[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
BILLIONS SPENT ON ``MISCELLANEOUS''
EXPENDITURES: INADEQUATE CONTROLS AT THE
U.S. DEPARTMENT OF VETERANS AFFAIRS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT AND
INVESTIGATIONS
of the
COMMITTEE ON VETERANS' AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JULY 31, 2008
__________
Serial No. 110-100
__________
Printed for the use of the Committee on Veterans' Affairs
U.S. GOVERNMENT PRINTING OFFICE
44-002 PDF WASHINGTON : 2008
----------------------------------------------------------------------
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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 HENRY E. BROWN, Jr., South
Dakota Carolina
HARRY E. MITCHELL, Arizona JEFF MILLER, Florida
JOHN J. HALL, New York JOHN BOOZMAN, Arkansas
PHIL HARE, Illinois 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 STEVE SCALISE, Louisiana
TIMOTHY J. WALZ, Minnesota
DONALD J. CAZAYOUX., Jr., Louisiana
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
published in electronic form. The printed hearing record remains the
official version. Because electronic submissions are used to prepare
both printed and electronic versions of the hearing record, the process
of converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
July 31, 2008
Page
Billions Spent On ``Miscellaneous'' Expenditures: Inadequate
Controls at the U.S. Department of Veterans Affairs............ 1
OPENING STATEMENTS
Chairman Harry E. Mitchell....................................... 1
Prepared statement of Chairman Mitchell...................... 27
Hon. Brian P. Bilbray............................................ 2
Prepared statement of Congressman Bilbray.................... 27
Hon. Ciro D. Rodriguez........................................... 3
WITNESSES
U.S. Government Accountability Office, Kay L. Daly, Acting
Director, Financial Management and Assurance................... 4
Prepared statement of Ms. Daly............................... 28
U.S. Department of Veterans Affairs, Edward J. Murray, Deputy
Assistant Secretary for Finance, Deputy Chief Financial
Officer, Office of Management, presenting the statement of Hon.
Robert J. Henke, Assistant Secretary for Management, U.S.
Department of Veterans Affairs................................. 11
Prepared statement of Hon. Henke............................. 46
SUBMISSION FOR THE RECORD
Stearns, Hon. Cliff, a Representative in Congress from the State
of Florida, statement.......................................... 48
BILLIONS SPENT ON ``MISCELLANEOUS''
EXPENDITURES: INADEQUATE CONTROLS
AT THE U.S. DEPARTMENT
OF VETERANS AFFAIRS
----------
THURSDAY, JULY 31, 2008
U.S. House of Representatives,
Committee on Veterans' Affairs,
Subcommittee on Oversight and Investigations,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:00 a.m., in
Room 334, Cannon House Office Building, Hon. Harry E. Mitchell
[Chairman of the Subcommittee] presiding.
Present: Representatives Mitchell, Space, Walz, Rodriguez,
and Bilbray.
OPENING STATEMENT OF CHAIRMAN MITCHELL
Mr. Mitchell. Good morning and welcome to the Subcommittee
on Oversight and Investigations hearing on ``Billions Spent on
Miscellaneous Expenditures,'' also entitled ``Inadequate
Controls at the U.S. Department of Veterans Affairs'' (VA).
This is July 31st and this hearing will come to order.
We are here today to examine an issue of great importance.
The Department of Veterans Affairs is the second largest in the
Federal Government. It is authorized to spend billions of
dollars of taxpayers' money every year to care for those who
bravely stepped forward to defend our Nation.
We have an obligation to ensure that the VA uses these
funds appropriately and they are not lost through waste, fraud,
or abuse. We must also be sure that they use adequate internal
financial controls and management.
Unfortunately, the VA does not have adequate internal
controls. Worse yet, is this problem is not new. VA's auditors
yearly have found material weaknesses in VA's financial
management systems' functionality and in financial management
oversight.
We will hear from the U.S. General Accountability Office
(GAO) that the VA procured billions of dollars of goods and
services by ways of ``miscellaneous obligations'' that should
not have been procured this way. Improper use of miscellaneous
obligations obscures how taxpayers' money is being spent.
In addition, goods and services that should have been
procured competitively can be subverted using this process.
Even when miscellaneous obligations are properly used,
GAO's review disclosed significant defects in VA's internal
financial controls and reporting.
For example, VA employees often fail to describe the
purpose of a miscellaneous obligation or used uncertain
descriptions like ``third quarter invoice,'' which would not
adequately describe its purpose to an unbiased audit.
GAO's review also disclosed serious failures in a bedrock
principle of financial management, the segregation of duties.
It is elementary that the person authorized to sign the checks
cannot be the same person that approves the expense. In 30 out
of 42 transactions that GAO looked at, VA failed to ensure the
proper segregation of duties.
Just a few years ago, VA spent $350 million on a failed
attempt to create a modern electronic financial system. VA has
embarked on redoing that project. But even if successful, it
may be many years away from completion. We cannot wait.
Even with the imperfect financial and procurement systems
it has, VA must ensure compliance with basic principles of
financial control.
We look forward to hearing today from VA about how it is
going to do this. But before I recognize the Ranking Republican
Member for his remarks, I would like to swear in our witnesses.
[The prepared statement of Chairman Mitchell appears on p.
27.]
I ask that all witnesses stand from both panels and raise
their right hand.
[Witnesses sworn.]
Mr. Mitchell. Thank you.
Next I ask unanimous consent that the Honorable Robert J.
Henke, Assistant Secretary for Management for the Department of
Veterans Affairs, may submit a statement for the record.
Hearing no objection, so ordered.
[The prepared statement of Hon. Henke appears on p. 46.]
I now recognize Mr. Brian Bilbray for his opening remarks.
OPENING STATEMENT OF HON. BRIAN P. BILBRAY
Mr. Bilbray. Thank you, Mr. Chairman.
Mr. Chairman, I am honored to sit in today. The Ranking
Member, Ms. Brown-Waite, she has apologized for not being able
to be here, but you and she have been working in a way that I
think that is commendable to not only this Committee but to the
entire Congress and Nation.
A bipartisan effort here I think is something that the
American people would like to see more of across all the
Committees in Washington, DC. And so I want to commend you for
that and with working with her on that.
Let me just say that I have to apologize to the witnesses
today. I read this report and I look at the category of
miscellaneous obligations and I hate to say it. I guess we are
all products of our experience. And all at once, I go back to
1978 when I was a 27-year-old Mayor and the auditor came in and
told me that there were no checks and balances on miscellaneous
expenditures. And I had to followup that with a local district
attorney.
Now, I do not think anybody today is saying that there is
criminal activity going on just because there seems to be some
real problems with the accounting process here, but when it
comes to accounting, process does matter, reporting does
matter, especially when we are talking about the expenditures
of the taxpayers' hard-earned money that we have forced from
them to send to Washington. And we have not only a right, we
have a responsibility to make sure those funds are used
appropriately and within the law.
And, frankly, I am really concerned. This is probably one
of the oldest issues in accounting, miscellaneous expenditures
growing to such a large degree that it may even equal--you
know, one account says out of twelve, $9 billion may be under
that category. That is absolutely terrifying for anyone who is
an accountant to think the potential for abuse is huge when
there is not an appropriate accounting process.
So, Mr. Chairman, I would like to introduce into the record
my opening statement. I have paraphrased. But let me just say
personally I am very honored to serve with you and to fill in
for the Ranking Member. And hopefully working together, the
American people will be served by your bipartisan leadership.
Thank you.
[The prepared statement of Congressman Bilbray appears on
p. 27.]
Mr. Mitchell. Thank you.
Mr. Space.
Mr. Space. Thank you, Mr. Chairman.
I will enter a written statement for the record.
[No statement was submitted.]
Mr. Mitchell. Mr. Rodriguez.
