[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




                  U.S. DEPARTMENT OF VETERANS AFFAIRS
              INTERNAL CONTRACTING OVERSIGHT DEFICIENCIES

=======================================================================

                                HEARING

                               before the

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                 of the

                     COMMITTEE ON VETERANS' AFFAIRS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 27, 2007

                               __________

                           Serial No. 110-31

                               __________

       Printed for the use of the Committee on Veterans' Affairs









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                     COMMITTEE ON VETERANS' AFFAIRS

                    BOB FILNER, California, Chairman

CORRINE BROWN, Florida               STEVE BUYER, Indiana, Ranking
VIC SNYDER, Arkansas                 CLIFF STEARNS, Florida
MICHAEL H. MICHAUD, Maine            JERRY MORAN, Kansas
STEPHANIE HERSETH SANDLIN, South     RICHARD H. BAKER, Louisiana
Dakota                               HENRY E. BROWN, JR., South 
HARRY E. MITCHELL, Arizona           Carolina
JOHN J. HALL, New York               JEFF MILLER, Florida
PHIL HARE, Illinois                  JOHN BOOZMAN, Arkansas
MICHAEL F. DOYLE, Pennsylvania       GINNY BROWN-WAITE, Florida
SHELLEY BERKLEY, Nevada              MICHAEL R. TURNER, Ohio
JOHN T. SALAZAR, Colorado            BRIAN P. BILBRAY, California
CIRO D. RODRIGUEZ, Texas             DOUG LAMBORN, Colorado
JOE DONNELLY, Indiana                GUS M. BILIRAKIS, Florida
JERRY McNERNEY, California           VERN BUCHANAN, Florida
ZACHARY T. SPACE, Ohio
TIMOTHY J. WALZ, Minnesota

                   Malcom A. Shorter, Staff Director

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                  HARRY E. MITCHELL, Arizona, Chairman

ZACHARY T. SPACE, Ohio               GINNY BROWN-WAITE, Florida, 
TIMOTHY J. WALZ, Minnesota           Ranking
CIRO D. RODRIGUEZ, Texas             CLIFF STEARNS, Florida
                                     BRIAN P. BILBRAY, California

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Veterans' Affairs are also 
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                            C O N T E N T S

                               __________

                             June 27, 2007

                                                                   Page
U.S. Department of Veterans Affairs Internal Contracting 
  Oversight Deficiencies.........................................     1

                           OPENING STATEMENTS

Chairman Harry E. Mitchell.......................................     1
    Prepared statement of Chairman Mitchell......................    27
Hon. Ginny Brown-Waite, Ranking Republican Member................     3
    Prepared statement of Congresswoman Brown-Waite..............    28
Hon. Timothy J. Walz.............................................     4

                               WITNESSES

U.S. Department of Veterans Affairs:
  Belinda J. Finn, Assistant Inspector General for Auditing, 
    Office of Inspector General..................................     5
    Prepared statement of Ms. Finn...............................    29
  Hon. Robert J. Henke, Assistant Secretary for Management.......    12
    Prepared statement of Hon. Henke.............................    31

                   MATERIAL SUBMITTED FOR THE RECORD

Post Hearing Questions and Responses for the Record:
  Hon. Harry E. Mitchell, Chairman, and Hon. Ginny Brown-Waite, 
    Ranking Republican Member, Subcommittee on Oversight and 
    Investigations, Committee on Veterans' Affairs, to Hon. 
    George J. Opfer, Inspector General, U.S. Department of 
    Veterans Affairs, letter dated July 16, 2007, and response 
    letter dated August 14, 2007.................................    34
  Hon. Harry E. Mitchell, Chairman, and Hon. Ginny Brown-Waite, 
    Ranking Republican Member, Subcommittee on Oversight and 
    Investigations, Committee on Veterans' Affairs, to Hon. R. 
    James Nicholson, Secretary, U.S. Department of Veterans 
    Affairs, letter dated July 16, 2007, and VA responses........    37



























 
                  U.S. DEPARTMENT OF VETERANS AFFAIRS
                     INTERNAL CONTRACTING OVERSIGHT
                              DEFICIENCIES

                              ----------                              


                        WEDNESDAY, JUNE 27, 2007

            U. S. House of Representatives,
      Subcommittee on Oversight and Investigations,
                            Committee on Veterans' Affairs,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:12 a.m., in 
Room 340, Cannon House Office Building, Hon. Harry E. Mitchell 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Mitchell, Walz, and Brown-Waite.

             OPENING STATEMENT OF CHAIRMAN MITCHELL

    Mr. Mitchell. Good morning and welcome to the Subcommittee 
on Oversight and Investigations for the June 27th meeting. The 
hearing this morning will be on the U.S. Department of Veterans 
Affairs' (VA's) internal contracting oversight deficiencies. 
This hearing will come to order. And I want to thank everyone 
for being here this morning.
    I am pleased that so many folks could attend this oversight 
hearing on the VA's internal contracting oversight 
deficiencies. This will not be the last. We all have work to 
do.
    We are going to begin today by hearing from the Office of 
Inspector General (IG) concerning the IG's recently completed 
audit of contracting practices at the Boston Healthcare System 
in Veterans Integrated Services Network (VISN) 1. The IG's 
report is extremely disturbing. Senior contracting and fiscal 
officers at the Boston Healthcare System executed contract 
modifications in excess of $5 million that were illegal.
    As just one example, in fiscal year 2002, Boston executed a 
contract for $16,000 to repair asphalt roadways. In March of 
2004, this paving contract was modified to add electrical panel 
and emergency generator projects totaling $900,000. These 
modifications were clearly outside the scope of the original 
contract and clearly in violation of laws governing the use of 
expired appropriations.
    These were not just technical violations. Not only did the 
contract modifications violate some of the most basic precepts 
of government contracting and appropriations law, they also had 
the following pernicious effects. First, the modifications were 
not completed. We have no way of knowing whether the taxpayers' 
interests in obtaining a fair price and good service were 
protected. Second, the Boston Healthcare System decided to put 
its own needs above all other priorities in VISN-1.
    VA does not have unlimited funds and has a process of 
prioritizing expenditures that Boston evaded. The Inspector 
General found that VISN-1 deferred renovation of a cardiology 
unit in another VA hospital because of concerns about an 
insufficient budget. The VISN had no opportunity to decide 
whether the cardiology unit at the other hospital was of higher 
priority than the parking lot in Boston.
    We are not here to assess individual responsibility. There 
are no witnesses from VISN-1 present and we will not be asking 
the IG or VA about individuals. VA is conducting an 
Administrative Board of Investigation and we leave that 
assessment of individual responsibility to that process.
    We are here to inquire about VA's internal controls over 
acquisition, controls that Boston certainly suggests are 
seriously lacking. For example, VA has a policy that all 
contract modifications in excess of $100,000 must be submitted 
for legal review. This was not done in Boston and the Inspector 
General indicated in his report that the improper contracting 
might have been prevented if this policy had been followed. The 
obvious question is: why did VA's internal controls not require 
verification of legal review prior to disbursement of funds for 
contract modifications in excess of $100,000? Policies are 
practically worthless if VA has no way of knowing if they are 
being followed.
    In February of this year, the Inspector General told this 
Subcommittee that the VA does not know what it purchases, who 
it purchases from, who made or approved purchases, whether a 
purchase was made by contract or on the open market, what was 
paid, and whether the prices were fair and reasonable. And this 
is not a new problem.
    In May of 2001, the Inspector General issued a report 
evaluating VA's purchasing practices. In July of that year, 
then-Secretary Principi formed a task force to correct the many 
problems identified by the IG. The task force issued its report 
in February 2002 with 62 recommendations for change. We look 
forward to the VA telling us which of these recommendations 
have been successfully implemented and what VA is currently 
doing to monitor their completion.
    We have little reason to be optimistic about VA's response. 
Since 2002, VA has spent hundreds of millions of dollars on 
procurement and deployment of the Core Financial and Logistics 
Systems, or CoreFLS. CoreFLS has been a complete failure. 
Congress mandated that VA develop the Patient Financial 
Services System.
    From 2003 to 2006, VA paid a contractor $30 million for 
this project, received nothing and terminated the contract with 
the $30 million of taxpayers' money wasted. There is a list of 
Inspector General reports recounting similar problems with VA 
contracting.
    Finally, the Subcommittee cannot help but note that VA's 
external auditors have found material weaknesses in VA's 
internal controls that were repeat deficiencies from prior 
years. Those material weaknesses include VA's integrated 
financial management system and its operational oversight. As 
the Inspector General has said, ``The risk of materially 
misstating financial information remains high because of these 
material weaknesses.''
    We all share the goal of ensuring that the $10 to $12 
billion VA spends on acquisition each year is well spent. That 
goal can only be met if VA has reliable internal controls. It 
is a truism in business--if you can't measure it, you can't 
manage it. VA cannot manage its spending without dramatic 
improvements in its controls.
    I can assure you, we will all be back here in a few months 
to see what progress VA has made. Between now and then, the 
Subcommittee expects the VA will work closely with the 
Subcommittee's staff so that Congress can stay informed about 
VA's progress.
    [The prepared statement of Chairman Mitchell appears on p. 
27.]
    Mr. Mitchell. Before I recognize the Ranking Republican 
Member for her remarks, I would like to swear in our witnesses. 
Would all the witness that are here today please stand and 
raise their right hand?
    [Witnesses were sworn.]
    Mr. Mitchell. Thank you. Now I would like to recognize Ms. 
Brown-Waite for opening remarks.

          OPENING STATEMENT OF HON. GINNY BROWN-WAITE

    Ms. Brown-Waite. I thank the Chairman very much, and I 
thank him for holding this hearing. It is important that we 
bring these concerns about procurement forward for discussion. 
I have a feeling that it has happened before and we are just 
repeating history. I know that the Chairman and I have no 
intention of just having history be repeated, that we are going 
to take some action. Our Nation's veterans are certainly a 
valuable asset and caring for them has to be our first 
priority.
    Procurement is an area in which we can provide services and 
care to veterans. But it is also an area where if it is not 
done properly and within the letter of the law, it is subject 
to abuse and impropriety. According to the VA's own Office of 
Acquisitions web page updated last on October 14th, 2006, VA 
states that its annual expenditures are more than $5.1 billion 
for supplies and services, including construction. VA is one of 
the largest procurement and supply agencies in the Federal 
Government. Drugs, medical supplies and equipment, information 
technology (IT) equipment, services and other critical patient 
care items must be procured and distributed to VA's healthcare 
facilities, mainly because it is the largest healthcare 
delivery system in the country.
    Supply support is also provided to regional offices, 
national cemeteries, automation centers and other various VA 
activities. Yet today, VA testifies that the $5.1 billion is 
now over $10 billion, almost double the amount from last 
October. VA's procurement practices are so decentralized with 
very little oversight. I wonder if VA really knows how much is 
being procured and how efficiently resources are being spent.
    I also believe that an unknown amount, probably a lot, is 
listed under that very benign category of miscellaneous 
obligations. What a great place to put purchases. I hope that 
we see some clarity to these issues during today's hearing. I 
understand that we will hear from the VA's IG about the 
egregious procurement improprieties that occurred at the Boston 
VA Healthcare System.
    VA can have policies and procedures stacked all the way to 
the ceiling, but if there are no controls in place to ensure 
compliance or noncompliance, what good are these policies. With 
reports dating back as far as April 1997, ten years ago, it 
appears the IG and the VA have recognized the existence of the 
systemic procedure problems. Yet, little has been done to 
address them. Oh, yes, we have generated reports and 
recommendations countless times over the past years. But when 
we see the same recommendations over and over again, we have 
got to wonder why no one took these seriously and why there has 
been no effort to punish the perpetrators.
    I have strong concerns that VA has failed to act on what 
they have known has been a problem. These reports speak of 
professionalizing the VA, optimizing and monitoring the 
procurement process and making the contracting process fair and 
accessible. Yet, cases like those found in the Boston VA 
Healthcare System provide a glaring example of perpetual lack 
of accountability.
    We owe it to our veterans to address the mismanagement in 
VA procurement once and for all. While we know that there are 
good VA employees working within the current procurement 
system, we need assurances that VA is working to fix a broken 
system. As of today, 19 of the 21 VISNs have taken steps to 
protect and update their procurement process. The other two 
VISNs must follow suit.
    With backlogged patients not getting the resources they 
need and the VA executives asking for more and more money, we 
need to make sure that funds are going where they need to go 
and not in the hands of procurement employees who spend more 
than the allotted and legal procurement amounts and methods. 
The first step of all recovery programs is to admit there is a 
problem.
    So I hope that the facts brought out in today's hearing and 
the IG's report, coupled with the incidents at Boston, are 
indicative of a long history of very dysfunctional 
decentralized acquisition and procurement programs with very 
little oversight. We hope that these will be a springboard for 
change within the VA.
    Thank you, Mr. Chairman, for yielding. It is important to 
bring these concerns about procurement forward for discussion. 
Our Nation's veterans are a valuable asset and caring for them 
should be our first priority. Procurement is an area in which 
we can provide services and care to our veterans. But it is 
also an area where if it is not done properly and within the 
letter of the law can be subject to fraud, abuse and lots of 
impropriety.
    According to the VA's own Office of Acquisitions Web site 
which was updated, they said $5 billion. We're now at $10 
billion. We hope to uncover today exactly what those problems 
were. And I appreciate the gentleman for yielding.
    [The prepared statement of Congresswoman Brown-Waite 
appears on p. 28.]
    Mr. Mitchell. Thank you. I would like to now recognize Mr. 
Walz.

           OPENING STATEMENT OF HON. TIMOTHY J. WALZ

    Mr. Walz. Thank you, Mr. Chairman, and thank you, Ms. 
Ranking Member, for your comments.
    Thank you, each of you, for coming today and we appreciate 
your expertise, your experience and your guidance to help us on 
this. This hearing is making certain we fulfill our obligation 
of oversight because we are all partners in this and our 
ultimate goal is to provide the best care possible for our 
veterans. And our second obligation is to make sure we are good 
stewards of the public trust.
    So I look forward to having the opportunity to learn from 
this experience, making sure, as the Ranking Member said, that 
we do more than learn, that we act on those to ensure that the 
precious resources that are allocated for our veterans are 
having the biggest impact. So I see this as an absolute piece 
of what needs to happen in terms of accountability. I see it as 
an absolute piece of what needs to happen to make sure that we 
increase our effectiveness.
    So I want to thank each and every one of you for coming and 
sharing with us what we can do to make this better. And I yield 
back, Mr. Chairman.
    Mr. Mitchell. Thank you. We will now proceed to panel one. 
Ms. Belinda Finn is the Assistant Inspector General for 
Auditing. She's accompanied by Ms. Maureen Regan, the Counselor 
to the Inspector General and a recognized contracting expert; 
and Mr. Nick Dahl, the Director of the Bedford Audit Operations 
Division, which was responsible for the report on the recent 
abuses in Boston. We look forward to hearing from Ms. Finn and 
her views on the VA's internal contracting and oversight 
process and procedures.
    Would you please come forward? Ms. Finn, you will have five 
minutes.
    Ms. Finn. Thank you.
    Mr. Mitchell. Thank you.

