Managerial Cost Accounting Practices: Departments of Labor and
Veterans Affairs (21-SEP-05, GAO-05-1031T).
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).
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-1031T
ACCNO: A37757
TITLE: Managerial Cost Accounting Practices: Departments of
Labor and Veterans Affairs
DATE: 09/21/2005
SUBJECT: Accounting standards
Cost accounting
Cost accounting standards compliance
Data integrity
Financial management
Financial management systems
Performance management
Performance measures
Reporting requirements
******************************************************************
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GAO-05-1031T
United States Government Accountability Office
GAO Testimony
Before the Subcommittee on Government Management, Finance, and
Accountability, Committee on Government Reform, House of Representatives
For Release on Delivery
Expected at 2:00 p.m. EDT MANAGERIAL COST
Wednesday, September 21, 2005
ACCOUNTING PRACTICES
Departments of Labor and Veterans Affairs
Statement of Robert E. Martin, Director Financial Management and Assurance
GAO-05-1031T
[IMG]
September 21, 2005
MANAGERIAL COST ACCOUNTING PRACTICES AT DEPARTMENTS OF LABOR AND VETERANS
AFFAIRS
Departments of Labor and Veterans Affairs
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
postimplementation 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.
United States Government Accountability Office
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 19901 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)2 required CFO Act agencies' systems to comply substantially with
federal accounting standards and federal financial management systems
requirements. Federal managerial cost accounting standards,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)4 System Requirements for Managerial Cost
Accounting,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.
1 Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).
2 Pub. L. No. 104-208, div. A., S: 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).
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 data6 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 Government7 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
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).
Department of Labor
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.
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,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
8 Labor distribution is essentially the number of hours worked pursuing a
particular performance goal, program, or other activity.
mission agencies and 5 of the 8 support agencies.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,
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.
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.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.
10 The Employment and Training Administration's fiscal year 2005 budget
authority represented nearly 91 percent of DOL's total.
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.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).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.
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.
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.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
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.
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
Contact and Acknowledgments
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.
For information about this statement, please contact Robert Martin at
(202) 512-6131 or by e-mail at [email protected] . 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.
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