OPENING STATEMENT OF HON. CIRO D. RODRIGUEZ
Mr. Rodriguez. Thank you, Mr. Chairman, for conducting this
hearing. And there is no doubt that we need to followup--
especially now that we have allocated some $13 billion
additional resources for the VA. As we do that, we have to make
sure we hold ourselves as well as the VA accountable to ensure
those resources are expended in the best interest of our
veterans out there.
So I look forward to this testimony. Thank you very much.
Mr. Mitchell. Thank you.
I ask unanimous consent that all Members have 5 legislative
days to submit a statement for the record. Hearing no
objection, so ordered.
At this time, I would like to recognize Ms. Kay Daly,
Acting Director of Financial Management and Assurance from the
U.S. Government Accountability Office (GAO).
Ms. Daly is accompanied by Mr. Glenn Slocum, who is the
Assistant Director of Financial Management and Assurance for
the U.S. Government Accountability Office.
I would like to ask our witness to stay within her 5
minutes for her opening statements. And your full written
statement will be entered into the record.
Thank you.
Ms. Daly, just before you begin, I am interested in your
name. I have a recent record that came from Ireland, which one
of the title songs is called Katie Daly. So I just thought, and
it has become one of my favorites.
STATEMENT OF KAY L. DALY, ACTING DIRECTOR, FINANCIAL MANAGEMENT
AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE;
ACCOMPANIED BY GLENN SLOCUM, ASSISTANT DIRECTOR, FINANCIAL
MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Ms. Daly. Well, Mr. Chairman, this is my married name, but
let me assure you my husband and all of his family are very
Irish, and have taken many trips back to Ireland. But thank you
so much.
I appreciate the opportunity, Chairman Mitchell,
Congressman Bilbray, Congressman Space, and Congressman
Rodriguez for the opportunity to discuss the Veterans Health
Administration's (VHA's) use of miscellaneous obligations.
Today I would like to talk about our preliminary
observations on first how VA used miscellaneous obligations
during fiscal year 2007 and then, second, whether VA's policies
and procedures provide adequate controls over the use of
miscellaneous obligations.
Now, on the first topic, VHA recorded over $6.9 billion in
miscellaneous obligations during fiscal year 2007. These
miscellaneous obligations were used for a variety of mission-
related goods and services, things such as fee-based medical
services, drugs, medicines, transportation of veterans to and
from Medical Centers, and logistical support and supplies.
Now, on the second topic, the results of our audit work
over the fiscal year 2007, miscellaneous obligations guidance
found that VHA's policies and procedures did not provide
adequate controls over the use of these transactions and
without effectively designed controls, using miscellaneous
obligations exposes VHA to increased risk of fraud, waste, and
abuse.
Specifically, although the existing policies require
contracting officials to review miscellaneous obligations,
there was no guidance as to how such reviews should be carried
out and documented.
With regard to segregation of duties, the policies and
procedures for miscellaneous obligations did not prevent one
individual from being able to perform multiple tasks in
authorizing and executing the obligations.
Finally, regarding documentation, VA's guidance did not
require that key pieces of information be included on the
authorization form.
Now, collectively, these systemic control design flaws were
identified in the case studies that we conducted at three
different VHA locations.
[Chart shown.]
As shown in the table here, and I believe you have a copy
available to you, there was a lack of documented oversight by
contracting officials in all of the 42 case studies that we
examined. We also found inadequate segregation of duties in 30
of the 42 cases.
Also, supporting documentation was not complete in many of
the cases. For example, the purpose field lacked crucial
descriptive information and in many cases, the vendor name and
contract number were also not provided.
Now, VHA has recently issued new guidance on the use of
miscellaneous obligations that does offer some improvements,
but it did not fully address the specific control design flaws
that we identified.
And without basic controls over the billions of dollars
that VHA is spending in miscellaneous obligations, VA is at
significant risk of fraud, waste, and abuse. Effectively
designed internal controls act as the first line of defense for
preventing and detecting fraud and help to ensure that an
agency meets its missions and goals, complies with laws and
regulations, and provides reliable financial information on its
programs and operations.
To help VA improve the design of its controls, we will be
issuing a related report in this area with specific
recommendations for a number of actions that VA could take to
implement effective controls in these areas.
So with that, Chairman Mitchell, Congressman Bilbray,
Congressman Space, and Congressman Rodriguez, this will
complete my prepared statement.
But I would like to thank you for holding this hearing
today because it helps shine a light on the internal control
weaknesses at VA and helps spur activity in this area.
So I thank you for doing that. And with that, I would be
glad to take any questions you might have.
[The prepared statement of Ms. Daly appears on p. 28.]
Mr. Mitchell. Thank you.
I have a couple questions. The VA's September 29th, 2006,
policy required the review of miscellaneous obligations by
contracting officials to ensure their proper use. VA's
supporting procedures did not detail how such reviews should be
carried out.
And the question is, what recommendation do you have for VA
that could improve controls in this area?
Ms. Daly. Well, our draft report contains a recommendation
that VA implement policies and procedures to improve
contracting oversight in this area. And I think this is very
important because contracting officials help ensure that the
contracts will be in accordance with laws and regulations,
important laws that have been passed to help ensure competition
in the contracting processes, and that the Economy Act and the
Federal Acquisition Regulations are followed.
And with that, I think it is also important to recognize
that in their May guidance that VHA issued, they have now
required that these reviews be documented. And I think that is
an important first step. There will be additional steps needed.
And I think the critical one is going to be that there is
monitoring to ensure these contracting steps are taken.
Mr. Mitchell. Thank you.
And regarding the area of segregation of duties, the
miscellaneous obligation automated system and associated
policies and procedures were not designed to prevent a single
official from performing multiple roles in the process of
authorizing and executing miscellaneous obligations.
What is the risk of fraud, waste, and abuse in the VA by
one person performing multiple roles and approving and
obligating funds?
Ms. Daly. Chairman Mitchell, I think this places VA at a
significant risk for fraud, waste, and abuse. One of the key
tenets of internal controls is that one person should not
control all aspects of a transaction. To do so does place
unnecessary risk on that transaction, that the funds would be
subverted for purposes other than that intended by the Congress
and that the taxpayers were hoping when they sent their funds
to Washington.
I think it is important that VA continue to develop
processes that will address this issue. In particular, we saw
that control point officials, which are the key officials in
the VA Medical Centers that are doing the transactions,
typically have the authority to request a transaction and
approve that transaction and also certify payment in the end.
Mr. Mitchell. And one last question before my time expires.
In its review of a limited number of transactions that you did,
GAO did not find any clear examples of fraud or waste or abuse.
Nonetheless, you are adamant that VA needs to take immediate
action to remedy the control deficiencies that you identified.
Why is that your adamant position?
Ms. Daly. Well, again, Congressman Mitchell, I think it is
a matter of risk that VA has assumed here that is more than is
necessary. I think that these systems have grown up over time,
but it is important that VA is now recognizing that things need
to change. Taxpayer dollars are at risk by having a lax control
environment. And so to implement new controls to address this
will protect our taxpayer dollars.
Mr. Mitchell. Thank you very much.
And, Mr. Bilbray.
Mr. Bilbray. Ms. Daly, is it not true that without the
segregated duties, there are no checks and balances in reality?
One person can make the call and either do a great job or do a
terrible job?
Ms. Daly. Well, Congressman Bilbray, I agree that it
certainly increases the risk that an unscrupulous employee
could use the funds for purposes other than that intended.
Mr. Bilbray. In fact, historically I think that this kind
of one person control has shown that it does not happen
overnight. It happens to be something that is slipped into a
little bit. It does not make any difference. No one is there to
call him down on a little mistake or a little transgression.
And slowly but surely the problem builds and grows until it
becomes a horrendous problem.
My question is, do you have any idea how long this
structure has existed?
Ms. Daly. Well, I cannot give you a definitive answer on
that, Congressman Bilbray. You know, our focus was really just
on the 2007 transactions, but VA officials have provided us
information indicating that the system goes back to the 1940s.
But it is not clear, so I could try to get back to you with
that information.