  STATEMENT OF BELINDA FINN, ASSISTANT INSPECTOR GENERAL FOR 
   AUDITING, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF 
VETERANS AFFAIRS; ACCOMPANIED BY MAUREEN T. REGAN, COUNSELOR TO 
   THE INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL, U.S. 
 DEPARTMENT OF VETERANS AFFAIRS; AND NICHOLAS DAHL, DIRECTOR, 
BEDFORD AUDIT OPERATIONS DIVISION, OFFICE OF INSPECTOR GENERAL, 
              U.S. DEPARTMENT OF VETERANS AFFAIRS

    Ms. Finn. Mr. Chairman and Members of the Subcommittee, 
thank you for the opportunity to be here today. I will be 
testifying about our report on the audit of alleged 
mismanagement of government funds at the VA Boston Healthcare 
System. The issues we reported in our recommendations were 
specific to VISN-1 and the Boston Healthcare System. However, 
we believe that the Veterans Health Administration (VHA) can 
improve controls to prevent similar incidents elsewhere.
    We began our review in response to an anonymous hotline 
complaint that alleged contract irregularities and the misuse 
of government funds on contract modifications. The original 24 
contracts were executed between fiscal years 2000 and 2003 at a 
value of $1.3 million. From 2002 to 2006, Boston Healthcare 
modified the original contracts 40 times to perform 
nonrecurring maintenance programs with a combined value of $5.5 
million.
    Our review determined that 37 of the 40 contract 
modifications were outside the scope of the original contracts 
and should have been competed as new procurements. As 
illustrated in Chairman Mitchell's opening statement, the work 
required by the modifications had little bearing in connection 
to the original contract. The modifications were worth a total 
of $5.4 million, all of which was paid with expired funds. 
Because the contract modifications were not within the scope of 
the original contracts, funding the actions with expired funds 
violated Federal appropriations laws.
    Boston Healthcare also failed to comply with Federal 
acquisition regulations. Several of the actions lacked an 
adequate statement of work to describe the work or services 
being required, and by modifying existing contracts, they also 
avoided competition requirements and did not perform the 
analyses that would have allowed them to determine if the 
prices were fair and reasonable.
    As already stated, policies and procedures were in place to 
prohibit the out-of-scope contract modifications and the 
improper use of expired funds. Controls were not in place to 
enforce compliance. Policies require VA approval to use expired 
funds, legal reviews of the contract modifications over 
$100,000, and even tracking of the nonrecurring maintenance 
projects at the VISN level.
    Boston Healthcare complied with none of these policies. But 
neither network nor VHA personnel were aware of the contract 
modifications, the use of expired funds, or the various 
nonrecurring maintenance projects being performed.
    In closing, the Office of Inspector General (OIG) is 
committed to working with VA and VHA to correct these 
deficiencies and help to prevent similar occurrences in the 
future.
    Mr. Chairman, thank you again for the opportunity to be 
here. My colleagues and I will be happy to answer any questions 
from you or the other Members of the Subcommittee.
    [The prepared statement of Ms. Finn appears on p. 29.]
    Mr. Mitchell. Thank you, Ms. Finn. I have a couple 
questions. First of all, what control weaknesses allowed the 
contracting irregularities and the misuse of funds to occur at 
the Boston Healthcare System?
    Ms. Finn. The control weaknesses basically were to ensure 
compliance. There were no system controls that would have 
prevented people below the VISN level from charging expired 
funds. There was no control in place to assure or ensure that 
the legal reviews were performed. There was no control to 
perform a further supervisory check on the contract 
modifications to determine if they were out of scope.
    Mr. Mitchell. Then comes a follow-up. What corrective 
actions has the VISN-1 Director taken in response to your 
recommendations and are you satisfied with their actions?
    Ms. Finn. Mr. Dahl is going to address that.
    Mr. Mitchell. All right.
    Mr. Dahl. In response to recommendations we made to improve 
controls over the execution of contract modifications, the use 
of expired funds, following the ``nonrecurring maintenance'' 
(NRM) approval process, and staying in compliance with the 
Federal Acquisition Regulation (FAR), the VISN has developed 
and issued a number of standard operating procedures and 
guidance to the field facilities within the VISN to improve the 
management controls over those aspects of the process.
    For example, they have a policy in place that is designed 
to better ensure that modifications that are funded with prior 
year funds are within the scope of the original contract. They 
also have a process in place where modifications that are going 
to be funded with prior year funds are approved at a level 
above the contracting officer.
    We also made recommendations that they take administrative 
action against the Chief of the Fiscal Service in Boston and 
the Chief of the Purchasing and Contracting Section in Boston 
and we also recommended that they conduct an administrative 
investigation of the facts surrounding the issues we found 
during our audit.
    In response to that, the VISN Director has charged an 
administrative board of investigation to conduct an 
investigation surrounding the facts of the improper 
modifications and use of expired funds. The board is comprised 
of employees from outside of VISN-1. They have a short 
deadline. Their report and conclusions are due to the VISN 
Director by the end of July and based on their findings and 
conclusions, the VISN Director has informed us that she plans 
to take action against any officials for whom it is warranted.
    Now, one other recommendation we made was that they make 
corrective accounting adjustments to properly record the 
funding of these improper contract modifications. The VISN 
Director has informed us that these modifications were made in 
accordance with instructions provided by headquarters.
    I would like to close this answer by saying we feel these 
are steps in the right direction. But we have not validated the 
actions reported, nor assessed their effectiveness. And I would 
also like to point out that they are specific to VISN-1. They 
are not specific to the entire VHA.
    Mr. Mitchell. Thank you. And that brings up the last one I 
want to ask. Are there any assurances that these deficiencies 
and problems that have occurred in VISN-1 are not incurring in 
other VISNs?
    Ms. Finn. No. We have no assurance that these actions are 
not occurring in other locations across the network, or across 
VHA.
    Mr. Mitchell. Are you looking into others besides just this 
one? I understand you looked at this one because you had a tip. 
What about the other VISNs?
    Ms. Finn. At present, we don't have any work going on in 
that area. But in the future we could look at that.
    Mr. Mitchell. Thank you. I yield to Ms. Brown-Waite.
    Ms. Brown-Waite. I thank the Chairman for yielding. Ms. 
Finn, you have got to have the most frustrating job in the 
whole wide world, second only to Members of Congress. How many 
similar reports of lack of controls in this, in the purchasing 
area? We know they go back to 1997. How frequently have they 
been issued? Do you know that?
    Ms. Finn. Ms. Brown-Waite, I am fairly new at VA, so I 
really can't give you an answer on the number. But I know it 
has been extensive. I did bring help with me and Maureen Regan 
is the Counselor to the IG. She has done a lot of work in 
contracting.
    Ms. Brown-Waite. Perhaps Ms. Regan could answer?
    Ms. Regan. We have done a series of reports primarily on 
individual contracting actions. There hasn't been the broad 
national type of audit in a number of years on this issue. But 
various contracts--even in the past year I think we have put 
out three or four, maybe even five reports on various large 
contracts in which there has been problems at all levels in the 
contracting process. This is because there are no controls to 
make sure that the acquisition is properly planned, to make 
sure that it is properly administered, to be sure that the 
bills are properly paid. There are problems in all those 
various areas.
    So there is a series of reports from 2001 with our 
purchasing report, our evaluation of sole source contracts at 
the medical centers, to affiliates which came out in 2005 and 
we put out this year the patient financial services system 
contract, the central incident report center contract, the 
contract that had to do with hiring the forensic auditors or 
investigators to look at the data lost last year. We have 
several CAP reports that I know we have worked with healthcare 
inspections on contracting actions at various medical centers. 
I know Dallas is out. We have a couple others coming out there. 
And all of them show similar lack of controls in planning and 
administration of contracts.
    Ms. Brown-Waite. The reason why I said it has got to be the 
most frustrating job is because you make recommendations that 
certainly would improve the systems and it appears as if your 
recommendations are ignored. Would that be a fair statement, 
Ms. Regan?
    Ms. Regan. A lot of times recommendations end up in 
policies and whether or not those policies are complied with, 
there is no oversight to ensure it. With respect to the 
purchasing report, former Secretary Principi, I think it was 
mentioned in Mr. Mitchell's statement, put out a Procurement 
Reform Task Force Report with 62 recommendations. There has 
been no oversight at all to see if they have been implemented.
    In the sole-source to the affiliate, the contract report, 
VA did put out directive 1663. We are not seeing that that has 
been complied with in the work that was ongoing in that area. 
So there is no--even if you put out a policy, there is no 
oversight for compliance.
    Ms. Brown-Waite. Ms. Finn, or Mr. Dahl, or Ms. Regan, what 
would lead the Chief of Fiscal Services to suppose that funds 
were available from a prior year appropriation? Is it ``I want 
to spend it, so I do it?''
    Mr. Dahl. We don't have a--I don't have a clear answer for 
you on that. I assume that is something similar to that. In the 
past, I think that these medical centers had more, more control 
over their own projects before the VISN concept came into 
place. If a medical center needed work done, they did their own 
contracting. They had their own funding. That has changed with 
the whole VISN structure.
    They found----
    Ms. Brown-Waite. Well----
    Mr. Dahl. They found creative ways to basically hide money 
in Boston so that money would be available to them down the 
road to complete projects that they wanted to have completed.
    Ms. Brown-Waite. But it was not legal what they did. And 
Mr. Dahl, you said that actions that are warranted will be 
taken--that you have been told actions that were warranted 
would be taken. Do you feel--do any of the three of you feel as 
if anybody really is accountable? Just a simple yes or no.
    Ms. Regan. In this particular case or in general?
    Ms. Brown-Waite. Let's take the Boston case.
    Mr. Dahl. Yes.
    Ms. Finn. I believe that people are accountable for their 
actions, yes.
    Ms. Brown-Waite. No. Do you think that people, the people 
who were involved should be--are accountable and should be held 
accountable?
    Ms. Finn. Yes.
    Mr. Dahl. Yes.
    Ms. Brown-Waite. Do you believe that will take place?
    Mr. Dahl. I have high hopes that that will take place.
    Ms. Brown-Waite. Would you define accountable to me? Maybe 
that is where I need to go.
    Mr. Dahl. Well, for instance, already----
    Ms. Brown-Waite. Should they be demoted? Should we make 
sure they, you know----
    Mr. Dahl. The Chief of the Purchasing and Contracting 
Section, we had also made a recommendation to the Deputy 
Assistant Secretary for Acquisition and Materiel Management 
that he determine whether her contract warrant should be 
revoked. He has already taken action to pull her warrant. I 
don't know that that is a final action until the Administrative 
Board has done their work. But that would seem to me, in my 
opinion, to be suitable, that she can no longer function as a 
contracting officer.
    Ms. Brown-Waite. Does she have an ugly twin sister who is 
doing it also? I mean maybe that is what the problem is.
    Mr. Chairman, I appreciate--I have gone over my time and I 
yield back to you.
    Mr. Mitchell. Thank you. Mr. Walz?
    Mr. Walz. Well, thank you, Mr. Chairman and thank you, Ms. 
Finn, for your testimony, and each of you. And on this I may 
be--because I know we are talking more on a micro level about 
this Boston incident. But having you here in the Office of 
Inspector General, one of the things that I am concerned about 
is looking at the macro level, if there is anything we can 
extrapolate from this to see if the scope of this extends.
    I know I may be asking you to maybe make a little bit of a 
reach. But one of the things we are trying to get a grasp on in 
this Committee, this Subcommittee and this Committee as a whole 
and this Congress last week passed some of the most sweeping 
legislation dealing with the VA in terms of resourcing in the 
77-year history of the VA. There is going to be a massive 
amount of resourcing and my colleagues on these Committees 
asked what I think were some very pertinent questions and some 
very important questions.
    Resourcing is one piece of it and we all agree that--at 
least 409 of us and 2 didn't agree that that was appropriate 
use of taxpayer money. My question is, do you believe that this 
experience is the tip of an iceberg? Are there systems in place 
for us to deal with expanding some of the coverage, opening up 
some traumatic brain injury centers, making sure we reduce that 
number of the backlog in cases?
    What this makes me wonder about is, are we setting 
ourselves up to have more of this happen as we get those 
resources in? So I know it is not a pointed or specific 
question, but the Office of the OIG I see as a very, very 
important tool in the delivery of quality services at the best, 
the best use of resources. So Ms. Finn.
    Ms. Finn. We have reported in our financial statement audit 
that the financial management systems at VA are a material 
weakness for the department. Until we have really an integrated 
financial system with adequate controls through, that will 
remain a material weakness.
    The lack of a financial management system to truly track 
and record our obligations and expenditures will prove a 
problem as we deal with additional resources and requirements.
    Mr. Walz. And one final question, again, I know I am asking 
you maybe to help us understand this. Again, going back to the 
OIG and it may extend the scope of this or step outside a 
little bit of this hearing. I am intrigued, I guess encouraged 
by, that this came from the use of a hotline, that this system 
of oversight appears to have worked in this case, at least on a 
very informal manner.
    My question to you is, I guess, do you feel like--being new 
to this and you are stepping into it, does the OIG have the 
resources to be able to follow up on these? And I think that 
the Chairman and the Ranking Member's question was, and 
Chairman Mitchell's question was, if we had it in Boston, I 
think, at least my gut feeling would tell me, perhaps we should 
look at the other VISNs too. But I am wondering if you have the 
resources or the ability or the authority or if you could help 
me understand that.
    Ms. Finn. We have the ability and the authority. The 
resources, we would be balancing this need against all of the 
competing priorities that we have to deal with and we have 
many. Specifically on hotline complaints, we receive a lot and 
we have to judge each one of those as to whether we can do a 
review of that complaint with OIG personnel. Many times we do 
not have the resources and we would refer it to management to 
review.
    In this case, I think I made the comment and my colleagues 
all seem to agree with me, that the one control that did work 
was the OIG hotline.
    Mr. Walz. Yeah. Okay. Well, very good. I appreciate it and 
I yield back, Mr. Chairman.
    Mr. Mitchell. I have one final question. Do you believe 
that the VA is in the process of getting an adequate financial 
management system in place?
    Ms. Finn. I know they are in the process of developing a 
system, but we have not done a review specifically of that. So 
I would like to defer really until we have resources and time 
to take a look at that system to give you an honest, complete 
assessment of that.
    Mr. Mitchell. Thank you. Do you have any other questions?
    Ms. Brown-Waite. First of all, I am glad to know that the 
hotline is working and whoever reported it has to also feel 
very good that actions, you know, that this was followed up. I 
know sometimes the constituents out there think the hotlines 
are useful because nobody ever does anything. And I will be 
very happy to go home and sing your praises because of the 
follow-up that took place here.
    Any of the three of you can try to answer this question. 
For these egregious acts to have taken place, did the 
individuals involved have multiple opportunities to catch 
themselves violating procedure and circumventing controls, like 
the hurdles of using expired contracts, modifying contracts 
outside their scope, obtaining proper legal concurrence from 
the VA regional council, and or the VA expired funds manager, 
you know, where they saw fit to use prior year's appropriate 
funds?
    I, at one point in my life before I came to Congress, 
actually was a contracts administrator in a large water 
management district. That is one of the reasons why I find this 
whole process so out of control and, you know, there is a way 
to stop this. So if you could just tell me if they had these 
multiple opportunities to stop themselves?
    Ms. Finn. Yes. I mean they modified the contracts. They did 
40 modifications over the years. So obviously, everybody 
involved had multiple opportunities to stop.
    Mr. Dahl. And I would add that, you know, contracting 
officers are well trained. They know their responsibilities. 
Also, people that have worked in fiscal service for any amount 
of time should be well aware of appropriation law and the 
proper use of funds. I really don't think, in my opinion, that 
these people had an excuse for what they did.
    Ms. Brown-Waite. Are we on our way to somebody up there 
seeing the light that Congress has caught on, that they have 
ignored all of these other reports?
    Ms. Finn. Are you talking about the larger procurement 
issues?
    Ms. Brown-Waite. Yes.
    Ms. Finn. Yes, I hope so. But I think time will tell.
    Ms. Brown-Waite. Mr. Chairman, I yield back.
    Mr. Mitchell. Thank you very much. We appreciate you being 
here and answering our questions. Thank you.
    Ms. Finn. Thank you.
    Mr. Mitchell. I would like to welcome panel two to the 
witness table. Mr. Robert Henke is the Assistant Secretary for 
Management of the VA and the Department's Chief Financial 
Officer (CFO). He is accompanied by Mr. Jan Frye, the Deputy 
Assistant Secretary of Acquisition and Materiel Management, and 
Mr. Frederick Downs, Jr., the Chief Prosthetics and Clinical 
Logistics Officer for the Veterans Health Administration who 
oversees contracting and procurement for the VHA.
    We look forward to hearing Assistant Secretary Henke's 
testimony and if you could please keep it to five minutes, we 
would appreciate that.

