approving the miscellaneous obligation; recording the obligation of
funds; or certifying the delivery of goods and services or approving
payment.
* Supporting documentation for miscellaneous obligations--New
procedures require completion of the purpose, vendor, and contract
number fields on VA Form 1358, Estimated Miscellaneous Obligation or
Change in Obligation. The procedures permit that a new miscellaneous
obligation can only be processed if the appropriate information is
recorded in the purpose, vendor, and contract field. The purpose field
must be specific, contain adequate references, and note the period of
performance; the vendor name and address must be provided, except in
the case of multiple vendors; and the contract number must be included
on the miscellaneous obligation document.
* Oversight mechanism to ensure control policies and procedures are
fully and effectively implemented--VA developed procedures requiring
oversight to help ensure the new policies and procedures are followed.
For example, each facility is now responsible for performing
independent oversight of the authorization and use of miscellaneous
obligations. In addition, facility reviews must be performed quarterly,
at a minimum, and should include all new miscellaneous obligations or
changes to existing miscellaneous obligations that occurred in the
previous quarter. The facility may use sampling to conduct the
quarterly reviews. Further, the results of the independent reviews are
to be documented and recommendations tracked by facility officials.
VA actions taken to develop policies and procedures intended to address
the deficiencies found in our September 2008 report represent an
important first step. However, full and effective implementation of
VA's new policies and procedures will be even more important. We have
not yet fully evaluated the extent to which VA's new policies and
procedures are in place and operating as intended. Further, VA's
ability to fully and effectively address the deficiencies identified in
our September 2008 report concerning miscellaneous obligations may be
adversely affected by continuing financial system weaknesses reported
by agency auditors. Specifically, one of the weaknesses we reported on
in November 2009[Footnote 19] was that VA lacked a system to track
obligations and purchases by vendors, resulting in VA relying on those
vendors to supply operational sales data on medical center purchases.
Consequently, this type of deficiency exposes VA to continued risk of
errors in financial information and reporting, potentially impacting
actions VA has made in developing policies and procedures intended to
increase accountability and controls over its use of miscellaneous
obligations.
In summary, our September 2008 report demonstrated that without basic
controls in place over billions of dollars in miscellaneous
obligations, VA is at significant risk of fraud, waste, and abuse.
Effectively designed internal controls serve as the first line of
defense for preventing and detecting fraud, and they help ensure that
an agency effectively and efficiently meets its missions, goals, and
objectives; complies with laws and regulations; and is able to provide
reliable financial and other information concerning its programs,
operations, and activities. VA management has made progress to reduce
the risks associated with the authorization and use of miscellaneous
obligations by developing policies and procedures that improve overall
control design over miscellaneous obligations. However, full and
effective implementation of this new guidance will be critical to
reducing the government's risks associated with VA's use of
miscellaneous obligations.
Mr. Chairman and Ranking Member Roe, this concludes my prepared
statement. I would be happy to respond to any questions you or other
members of the subcommittee may have at this time.
GAO Contact and Staff Acknowledgments:
For further information about this testimony, please contact Kay L.
Daly, Director, Financial Management and Assurance at (202) 512-9095,
or dalykl@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
testimony. Major contributors to this testimony included Glenn Slocum,
Assistant Director; Carla Lewis, Assistant Director; Richard Cambosos;
Debra Cottrell; Francine DelVecchio; Daniel Egan; W. Stephen Lowrey;
Robert Sharpe; and George Warnock.
[End of section]
Footnotes:
[1] An obligation is a definite commitment that creates a legal
liability of the government for the payment of goods and services
ordered or received, or a legal duty on the part of the United States
that could mature into a legal liability by virtue of actions on the
part of the other party beyond the control of the United States.
Payment may be made immediately or in the future.
[2] VA Office of Finance Directive, VA Controller Policy MP-4, part V,
chapter 3, section A, paragraph 3A.01 Types of Obligations and Methods
of Recording states in pertinent part that "it will be noted that in
many instances an estimated miscellaneous obligation (VA Form 4-1358)
is authorized for use to record estimated monthly obligations to be
incurred for activities which are to be specifically authorized during
the month by the issuance of individual orders, authorization requests,
etc. These documents will be identified by the issuing officer with the
pertinent estimated obligation and will be posted by the accounting
section to such estimated obligation."
[3] VA Office of Finance Directive, VA Controller Policy MP-4, part V,
chapter 3, section A, paragraph 3A.02 Estimated Miscellaneous
Obligation or Change in Obligation (VA Form 4-1358).
[4] GAO, Veterans Health Administration: Improvements Needed in Design
of Controls over Miscellaneous Obligations, [hyperlink,
http://www.gao.gov/products/GAO-08-976] (Washington, D.C.: Sept. 11,
2008).
[5] IFCAP is used to create miscellaneous obligations at VA and serves
as a feeder system for VA's Financial Management System, the
department's financial reporting system of record used to generate VA
financial statements and other reports.
[6] GAO, Principles of Federal Appropriations Law third ed vol II,
[hyperlink, http://www.gao.gov/products/GAO-06-382SP] (Washington,
D.C.: February 1, 2006).
[7] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999).
[8] [hyperlink, http://www.gao.gov/products/GAO-08-976].
[9] The IFCAP database of miscellaneous obligations included 129 VHA
stations. A VHA station may include more than one medical center and is
located in one of VHA's 21 Veterans Integrated Service Networks (VISN).
A VISN oversees the operations of the VHA stations (various medical
centers and treatment facilities) within its assigned geographic area.
[10] State veterans homes are established by individual states and
approved by VA for the care of disabled veterans. The homes include
facilities for domiciliary nursing home care and adult day health care.
[11] VA officials said that this practice is consistent with 38 C.F.R.
17.52, which provides that infrequently used services, such as fee-
basis services, may be initiated using individual authorizations. They
said that individual authorizations for fee-basis care are not subject
to procurement regulations, and that procurement regulations apply when
the need for like medical services from the same medical provider is
frequent enough to warrant the use of standard acquisition processes.
[12] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[13] To help minimize the use of miscellaneous obligations, VA policy
(VA Office of Finance Bulletin 06GA1.05) entitled Revision to MP-4,
Part V, Chapter 3, Section A, Paragraph 3A.02 - Estimated Miscellaneous
Obligation or Change in Obligation (VA Form 4-1358) (Sept. 29, 2006)
stated that miscellaneous obligations would not be used as obligation
control documents unless the contracting authority for a station had
determined that purchase orders or contracts would not be required. VA
policy also required a review of miscellaneous obligations by
contracting officials to help ensure proper use in accordance with
federal acquisition regulations, but did not address the intended
extent and nature of these reviews or how the reviews should be
documented.
[14] Department of Veterans Affairs, Office of Inspector General, Audit
of Alleged Mismanagement of Government Funds at the VA Boston
Healthcare System, Report No. 06-00931-139 (Washington, D.C.: May 31,
2007); Grant Thornton, Department of Veterans Affairs, OMB Circular A-
123, Appendix A - Findings and Recommendations Report (Procurement
Management) (July 18, 2007).
[15] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[16] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[17] 31 U.S.C. §1501(a).
[18] This official acts as VA's Senior Procurement Executive and
oversees the development and implementation of policies and procedures
for departmentwide acquisition and logistics programs supporting all VA
facilities.
[19] GAO, Department of Veterans Affairs: Improvements Needed in
Corrective Action Plans to Remediate Financial Reporting Material
Weaknesses, [hyperlink, http://www.gao.gov/products/GAO-10-65]
(Washington, D.C.: Nov. 16, 2009).
[End of section]
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