Mr. Bilbray. I mean, again, it is all our responsibilities
to make sure the system serves the public and that means that
sometimes individuals may make mistakes, but we should make
sure that the system minimizes that potential.
Out of 42 reviews, 30 of them or only 12 of them had what
you felt was segregated oversight.
Ms. Daly. Right.
Mr. Bilbray. That is a pretty substantial number when you
get down there. And I would have to say that even with my less
than stellar academic achievement of the past, that is not a
passing grade for the process.
Ms. Daly. Exactly.
Mr. Bilbray. And so I appreciate it.
And, Mr. Chairman, I will yield back. I look forward to
hearing more testimony.
Mr. Mitchell. Thank you.
Mr. Space.
Mr. Space. Thank you, Mr. Chairman.
Ms. Daly, how are you today? Thank you for joining us and
providing your testimony and the work that you have prepared in
advance.
When was this audit conducted? What were the dates?
Ms. Daly. We started our work in approximately November of
2007 and are continuing to wrap it up now. Our draft report is
over at VA for comment and we hope to have it fully issued in
September of this year.
Mr. Space. What was the impetus or genesis of the audit?
Why was it done?
Ms. Daly. Well, the start of the audit was the staff at VA
came over and briefed the Committee here and informed them
about the use of miscellaneous obligations. Therefore, the
Chairman and Ranking Minority Member asked that GAO conduct a
study into this area.
Mr. Space. Right. And when was the last audit conducted by
the GAO of the VHA miscellaneous expenditure system?
Ms. Daly. Congressman, I am not sure that it has ever been
done before to tell you the truth. I am not aware of any prior
studies in this area.
Mr. Space. Okay. And when were your reports or findings
delivered to the VHA?
Ms. Daly. We provided a copy of our report July 17th, I
believe.
Mr. Space. Okay. And your audit was confined to the VHA,
not the entire Veterans Administration, other departments; is
that correct?
Ms. Daly. That is correct.
Mr. Space. Do you have any kind of estimation or idea as to
the nature of whether these miscellaneous expenditure auditing
deficiencies exist in other departments within the VA?
Ms. Daly. Well, Congressman, I am sorry, but I cannot speak
to that simply because our review focused just on what was
happening at VHA.
Mr. Space. I understand from your testimony and from the
report that the VHA has taken steps, but it appears to me that
you are not satisfied with them.
Ms. Daly. Well, I think that is close to a fair
approximation of our assessment of their steps to date. You
know, they have taken important first steps in that they issued
new guidance that address some of the issues that we have
brought out regarding contracting reviews over these
transactions. They now are requiring that a review be--they
have always required that a review be performed, but from what
we saw, it was not being performed.
Mr. Space. And the principal problem would be the failure
to fully address the need for segregation and oversight?
Ms. Daly. That is correct. There is still a need for those
issues to be addressed and I am looking forward to seeing how
VA plans to address those. Their May 2008 guidance did not
fully address that issue, so we think that is an important area
to still be covered.
Mr. Space. I guess I am curious as to where we go from here
and your recommendations on what this Subcommittee can do to
ensure that those deficiencies are corrected in a timely
fashion.
Ms. Daly. Well, as always, the Congress provides an
important oversight function to help ensure that agencies do
what they promise they are going to do. And we stand ready to
help you in that endeavor in any way you would like.
Mr. Space. Is there a follow-up audit scheduled? Do you
intend to look at this again in 6 months, 9 months, a year?
Ms. Daly. Well, we would leave that to the Committee's
discretion. We would be glad to followup if you would like us
to.
Mr. Space. Thank you very much.
Ms. Daly. You are welcome.
Mr. Space. I yield back.
Mr. Mitchell. Thank you.
Mr. Rodriguez.
Mr. Rodriguez. Thank you, Mr. Chairman.
Let me ask you, in followup on the questions that have been
asked, what do you recommend that we do to make sure we stay on
top of it knowing full well that there is a large amount of
resources going to the agency.
I also know that sometimes externally it is difficult for
them to move because if they have been doing this for some time
on their own, you almost need an external group to come in.
What are some of the recommendations that your agency can
come up with that would allow those of us who are not
accountants to exert our oversight responsibility?
Ms. Daly. Congressman Rodriguez, I think it is important
first for VA to implement a monitoring mechanism internally to
make sure that the new policy and guidance, that it has come
out with on contracting oversight and the documentation
requirements to monitor that and ensure that those steps are
indeed taken. You know, it is one thing to issue a policy. It
is something else entirely to make sure it is implemented.
So a good step will be to ensure that those things are
being covered internally. Secondly, I think the oversight by
the Congress is an important tool to be used to help ensure
that the agency is taking the actions that it has agreed to
take. And we stand ready to help you in that area.
Mr. Rodriguez. Okay. Let me ask that question again.
Ms. Daly. Okay.
Mr. Rodriguez. Not being an accountant, not being an
economist, you see a situation such as that. You are saying to
allow them to come forward with recommendations.
Are there some specific items? Do they allow an opportunity
for whistle blowing, for example? Have you had any opportunity
to be able to get people there to talk to you about the
possibility that fraud has existed or waste has existed as a
result of just having one individual overseeing an operation
versus being more open?
Ms. Daly. Congressman Rodriguez, we have not had any
whistle blower complaints related to this on GAO's hotline. We
do have a hotline where anyone can call in and give us tips on
issues just like you talked about. I think the Inspector
General (IG) of VA also has a similar hotline where people can
call in whether they are VA employees or not.
Mr. Rodriguez. And have you had access to those?
Ms. Daly. We have not accessed those ourselves, sir, as
part of this study.
Mr. Rodriguez. Okay. And what does it take for you to have
to get access to that?
Ms. Daly. I think it would just be a matter of making
certain inquiries to the people who do have responsibility over
those hotlines.
Mr. Rodriguez. Because a lot of times the best source is
the people themselves. They will tell you what is wrong, you
know. Sometimes there might be just complaints and gripes,
those kind of things. But a lot of times, that might be a way
of getting a good handle on it.
What kind of time table are we talking about that, you are
allowing the system to have in order to come back and try to
correct itself because you are talking about almost two-thirds
of the system having some serious problems when you talk about
12 out of 40; is that correct?
Ms. Daly. That is correct, sir, that there are some serious
problems with their controls. And I think an organization as
large as VA and VHA in particular that we focused on in this
review will take some time to be fixed, but I think it is
important that VA move quickly in this area to mitigate its
risk.
Mr. Rodriguez. What do you mean by quickly?
Ms. Daly. Well, it is going to----
Mr. Rodriguez. What is appropriate?
Ms. Daly. That is a difficult question to answer, sir,
because it is going to vary depending upon the circumstances.
I think the policy guidance is something that could be done
much more quickly than making sure that it is fully implemented
throughout VA, which is the critical step. You know, you can
issue guidance, but having it implemented is the challenging
part.
Mr. Rodriguez. What kind of report should we ask for from
you that would allow us to get a better grip on this issue so
that we can make sure we hold the system accountable in being
responsive to the constituency?
Ms. Daly. Well, I would be glad to work with you and any
other Members of the Committee in crafting such a request for
our services and that we could be doing that as soon as the
hearing is over.
Mr. Rodriguez. Okay. And, once again, any indication of
somewhat of a time table that gives us an opportunity to
oversee this situation, that we should expect something by
when?
Ms. Daly. Like I said, that is challenging. I would think
that certain things could be done more quickly than others. I
would probably ask VA what they think might be a reasonable
time table and then make an assessment from there.
Mr. Rodriguez. Okay. Thank you.
Ms. Daly. You are welcome. Thank you.
Mr. Mitchell. Thank you.
Mr. Bilbray. Mr. Chairman, just a followup on Mr.
Rodriguez.
Mr. Mitchell. Yes.
Mr. Bilbray. I think one of the things we know, though, is
so much with this is unlike a lot of other problems we may have
with operations going awry. The whistle blower usually does not
help on this because no one knows.