  STATEMENT OF HON. ROBERT J. HENKE, ASSISTANT SECRETARY FOR 
MANAGEMENT, U.S. DEPARTMENT OF VETERANS AFFAIRS; ACCOMPANIED BY 
JAN R. FRYE, DEPUTY ASSISTANT SECRETARY, OFFICE OF ACQUISITION 
 AND MATERIEL MANAGEMENT, U.S. DEPARTMENT OF VETERANS AFFAIRS; 
   AND FREDERICK DOWNS, JR., CHIEF PROSTHETICS AND CLINICAL 
    LOGISTICS OFFICER, VETERANS HEALTH ADMINISTRATION, U.S. 
                 DEPARTMENT OF VETERANS AFFAIRS

    Mr. Henke. Yes, sir, Mr. Chairman. Let me do that and just 
basically cut right to the chase. We recognize--I personally 
recognize that VA's procurement practices are one of the top 
five major management challenges that our IG has identified for 
the Department. What I want you to know today is that we 
understand the challenges and we have many efforts underway to 
improve our systems and our processes.
    Our leadership is engaged from the Secretary down and is 
committed, and is clearly articulating an expectation that VA 
must work to improve the quality, efficiency and productivity 
of our acquisition services.
    Mr. Chairman, if I might, I would like to highlight for the 
Committee some of the things we have accomplished and things we 
are working to accomplish in the area of acquisition, just to 
put the problem, the issue in context.
    We have reduced from over 200 to 31 the number of heads of 
contracting activities who oversee contracting, and have 
implemented 60 of the 62 recommendations in the VA Procurement 
Reform Task Force. We have consolidated the contracting 
function at 19 of our 21 healthcare networks and the other two 
will be done by the end of this year. We established contract 
review boards and required their use at three critical points 
in the acquisition process for contracts valued at $5 million 
and above.
    We recognize the need for much stronger, more deliberate 
and more rigorous acquisition planning and have launched cross-
functional IPT's or integrated product teams to develop those 
requirements and assure the contracting process meets the need. 
We have deployed nationally an Electronic Contract Management 
System that automates contract writing, promotes 
standardization and ensures better accuracy of contracting 
data. And what this system will do is give management better 
oversight and better reporting and analytical tools to track 
and oversee contracting actions that are underway.
    We have hired a new Deputy Assistant Secretary for 
Acquisition. He has 30 years of Army experience in logistics 
and contracting to include senior command positions in Korea, 
the UK and stateside. We hired a new executive as VA's 
acquisition lead. He has 20 years of experience in industry, 
the Department of Justice, Department of Commerce.
    We designated VHA's Prosthetics and Clinical Logistics 
Officer, that is Mr. Downs seated to my left. And forgive me, 
Mr. Frye is my Deputy for Acquisition. He is the guy with the 
Army logistics background.
    We have completely reorganized my 440-person acquisition 
office. We separated in the office the functions of operations 
and execution from policy development which over time had grown 
intertwined and, frankly, a bit confused. I asked for and 
received two additional executive positions and they were 
approved by the Deputy Secretary to improve that organization.
    We performed the first ever external independent audit of 
VA's supply fund, the first audit since that fund was 
established in 1953. We hired a fantastic young executive to 
lead our national Acquisition Center in Chicago. That position 
had been vacant for almost two years and now it is filled.
    I designated a senior executive at VA as my Acquisition 
Career Manager to reflect the importance of getting this 
acquisition work force right and giving them the tools they 
need to succeed. We have completed a total rewrite of VA's 
acquisition regulations, the first complete rewrite of them 
since 1984 and we are going to publish that final rule here 
sometime this summer.
    We have defined the acquisition work force at VA and are 
dedicating resources to educate, train and certify that work 
force. At the IG's suggestion, we have established a data 
mining program to improve compliance and oversight in our 
purchase card program. In 2004, we established a Business 
Oversight Office in Texas and staffed it with 108 auditors, 
system experts, financial experts and acquisition 
professionals.
    We have directed--I have directed a comprehensive, third-
party assessment of VA's acquisition model and governance. That 
solicitation is on the streets and I expect to have an award of 
a nationally reputable firm here in August and they will come 
back to us with their assessment of our governance model for 
acquisition, and whether we are organized properly or not.
    We performed 1,632 acquisition reviews last year in my 
acquisition resources service.
    We have embarked on the government's version of Sarbanes-
Oxley. We have hired a major national accounting and audit firm 
to test, to rigorously test our internal controls and to give 
me the assurance as the CFO that I can sign off on the 
integrity of our financial statements.
    We are in year two of that process and we have identified 
the 11 key business activities we are looking at and we are 
testing the controls in every one of them. This year we are 
testing controls in, among other things, contracting, purchase 
cards and equipment inventories. And I have established a 
separate Internal Controls Service in Austin and I am staffing 
it now.
    In summary, Mr. Chairman, we recognize the challenges we 
have. We know that much work remains. We brought in new 
leadership to tackle the problem. The people at the table and 
the people behind us are working together to solve the problem. 
We believe we are moving forward and making strong progress and 
we recognize there is more work to do.
    That concludes my opening statement and I would be pleased 
to take your questions, sir.
    [The statement of Hon. Henke appears on p. 31.]
    Mr. Mitchell. Thank you, Mr. Henke. The reason we are here 
today is because of a hotline tip. And I assume that if that 
tip hadn't come in, business would still be going on as usual. 
Hopefully that is not the case, but that sure seems to be the 
case.
    Let me ask, could you assure us that the control weaknesses 
that we found in VISN-1 are not occurring and have not occurred 
in any of the other VISNs?
    Mr. Henke. Sir, I can assure you that I view what occurred 
in Boston as an aberration in the system. Frankly, it is 
unfortunate that it had to get to a hotline inquiry to get it, 
to bring it to resolution. The hotline is obviously the court 
of last resort for something. We have literally dozens of 
actions underway and increased oversight to ensure that a 
Boston doesn't happen again.
    When I read the report and talk to the people in Boston who 
are involved with this, it is clear to me that the contracting 
office there, the Chief of the Purchasing Section--anyone in 
contracting 101 knows you don't do out-of-scope modifications 
to contracts. Any fiscal officer knows you don't move around 
expired funds without a very good reason and a under very 
limited circumstances that get to bona fide need in 
appropriations law.
    I can tell you that we are going to take a number of 
actions specifically in the VISN-1 area to support them and 
assist them and assure that they come up to compliance with 
standards. Sir, I do want to point out that what occurred in 
Boston occurred in the timeframe of 2000 to 2003, if I recall 
correctly. That was before we had centralized or consolidated 
the contracting function at 19 of 21 of our VISNs.
    Since that time, we have established positions at the 
network level to take contracting officers out of the chain of 
command of the facility director and put them in at the network 
level, meaning there is a network contract manager who is an 
1102 contracting professional. There is a Chief Logistics 
Officer and a Deputy Network Director at senior levels to 
oversee the business functions in that network.
    Mr. Mitchell. I understand what you are saying. I think 
this practice went on clear up until about 2006. But in any 
case, what I am asking you again is, can you assure us that the 
things that happened in Boston have not happened in the other 
VISNs? Have you checked them as you are doing it? And Boston is 
an aberration that has not occurred in the others?
    Mr. Henke. Can I assure you with a hundred percent 
certainty that it is not happening anywhere else?
    Mr. Mitchell. Yes. Are you looking into the other VISNs or 
you are just looking into Boston?
    Mr. Henke. We are looking into other VISNs. I can't assure 
you that it is not happening elsewhere. But I am taking steps 
to find out if it is.
    Mr. Mitchell. Thank you. Ms. Brown-Waite?
    Ms. Brown-Waite. Thank you, Mr. Chairman, for yielding. Mr. 
Henke, this is not the first instance of contracting going awry 
at the VA. Earlier this year, we learned of a problem with the 
contract with UNISYS where the VA ended up paying $12 million 
for software that now sits on a shelf unfinished and unusable.
    Tell me how you are going to prevent this kind of absolute, 
total complete waste from happening again.
    Mr. Henke. Yes, ma'am. I am painfully aware of all the IG 
reports that point out where we have fallen short. What we are 
doing to fix it is--and the core problem in that case was we 
don't have a very strong culture of program management, program 
management expertise partnered with the acquisition community 
and acquisition work force to develop clear statements of 
requirements for what the contract is supposed to do, to 
develop that contracting vehicle in a collaborative way with 
legal in the room, with finance in the room, with acquisition 
and program officials in the room.
    So too often we write vague requirements that then aren't 
executed by a contractor. We also need to improve post-award of 
that contract. We need to improve our ability to manage that 
contract. Once the contract is in place, we can't put it on a 
shelf and hope that things come to fruition. We need to 
actively manage the contractor to ensure they perform and they 
deliver.
    Ms. Brown-Waite. Sir, are you saying you don't have 
contract managers? You have been in--VA has been in existence 
and doing these multi-million dollar contracts all these years 
and you don't have contract managers?
    Mr. Henke. No, ma'am. We need to professionalize our 
program management work force, not the acquisition people, but 
the people who determine, ``I have a need to acquire 
something.'' The program management expertise that frankly DoD 
is very good at, is lacking in other agencies and the OMB is 
directing us to make similar improvements in civilian agencies.
    Ms. Brown-Waite. Sir, you brought up the term ``culture'' 
and I think that is exactly what is wrong with the VA's whole 
purchasing debacles, a decade now of debacles. It is the 
culture there of anything goes and just spending the taxpayer 
dollar. You know, the culture of let's just go ahead and spend 
with little or no oversight is absolutely an insult to the 
taxpayers. And I hope that you three gentlemen know this and 
that you take this message back.
    It is a complete insult to the taxpayers who want to do 
right by our veterans. Their tax dollars are paying your 
salaries and the salaries of people who are supposed to be 
watching over the procurement process and it just doesn't seem 
to happen.
    Now, one of the things that was mentioned was that you now 
have contract oversight and you have a person actually in 
charge of this; is this accurate?
    Mr. Henke. We have, we have staffed up long vacant 
executive positions in my organization with new leadership. We 
have established formal contract development processes with 
integrated product teams and formal contract review boards at 
critical stages in the acquisition process to ensure that the 
contracting officer brings their work forward, lays it out for 
the most senior experienced contracting professionals. Mr. Frye 
would call them the gray beards in the acquisition world. But 
those contract officers come in and lay their work out and say 
here is my plan to accomplish this objective. And they get 
guidance and direction and oversight from this contract review 
board with the most senior people.
    Ms. Brown-Waite. Do those people actually have oversight? 
Mr. Downs, first of all, thank you very much for your very 
distinguished military career. But do you actually have 
oversight? I see your title is Chief Prosthetics and Clinical 
Logistical Officer. Do you actually have real oversight that 
ensures tax dollars are spent appropriately?
    Mr. Downs. The issues before us in oversight means being 
able to know what is going on out there. And what I--we have 
done a lot of activities within VHA to begin to conduct the 
kind of oversight that all of us want to do. So the oversight 
that we have in VHA is the instruments that we are developing--
we have put together in response to the IG for instance, we 
have put together a crosswalk. When I came into this job I 
asked what is happening with all these IG reviews.
    So what we did is put together a crosswalk and I think it 
is important to understand that this office in VHA is new. I am 
the first Chief Officer of Logistics in VHA. There was no 
office at all. So there was no one to implement national policy 
at the field level that was developed at the national level. So 
I think it is important to help put this in perspective, 
because one of the thing that we now need to do is work as a 
team with now the national policy developers and first of all, 
what is going wrong.
    And so we built this crosswalk and then we put together, 
there were 26 groups that I put together. We addressed the OIG 
cap reviews for 2004 and 2006. We built a crosswalk of what old 
things have been found. It is embarrassing and the Veterans 
Health Administration wanted to get it fixed. So I have put 
this together. We have presented it to our chain of command in 
VHA.
    And Mr. Feeley is the one who has direct line authority 
over the field. So my authority to accomplish things in the 
field comes from the chain of command. I provide information to 
him. And the key to this are compliance reports. So as you said 
earlier, we can pass policy until the cows come home, but if we 
can't find out what they are really doing, then it sort of is 
not productive.
    So getting back, we developed these work groups and they 
are addressing each one of these IG recommendations. We have 
addressed--and now follow-up is important. The key to this also 
is the development of a data system so that we can 
electronically, objectively find out what exactly is happening. 
And this ties in with lots of other issues that perhaps come 
forward in this hearing today. So yes, in compliance I feel 
confident that we are developing the process to conduct the 
compliance we need.
    Now, another thing that goes along with this compliance is 
the fact that we have this centralization within the VISN, 
taking the contracting officers away from the facility 
directors, centralizing under a network contract manager. Now, 
this was a major change that occurred. It didn't happen perhaps 
as fast as we would have liked to have had it happen at first, 
but it has happened. And we have two, as you said, two VISNs 
that yet have to accomplish this, but they will have it done by 
October. All 21 VISNs then will have a centralized contracting 
office. All contracting officers will answer to that individual 
who then answers to the Chief Logistics Officer and the Network 
Director.
    That is one of the major accomplishments we have made in 
assuring that we are going to be able to force compliance on 
contracting within that VISN, because the network contract 
manager has responsibilities which we have and are in the 
process of developing instruments, electronic instruments to 
verify what is being done.
    Ms. Brown-Waite. Mr. Chairman, I know my time has expired, 
but I do have some additional questions. And would it be your 
preference that I yield back or continue?
    Mr. Mitchell. No, go ahead.
    Ms. Brown-Waite. Who actually--so at the VISN level you 
have network, a network contract manager?
    Mr. Downs. Yes, ma'am.
    Ms. Brown-Waite. Does that person have staff----
    Mr. Downs. Until recently----
    Ms. Brown-Waite [continuing]. In each of the VISNs?
    Mr. Downs. All the VISNs except one have various numbers of 
staff. VISN-1 did not have staff, but VISN-1 has rectified that 
in May. The Boston leadership in VISN-1 approved a number of 
changes. The VA hospital in Brockton will become the primary 
location in the consolidating contracting activity for all of 
New England and the CLO, which is the Chief Logistics Officer, 
the Network Contract Manager and the entire Boston contracting 
staff which is currently located in Jamaica Plain, will all 
immediately move to that Brockton facility.
    Now, in addition, all positions approve and they have 
approved 10 new additional staff which will be hired in this 
consolidation for a total of 16 staff that will be located at 
Brockton to support that consolidated contracting group and 
that is----
    Ms. Brown-Waite. Okay. Who looks at the contracts at the 
152 hospitals?
    Mr. Downs. Excuse me?
    Ms. Brown-Waite. Who looks at the contracts for the 152 
hospitals?
    Mr. Downs. Each one of the NC--each one of the network 
contract managers is responsible for reviewing the contracts 
within their VISN that are being written by the contracting 
officers who now report to them. And there is something new 
that has been added too. The contracts are now required to be 
entered into the new electronic management writing system that 
Mr. Frye has brought into our agency and this will allow 
electronic overview of contracts at the national level into the 
VISN level.
    Now, this is going to enable us to, us being anyone 
actually, even the IG, to look at specific contracts anytime 
they wish, to review those contracts. Now, the contracts that 
are written over a certain dollar amount of course have to come 
back to legal and technical review and the business clearance 
review through Mr. Frye's shop.
    Ms. Brown-Waite. One last question, Mr. Chairman, and Mr. 
Henke, you may want to answer this. Have you looked at and 
found one VISN that has what would you consider best management 
practices, BMP's, on procurement and said they are doing it 
right, let's clone that process?
    Mr. Henke. Ma'am, that is what we, that is what we want to 
find and identify is a collection of practices, if they are not 
all in one VISN, they are across VISNs, but share those 
practices and get them all to adopt the same standards. I would 
be happy to get back to you on the record for which VISN we 
think has it most right, or if Mr. Downs could address who has 
made the most progress in terms of centralizing and improving.
    But I--we have made, we have centralized consolidated 19 of 
21. The next two are going to get onboard by the end of this 
year. What we need to do better is find and propagate who does 
it right in the system to ensure these things don't happen 
again.
    But Mr. Downs, do you have----
    Mr. Downs. I can recommend that you can go to VISN-6, for 
instance. They have a superb supplies contracting facility. 
VISN-12, VISN-22, those are some of our VISNs around the area 
and we have more centralized contracting facility, or systems 
that have been set up within the VISN. All of the VISNs are 
moving in that direction. But VISN-6 is close by, certainly 
easier for you to get to and I think you will see a superb 
operation down there.
    Ms. Brown-Waite. I yield back the balance of my time. Good 
luck in changing the course of that VA cultureship, wide birth.
    Mr. Mitchell. Thank you. Mr. Walz?
    Mr. Walz. Thank you also, Mr. Henke. Thank you also for 
coming and of course thank you for your service. We really 
appreciate your commitment to our veterans. And Mr. Downs, this 
is a place where your Combat Infantry Badge (CIB) will always 
get the respect that it so rightfully deserves. And so I thank 
you for your commitment on this.
    As I said, and again, I can't stress this enough, the 
commitment of this Congress is unwavering, not just in word, 
but in deed. And we really need to get the part of it, the 
accountability part right, because we risk undermining the 
public support for this and nothing can be more important in 
making sure we provide these services.
    I would also at this point say that, I would argue some of 
the issues, especially with the OIG, which I think has been 
vastly, maybe draconically short-changed in the past and as the 
VA being the system that it is and the government system that 
it is, is a key component of this, yet we see some of the 
largest ratios of IG's to the amount of ground they have to 
cover of anywhere in the Federal Government. So it seems to me 
that we were setting up a self-fulfilling prophecy that they 
were going to not be able to do what needed to happen.
    And I would like to comment on a couple things. And also, 
with you, Mr. Henke, I really appreciate--I know, I believe you 
were at GE before; is that correct, so you've come from the 
private sector?
    Mr. Henke. Yes, sir.
    Mr. Walz. And you were over at DoD, so you bring knowledge 
of this from the private sector, from a different governmental 
agency that is very well known for procurement and then coming 
into the VA. So I hope you can help me with this. Again, I am 
going to be a little bit macro on this in trying to have you 
help me figure out what we can do on this and what we can do to 
get this right, because I think that--I think Ms. Brown-Waite 
is well-founded in being concerned that as we look at this, how 
widespread is this, how many problems are we going to have, 
especially at a time when we are ready to inject huge amounts 
of resources to get a lot of this right.
    So you mentioned, and I am not sure if I have the 
terminology right on this. I think in your testimony you said 
1,632 audits. Are these like spot audits or----
    Mr. Henke. They are contract reviews----
    Mr. Walz. Okay.
    Mr. Henke [continuing]. Above certain thresholds, contracts 
receive both legal and technical review.
    Mr. Walz. Okay. Of those, what percentage met the standards 
or were done correctly, if you happen to know that?
    Mr. Henke. I don't have that, but I am happy to get it to 
you for the record, sir.
    Mr. Walz. That would be great. I mean is it something that 
stood out to you that there were an inordinate amount of 
inaccuracies? And I don't know if I would--improper use of 
fundings or whatever they might be. Does it stand out in your 
mind or is it something you would rather wait and get the 
numbers for?
    Mr. Henke. I would rather wait and get the----
    Mr. Walz. Very good.
    Mr. Henke [continuing]. Nnumber right, sir. What I do know, 
the IG report on Boston makes it clear that those reviews were 
required but not sought. So that is the weak link we have in 
that system----
    Mr. Walz. Okay.
    Mr. Henke [continuing]. That policy requires reviews, but 
the compliance with those reviews is the challenge.
    [The following was subsequently received:]