It is much like the case I had in my city and that DC just
had where money was going in, but nobody was checking, so there
was no way for another party to know what was going on because
the system was not there.
Now, Ms. Daly, is it not true, though, that when we go to
segregating the services, it is not enough just to go to two
people checking out, that you really want to go to three so you
almost square the check and that the security of three is mega
times over what a two-person check off point?
So is that not one of those things that we should be aiming
for in an appropriate system?
Ms. Daly. Well, Congressman Bilbray, I think you made an
important point there. Of course, the gold standard in a four-
step process that we have here would be all four steps being
segregated. But there are certainly mitigating controls that
you can put in place to make sure that things are being done to
the standards that really provide the safety for these funds
that are needed.
Mr. Bilbray. And getting back to exactly what Mr. Rodriguez
was saying, what can we do now, and what can this
Administration do, and this Committee do working with the
Administration to make sure that in January we have a system
that is accountable to the taxpayers?
Ms. Daly. Well, I think continuing to provide oversight in
this area is an exceptionally important point. It often takes a
series of steps in order to ensure that steps are taken by
agencies to move them forward.
I am very impressed that they are planning to do some
monitoring activities over this internally, but with the
Congress continuing to provide oversight, continuing to ask
them to move forward, continuing to provide accountability from
these officials will be a critical step too.
Mr. Bilbray. But we need to have a minimum standard they
modify to be able--the procedure that is appropriate in modern
day accounting, not 1940 models.
Thank you very much.
Ms. Daly. Thank you.
Mr. Mitchell. Thank you.
Mr. Walz.
Mr. Walz. No questions, Mr. Chairman.
Mr. Mitchell. Well, thank you very much. I appreciate it.
And hopefully we will be working together much longer than this
short period of time we have had so far. So thank you.
Ms. Daly. Thank you.
Mr. Mitchell. I would like to welcome panel number two to
the witness table.
At this time, I would like to recognize Mr. Edward Murray,
Deputy Assistant Secretary for Finance and the Deputy Chief
Financial Officer for the Department of Veterans Affairs.
Mr. Murray is accompanied by Mr. Frederick Downs, Jr.,
Chief Prosthetics and Clinical Logistics Officer for the
Veterans Health Administration; Mr. W. Paul Kearns, Chief
Financial Officer (CFO) for the Veterans Health Administration;
Mr. Jan Frye, Deputy Assistant Secretary for Acquisition and
Logistics and Senior Procurement Executive for the Department
of Veterans Affairs; and Ms. Phillipa Anderson, Assistant
General Counsel for the Department of Veterans Affairs.
And I would like to recognize Mr. Murray for up to 5
minutes.
STATEMENT OF EDWARD J. MURRAY, DEPUTY ASSISTANT SECRETARY FOR
FINANCE, DEPUTY CHIEF FINANCIAL OFFICER, OFFICE OF MANAGEMENT,
PRESENTING STATEMENT OF HON. ROBERT J. HENKE, ASSISTANT
SECRETARY FOR MANAGEMENT, U.S. DEPARTMENT OF VETERANS AFFAIRS;
ACCOMPANIED BY FREDERICK DOWNS JR., CHIEF PROSTHETICS AND
CLINICAL LOGISTICS OFFICER, VETERANS HEALTH ADMINISTRATION,
U.S. DEPARTMENT OF VETERANS AFFAIRS; W. PAUL KEARNS III, CHIEF
FINANCIAL OFFICER, VETERANS HEALTH ADMINISTRATION, U.S.
DEPARTMENT OF VETERANS AFFAIRS; JAN R. FRYE, DEPUTY ASSISTANT
SECRETARY FOR ACQUISITION AND LOGISTICS, OFFICE OF MANAGEMENT,
U.S. DEPARTMENT OF VETERANS AFFAIRS; AND PHILLIPA ANDERSON,
ASSISTANT GENERAL COUNSEL, OFFICE OF GENERAL COUNSEL, U.S.
DEPARTMENT OF VETERANS AFFAIRS
Mr. Murray. Mr. Chairman and Members of this Subcommittee,
good morning. Thank you for the opportunity to discuss the
draft Government Accountability Office report entitled,
``Veterans Health Administration Improvements Needed and Design
of Control Over Miscellaneous Obligations.''
I am Edward Murray, VA's Deputy Assistant Secretary for
Finance. I also serve as VA's Deputy Chief Financial Officer. I
am here on behalf of Robert Henke, VA's Assistant Secretary for
Management, who was not available to appear today.
I am accompanied by Mr. Frederick Downs, Chief Prosthetic
and Clinical Logistics Officer in the Veterans Health
Administration; Mr. Paul Kearns, Chief Financial Officer,
Veterans Health Administration; Mr. Jan Frye, Deputy Assistant
Secretary for Acquisition and Logistics and VA's Senior
Procurement Executive; and Ms. Phillipa Anderson, Assistant
General Counsel.
I have Mr. Henke's written statement which I would like to
submit for the record.
I appreciate the opportunity to discuss the draft GAO
report. Although in the draft report GAO found that VA policies
and procedures were not adequately designed, it is important to
note that GAO identified no incidents of waste, fraud, or
abuse.
Our leadership is committed to improving the guidance,
oversight, and business processes associated with the use of
miscellaneous obligations and the delivery of service to our
Nation's veterans.
This week, your staff met with me and VA staff to observe
the steps VA is taking to reduce any vulnerability. VA agrees
with all four of GAO's recommendations and we are prepared to
discuss the various initiatives planned or underway to reduce
the use of miscellaneous obligations and associated internal
control risks.
We are issuing additional Departmental policy and guidance
that will improve accountability of the miscellaneous
obligations process. We have reports that enable us to track
the improvements.
Interim guidance was issued in January 2008 and was further
refined in May 2008 by the Veterans Health Administration
because the Veterans Health Administration is the predominant
user of this method of financial obligation.
The Office of General Counsel has reviewed the interim
guidance and has determined that the new guidelines coupled
with existing VA accounting policy meet legal recording
requirements.
New requirements for miscellaneous obligations will be
routed for review by the appropriate contracting official and
this review will be documented and included in the record for
the obligation.
The interim process will be used until a system change can
be made to accomplish this electronically in the Integrated
Funds Distribution Control Point Activity Accounting and
Procurement system, referred to as IFCAP.
In addition, we are developing requirements for a patch to
IFCAP mandating population of the purpose, vendor, and contract
number fields. Until this patch is installed, data must be
entered manually.
Miscellaneous obligations forms are used for both
procurement and nonprocurement expenditure obligations. If the
miscellaneous obligation is for goods or services not required
to follow formal procurement procedures, which are
nonprocurement items, such as fee-basis medical or dental
services, authorizations for individual patients are tracked in
the FeeBasis software system.
This process includes the appropriate approval requirements
by the requesting service approving official. To ensure
appropriate segregation of duties, a fiscal office employee
approves payment of invoices. Receipt of medical or dental
services is documented by either an industry standard billing
abstract document or clinical information from the non-VA
provider.
If the miscellaneous obligation is for one of the
procurement items approved to be documented by use of a
miscellaneous obligation, such as nursing homes, separate
software programs in the Veterans Health Information Systems
Technology Architecture track individual expenditures and show
the appropriate approval by the requesting service approving
official and fiscal office employees.
The contracting officers technical representative verifies
that goods and services were received for the individual
contracts. Contracting officers perform all procurement duties
related to award of the contract.
To ensure that policies and procedures are being
implemented and monitored, VHA now tracks and trends the number
and dollar amounts of funds obligated using miscellaneous
obligations by Budget Object Code every month. This process
enables VHA to determine whether its facilities are adhering to
VA and VHA policy.
In addition, VA established the Office of Business
Oversight (OBO) in 2004 to realign and consolidate existing
review organizations and functions and to have oversight and
compliance responsibilities at the Departmental level. OBO will
review miscellaneous obligations during their field reviews
with special emphasis on adherence to control policies and
procedures.