        The legal/technical review process allows for changes and 
        corrections to be made as the project moves forward. Some 
        corrections are minor, others are more significant, but the 
        goal of the review is to bring the procurement up to standard 
        without unnecessarily delaying the project. This is not always 
        possible. Some findings are so significant that the submission 
        is rejected and returned for revision and resubmission before 
        it is allowed to continue forward. Of the 1,632 solicitations 
        that were reviewed, approximately 5 percent were rejected and 
        had to be resubmitted.

    Mr. Walz. And I am interested, as you bring in and I know 
you will be, bringing in the private sector of system analysis, 
gap analysis, whatever you are going to use to find problems in 
this. I bring a perspective where I worked as full-time as a 
lowly technician in a national Guard Armory and it was like 
moving a mountain to get a gallon of paint through the 
procurement process.
    And so it seemed like there were an incredible amount of 
checks and balances over me, almost to the point of excess for 
getting things done I needed to get done. Do you believe it is 
maybe just the nature of an organization as it grows and gets 
to the size it is that it becomes more unruly at the top? Maybe 
either one of you can comment on that.
    Mr. Henke. I take your point, sir, about the difficulty 
experienced at a working level where work gets done in terms of 
their challenges to procure items. One of the things that the 
Federal Government has done as a Federal-wide initiative is 
said below certain thresholds, micro purchases which they are 
called, which are $3,000.00 and below, we now have a purchase 
card program. So if someone needs a case of office copier paper 
or something they can, they need to procure quickly, they have 
the same ability I do to get online or get on the 1-800 office 
supplies and get those supplies very quickly, not having to go 
through the contracting formality and process to buy an item 
that is a low dollar value.
    Obviously, there are control risks and tradeoffs in that, 
too. At VA we have got a great credit card, purchase card 
program. We have worked to improve that much over time and we 
think we have got it about right. So there are smart things you 
can do, frankly, to take work off of the field so they can work 
on more important, more focused things. And that is the mantra 
that I try to repeat with the good folks who are in my office. 
If there is a better way to fix the process and do it so it 
takes work off the field and relieves them and helps them get 
it right, that is what we want to do.
    Mr. Walz. Do you believe--just the last question. I see my 
time is about running out. And again, I am asking you to maybe 
just kind of speculate a little bit for me. Is the system more 
prone in your mind to maybe inefficiencies or is there a 
possibility for fraud in this? Because I am concerned and I 
know I can't, I am not going to get at the specifics of the 
Boston thing. But I wonder how necessary those repairs were. It 
is not going to justify that it was right, that it was, 
violated the procedure. But I am wondering if this system 
fraught with the fear that it could be steering contracts for 
favors, that type of thing, I mean in your opinion, or do you 
think it is just more unwieldy or they are just not executing 
properly?
    Mr. Henke. I don't think I would say, sir--I would not say 
that the system is fraught with that opportunity. Whenever you 
get, as in the Boston case, you get people who should have 
known better, probably did know better--this is my opinion--and 
they knew what controls were in place, but they found a way to 
do what they needed to get done, what were perhaps valid 
facility improvement projects, but they did it the wrong way.
    Mr. Walz. Yeah.
    Mr. Henke. So I give them credit for pursuing their 
mission, but obviously they missed, they overstepped a number 
of rules and policies.
    Mr. Walz. Very well. Thank you so much. I yield back, Mr. 
Chairman.
    Mr. Mitchell. Thank you. But that is also the real weakness 
in the VA because they did that and it was not caught for six 
years. It should have been caught. They should have known 
obviously that it was wrong and they shouldn't have done it. 
But it shouldn't have gone on that long and it should not take 
a hotline call catch something like this.
    Let me just ask another question and it is kind of along 
the lines of Ms. Brown-Waite's in terms of your procurement. 
The Inspector General has identified procurement as one of the 
VA's major management challenges. This past February the IG 
testified before this Subcommittee that the most significant 
problem facing deficiencies in the procurement process is VA's 
decentralized organizational structure for acquisition.
    As a result, the VA does not know what is purchased, who it 
is purchased from, who made or approved the purchases, whether 
it was a contract or open market, what was paid and whether the 
price was fair or reasonable. First of all, do you agree with 
that statement from the IG and second, if not, why is the IG 
wrong?
    Mr. Henke. Sir, what I would say about that is, I am not 
convinced that the complete consolidation or centralized model 
is necessarily the right way to pursue it. We have, as the 
Procurement Reform Task Force (PRTF) identified, we have moved 
in that direction by consolidating contracting functions at not 
156 or more locations, but 21 locations. So that will improve 
our span of control and our oversight.
    We have, as I said, sir, we have asked for a think tank or 
a contractor to come in and take a look at our governance 
model, our acquisition structure in VA. We had a contractor 
come in and look at Mr. Frye's organization and we have taken 
steps to fix that because that is important. The next step is 
the broader look at how we are organized for battle in VA 
acquisition. What kinds of models are out there in forward-
leading Federal agencies for how they have structured their 
acquisition authority, the acquisition authority that at the 
end of the day I am responsible for in the Chief Acquisition 
Officer's Act of 2003.
    Mr. Mitchell. Would you agree or disagree and tell us if it 
is your opinion. I want to again quote from the IG: ``The VA 
does not know what is purchased, who it is purchased from, who 
made or approved the purchases, whether it was a contract or 
open market, what was paid or whether the prices were fair or 
reasonable.''
    Mr. Henke. If the statement is VA did not know in all those 
cases, I don't agree with that statement, sir. I think that is 
an excessive characterization.
    Mr. Mitchell. The vast majority of the contracting the VA 
does is done by VHA. The VHA fiscal and contracting personnel 
report up through the Under Secretary for Health and not 
through the Office of the Assistant Secretary for Management. 
This question is for Mr. Frye. At what level of oversight do 
you, as the senior procurement executive, have over VHA 
contracting activities, in particular, those at the VISN and 
medical center levels?
    Mr. Frye. The level of oversight that we have, Mr. 
Chairman, is essentially we are a decentralized organization by 
design. My office develops the policy, the national broad 
policy, if you will. That policy is promulgated in the field 
and we rely on the VHA to execute that policy.
    Now, we also provide oversight in effect because for 
procurements over certain dollar amounts, we also require VHA 
to send the requirement back to us for review, a technical 
review and legal review. At the same time, I am the individual 
that signs the warrants for VHA contracting officers so they 
can execute their contracts.
    But on a day-to-day basis, my office does not have purview 
over those contracts by design.
    Mr. Mitchell. Well, let me ask--it seems like then, that 
you have responsibility but no real authority.
    Mr. Frye. I have responsibility.
    Mr. Mitchell. And no real authority, and to go on from 
that, how can the VA expect to solve its serious internal 
control deficiencies if the senior executive, that is you, for 
procurement does not even have the direct line of authority 
over VHA's contracting officers?
    Mr. Frye. Well, I think the real key there is to work very, 
very closely with the VHA and we are doing that now. Mr. Fred 
Downs and I are working more closely now than two VA 
counterparts probably ever have. I meet with him and his staff 
once a week. I recently, within the last three weeks, went to 
visit one of the VA hospitals down in Hampton, Virginia. So Mr. 
Downs and other members of his staff and my staff are working 
probably more closely together. I think I would leave it to Mr. 
Downs to characterize that. But we are working more closely 
together than the two staffs ever have to make sure that there 
is the proper oversight and that we are in compliance with the 
Federal Acquisition Regulation and other rules and regulations.
    Mr. Mitchell. I have to excuse myself. I have to go to a 
markup and I would like to turn the gavel over to Mr. Walz. But 
just before I leave, I would like to mention something I said 
at the very beginning in my opening statement. We all share the 
goals of ensuring that the $10 to $12 billion the VA spends on 
acquisition each year is well spent. That goal can only be met 
if VA has reliable internal controls. It is a truism in 
business, if you can't measure it, you can't manage it.
    VA cannot manage its spending without dramatic improvements 
in its controls. I assure you we will all be back here in a few 
months to see what progress the VA has made. Between now and 
then, the Subcommittee expects the VA will work closely with 
the Subcommittee staff so that Congress can stay informed about 
the VA's progress. It is obvious that there are no more laws 
that need to be made, or there are no more procedures or any of 
those. We have got all those in place.
    The fact is that we need people to enforce them. And I 
think the responsibility of this Committee is one of oversight. 
So you will see us again. Thank you.
    Mr. Henke. Sir, thank you very much and I agree with your 
statements.
    Mr. Walz. Thank you, Mr. Chairman. Ms. Brown-Waite?
    Ms. Brown-Waite. I thank the Chairman very much. I have 
here a copy of a request for information (RFQ) that was issued 
June 15th and it is to solicit GSA schedule contract holders 
for this procurement. The object is: (1) to analyze, to examine 
and analyze VA's current acquisition organization, (2) to 
recommend a business model that provides three viable solutions 
with one recommendation path.
    However, when you open this up, inside I think is probably 
even more revealing. It says, ``This request for quote has not 
received the mandatory advisory and assistance approval from 
the Office of the Secretary. It is, therefore, subject to 
change or cancelation as a result of the Secretary's 
decision.''
    The timing of this RFQ I would have to say is somewhat 
suspect. Was this put out because you knew this hearing was 
going----
    Mr. Henke. No, ma'am.
    Ms. Brown-Waite [continuing]. To be this week?
    Mr. Henke. No, ma'am, it was not. That has been in the 
works for a number of weeks, if not months.
    Ms. Brown-Waite. Well, if it was in the works for a number 
of months, do you think you might have run it by the Office of 
the Secretary and received approval?
    Mr. Henke. Ma'am, what that reflects is, I have changed the 
approval process for A&A, advisory and assistance contracts to 
bring that down to an appropriate level. Every A&A action was 
going up to the Secretary or the Deputy. That was too 
cumbersome and frankly was just a burden on people. So that 
action, I don't recall the expected costs of it, but it would 
be either at my level or Mr. Frye's level to approve. That 
reflects no change in our commitment to go ahead and do this 
study and take it onboard.
    Ms. Brown-Waite. Have you set aside a sufficient amount of 
money in the budget for this outside study?
    Mr. Henke. Yes, ma'am, we have. We have the resources to do 
that, to perform that study. We found the resources to perform 
the study for Mr. Frye's organization and we had Logistics 
Management Institute (LMI) come in and give us their best 
ideas, best brains on that. And we are going to find a similar 
contractor or a think tank to do this here. We have those 
resources.
    Ms. Brown-Waite. Mr. Henke, I know you have only been with 
the agency a little over a year; is that correct?
    Mr. Henke. Yes, ma'am, 18 months. It might seem like longer 
some days.
    Ms. Brown-Waite. I know exactly what you mean. I am sure 
that there are many new procedures that can be implemented. But 
again, we get to the question of oversight. Harry Truman had a 
wonderful plaque on his desk and it said, ``The buck stops 
here.'' Now, certainly, some would say that the buck stops at 
the Secretary's office, but I can just tell you that the way I 
run my organization is, if my district director, which would be 
comparable to a VISN Director or perhaps a hospital 
administrator, if my District Office Director messes up or 
misappropriates or spends money that she was not authorized to 
do, she would be my former District Office Director.
    That doesn't seem to be happening in the VA. I can mention 
within the VISN that I am in where people don't get demoted, 
they get moved on. And no one seems to be being held 
accountable. If I were to say probably the biggest frustration 
of having--this is my fifth year of serving on this Committee 
and other Committees also with oversight. That is the biggest 
frustration. Does anybody ever get fired for mismanagement, for 
spending unauthorized funds, expired funds? I think the 
taxpayers deserve an answer and I would appreciate any one of 
your answering that question.
    Mr. Henke. Yes, ma'am. If people break rules, break laws, 
there are--first, there are personnel processes in place. The 
VISN Director has one, if not two, investigation boards 
underway. People should be held accountable for their actions. 
I am not going to opine about actions that should be taken in 
this case, because that would be inappropriate.
    But obviously, the IG report has some fairly, in my view, 
some fairly scathing things in it and the VISN Director has 
taken action to investigate and mete out whatever 
administrative or disciplinary action they deem is appropriate 
and warranted.
    Ma'am, I get your point. I understand that I am accountable 
at the end of the day for the VA acquisition system. I am here 
today and your oversight, frankly, is helpful to us to help us 
get, make progress and to move forward. So this is a part of 
the process as difficult as it is to talk about a report like 
Boston, but the buck stops here with me as the Chief 
Acquisition Officer and I hope you understand that we are 
taking literally dozens of steps to improve and to fix this 
problem.
    Ms. Brown-Waite. This report making the recommendations for 
seeking an outside organization to come in and make 
recommendations was dated 2002 and I know you weren't at the 
agency then.
    Mr. Henke. Right.
    Ms. Brown-Waite. Why has it taken so long to actually do 
something? This is 2007. The recommendation to go for some 
outside consulting and to take the problems serious, the 
Procurement Reform Task Force (PRTF) Report made pretty much 
the same recommendations that seem to finally now be being 
implemented in this RFQ. Is it because you brought new eyes to 
the agency? What took almost as long as I have been in 
Congress?
    Mr. Henke. Ma'am, the PRTF, that report you have there, did 
not call for a complete look at VA's acquisition governance. So 
we are taking this, the PRTF recommendations, goal four, 
improve VA procurement organization effectiveness, and I could 
walk down the list there and cite the recommendations 4.1, 4.2, 
4.3 to 4.9, many of them are done or are completed and ongoing.
    What this outside independent look will do is allow us to 
take it to the next level and identify the governance approach 
we need, centralized, decentralized, whatever it is in that 
continuum and move out to implement that and give us ideas and 
courses of action.
    Ms. Brown-Waite. Sir, in this report, goal three, for 
example, was to obtain and improve comprehensive VA procurement 
information and goal four was improve VA procurement 
organization effectiveness. So these recommendations, these 
goals for the agency have been out there for five years. And, 
you know, it has virtually been ignored.
    Mr. Henke. Ma'am, I would not be able to agree with the 
characterization that it has been ignored. We implemented--our 
own IG has said we have implemented 60 of the 65 items in the 
PRTF. Many of them are ongoing actions. The fifth 
recommendation is to improve, ensure a talented and sufficient 
VA acquisition work force. That is a never-ending challenge. 
The labor market for qualified 1102 contracting officers is 
very difficult. It has been acknowledged as a national 
challenge among Federal agencies. So that goal is absolutely 
ongoing.
    So I would not characterize this report as being ignored. 
We have taken action and we are going to take further action to 
keep moving the ball down the field.
    Ms. Brown-Waite. Sometimes I get the opinion that, or the 
impression that you implement them, but there is no oversight, 
and you know, it is one more sheet of paper in one more book 
that gets put up on the bookshelf in an office and there 
doesn't seem to be the oversight when something is implemented.
    And I think that is exactly what has happened with the 
whole procurement debacle that is taking place. And I would, I 
would just encourage you to make sure that whatever the results 
of this recommendation are, if they are implemented, they have 
to have oversight. You can't just implement them and tell 
people to go forward and do it and not ensure that they are 
doing it, or you might as well just save your money, save the 
taxpayers the money for the study, if there isn't the 
accompanying oversight.
    Mr. Henke. Yes, ma'am. You are absolutely right. One point 
of example, if I may. The study we did last year that we 
solicited on the open market and we had a, just a fantastic 
group come in, the Logistics Management Institute. They came in 
with a complete look at organizing my and Jan's Office of 
Acquisition and Logistics. Are we organized right? Are we 
structured right? Do we have a strategic plan? We do now. Do we 
have score cards and metrics in place? We do now.
    That organizational plan went from concept last year, 
development, and it was approved by the Secretary on May 16th. 
He bottom-lined the implementation of that and the organization 
of Jan's team so he can bring to fruition the changes that VA 
knows we need to bring forward.
    So this one, the one we did last year is being implemented 
and we have briefed your staff a number of times on that LMI 
study. We got it approved and we are in the execution and 
implementation phase and I am very serious about seeing that 
through.
    Ms. Brown-Waite. Well, apparently the LMI study is for 
headquarters, not for VHA; is that correct?
    Mr. Henke. That was--yes, ma'am, that was by design in the 
intent--it was to look at Jan's organization inside those 
lifelines, those 450 people at seven or eight locations around 
the country and say, is this team set up right, organized 
right, structured right to do good things. The next step is 
taking a broader look at the VA acquisition system in totality 
and that is the study that you cited with the solicitation on 
the street.
    Ms. Brown-Waite. I yield back the balance of my time.
    Mr. Walz. Thank you to the Ranking Member. Just a couple of 
follow-up questions before we adjourn, Mr. Henke. And once 
again, I get back to this because I know you bring a lot of 
experience to this and especially your DoD experience. Do you 
have the ability or do we have the ability to import any of 
those best practices from DoD, because it does seem to me and I 
am not sure if this is anecdotal or if we can back it up, the 
DoD is doing a better job of this. Is there something you can 
bring in?
    And as you answer that, I am wondering with our Ranking 
Member's characterization, is there something in the VA culture 
that makes that more difficult to do? And I want to know how 
that all fits, if you could.
    Mr. Henke. Sir, your first question, can we implement, can 
we bring in best practices from other agencies? Absolutely. Do 
we do enough of it? My opinion is no, we don't. And that is one 
of the reasons we are doing this larger study is to have an 
organization go out and find how other agencies are organized, 
how they are structured, the processes they have set up and 
bring that into VA. So we are reaching out to go get that.
    And sir, I am sorry, your second question, I----
    Mr. Walz. Well, I am just--the Ranking Member and many of 
us are concerned about this and I am a believer that there is 
something to be said about the culture of any organization, as 
you well know. You have come from others. Is there anything in 
the VA, that inertia that stops someone like yourself coming in 
with a vast amount of knowledge from other organizations, both 
private sector and government, from implementing some of these, 
or do you feel that it is just like any other organization?
    Mr. Henke. Sir, it is like any other large organization. 
VA's culture is unique from DoD, as it is unique from, I am 
sure, Treasury and Commerce. The culture in VA fundamentally is 
one of service and performance, and a mission to serve the 
veteran. And that is the thing that we take most critically, is 
performing the clinical visits, the benefits delivery and the 
memorial affairs that are our three business lines.
    I have not found the culture too difficult. Sure, there are 
things we can improve. But at the end of the day, it is the 
ability to sit down with professionals like Jan and Fred here 
and work toward a common solution. I don't find the culture to 
be an inhibitor. I think you have to find ways to build 
coalitions of people that want to get the same thing done. At 
the end of the day, my goal is the same as Mr. Downs' goal and 
Mr. Frye's goal and that is to improve the place so we can 
better deliver services to the vets. At the end of the day, 
sir, that, as you said, that is the bottom line. So we have the 
same goal and we are trying to get aligned to do that.
    Mr. Walz. Well, I appreciate that and I think your comment 
of talking about how this hearing of oversight is helpful to 
you, I applaud you for embracing that. I applaud you for 
embracing the IG as team members in this and all of us working 
together, because the ultimate goal and as our Ranking Member 
so clearly pointed out, and is absolutely correct, that the 
effectiveness in actual implementation and an improvement in 
delivery to our veterans as well as accountability of our 
taxpayer dollars is the ultimate goal here. And that is what we 
need to keep striving for.
    So knowing the Chairman of this Committee and the Ranking 
Member, a long tradition of being a watchdog of our veterans 
and our resources and that we are just getting started on this, 
I would ask you to see us as a resource, to see the Congress 
and Members of this Committee as someone you can come to, 
someone you can work through, because our goal, rest assured, 
is exactly what yours is. We just need to figure out how best 
to get there.
    Mr. Henke. Sir, I appreciate that and if there are 
legislative ideas that we need to advance and need your help, 
we will come forward and bring those to you. I got your point, 
sir. Thank you.
    Mr. Walz. We appreciate it. Ms. Ranking Member, anything 
else?
    Ms. Brown-Waite. No.
    Mr. Walz. With no further questions, this Subcommittee on 
Oversight and Investigations is adjourned.
    [Whereupon, at 11:37 a.m., the Subcommittee was adjourned.]


















                            A P P E N D I X

                              ----------                              

             Prepared Statement of Hon. Harry E. Mitchell,
         Chairman, Subcommittee on Oversight and Investigations
    This hearing will come to order.
    Thank you all for coming today. I am pleased that so many folks 
could attend this oversight hearing on VA Internal Contracting 
Oversight Deficiencies. This will not be the last--we all have a lot of 
work to do. We are going to begin today by hearing from the Office of 
the Inspector General concerning the IG's recently completed audit of 
contracting practices in the Boston Healthcare System in Veterans 
Integrated Service Network, or VISN, number 1. The IG's report is 
extremely disturbing. Senior contracting and fiscal officers at the 
Boston Healthcare System executed contract modifications in excess of 
$5 million that were illegal. As just one example, in fiscal 2002 
Boston executed a contract for $16,000 to repair asphalt roadways. In 
March of 2004, this paving contract was modified to add electrical 
panel and emergency generator projects totaling $900,000. These 
modifications were clearly outside the scope of the original contract 
and clearly in violation of laws governing the use of expired 
appropriations.
    These were not just technical violations. Not only did the contract 
modifications violate some of the most basic precepts of government 
contracting and appropriations law, they also had the following 
pernicious effects. First, the modifications were not competed. We have 
no way of knowing whether the taxpayers' interests in obtaining a fair 
price and good service were protected. Second, the Boston Healthcare 
System decided to put its own needs above all other priorities in VISN-
1. VA does not have unlimited funds and has a process for prioritizing 
expenditures that Boston evaded. The Inspector General found that VISN-
1 deferred renovation of a cardiology unit in another VA hospital 
because of concern about an insufficient budget. The VISN had no 
opportunity to decide whether the cardiology unit at the other hospital 
was of higher priority than the parking lot in Boston.
    We are not here to assess individual responsibility. There are no 
witnesses from VISN-1 present and we will not be asking the IG or VA 
about individuals. VA is conducting an Administrative Board of 
Investigation and we leave the assessment of individual responsibility 
to that process.
    What we are here for is to inquire into VA's internal controls over 
acquisition, controls that Boston certainly suggests are seriously 
lacking. For example, VA has a policy that all contract modifications 
in excess of $100,000 must be submitted for legal review. This was not 
done in Boston and the Inspector General indicated in his report that 
the improper contracting might have been prevented if this policy had 
been followed. The obvious question is: why did VA's internal controls 
not require verification of legal review prior to disbursement of funds 
for contract modifications in excess of $100,000? Policies are 
practically worthless if VA has no way of knowing if they are being 
followed.
    In February of this year, the Inspector General told this 
Subcommittee that VA does not know what it purchases, who it purchases 
from, who made or approved purchases, whether a purchase was by 
contract or on the open market, what was paid, and whether the prices 
were fair and reasonable. And this is not a new problem. In May 2001 
the Inspector General issued a report evaluating VA's purchasing 
practices. In July of that year, then-Secretary Principi formed a task 
force to correct the many problems identified by the IG. The task force 
issued its report in February 2002 with 62 recommendations for change. 
We look forward to VA telling us which of those recommendations have 
been successfully implemented and what VA is currently doing to monitor 
their completion. We have little reason to be optimistic about VA's 
response. Since 2002 VA has spent hundreds of millions of dollars on 
procurement and deployment of the Core Financial and Logistics System, 
or CoreFLS. CoreFLS has been a complete failure. Congress mandated that 
VA develop the Patient Financial Services System. From 2003 to 2006 VA 
paid a contractor $30 million for this project, received nothing, and 
terminated the contract with the $30 million of taxpayers' money 
wasted. There is a list of Inspector General reports recounting similar 
problems with VA's contracting.
    Finally, the Subcommittee cannot help but note that VA's external 
auditors have found material weaknesses in VA's internal controls that 
are repeat deficiencies from prior years. Those material weaknesses 
include VA's integrated financial management system and its operational 
oversight. As the Inspector General has said: ``The risk of materially 
misstating financial information remains high because of these material 
weaknesses.''
    We all share the goal of ensuring that the 10 to 12 billion dollars 
VA spends on acquisition each year is well spent. That goal can only be 
met if VA has reliable internal controls. It is a truism in business--
if you can't measure it, you can't manage it. VA cannot manage its 
spending without dramatic improvements in its controls.
    I can assure you, we will all be back here in a few months to see 
what progress VA has made. Between now and then, the Subcommittee 
expects that VA will work closely with the Subcommittee's staff so that 
Congress can stay informed about VA's progress.

                                 
             Prepared Statement of Hon. Ginny Brown-Waite,
                       Ranking Republican Member,
              Subcommittee on Oversight and Investigations
    Thank you, Mr. Chairman for yielding. It is important to bring 
these concerns about procurement forward for discussion. Our nation's 
veterans are a valuable asset, and caring for them should be our first 
priority. Procurement is an area in which we can provide services and 
care to our veterans, but it is also an area where, if not done 
properly and within the letter of the law, can be subject to abuse and 
impropriety.
    According to VA's own Office of Acquisitions' web page, last 
updated October 14, 2006, VA states that its annual expenditures are 
more than $5.1 billion for supplies and services, including 
construction. VA is one of the largest procurement and supply agencies 
in the Federal government. Drugs, medical supplies and equipment, IT 
equipment and services, and other critical patient care items must be 
procured and distributed to VA's healthcare facilities to what is the 
largest healthcare delivery system in this country. Supply support is 
also provided to regional offices, national cemeteries, automation 
centers, and other various VA activities.
    Yet today, VA testifies that the $5.1 billion is now over $10 
billion! . . . Almost doubled since last October. VA's procurement 
practices are so decentralized with very little oversight, I wonder if 
VA really knows how much is being procured and how efficiently 
resources are spent?
    I also believe that an unknown amount . . . maybe a lot . . . is 
listed under that benign category of ``miscellaneous obligations''. I 
hope we see some clarity to these issues in today's hearing.
    I understand we will hear from the VA's IG about the egregious 
procurement improprieties that occurred at the Boston VA Healthcare 
System. VA can have policies and procedures stacked to the ceiling, but 
if there are no controls in place to ensure compliance or non 
compliance, what good are these policies? With reports dated as far 
back as April 1997, it appears the Inspector General and VA have 
recognized the existence of the systematic procurement problems, yet 
little has been done to address them.
    Yes, reports have been generated and recommendations have been made 
countless times over the years, but when we see the same 
recommendations over and over again, one must wonder why no serious 
actions have been taken to correct the problems and punish the 
perpetrators. I have strong concerns that VA has failed to act on what 
they know is a problem. These reports speak of professionalizing the 
VA, optimizing and monitoring the procurement process, and making the 
contracting process fair and accessible, yet cases like those found in 
the Boston VA Healthcare System provide a glaring example of a 
perpetual lack of accountability.
    We owe it to our veterans to address the mismanagement in VA 
procurement once and for all. While we know that there are good VA 
employees working within the current procurement system, we need 
assurance that VA is working to fix a broken system. As of today, 19 of 
the 21 VISNs have taken steps to protect and update their procurement 
processes. The other two VISNs must take steps to protect the financial 
resources they are responsible for maintaining.
    With backlogged patients not getting the resources they need and VA 
executives asking for more and more money, we need to make sure the 
funds are being used where they need to go, not into the hands of 
procurement employees who spend more than allotted and use illegal and 
illegitimate procurement methods.
    The first step of all recovery programs is to admit there is a 
problem, so I hope that the facts brought out in today's hearing, 
coupled with the incidences at Boston which are indicative of a long 
history of very dysfunctional, decentralized acquisition and 
procurement programs with very little oversight, will be a spring board 
for change within the VA.