VA is taking meaningful steps to resolve the current
challenges concerning the use of miscellaneous obligations. VA
remains committed to improving its processes and we are
confident that our challenges can be overcome for the benefit
of the veterans we serve as well as the taxpayers. At the end
of the day, this is not about systems. It is about veterans.
This concludes my statement, Mr. Chairman. I will be happy
to answer any questions that you or the other Members of the
Subcommittee may have. Thank you.
[The prepared statement of Hon. Henke appears on p. 46.]
Mr. Mitchell. Thank you.
Let me just give you a little story about my background. I
was a high school teacher and at the same time, I served as
Mayor of our city. And I always found it interesting. Early in
the morning as a teacher, I would go into the teacher's lounge
and go through the mailbox and find a statement coming from the
superintendent, but I was a classroom teacher, or from the
school board. And I would say, if the superintendent or the
school board would ever come down here and be in the classroom,
they would not make these kinds of statements.
And then in the afternoon, I went to the Mayor's Office and
I thought I really had a handle on things. And I would say, and
I am sure there were many people in the city say, you know, if
the Mayor would ever get out of his third floor office and come
down here, he would not make those kinds of statements.
What I am asking you is you can make all the statements you
want here and you can put in all the reforms you want, but the
question is, how do you know that these are going to be
implemented where it really counts?
The people that were in these particular stations,
Pittsburgh, Cheyenne, Kansas City, this was just three of what
the GAO went to do. How are you going to know that it is just
not going to be dismissed by the people who say, well, here
comes another Directive from Washington? Let us just keep doing
what we have always done. They will never come down here. How
do we know what we are asking you to do is going to be
implemented?
Mr. Murray. Starting with fiscal year 2009, the Office of
Business Oversight, which works directly for the Chief
Financial Officer, is going to review 70 to 80 stations. They
are going to visit these field facilities and are going to put
a special review emphasis in this particular area to see that
we do have segregation of duties and that these miscellaneous
obligation transactions are being handled appropriately. So
that is going to happen at the beginning of the fiscal year.
Mr. Mitchell. You know, I looked at the resumes of all of
you that are here as a backup for your support. And you all had
many years in the financial situations in different
departments.
And my question is, did you come into this situation that
we find in the VHA, did you not find these and other--what is
being recommended are standard financial procedures, checks and
balances. And from what I understand, every year Deloitte would
come in and they would give an audit and every year, they
showed some weaknesses in your accounting and nothing has been
done.
With all your experience, do these kinds of things happen
in departments you are in? Did this not flag something to you
that we should be doing something different than what has been
going on?
Mr. Murray. I believe that we are doing some things
differently. In fact, Grant Thornton also in July 2007 noted
some segregation of duty and other deficiencies with the use of
13 miscellaneous documents.
One of the things we have done is strengthen our policy. We
are in the process of issuing Departmental level policy that
requires evidence of contracting review. One of the areas I am
working with the Chief Information Officer (CIO) and VHA on is
that we need to make changes in the system I referred to as
IFCAP.
We have to make changes such that the system enforces the
control that the contracting officer does, in fact, review
every 1358 or miscellaneous obligation document. And we will
work closely with VHA and our CIO to prioritize changes to the
IFCAP system to ensure that there is a contracting officer
review.
Mr. Mitchell. I assume that in all the agencies you have
worked for, all of you, and the years of service, this is the
first time this type of thing has ever happened. I just cannot
believe that. I think that with your experience, somebody
should have found this out before a GAO report.
One of the things that is good, and you mentioned this,
that there was no fraud, waste, or abuse that has occurred, but
that is not because of the system. And we do not know if we
checked all of them. And it is a credit to those who are
working there.
But the important thing is, as Mr. Bilbray said, this opens
up the opportunity for that. And it did not take much. Just
read what happened recently in the DC municipal government with
the people who, and it is why whistleblowers do not work, all
of the stuff that was going on in that particular situation,
this can happen. And what we are doing is if there is fraud,
abuse, or waste or not, as you have said, this shortchanges the
services that we ought to be giving to the people this agency
is designed to serve. That is the bad part.
Thank you.
Mr. Bilbray.
Mr. Bilbray. Thank you, Mr. Chairman.
First of all, I think we need to clarify that this appears
to be a situation that has been around a long time. And I guess
all of us should sort of approach this, that being notified
that the beautiful home you bought that was built in the 1940s
that looked so great when you walked in has a foundation that
has major problems.
And so if we can all approach this with the fact that this
is a common problem, we are not here to point fingers at any
individual, but we are willing to say this is a problem that
predates all of us technically.
But now the problem seems to be the lack of a definitive
approach to solving the problem, of how we are going through
and restructuring the foundation of the VA so that it has a
sound fiscal structure with some kind of accountable process.
Mr. Murray, you were saying that you are relieved that
there was no fraud detected. Do you think 42 reviews out of
131,000 expenditures is a reasonable and confidence building
review process?
Mr. Murray. No, I do not.
Mr. Bilbray. Okay.
Mr. Murray. I do not know that it was statistically
generated, but I would say probably not.
Mr. Bilbray. Okay. I think we have just got to say let us
not say, hey, nothing has been found because in reality, you
scratched the surface and found enough evidence to say, wow,
you know, the potential for it is so huge.
So let us not even talk about how nothing happened. Let us
assume just by the nature of the system that there is so much
happening and has happened since 1940 that none of us know
about and we will probably never know about it.
So let us just accept there is a horrendous problem that
predates our taking the responsibility. This was raised in 2003
and 2004 as a concern. Now we would like to raise it up to a
major concern if not a fiscal crisis of confidence that we need
to address.
And, you know, Mr. Frye, do you feel that you have adequate
information on monitoring the use of these funds?
Mr. Frye. Well, let me put it in context. With the use of
1358s, the acquisition professionals do not get involved if
these are fee-basis transactions. In other words, these do not
fall under the Federal Acquisition Regulation headline.
What my concern is----
Mr. Bilbray. Do you know where miscellaneous is going? Do
you know why it was going?
Mr. Frye. I know where, if it is fee basis, I know where it
is going, yes. Do I review the information on a monthly basis
as to where fee basis is going, no, I do not.
Mr. Bilbray. Yes. Who would review it or who reviews it
today to see if it is appropriate?
Mr. Frye. The VHA reviews on a monthly basis reports that
they generate on the use of miscellaneous obligations out in
Veterans Health Administration.
Mr. Bilbray. How do they review it when the fact is that
you end up with, you know, so much of the reporting left blank
or not describing exactly what the expenditure was for?
I mean, the reporting process looks like it has just got
gaping holes. You review something and you get how much money
was spent, but there are whole sections in here that do not--
people did not bother to say, you know, why it was done and for
what reason and what the justification.
So how do you review justification if even the auditors are
pointing out that the reporting sheets are not being filled
out?
Mr. Frye. Well, I would agree with you. If the forms are
not filled out properly, it makes it very difficult to review
it on the face of the form.
Mr. Bilbray. Mr. Murray, my question is, there are
appropriate accounting procedures and systems that the 21st
century world has accepted for a long time. This is not rocket
science. This is, you know, something that is just like a
minimum standard for anybody that handles any funds, let alone
public funds.
Are you going to have those processes online and ready to
go so that we can sort of repair this foundation this year, so
that 3 years from now, 5 years from now, we are not back here
doing what we are doing today after being warned about this
back in 2003 and 2004? Are we going to have multi review? Are
we going to have at least three people being able to review any
expenditure so that there is some accountability in here? Are
we going to have that online ready for the next fiscal year?
Mr. Murray. I will work with the Veterans Health
Administration staff to ensure we segregate those duties. And
hopefully we will give Mr. Downs an opportunity to talk about
some of what he is doing in terms of oversight and what he is
proposing to do to ensure that the purpose of contract fields
are filled. It is unfortunate that the IFCAP system is very
archaic and to actually review the separations of duty, you
have to basically touch that field facility or that Medical
Center.
We do not get to work with the modern tools that industry
has. We have a lot of confidence, Mr. Henke and I, that if we
can get FLITE going we will have work flow, separation of
duties, and audit tools embedded in our next generation
financial management system.
To a great degree, we are hamstrung with the environment we
have in terms of system tools. Nonetheless, Mr. Downs has a
very ambitious way to do good oversight of miscellaneous
obligations if he would have an opportunity to discuss it.
Mr. Bilbray. Thank you, Mr. Chairman. I look forward to
hearing from Mr. Downs whenever appropriate.
Mr. Mitchell. Thank you.
Mr. Space.
Mr. Space. Thank you, Mr. Chairman.
I find myself agreeing with, I think, the implication just
registered by my colleague, Mr. Bilbray, that one would have to
be a fool to think that a system so full of potential for abuse
has not, in fact, been abused and fraud, waste, or abuse has
not occurred.
But I also think that the sampling is sufficiently large to
make clear that these systemic problems are of a profound
nature. And while I still find it somewhat difficult to believe
that this situation has never been examined, looked at, or
perhaps even considered up until the last couple of years, I am
curious, and perhaps you know this and maybe you do not,
upwards of $6 billion fell through this miscellaneous
expenditure provision.
Do you have any knowledge of what that number would have
looked like, say, 4 years ago?
Mr. Murray. I will have to get back to you with that
number.
Mr. Space. Yeah. While you are at it, I would like to see
what that number is for the last 20 years, each and every year.
[The following information was subsequently received from
the VA:]
HVAC O&I Colloquy on Miscellaneous Obligations
During the July 31, 2008 House Veterans' Affairs Oversight
and Investigations Subcommittee hearing on the topic of
miscellaneous obligations, Congressman Space requested detailed
historical information on the use of miscellaneous obligations
in VA accounting.
Unfortunately, for the reasons stated below, that level of
detail would be extraordinarily difficult to produce with any
accuracy. As noted, VA is improving its accounting systems in
numerous ways, including tracking this category of obligations.
A computer application called Integrated Funds Distribution,
Control Point Activity, Accounting and Procurement (IFCAP) is
used by over 150 VA facilities to obligate funds. There is a
separate IFCAP installation (including a separate database
holding source transactions) at each of these sites.
There are two main types of documents created in IFCAP: VA
Form 1358 (Estimated Miscellaneous Obligation or Change in
Obligation) and VA Form 2237 (Request, Turn-In and Receipt of
Property or Services).
Each locally based IFCAP system transmits obligation data
through an interface to VA's core accounting system, the
Financial Management System (FMS), on a daily basis. The
obligations are then processed and recorded in FMS.
Due to current system design limitations in FMS, the
obligation data sent from IFCAP to FMS does not include enough
information to distinguish between the two document types (1358
or 2237). Once the data is in FMS, it is impossible to tell the
difference between data applicable to a 1358 and data
applicable to a 2237. Therefore, it is currently not possible
to use FMS to derive the total dollar figure for Miscellaneous
Obligation (1358) documents only.
Getting this information directly from the IFCAP system would
involve a massive effort. Data in each of the 150 separate
systems would need to be extracted and compiled in a meaningful
manner. Even more problematic is the fact that much of the data
going back over 20 years has already been archived. This would
require that VA reload many years worth of data at each of the
150 sites to even begin an attempt to develop the requested
numbers. This would be a very labor-intensive effort, and
present various other technical and logistical issues. It is
not feasible to compile this data from IFCAP without tremendous
effort, and any resulting information would be of questionable
accuracy.
Going forward, we acknowledge that the affected systems need
to be changed so that 1358 data can be easily isolated from the
other obligation data. We have plans to implement a system
change which will provide this capability in the future. IFCAP
will add a notation to 1358 documents that are sent through the
interface to FMS. This data will then be recorded in FMS for
each 1358, and reports can then be created on 1358 activity
only. This change is scheduled for implementation in August
2009.
The future financial accounting system, FLITE, has also
addressed these issues during requirements development. Not
only will the ability to report on detailed miscellaneous
obligations be available in FLITE, but the system will further
restrict miscellaneous obligations and increase internal
control mechanisms surrounding them.
Prepared by: Department of Veterans Affairs
Office of Finance, Office of Financial Business Operations
POC: Jonathan W. Lambert, (202) 461-6173
January 14, 2009, 12 p.m.
Mr. Space. Mr. Murray, what is your official title?
Mr. Murray. Deputy Assistant Secretary for Finance and
Deputy CFO.
Mr. Space. And how would you define in no more than two or
three sentences your job description?
Mr. Murray. Review the accounts and financials, be the
financial steward for VA, review financial processes, prepare
the financial statements.
Mr. Space. Prior to the GAO audit and prior to the hearings
that this Subcommittee held, had it ever crossed your mind that
there may be a problem with spending upwards of $6 billion a
year in miscellaneous expenditures that lacked basic and
fundamental accounting principles?
Mr. Murray. To the extent that the separations of duties
are adhered to, to the extent that contracts are reviewed, and
obligations were appropriate for those procurement items, and
there is a contract or other vehicle to support those
procurement items. It is a service order. On the face of it,
what it becomes in the official accounting system is a service
order.
So if the separation of duties are in place, the formal
contract or procedures were appropriate, it would be okay to
spend billions of dollars if all those things were being done.
Mr. Space. They were not, though, were they?
Mr. Murray. Well, as we discovered through Grant Thornton's
review under A-123 and through the GAO report recently drafted
for review, we are finding that there are serious deficiencies
in our control structure.
Mr. Space. For how long have you been working in your
current capacity?
Mr. Murray. About 6 years.
Mr. Space. All right. So in the first 4 years, you had no
indication that these basic and fundamental guidelines were not
being adhered to?
Mr. Murray. We are working a number of various issues and
there are a number of control issues throughout the VA that are
being tackled. So this has come more to the forefront in the
last few years.
Mr. Space. And, Mr. Murray, I am not doing this to point
fingers. I mean, I am not interested in that. I am not trying
to intentionally embarrass anybody. But if we have a systemic
problem that allows something so blatant and so obvious to go
ignored for so many years with such huge potential for waste
and fraud, then I think we have an obligation to address it.
And I am trying to figure out what is wrong with our system
where someone in your position who is knowledgeable,
intelligent, works hard, it would not occur to you that there
is a significant problem here.
Now, you heard Ms. Daly's testimony. You have read the
report. And I know my time is growing short. You understand
that the GAO thinks you need to do much more in terms of
segregation and oversight than what you have done in terms of
your interim findings or action.
Are you committed to doing those additional, taking those
additional steps that the report cites?
Mr. Murray. Absolutely.
Mr. Space. Thank you.
Mr. Mitchell. Thank you.
Mr. Rodriguez.
Mr. Rodriguez. Thank you, Mr. Chairman.
Mr. Murray, I know I asked GAO what they could do to help
us out in the process. I am going to ask you the same question.
You are in a situation where you have this occurring. What
can we do to help out or how can the GAO help you make that
happen, you know, in a quick way to expedite because I know
that you--let me ask you first of all, are you a political
appointee or----
Mr. Murray. I am a career employee, sir.
Mr. Rodriguez [continuing]. Career. Okay. So you are a--I
do not mean this in a negative--you are a bureaucrat, so you
are going to be there no matter what.
What do we need to do to help you make it happen or what do
you need the GAO to do to make it happen because I know you
have got a bureaucracy there that is hard to deal with also?
How can you go into all those systems and make something happen
as quickly as possible?
Mr. Murray. Continued emphasis, oversight, assistance from
GAO, from our Inspector General, from our auditors, both Grant
Thornton and Deloitte and Touche, as well as the Office of
Business Oversight, keeping our gaze on resolution of this
problem is in my experience when the VA has gotten things done.
So I would encourage GAO's assistance, meeting with them
periodically, discussing progress, as well as with our
Inspector General. I continue to do so with Grant Thornton and
our Office of Business Oversight.