                                 
                 Prepared Statement of Belinda J. Finn,
               Assistant Inspector General for Auditing,
  Office of the Inspector General, U.S. Department of Veterans Affairs
INTRODUCTION
    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to testify on facts surrounding the Office of Inspector 
General's (OIG's) report on the Audit of Alleged Mismanagement of 
Government Funds at the VA Boston Healthcare System, which was issued 
on May 31, 2007. I am accompanied by Maureen Regan, Counselor to the 
Inspector General, and Nicholas Dahl, Director of the Bedford Audit 
Operations Division, who directed the team responsible for the audit. 
We performed the audit in response to an anonymous hotline call 
concerning contract irregularities and the misuse of government funds. 
The issues we reported are specific to the VA Boston Healthcare System, 
which is one of eight facilities in Veterans Integrated Service Network 
(VISN) 1; however, I will highlight areas where I believe VHA 
management can improve controls to help prevent similar incidents from 
occurring elsewhere in VHA.
BACKGROUND
    The complainant listed 24 contracts that allegedly had improper 
contract modifications associated with them. These 24 contracts were 
originally executed between fiscal years 2000 through 2003 and had a 
combined value of $1.3 million. During fiscal years 2002 through 2006, 
the Boston Healthcare System executed 40 contract modifications against 
these contracts with a combined value of $5.5 million. All 40 
modifications involved non-recurring maintenance (NRM) work for the VA 
Boston Healthcare System.
CONTRACT MODIFICATIONS
    A contract can be modified to add additional work only if the work 
is within the scope of the original contract documents. If the work is 
outside the original scope of work, a new contract must be awarded 
using procedures prescribed in Federal Acquisition Regulations, 
including competitive procedures. Modifications that are outside scope 
are prohibited cardinal changes to the contract. It is the 
responsibility of the contracting officer to determine whether a 
modification is appropriate and for ensuring that all modifications are 
appropriate. Contracting officials also violated Federal Acquisition 
Regulations by issuing modifications to contracts that had expired.
APPROPRIATIONS LAW
    Appropriations are available to pay for expenses incurred during 
the years the appropriations are available. If an agency does not 
obligate funds prior to the expiration of the appropriation, the funds 
are not available to pay for new obligations. The only exception is if 
the expenditure meets the ``bona fide needs'' test set forth in Title 
31, U.S.C. Section 1502. Under this test, expired funds can be 
obligated to pay expenses incurred properly during the life of the 
appropriation or to complete contracts properly made during this time 
period.
VALIDATION OF COMPLAINT
    We determined that 37 of the 40 contract modifications were outside 
the scope of the original contracts and that payment with expired 
appropriations violated Federal appropriations laws. The Chief of the 
Purchasing and Contracting Section executed 26 of the 37 contract 
modifications and 4 other contracting officers executed the remaining 
11 modifications. The total value of the 37 modifications was $5.4 
million, all paid from expired funds. We concluded that the VA Boston 
Healthcare System's Chiefs of the Purchasing and Contracting Section 
and Fiscal Service, along with Engineering Service personnel, 
collaborated to circumvent internal controls.
    The collaboration began when the Chief of Fiscal Service reportedly 
informed the Chief of Engineering Service that funds were available 
from prior year appropriations. Engineering Service maintained a list 
of NRM work needing completion and provided the names of vendors who 
had performed work during the appropriation years of the expired funds 
and the relevant purchase order numbers to the Chief of the Purchasing 
and Contracting Section. Contracting officers used that information to 
execute 37 contract modifications that were outside the scope of the 
original contracts.
    For example, the VA Boston Healthcare System executed an original 
contract in fiscal year 2002 to repair roadways for $16,000 at the West 
Roxbury campus of the VA Boston Healthcare System. The first 
modification, executed in fiscal year 2003, provided $102,367 to repair 
parking lot lights. Another modification, executed in fiscal year 2004, 
provided $487,000 to replace emergency electrical panels. A third and 
final modification, executed in fiscal year 2004, provided $408,500 to 
replace an emergency generator. The three modifications had a total 
value of $997,867, all paid with expired funds.
    Personnel within all three services did not follow established 
procedures and circumvented controls. The Chief of the Purchasing and 
Contracting Section, and four other contracting officers, exceeded 
their authority by executing contract modifications against expired 
contracts and were outside the scope of the original contracts. The 
contracting officers also did not obtain the required legal concurrence 
from VA Regional Counsel to execute modifications exceeding $100,000. 
In addition, the Chief of Fiscal Service allowed the obligations and 
did not obtain approval from the VA Expired Funds Manager to use $5.4 
million in expired funds. Finally, Engineering Service personnel did 
not input non-recurring maintenance project submissions into the VISN 
Support Service Center Capital Asset Database, which is used to track 
NRM projects. The effect of these omissions was to reduce the chance 
that anyone at the VISN or VHA would question and oversee these 
projects.
    In addition, the VA Boston Healthcare System did not comply with 
other Federal Acquisition Regulations in awarding the contracts. For 
example, in several cases, they did not develop statements of work 
(SOW) that adequately described the work to be performed or the 
services to be rendered. The SOW is in itself a control mechanism that 
provides an objective measure for the completion of work. By executing 
modifications to existing contracts, the VA Boston Healthcare System 
also avoided competition requirements and had no assurance that the 
prices paid were fair and reasonable.
CONTROL WEAKNESSES
    Our review identified policies and procedures were in place to 
prohibit the improper use of expired funds. However, no controls were 
in place to ensure compliance or detect noncompliance with prescribed 
policies and procedures. VA Boston Healthcare System employees' ability 
to circumvent these procedures puts the effectiveness of these policies 
and procedures into question.
    Although the procedures required the approval of the VISN Chief 
Financial Officer before obligating expired funds, the Chief of Fiscal 
Service was able to use expired funds without receiving the required 
approval and without the VISN or VHA knowing about the obligations of 
the expired funds. System controls could prevent personnel below the 
VISN level from obligating expired funds. A more cost effective control 
would be reports designed to flag obligations of prior year funds.
    In addition, the VA Boston Healthcare System was able to execute 
improper contract modifications without the awareness of VISN or VHA 
officials. VA acquisition regulations require contracting officers to 
request legal reviews from the VA Regional Counsel prior to executing 
modifications greater than $100,000. When submitting a request for 
legal review, contracting officers are required to submit a statement 
as to whether the modification is within the scope of the original 
contract. VA Boston Healthcare System ignored this procedure and 
executed 17 modifications over $100,000, valued at $4.4 million, 
without requesting the legal reviews. No controls are in place to 
identify contracts or modifications that have not had the required 
legal or technical reviews.
    Contracting officers are responsible for safeguarding the interest 
of the government in contractual agreements. Contract modifications 
should not be executed to expedite the contracting process or in 
response to pressure from requesting services. It was ultimately the 
responsibility of the Chief of the Purchasing and Contracting Section 
to make the correct determination that modifications were outside the 
scope of the original contracts and that Fiscal Service could not 
obligate additional funding to pay for these modifications. We saw no 
procedures in place at the time that would have alerted the VISN or VHA 
to the improper modifications. The results of our review suggest that 
oversight over contracting officials' activities should be increased to 
improve the accountability of their actions.
    We reported the issues identified at the VA Boston Healthcare 
System to the auditors who are responsible for the annual consolidated 
financial statement audit. Standards require that auditors design a 
financial statement audit to provide reasonable assurance of detecting 
material misstatements, whether caused by error, fraud, or illegal 
acts. Although the violations of law cited in the Boston report did not 
result in material misstatements, the auditors must consider the risk 
of similar acts occurring elsewhere that could be a material weakness. 
Our auditors have considered the Boston report in designing their audit 
procedures for this year. The audit is still underway, with the report 
due in November.
RECOMMENDATIONS
    We made seven recommendations to the VISN-1 Director. Four of the 
recommendations concerned the improvement of controls over the 
execution of contract modifications, the use of expired funds, the NRM 
reporting and approval process, and compliance with the Federal 
Acquisition Regulations. We also recommended that the VISN-1 Director 
take administrative actions against the Chiefs of the Purchasing and 
Contracting Section and Fiscal Service; initiate an administrative 
investigation; and take actions, if warranted, against other VA Boston 
Healthcare System employees involved with the issues identified during 
our audit. Finally, we recommended the necessary accounting adjustments 
to correctly record the funding of the improper contract modifications.
    In addition, we recommended the Deputy Assistant Secretary for 
Acquisition and Materiel Management determine whether the warrant 
authority for the Chief of the Purchasing and Contracting Section 
should be revoked. The Deputy Assistant Secretary subsequently revoked 
the Chief of the Purchasing and Contracting Section's warrant 
authority.
VISN ACTION PLAN
    In response to our recommendations, the VISN developed and issued 
standard operating procedures and policy guidance to help improve 
management controls over the execution of contract modifications, use 
of expired funds, and the approval of NRM projects. With guidance from 
VHA accounting officials, VA Boston Healthcare System accounting staff 
made the necessary accounting adjustments to correctly record the 
funding of the improper contract modifications.
    The VISN-1 Director appointed an Administrative Board of 
Investigation to conduct an assessment of the facts surrounding the 
improper contract modifications and use of expired funds. The VISN-1 
Director instructed the Board to inquire into all aspects related to 
the issues, and to obtain testimony under oath or affirmation without a 
pledge of confidentiality. A final report is due by July 15, 2007.
CLOSING
    The OIG will continue to work with VA to improve the oversight of 
contracting and fiscal activities to prevent similar occurrences in the 
future.
    Mr. Chairman, thank you again for the opportunity to testify. I 
would be pleased to answer any questions that you or other Members of 
the Subcommittee may have.

                                 
              Prepared Statement of Hon. Robert J. Henke,
Assistant Secretary for Management, U.S. Department of Veterans Affairs
    Mr. Chairman and members of the Subcommittee, I am pleased to have 
the opportunity to testify on the Department of Veterans Affairs' 
acquisition system. VA spends over $10 billion per year through widely 
dispersed acquisition activities for pharmaceuticals, medical/surgical 
supplies and equipment, prosthetic devices, information technology, 
construction, and other acquisition services.
    VA procurement practices have been identified by VA's Inspector 
General as one of the five major management challenges facing the 
Department. I assure you that VA understands our challenges and is 
dedicated to improvement. Our leadership is engaged, committed, and is 
clearly articulating the expectation that VA will work to improve the 
quality and efficiency of acquisition services. We have many 
improvement initiatives underway, new people on board, and additional 
policy and guidance to improve performance.
    As VA's Chief Acquisition Officer (CAO), I am responsible for 
monitoring the performance of acquisition activities and acquisition 
programs across the agency, as well as advising on appropriate business 
strategies to achieve VA's mission. My duties also entail managing the 
direction of acquisition policy and ensuring that VA's acquisition work 
force is trained and capable of providing the highest level of support 
to our mission-focused programs.
    I would like to cover five of my top responsibilities and 
initiatives as CAO:
  1.  Advising on proper business strategies to achieve agency mission 
        and monitor the performance of acquisition activities
    VA's acquisition system is very large, complex, and decentralized. 
To determine whether VA acquisition is organized correctly and has the 
right quantity and types of acquisition professionals, I have directed 
that a comprehensive study be conducted by an independent third party 
contractor with extensive knowledge of the acquisition work force and 
challenges. The contractor will benchmark our procurement system 
against other government agencies and provide courses of action for 
improving VA's acquisition infrastructure and accountability.
    We have made very important policy changes within VA to improve our 
acquisition processes. Contract requirements must be clear, well 
written and understandable to reduce our risks. To that end we have 
implemented a collaborative approach to contract requirements 
definition. For some major acquisitions over $5 million, we now use 
cross-functional Integrated Product Teams (IPTs) to develop our 
requirements. Key program, contracting, legal and finance officials 
work collaboratively to write acquisition plans, performance work 
statements and other critical acquisition documents. This approach 
significantly decreases the risks of developing a poorly defined 
requirement.
    To help ensure that contracting officers develop effective 
contracts, we have implemented the use of Contract Review Boards 
(CRBs). CRBs are composed of the most knowledgeable and senior 
acquisition professionals. As with IPTs, CRBs use a collaborative and 
structured approach to ensure that good contracts are awarded. Although 
contracting officers have traditionally had their work reviewed by 
their peers and legal counsel, they are now required to have their 
major acquisitions reviewed at three critical junctures by the CRB: 
prior to issuance of the solicitation, prior to negotiations and prior 
to award. This simple, common-sense approach to acquisition management 
is vastly improving our contract award process.
    Contract administration is critical to ensuring that the government 
gets what it pays for. We are currently developing a comprehensive plan 
that will improve contract administration at VA. Our goal is to create 
a culture where contracting and program officials work collaboratively 
to manage contracts throughout their life cycle.
    In February 2004, VA consolidated oversight and review of VA's 
acquisition activities under one office, the Office of Business 
Oversight (OBO), which reports to me as the VA Chief Financial Officer 
and CAO. OBO is VA's primary internal quality assurance organization 
for financial management activities and operations, including 
acquisition activities. OBO's main focus is to review acquisition 
activities at decentralized locations for compliance with Federal, 
Department, and Administration policies and procedures and to provide 
local management with recommendations to improve their acquisition 
activities. The consolidation of acquisition oversight within OBO has 
resulted in a standardization of acquisition review processes and 
oversight reporting, and has created opportunities to highlight best 
practices in the field.
    The OBO acquisition review team is staffed with a combination of 
procurement specialists and professional auditors trained in conducting 
acquisition compliance reviews. The team conducts contract inspections 
at a number of Veterans Integrated Service Networks each year, 
reviewing up to 450 contract files at as many as 25 locations. The team 
also conducts special-topic acquisition audits as needed. OBO began 
acquisition reviews in the second half of FY 2005 and since that time 
has issued 11 acquisition reports containing 76 recommendations to 
improve field station compliance with policies and procedures and to 
enhance the effectiveness of acquisition operations. This consolidated 
acquisition oversight team has improved my ability to monitor the 
performance of acquisition activities across the Department.
    We conduct pre- and post-award audits of VA Federal Supply Schedule 
contracts for medical products and services. We assure that these 
vendors are charging Federal customers the most favorable customer 
prices and in FY 2006 identified over $20 million that could be 
recovered. The 25 auditors dedicated to perform these services work in 
the Office of Inspector General and are under a reimbursable agreement 
paid for by VA's Supply Fund.
    Additionally, we have implemented a robust strategic sourcing 
program. I chair VA's Strategic Sourcing Council, supported by 
Assistant Secretaries, senior executives, and stakeholders from VA's 
three administrations. In fiscal year 2006, VA continued to build on 
its strategic successes. We benchmarked other government agencies, 
private firms, and current VA suppliers to continually improve our 
program. We are actively involved in Federal Strategic Sourcing 
Initiatives for common commodities, including express/ground delivery 
services, office supplies, wireless communication services, and 
copiers. Ever mindful of our commitments to small business, 
particularly those owned by veterans and service-disabled veterans, one 
of our goals this fiscal year is to identify strategic sourcing 
opportunities for these socioeconomic groups.
  2.  Increasing appropriate use of performance-based contracting and 
        performance specifications
    The Office of Federal Procurement Policy has mandated that this 
year agencies will award 40% of eligible service dollars as 
Performance-Based Service Acquisitions (PBSA). To that end we targeted 
two of VA's largest mission-critical services as PBSA: ``Project HERO'' 
(Health Effectiveness through Resource Optimization) for the Veterans 
Health Administration (VHA), and Vocational Rehabilitation and 
Employment Services (VR&E) for the Veterans Benefits Administration. 
Project HERO is a pilot program that will improve delivery of 
healthcare services under VA's fee-basis program, the intent of which 
is to consolidate like services under fewer contract providers. In 
support of the VR&E program, we are implementing a national contract 
strategy that will further consolidate VR&E services under fewer 
providers. Both actions are currently in progress. We will also be 
providing PBSA training to acquisition and program officials during 
their certification process.
  3.  Making acquisition decisions consistent with applicable laws and 
        establish clear lines of authority, accountability, and 
        responsibility for acquisition decision making.
    I have designated the Deputy Assistant Secretary (DAS) for 
Acquisition and Logistics as VA's Senior Procurement Executive. In that 
capacity the DAS will serve as my principal advisor in all acquisition 
matters.
    VA currently has 33 Heads of Contracting Activities (HCA) with 413 
contracting officers warranted at the $100,000 and above threshold. 
These contracting officers are located in VA medical centers, national 
cemetery offices, and several VA support locations throughout the 
nation. Each HCA and the 413 contracting officers are delegated 
contracting authority from the DAS for Acquisition and Logistics who 
reports directly to me. VA has an established warranting program to 
ensure contracting officers have the requisite education and experience 
needed to meet the VA mission.
    VHA consolidated its contracting organizations into ``Network 
Contracting Centers.'' To date, 19 of the 21 networks have been 
consolidated. Each network has hired Chief Logistics Officers and 
Contract Managers to provide guidance on and oversight of the 
acquisition activities.
  4.  Managing the direction of acquisition policy for VA including 
        implementation of the unique acquisition policies, regulations 
        and standards for VA
    I am pleased to inform you that VA published a proposed rule in the 
Federal Register that is its first rewrite of the VA Acquisition 
Regulation (VAAR) since 1984. The new VAAR will be easier to understand 
and consolidates changes and modifications that have occurred in the 
last 23 years. The new VAAR parallels the Federal Acquisition 
Regulation and eliminates redundant and outdated information.
    On December 22, 2006, President Bush signed Public Law (P.L.) 109-
461, the Veterans Benefits, Healthcare, and Information Technology Act 
of 2006. Included in this Act is a unique ``Veterans First'' approach 
specific to VA contracting that became effective June 20, 2007. This 
approach changes the preferences for contracting within VA, placing 
Service-Disabled Veteran-Owned Small Business (SDVOSB) and Veteran-
Owned Small Business (VOSB) first and second, respectively, in 
satisfying VA's acquisition requirements designed to meet established 
VA contracting goals. Certain conditions must be met, however, 
including the need to achieve a fair and reasonable price. We issued 
Information Letter (IL) 049-07-08 on June 19, 2007, which provides 
guidance until a change to the VAAR is published in the Federal 
Register.
    The Secretary recently approved a reorganization of the newly named 
Office of Acquisitions and Logistics (OAL). The reorganization 
positions OAL to better provide the needed leadership to VA's 
acquisition and logistics community. It separates the policy and 
operation functions from the purview of a single Associate Deputy 
Assistant Secretary (ADAS) for Acquisitions into two distinct 
functions. As a result, operational contracting components will now be 
separated from the policy development component. This will enable us to 
provide a greater concentration of effort in both areas, and is 
designed to improve our overall performance. Acquisition policy will 
come to the forefront, under the direction of a newly approved 
Associate Deputy Assistant Secretary for Acquisition and Logistics 
Programs and Policy. This same senior executive will be responsible for 
career management of the acquisition work force, to include development 
of policies and plans for improvement.
    Additionally, VA is well represented in the Chief Acquisition 
Officer Council (CAOC) and the Civilian Agency Acquisition Council 
(CAAC). Our participation ensures that VA's needs are appropriately 
considered prior to promulgating government-wide acquisition policy.
  5.  Acquisition Work force and Career Management
    Perhaps the most daunting challenge currently facing VA, as well as 
all Federal agencies, is our ability to attract, develop and retain a 
competent, professional contracting work force. The dollars obligated 
by VA have more than doubled since 2000, yet our contracting work force 
has remained relatively the same size during this period. The agency-
wide acquisition study that I mentioned is designed to include data to 
assess the size and capability of our services.
    Wide-spread problems in our central office contracting 
organization, the Office of Acquisition and Logistics, led me to direct 
that a study be done to determine if we were organized properly to 
perform our mission. That study, which was completed last February, 
resulted in a major reorganization of the Office of Acquisition and 
Logistics.
    Another result of this study includes formation of a new Center for 
Acquisition Innovation (CAI), which will be located outside the DC 
area. This new organization focuses on quality, innovation and customer 
service. The CAI will provide a full complement of cost-efficient 
acquisition solutions and enterprise ``best practices'' to support our 
VA customers. It will become the catalyst for change within VA, 
transforming VA's acquisition process from a tactical and reactive 
function to a strategically driven function that ensures maximum value 
for every acquisition dollar spent. The CAI will provide a wide range 
of specialized acquisition and logistics services to VA customers. The 
CAI will be organized into two operating activities, Operations and the 
Acquisition Leadership Academy.
    The operation activity will focus on three business lines: major 
acquisitions with VA-wide implications, strategic sourcing, and 
emergency response and recovery acquisitions.
    The Acquisition Leadership Academy will implement training and 
certification programs authorized by the Office of Federal Procurement 
Policy. It will emphasize three areas: contracting certification (FAC-
C); program/project management certification (FAC-P/PM); and 
acquisition internship. The contracting and program/project management 
certification programs are designed to be first-rate training venues, 
and it is our intent to provide the type of training that will put us 
in a government-wide leadership position. The acquisition intern 
program is our long-term solution to building a professional 
contracting workforce. Again, this will be a robust, second-to-none 
effort, which will train interns for deployment to VA contracting 
organizations across the United States.
Summary
    VA has taken meaningful steps to resolve the current challenges 
concerning our acquisition programs and practices. VA remains committed 
to improving its processes and we are confident that our challenges can 
be overcome for the benefit of both the veterans that we serve and the 
taxpayers.
    This concludes my statement. I would be pleased to answer any 
questions members of the Subcommittee may have.