I think what gets measured gets done. So that sort of
emphasis, I think, will get this done.
Mr. Rodriguez. Do you feel you might need, in addition to
the GAO, any other external group coming in? I know you have
the auditors, I guess, coming in. They can also be extremely
helpful in making some additional recommendations.
Now, what kind of time table do you think is appropriate in
moving forward in trying to make things happen?
Mr. Murray. I would like to see within a year, next year,
when the Office of Business Oversight does their reviews
starting in 2009, at 70 to 80 site visits, vast improvement
first in the separation of duties and the appropriate use of
miscellaneous obligations as well as I would like to see those
contracting reviews, where applicable, being done.
So I would like to see those GAO statistics and I would use
them as a baseline for those three sites to ensure they have
changed dramatically by the end of fiscal year 2009. In the
fourth quarter, I would like to see that be a small number,
maybe one, maybe two.
Mr. Rodriguez. And I would gather that a lot of the
institutions out there might be operating--I know the Chairman
mentioned--I will mention a school district with all the local
campus that they might be stand-alone situations that are very
difficult to change.
Do you have any suggestions as to how to deal with that?
Mr. Murray. Well, institutionalizing good behavior is a
challenge. We recently implemented an end-to-end web-based
system that enforces very strong controls and approvals through
work flow. We used to have four travel systems with pretty weak
controls in the VA.
You know, that is ultimately where I would like to see us
go across the board. It takes time though. But, what I would
really like to work with is the Logistics Service, with the VA
CFO Office applying all resources, both the Departmental
resources as well as the VHA resources, to institutionalize
change.
Mr. Rodriguez. Do you have the power to be able to go into
those other institutions and tell them what they need to do?
Mr. Murray. I believe I do. And I want to be up front here.
I have never had the VHA CFO or Mr. Downs, Chief Logistics
Officer, tell me or the Inspector General not to offer every
assistance. We can get on board and work collaboratively with
Mr. Feeley, Under Secretary for Health Operations, to get this
done.
Mr. Rodriguez. Okay. Let me ask you, who keeps the
liabilities? For example, the--I am not an attorney--but the
lawsuits, when people have felt that they have been done wrong
in contracting, who keeps a record of that?
Mr. Murray. We are not talking about the medical
liabilities and torts.
Mr. Rodriguez. More contracts and those kind of things.
Mr. Murray. The judgment fund. We work with Treasury to
reimburse the judgment fund for those claims.
Mr. Rodriguez. Okay. How many lawsuits have we had or who
keeps records of that?
Mr. Murray. Go ahead, Phillipa, General Counsel.
Ms. Anderson. We would have to get back to you on the
judgment fund issue.
Mr. Rodriguez. Okay. Because I would like to know the
liability of all this in terms of--because if there has been
problems or, abuse and if some people have been going to
certain contractors, then the only other one that would be
complaining are the ones who did not get the contract. And you
might have a lot of lawsuits out there that has created a
liability for the institution.
So I would ask that you get that to the Committee here, the
number of lawsuits, the number of, complaints, and those kind
of things and any kind of whistle blowing that you have had, I
would appreciate it, and any other items that you think might
be helpful. And that would also be helpful for you to also ID
some areas that are more problematic than others that you need
to zero in on as quickly as possible.
Thank you very much.
[The following information was subsequently received from
the VA:]
Congressman Space asked about records regarding liabilities
arising from contract claims against VA.
The following is the response to the Congressman's request
for data showing the number of challenges to VA's decisions to
sole-source.
Research by our Office of General Counsel showed four cases
in which VA sole-source contracting was an element of the
contract award challenge. In one of the 4 GAO found the VA
failed to demonstrate a reasonable basis for the sole-source
award. In that matter GAO did not disturb the acquisition since
the order had been placed, but GAO ordered the VA to pay the
protester its costs of prosecuting the protest including
reasonable attorney's fees. Matter of Bausch & Lomb, Inc, 2006
CPD 135.
As a point of clarification on VA's testimony, the Department
of the Treasury Judgment Fund is not a source of funding for
GAO-ordered costs. The source of funding is the VA account from
which the requirement is to be funded.
Mr. Mitchell. Thank you.
Mr. Walz.
Mr. Walz. Thank you, Mr. Chairman.
And thank you, Mr. Murray and the rest of you, for being
here today. I would echo a little bit of what my friend from
Texas said.
First of all, I do want to thank you for serving this
country and serving our veterans. I think it was a very
important question that he asked you about being career in
this. You are working in the largest healthcare system in the
world and we are cognizant of that.
Our job is to be here to help provide whatever we can to
make your job as successful as possible because that translates
into care of our veterans. That protecting of the public trust
in the VA system is one of the highest priorities I see in my
job of sitting here.
And so maybe it is like the Chairman. I am also a high
schoolteacher. We can always find the silver lining anywhere. I
can tell you that. To survive, you must. And there is a lot of
good.
And so I think that there are some things happened here
that I think should give us reason to be optimistic, but I
think each of my colleagues brought up very legitimate
concerns, which you have acknowledged, and the GAO has done a
fine job of doing what they are supposed to do.
My first positive, I guess, is the IG process seemed to
have worked back in 2007 in Boston and identified what was
going on. I have been, as this Committee, I think, has been, a
strong proponent of making sure the IG is there as a partner,
make sure they are well funded, make sure they have the ability
to do what they are supposed to do.
And I would applaud the Chairman and Ranking Member Brown-
Waite for also bringing this up.
I guess my concern is, and maybe it is a little esoteric
and it went to where Mr. Rodriguez was speaking about, one of
the areas I have spent a lot of time on in my doctoral work was
in organizational design. And so I appreciate the challenges
you have, but I also know there are things that we can do to
make this work.
I am trying to get at that Boston report came out in June
of 2007 and here we sit on July 31st of 2008 talking about what
we are going to do. My concern has always been with the VA,
that we provide you not only the necessary oversight but we
provide you the necessary flexibility and tools to be able to
do your job with several basic, I guess, mission statements for
you. The highest quality of care for this Nation's veterans
that we can provide in the most fiscally responsible manner
that we can do that.
So my question, I guess, and this is maybe where we can let
Mr. Downs--I kind of wanted to hear a little bit from that--we
are seeing this is there. I wish the sense of urgency were
higher. It does appear like the GAO offered nothing more than
basic best practices. You have agreed to that. And I think, as
you said, let us hope that it did not get into waste, fraud,
and abuse.
What are we going to do, though? What is specifically going
to be done? And I guess the question was maybe answered
already, how quickly you think this will take over. I
understand cultural change inside an organization is much
longer than structural or, you know, these directives.
But, Mr. Downs, if you could tell us for just a minute or
so just some basics of what is going to change.
Mr. Downs. Sir, we have a short-term goal and, of course, a
long-term goal. Short-term is working with our antiquated data
systems to work-arounds and such to start to pull the reports
out so electronically we can begin to review what is going on
across the field.
In fact, the issue of 1358s was discovered by my office
when we first became an office and began looking at data. Well,
we needed to find out what are we buying, where are we buying
it from, what does it cost, et cetera, et cetera.
That is when we went into the IFCAP system, found out we
had basically, I think, seven different stovepipe data systems
within each one of the 154 Medical Centers and none of them
were--we could not pull data up at a national level very well.
So we have had a lot of data people in my office working on
that. Now they are pulling reports up.
And when we discovered the 1358, we brought it to the
attention of appropriate folks and then, of course, things
rolled downhill from there because we want to find out what the
problems are and then we need to solve it.
And going back to Mr. Murray a while ago when he was being
questioned, you know, part of the fact is that we are a team.
And in VHA, there was not a Logistics Office for 25 years and
so this office was formed. And then we have to work with them.
So I found this information or my staff found out. We
immediately went to the CFO, Paul Kearns here, and Mr. Murray
and said here is our problem, Mr. Frye. We shared that
information because we have to work as a team to solve it.