                                 
          POST HEARING QUESTIONS AND RESPONSES FOR THE RECORD
                                     Committee on Veterans' Affairs
                       Subcommittee on Oversight and Investigations
                                                     Washington, DC
                                                      July 16, 2007

Honorable George J. Opfer
Inspector General
U.S. Department of Veterans Affairs
810 Vermont Avenue, NW
Washington, DC 20420

Dear Mr. Opfer:

    On Wednesday, June 27, 2007, the Subcommittee on Oversight and 
Investigations of the House Committee on Veterans' Affairs held a 
hearing on VA's Internal Contracting Oversight Deficiencies.
    During the hearing, the Subcommittee heard testimony from Ms. 
Belinda Finn, the Assistant Inspector General for Auditing. She was 
accompanied by Ms. Maureen Regan, the Counselor to the Inspector 
General, and Mr. Nick Dahl, the Director of the Bedford Office of 
Audit. As a follow-up to that hearing, the Subcommittee is requesting 
that the following questions be answered for the record:

    1.  What internal controls does the OIG suggest be used to ensure 
compliance or detect noncompliance with prescribed policies and 
procedures concerning contracting other than more procedural checks?
    2.  Following your investigation, VISN-1 implemented changes to 
require approval by the VISN-1 CFO of some of the types of expenditures 
at issue in your investigation. In your judgment, is this change 
sufficient to ensure that the types of improper activities disclosed in 
your investigation do not recur? Do you have any information about 
whether this change has, in fact, achieved its stated goal?
    3.  Following your investigation, VISN-1 instituted a new Standard 
Operating Procedure concerning the use of Estimated Miscellaneous 
Obligation (VAF 1358). In your judgment, is this Standard Operating 
Procedure sufficient to prevent the future misuse of VAF 1358 
expenditures like those your investigation uncovered? Do you have 
information that would lead you to believe whether VA has controls in 
the other VISNs that would prevent similar misuse of VAF 1358 
expenditures?

    We request you provide responses to the Subcommittee no later than 
close of business, Friday, August 10, 2007, to Ms. Caitlin Ostomel.
    If you have any questions concerning these questions, please 
contact Subcommittee on Oversight and Investigations Staff Director, 
Geoffrey Bestor, Esq., at (202) 225-3569 or the Subcommittee Republican 
Staff Director, Arthur Wu, at (202) 225-3527.

            Sincerely,
                                                  Harry E. Mitchell
                                                           Chairman

                                                  Ginny Brown-Waite
                                          Ranking Republican Member

                                 

                                U.S. Department of Veterans Affairs
                                                    Washington, DC.
                                                    August 14, 2007

The Honorable Harry E. Mitchell
Chairman
The Honorable Ginny Brown-Waite
Ranking Republican Member
Subcommittee on Oversight and Investigations
Committee on Veterans' Affairs
U.S. House of Representatives
Washington, DC 20515

Dear Mr. Chairman:

    Enclosed are responses to follow-up questions from the June 27, 
2007, hearing before the Subcommittee that were included in a letter 
from you and the Ranking Republican Member. A similar letter is being 
sent to the Ranking Republican Member of the Subcommittee.
    Thank you for your interest in the Department of Veterans Affairs.

            Sincerely,
                                                    George J. Opfer
                                                  Inspector General

            Enclosure

                                 
              VA Office of Inspector General Responses to
            Follow-Up Questions from June 27, 2007, Hearing
        Before the Subcommittee on Oversight and Investigations
     Committee on Veterans' Affairs, U.S. House of Representatives
    Question 1: What internal controls does the OIG suggest be used to 
ensure compliance or detect noncompliance with prescribed policies and 
procedures concerning contracting other than more procedural checks?

    Answer: The inappropriate contracting and fiscal actions in the VA 
Boston Healthcare System (VABHS) were the result of collaboration 
between the fiscal and contracting activities at high levels at the 
medical facility, making existing paper-based checks and balances 
ineffective. If the contracting entity complied with existing policy 
that required a legal review for modifications over $100,000, the 
deficiencies we found may have been identified and prevented. As the 
Department moves to a system of electronic procurements, we believe VA 
should establish checks and balances within the system that may better 
ensure compliance by preventing the completion of an award or 
modification that does not comply with statutory, regulatory, and other 
policy requirements. Using the VABHS situation as an example, if an 
electronic system required documentation of a legal review before 
allowing the modifications to proceed, the problems may have been 
prevented. Also, if an electronic system required input of information 
relating to scope, price, date of last payment, and a review of this 
information at a level above the contracting officer, contracting 
officers may have been prevented from completing actions that were 
outside scope or were to be funded with expired appropriations. 
However, the success of any system of checks and balances is dependent 
on the integrity of the information entered into the system and the 
people who enter the information in the system.

    Question 2: Following your investigation, VISN-1 implemented 
changes to require approval by the VISN-1 CFO of some of the types of 
expenditures at issue in your investigation. In your judgment, is this 
change sufficient to ensure that the types of improper activities 
disclosed in your investigation do not recur? Do you have any 
information about whether this change has, in fact, achieved its stated 
goal?

    Answer: It is not a new requirement for the Veterans Integrated 
Service Network (VISN) CFO to approve contract modifications that will 
be funded with prior year money. The requirement to obtain VISN CFO 
approval prior to using expired funds for non-recurring maintenance 
projects was in effect within VHA during the time the improper 
activities occurred at the VABHS. However, facility managers chose to 
disregard the approval process and there was no system control in place 
to alert VISN officials that expired funds were used illegally. 
Subsequent to our review, the VISN-1 Financial Quality Assurance 
Manager started monitoring general ledger account 4650, which accounts 
for the use of expired funds. If this account is adequately monitored, 
it will provide greater assurance that expired funds are being spent in 
accordance with appropriations law.

    Question 3: Following your investigation, VISN-1 instituted a new 
Standard Operating Procedure (SOP) concerning the use of Estimated 
Miscellaneous Obligation (VAF 1358). In your judgment, is this SOP 
sufficient to prevent the future misuse of VAF 1358 expenditures like 
those your investigation uncovered? Do you have information that would 
lead you to believe whether VA has controls in the other VISNs that 
would prevent similar misuse of VAF 1358 expenditures?

    Answer: VISN-1 SOP 2006-02, Use of Estimated Miscellaneous 
Obligation (VAF 1358), prescribes policy and circumstances governing 
the use of the 1358 method of obligating funds, and its issuance helps 
standardize practices throughout VISN-1. The SOP describes the proper 
use of 1358s, necessary approvals, and potential personal liability. 
The SOP only prescribes policy; it does not include corresponding 
system controls in the information technology systems in which these 
transactions are processed. Therefore, the VISN must rely on people to 
follow the policy in order for it to be effective.
    Our review focused on specific allegations pertaining to VISN-1. We 
are not aware of any VA controls in other VISNs that would have 
prevented similar misuse of 1358 expenditures.

                                 

                                     Committee on Veterans' Affairs
                                                     Washington, DC
                                                      July 16, 2007

Honorable R. James Nicholson
Secretary
U.S. Department of Veterans Affairs
810 Vermont Avenue, NW
Washington, DC 20420

Dear Secretary Nicholson:

    On Wednesday, June 27, 2007, the Subcommittee on Oversight and 
Investigations of the House Committee on Veterans' Affairs held a 
hearing on VA's Internal Contracting Oversight Deficiencies.
    During the hearing, the Subcommittee heard testimony from the 
Honorable Robert J. Henke, the Assistant Secretary for Management. He 
was accompanied by Mr. Jan Frye, the Deputy Assistant Secretary for 
Acquisition and Material Management, and Mr. Frederick Downs, Jr., the 
Chief Prosthetics and Clinical Logistics Officer. As a follow-up to 
that hearing, the Subcommittee is requesting that the following 
questions be answered for the record:

     1.  Following your investigation, VISN-1 instituted new Standard 
Operating Procedures (``SOP'') to address the problems identified in 
the Inspector General's investigation of the Boston Healthcare System. 
Is it standard operating procedure for individual VISNs to have their 
own SOPs concerning matters such as contracting and expenditure of 
government funds? Were VISN-1's new SOPs reviewed by anyone in VA 
central office before being implemented?

     2.  Following your investigation, VISN-1 implemented a new 
Standard Operating Procedure concerning the use of Estimated 
Miscellaneous Obligation (VAF 1358). What assurance do you have that 
the misuse of VAF 1358 expenditures identified in the IG's 
investigation is not occurring at other VISNs?

     3.  Following the IG's investigation, VISN-1 implemented changes 
to increase the authority and responsibilities of the VISN-1 Chief 
Financial Officer (CFO) in order to prevent future occurrence of the 
abuse identified by the IG. Have these changes been implemented? How 
many staff does the VISN-1 CFO have? Does the VISN-1 CFO receive 
sufficient support to meet his/her new responsibilities? Does the CFO 
in place at the time of the hearing believe there is enough support to 
meet these responsibilities?

     4.  As part of the organizational analysis outlined in the GAO 
Report dated October 2005, titled ``Status of Seven Key 
Recommendations'' relating to the development of a long-term 
improvement plan, what were the recommendations made by LMI?

     5.  Of the 1632 audits mentioned in Mr. Henke's testimony, how 
many of the audits found that things were being done correctly, and how 
many of the audits found improprieties?

     6.  In reference to Mr. Henke's testimony, why was it determined 
that contract-review board process procedures would apply primarily to 
acquisitions above $5 million, and has this been done?

     7.  What is the status of the Electronic Commerce Management 
System (eCMS) meant to improve efficiency and transparency in the 
contracting process?

     8.  As addressed by the VA's goal of improved customer relations, 
what are the required ``extraordinary efforts'' that are needed by the 
entire acquisition chain of command? Have they been made?

     9.  As referenced in the Procurement Reform Task Force Report of 
May 2002, how many non-Federal Supply Schedules have been contracted? 
How many were requested? How many were approved?

    10.  How many joint pharmacy contracts between the DoD and VA have 
been negotiated, and how much has been saved? How much has been 
purchased jointly over the past 3 years?

    11.  How many national medical-surgical prime vendors have been 
contracted?

    12.  What was identified by the 60 new work groups that were formed 
to standardize 140 new product lines?

    13.  Have all civilian departments met certification requirements 
with regards to education, training, and experience for acquisition 
duties, as stipulated by OFPP Policy Letter No. 05-01?

    14.  Does the Office of Business Oversight itself act as the 
arbitrator for various contracts, or does it solely perform an 
oversight function?

    15.  Concerning the audits conducted before and after contracts 
referred to in Mr. Henke's testimony, and the $20 million that could be 
recovered, have those funds been recovered and why were those funds 
unaccounted for until investigating the contract afterward?

    16.  In the cases of Project HERO and the Vocational Rehabilitation 
and Employment Services program, how is the consolidation of fewer 
providers stimulating more competition in prices and service 
capabilities?

    17.  Why has the contracting workforce remained relatively the same 
size as the budget has more than doubled?

    18.  In Mr. Henke's statement, he mentioned that he had issued an 
Information Letter (IL) 049-07-08 on June 19, 2007, which provides 
guidance on changes to the VAAR stemming from Public Law 109-461 for 
Veteran Owned Small Businesses, and Service-Disabled Veteran Owned 
Small Businesses. Please provide a copy of this letter for the official 
record, so that we can see the changes that are being implemented based 
on that law?

    19.  When do you anticipate the final regulations on the VAAR will 
be published in the Federal Register?

    20.  What role is A&MM playing in the implementation of the veteran 
and disabled veteran-owned small business provisions in Title 5 of PL 
109-461?

    We request you provide responses to the Subcommittee no later than 
close of business, Friday, August 10, 2007 to Ms. Caitlin Ostomel.
    If you have any questions concerning these questions, please 
contact Subcommittee on Oversight and Investigations Staff Director, 
Geoffrey Bestor, Esq., at (202) 225-3569 or the Subcommittee Republican 
Staff Director, Arthur Wu, at (202) 225-3527.

            Sincerely,
                                                  Harry E. Mitchell
                                                           Chairman

                                                  Ginny Brown-Waite
                                          Ranking Republican Member

                                 
                        Question for the Record
                    Hon. Harry E. Mitchell, Chairman
           Hon. Ginny Brown-Waite, Ranking Republican Member
              Subcommittee on Oversight and Investigations
                  House Committee on Veterans' Affairs
                             June 27, 2007
      Hearing on VA's Internal Contracting Oversight Deficiencies
    Question 1: Following your investigation, VISN-1 instituted new 
Standard Operating Procedures (``SOP'') to address the problems 
identified in the Inspector General's investigation of the Boston 
Healthcare System.

    Question 1(a): Is it standard operating procedure for individual 
VISNs to have their own SOPs concerning matters such as contracting and 
expenditure of government finds?

    Response: Each veterans integrated service network (VISN) is 
expected to develop local standard operating procedures based on 
national policy, directives and handbooks that are to be followed by 
its facilities.

    Question 1(b): Were VISN-1's new SOPs reviewed by anyone in VA 
central) office before being implemented?

    Response: VISN-1's new standard operating procedures were reviewed 
after implementation.

    Question 2: Following your investigation, VISN-1 implemented a new 
Standard Operating Procedure concerning the use of Estimated 
Miscellaneous Obligation (VAF 1358). What assurance do you have that 
the misuse of VAF 1358 expenditures identified in the IG's 
investigation is not occurring at other VISNs?

    Response: At the end of every fiscal year beginning with 2006 
procurement history, the Department of Veterans Affairs (VA) has 
reviewed open Estimated Miscellaneous Obligations (VA form 1358), 
notified facilities with open 13585, request information on the status 
of the order and justification for it to remain in open status. Monthly 
spot checks are being conducted to ensure actions were taken to close 
out open 1358s.

    Question 3: Following the IG's investigation, VISN-1 implemented 
changes to increase the authority and responsibilities of the VISN-1 
Chief Financial Officer (CFO) in order to prevent future occurrence of 
the abuse identified by the IG.

    Question 3(a): Have these changes been implemented?

    Response: VISN-1 has implemented changes to increase authority and 
responsibilities of the VISN-1's chief financial officer (CFO). The 
procedures that will be used for commitment, transfer, and obligation 
of funds will directly involve VISN-1's CFO. VISN-1's CFO will forward 
to the requiring activity or program office responsible for the 
procurement a statement certifying that funds have been committed. This 
certification will be forwarded to the assigned contracting officer as 
part of the procurement request (PR) package.
    The standard operating procedure (SOP) has been implemented. The 
SOP requires that all modifications to be executed with prior year 
funds (regardless of dollar amount) be approved at one level above the 
contracting officer responsible for the action. The contract file shall 
contain a written justification that the modification is within the 
scope of the original contract and therefore constitutes a bona fide 
need of the prior fiscal year. In addition, all modifications to be 
executed with prior year funding shall be approved by VISN-1's CFO.

    Question 3(b): How many staff does the VISN-1 CFO have?

    Response: No staff report directly to the VISN-1 CFO; however, the 
VISN-1 CFO works closely with the VISN's financial quality audit 
manager (FQAM) and CFOs at the medical centers.

    Question 3(c): Does the VISN-1 CFO receive sufficient support to 
meet his/her new responsibilities?

    Response: The current staffing meets the needs of the CFO 
requirements; however, a workload analysis completed by VISN-1's chief 
logistics officer (CLO) and network contract manager (NCM) identified 
the need for the following changes to include additional staff and co-
location of staff:

      The VA Hospital in Brockton, MA will become the primary 
location for the consolidated contracting activity (CCA) New England 
acquisition staff. The CLO, NCM and entire VA Boston contracting staff 
(currently located in Jamaica Plain) will all immediately move to the 
Brockton facility. In addition, all positions approved as a result of 
this workload analysis will be staffed in Brockton.
      By the Fall of 2007, 10 new staff will be hired. The 10 
new staff combined with the existing six staff at Boston will be 
consolidated to the Brockton campus for a total of 16 staff. The 
Brockton group will perform all of VA Boston's work and take on the 
overflow from all other facilities. Facility chiefs of procurement and 
contracting will continue to assign work locally. All consolidated 
contracts will be completed in Brockton. A core team will continue at 
the facility, however, as vacancies arise in the network those 
vacancies will be filled at the Brockton campus. Each facility will be 
left with a limited amount of staff to maintain a presence at that 
facility.
      The Brockton staff will be organized into three specialty 
contracting teams (construction, medical services, and commodities). 
There will be a team leader located in Brockton for each of the three 
contracting teams, who will be responsible for assigning, reviewing, 
monitoring and supervising all work performed within that group. The 
team leader will be responsible for managing the entire workload within 
the team.

    Question 3(d): Does the CFO in place at the time of the hearing 
believe there is enough support to meet these responsibilities?

    Response: At the time of the hearing, preliminary discussions were 
being held on the need for a staffing plan to assist the VISN CFO. 
There have been several changes to processes and procedures in addition 
to increased workloads that justify the need to obtain more staff. 
Plans are now in place to develop a viable staffing plan to assist the 
CFO to effectively carry out their financial responsibilities.

    Question 4: As part of the organizational analysis outlined in the 
GAO Report dated October 2005, titled ``Status of Seven Key 
Recommendations'' relating to the development of a long-term 
improvement plan, what were the recommendations made by LMI?

    Response: The Logistics Management Institute (LMI) recommended the 
establishment of a center for acquisition innovation which would have a 
headquarters and field components devoted to providing innovative 
contracting solutions in support of major VA procurements, strategic 
sourcing initiatives, and emergency response and recovery operations. 
LMf is assisting the Office of Acquisition and Logistics with the 
implementation of its strategic plan and balanced scorecard of 
performance measures, which include initiatives to address the key 
recommendations in the areas of customer service, communications, 
recruitment, and retention of a quality work force and the award and 
administration of contracts.

    Question 5: Of the 1632 audits mentioned in Mr. Henke's testimony, 
how many of the audits found that things were being done correctly, and 
how many of the audits found improprieties?

    Response: The legal/technical review (audit) process allows for 
changes and corrections to be made as the contract action moves 
forward. Some corrections are minor and others are more significant, 
but the goal of the review is to bring the procurement up to standard 
without unnecessarily delaying the acquisition. Some findings are so 
significant that the submission is rejected and returned for revision 
and resubmission before it is allowed to continue. Of the 1,632 
solicitations that were reviewed, approximately 5 percent were rejected 
and had to be resubmitted.

    Question 6: In reference to Mr. Henke's testimony, why was it 
determined that contact review board process procedures would apply 
primarily to acquisitions above $5 million, and has this been done?

    Response: The contract review board (CRB) process is being 
implemented in VA as a replacement for the business clearance review 
(BCR) process. The CRB process adopted the same dollar thresholds used 
by the BCR process. Both the CRB and BCR processes are thorough and, 
therefore, very labor intensive. The $5 million threshold was 
established in an effort to balance the importance and dollar level of 
the procurement with the level of effort needed for review. Contracts 
below $5 million are reviewed using the legal and technical review 
process discussed in question 5. The CRB process has been implemented 
for about two-thirds of VA's qualifying procurements, with the BCR 
process used for the remaining one-third. The BCR process will be 
phased out completely over the next year in favor of the CRB process.

    Question 7: What is the status of the Electronic Commerce 
Management System (eCMS) meant to improve efficiency and transparency 
in the contracting process?

    Response: The electronic commerce management system (eCMS) has been 
deployed VA-wide with the contracting officers (1102 job series) having 
been trained through a phased approach starting in fiscal year (FY) 
2006. As of August 2007, over 55,000 acquisition actions have been 
entered into eCMS covering the full procurement cycle from acquisition 
plan through modification. There are currently over 1,000 users of the 
system. Plans are underway to train 400 purchasing agents and 
prosthetics purchasing staff in FY 2008, In October, an interface to 
the General Services Administration e-Buy system will be implemented to 
facilitate the use of its electronic solicitation mechanism.

    Question 8: As addressed by the VA's goal of improved customer 
relations, what are the required ``extraordinary efforts'' that are 
needed by the entire acquisition chain of command? Have they been made?

    Response: VA is proceeding with a competitive solicitation for an 
acquisition study that will provide an analysis of VA's current 
acquisition structure, delegated lines of authority, and options for 
new/revised acquisition organizational structures for consideration. 
The solicitation should be awarded prior to the end of FY 2007. As part 
of the reorganization of the Office of Acquisition and Materiel 
Management, we are establishing a new associate deputy assistant 
secretary (ADAS) for acquisition and logistics programs and policy who 
will be responsible for the policy and oversight of VA's acquisition 
program. This newly established position will be responsible for 
developing operational and program management performance measures for 
VA's acquisition program.

    Question 9: As referenced in the Procurement Reform Task Force 
Report of May 2002, how many non-Federal Supply Schedules have been 
contracted? How many were requested? How many were approved?

    Response: At the National Acquisition Center, approximately 322 
contracts, which include national contracts, national blanket purchase 
agreements (BPAs), and national blanket ordering agreements, have been 
awarded and are in place. These contract vehicles leverage requirements 
from VA and/or Department of Defense (DoD) and other government 
agencies to achieve better pricing, terms, and conditions. All requests 
that contained complete requirements were accepted and processed.

    Question 10: How many joint pharmacy contracts between the DoD and 
VA have been negotiated, and how much has been saved? How much has been 
purchased jointly over the past 3 years?

    Response: We currently have 67 joint contracts and 6 joint BPAs, 
i.e., incentive agreements, in place. From FY 2004 to FY 2006 (the last 
full 3-year period), VA has saved a total of $1.75 billion and spent a 
total of $1.12 billion under VA/DoD joint pharmaceutical contracts. VA 
does not have DoD spend and cost savings data.

    Question 11: How many national medical-surgical prime vendors have 
been contracted?

    Response: Seven medical-surgical prime vendor contracts have been 
awarded. They are awarded by region. Two are to large businesses, and 
five are to small businesses.

    Question 12: What was identified by the 60 new work groups that 
were formed to standardize 140 new product lines?

    Response: After the release of the procurement reform task force 
report of May 2002, the Veterans Health Administration (VHA) revamped 
the standardization program, and created 60 integrated product teams 
(IPT) to identify and award standardization contracts. As of August 
2007, 92 national blanket purchase agreements, 88 national contracts, 
and 23 basic ordering agreements have been awarded under the 
standardization program. In addition, the current 29 of the 60 IPTs are 
reviewing and working on awards of an additional 125 products. The 
standardization program is an on-going project and products are 
identified for standardization as the requirement is identified.

    The following documents are attachments to response:

    A.   Active National Medical Surgical Standardization Contract 
Awards
    B.   Current Medical Surgical Standardization Projects
    C.   Active Prosthetics Standardization Contract Awards
    D.  Current Prosthetics Standardization Projects

    Question 13: Have all civilian departments met certification 
requirements with regards to education, training, and experience for 
acquisition duties, as stipulated by OFPP Policy Letter No. 05-01?

    Response: VA does not have information on progress of other 
departments/agencies in implementing Office of Federal Procurement 
Policy (OFPP) policy letter No 05-01. The Office of Management and 
Budget (OMB), tracks and maintains this information. VA has begun the 
certification process mandated by OMB. As of September 5, 2007, 105 
contract specialists (1102s) have been certified in accordance with the 
Federal Acquisition in Contracting (FAC-C) certification process. The 
VA Center for Acquisition Innovation will include an acquisition 
leadership academy that will have schools with curricula devoted to 
contracting and program and project management certification.

    Question 14: Does the Office of Business Oversight itself act as 
the arbitrator for various contracts, or does it solely perform an 
oversight function?

    Response: The Office of Business Oversight performs oversight of VA 
acquisition operations. One of the primary reasons for the creation of 
the office was to separate the policy and operations functions from the 
oversight of compliance with those policies and operations. 
Accordingly, the Office of Business Oversight conducts contract 
inspections and contract audits of VA acquisition activities and does 
not act as the arbitrator for contracts.

    Question 15: Concerning the audits conducted before and after 
contracts referred to in Mr. Henke's testimony, and the $20 million 
that could be recovered, have those funds been recovered and why were 
those funds unaccounted for until investigating the contract afterward?

    Response: Under the audit review process for Federal supply 
schedules, pre- and post-award audits are performed. Pre-award audits 
assist the contracting staff in ensuring that information provided by 
the contractor is accurate, complete, and current. Depending on the 
findings of the pre-award review, discrepancies found during contract 
administration, voluntary disclosures by the contractor, or other 
circumstances which arise during the administrative execution of the 
contract, a post-award audit may also be needed or desired. Once a 
post-award audit is completed, negotiations are held with the company 
to substantiate findings and to reach a settlement. In some cases, 
these findings are litigated. The whole process can take 6 months to 2 
years before settlement or audit recovery can be reached, depending on 
the circumstances and recourse taken by the contractor. The $20 million 
in post-award audit recoveries were collected during FY 2006.

    Question 16: In the cases of Project HERO and the Vocational 
Rehabilitation and Employment Services program, how is the 
consolidation of fewer providers stimulating more competition in prices 
and service capabilities?

    Response: The procurement process for these two projects has not 
been completed yet, therefore, VA cannot fully respond to the question 
at the present time.

    Question 17: Why has the contracting workforce remained relatively 
the same size as the budget has more than doubled?

    Response: Greater efficiencies in our work force have been achieved 
in recent years. Some efficiencies have been made possible because of 
improvements in the procurement process resulting from the Federal 
Acquisition Streamlining Act (FASA) 1995 and the Federal Acquisition 
Reform Act (FARA) 1996. Other efficiencies are due to consolidations of 
VA medical center contracting activities and improved work process 
management. The other reality is that VA and other government agencies 
have had difficulty in recruiting qualified 1102 contracting officers. 
We recognize that our current contracting work force needs to be 
reevaluated to meet future challenges. This reevaluation will be 
accomplished within the context of the proposed VAt-wide acquisition 
study to be conducted in FY 2008.

    Question 18: In Mr. Henke's statement, he mentioned that he had 
issued an Information Letter (IL) 049-07-08 on June 19, 2007, which 
provides guidance on changes to the VAAR stemming from Public Law 109-
461 for Veteran Owned Small Businesses, and Service-Disabled Veteran 
Owned Small Businesses. Please provide a copy of this letter for the 
official record, so that we can see the changes that are being 
implemented based on that law?

    Response: A copy of Information Letter (IL) 049-07-08 is attached.

    Question 19: When do you anticipate the final regulations on the 
VAAR will be published in the Federal Register?

    Response: The target date for publication in the Federal Register 
is December 14, 2007.

    Question 20: What role is A&MM playing in the implementation of the 
veteran and disabled veteran-owned small business provisions in Title 5 
of PL 109-461?

    Response: Interim guidance to VA contracting officers was provided 
in IL 049-07-08 issued on June 19, 2007. A formal change to the VA 
Acquisition Regulation to codify VA's implementation of the public law 
is being finalized and is expected to be published in the Federal 
Register by December 14.

                                  
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