So we are dealing with legacy systems. We are developing
work-arounds so we can do these reports. We are as intense
about this as you all are, in fact more so because we have an
obligation to make this thing work.
And it is appalling when we come in and we are not able to
provide you the answers you want nor are we able to properly
conduct our oversight and monitoring if we do not have the
tools in front of us to do it. And manual reports just do not
cut it. You have to have the ability to electronically pull
data in so that you can then do the reviews.
So what we are doing here with our first data runs as we
did the method of processing report, which brought up the 1358
issue, now we are looking at the on-off contract report. In
other words, we are looking at obligations. Do they have a
contract or do they not have a contract. We are looking at the
miscellaneous obligation open and closed.
So one thing that we can do with that is are they leaving
these 1358s open or are they closing them like they should be.
What is going on there. And we are looking at the budget object
codes to see what is going on with that. The expendable
inventory reports, our GIP, how does that tie in.
The FPDS matching report is something new that we have just
been able to put together, which would show the contracts that
we have and are they being reported properly into FPDS.
See, all of these things are integrated. They cannot be
just taken one at a time. And we have a number of other issues
that we are going through, looking at our item file and our
vendor file. They are all confused. And so trying to pull that
together.
And to also help put it in perspective is that when core
FLS came into being many years ago, it was supposed to solve
many of these problems because we knew some of these things
existed or our predecessors did. But, of course, that all fell
apart.
In the interim, though, we have come new on the scene and
we see the problems. And now we are trying to do these work-
arounds to get them going again. And so we now as of today, as
a matter of fact, there is a Request For Proposal on the street
for the integration of the strategic asset management system,
which we hope to begin a pilot in January.
And to answer the questions that have been asked about
time, this particular part of flight, if the pilot will take
place, we hope starting in January, it will take place about a
year and then we will do about ten more stations and the next
year roll that out and then the third year begin rolling out
nationwide.
So in the long term, we are looking at a 3-year project if
all goes well. In the short term, we are going to continue
working with these issues as we develop work-arounds with the
data systems that we have. And we are looking at that
information.
And then, more importantly, we are sharing it back with the
field because the field has been doing this for years. No one
has given them feedback, so I think in many cases, they did not
even know they were doing it wrong. They just sort of drifted
into it as personnel changed and such.
Mr. Walz. My time is up, Mr. Downs. This information
technology (IT) issue, and I asked the Chairman and the Ranking
Member, how many hearings have we had that we come back around
to the IT issue, whether it is the electronic medical record
and now we are hearing it here?
This is an issue that the Members who have been on this
Committee for 10, 15 years and they keep coming around to the
IT issue. And my belief is if that is where this is all
stemming from, boy, we have to figure that out.
I am a big fan of Mr. Henke who I think brought a new
vision to this on the IT side of things, but I still keep
hearing and it is still frustrating.
So I thank you for what you have done on that and, of
course, Mr. Downs, I thank you any time you are wearing a
Combat Infantry Badge. We welcome you at this Committee.
Mr. Downs. Thank you.
Mr. Mitchell. Thank you. Thank you very much.
You know, one thing that has kind of been hinted at from
everybody up here, and I appreciate what you are doing--this is
the second largest department in the Federal Government, which
is obviously huge. And as you mentioned, it is pretty hard to
institutionalize good behavior and change. And I appreciate all
your efforts in doing that.
What I want to ask you very quickly is, what do you need
from Congress? Do you need resources? Do you need legal
authority? Do you need anything from us to help fix the
problems that have come up?
Mr. Downs. A magic wand would help. But, anyway, it is a
difficult question to answer. But this continued oversight is,
I think, one of the keys because it keeps the attention level
up and keeps the focus up.
Each individual who is back there in headquarters, whether
it's the CIO or the VHA or the Veterans Benefits
Administration, we are all trying to struggle to solve these
problems and it is just a humongous organization and it takes
time to sort through it.
And the focus by the Committee is helpful to us when a
request goes up for resources or support among ourselves. We
all know the attention is there. So I think the best thing is
the continued oversight and our ability to come back and report
to you our progress.
Mr. Mitchell. Mr. Murray, did you----
Mr. Murray. I would like to add that from my vantage point,
support of FLITE, our modernization of our core accounting
system which would replace IFCAP, is just paramount. I do not
have the tools that industry has because I am running kind of a
band-aid set of applications that are very, very old. And it is
hard to do the work without some of the tools that many others
enjoy. I would appreciate your support of our tool building
initiative. It is named FLITE.
Thank you.
Mr. Mitchell. Well, I can assure you, Mr. Downs, there will
be continued oversight. But also I think everybody on this
Subcommittee and the larger Committee wants to provide the
resources and whatever you need to serve our veterans. So if it
is money or any other type of resources, we need to know that.
Mr. Downs. We need IT attention on our clinical issues that
we have been working on in VHA. We need IT attention on our
organizational administrative issues, which is what we are here
about.
For years, we have achieved success and honor with a high
quality of healthcare. Now we need to maintain that with the
infrastructure that takes it to support it. And that is where
our needs for this IT, as you can tell from these
presentations, is so great.
Mr. Mitchell. Thank you.
Mr. Bilbray.
Mr. Bilbray. Mr. Chairman, I want to clarify that we are
not talking about behavior here. We do not know about the
behavior. We have not done enough of the research. We have not
done a deep enough dive here to find out about behavior. We are
talking process, procedure.
Mr. Murray, is there any reason at all why, from your lofty
position in the Department, that you cannot immediately send
out a directive that you will not have any miscellaneous
expenditures unless we get three signatures on a document that
justifies it? And from this point, to this point, to this
point, it does not take computers to do that.
Mr. Murray. You are absolutely correct, sir. In fact, we
have such a document in review and concurrence right now.
Mr. Bilbray. Okay. Review and concurrence on it, because
let me tell you guys I have sat in front of Department heads
and staffers since I was 25 years old. What I hear you say
about this oversight process is, Congressman, keep having
meetings, keep talking, you know, we can do this back and
forth, back and forth.
My problem is, you know, this is a great game of
intellectual tennis that we are playing here, but does it get
the job done? And by 1940 to here shows you that oversight and
talking about it does not get it done. There need to be some
thresholds. There should be some minimum standards. In the
private sector, you set a minimum standard. If someone does not
fix it, Mr. Downs, you know exactly what happens.
The fact is here, Mr. Murray, this really sits on you
because you are the guy at the top of this financial review
process. There should be some minimum standards saying, I do
not care if you cannot do it on a computer. Take a piece of
paper and write it down, but I want to see those three
signatures. I want to have three people that are willing to put
their head and their reputation on the line. When miscellaneous
is on that, that should be a big red flag that somebody has an
extraordinary reason not to play by the rules, which I
understand. We do not want to have, you know, road blocks, but
we certainly want to have some accountability.
And I still do not see, Mr. Murray, why we cannot put a
time certain that any miscellaneous in the 2009 budget has to
have three signatures and here are the ones I am requiring and
I do not want to hear excuses about it.
Is there any reason why you cannot do that in 2009?
Mr. Murray. Our policy, separation of duties, strong
controls, whether it is a miscellaneous document or a 2237
purchase order document, any kind of financial obligation needs
strong controls. It is kind of Accounting 101.
However, we intend to mandate those separation of duties in
our policy.
Mr. Bilbray. Well, let me tell you something, Mr. Chairman.
We have upped the budget appropriately of the VA. But I will
tell you something. Rather than talking about your IT system, I
think the shot across the bow could be the fact that we are
going to up the audits. We are going to start doing a deep
dive.
We are not going to mess with 42. We are going to be
talking about, you know, 42,000 audits. And if that is where we
have to go because the system has such a potential for abuse to
scare the hell out of people to understand that, do not be
tempted because the Oversight Committee is already looking at
this.
I serve as Ranking Member on Procurement for Government
Oversight. This is right up my alley and I am sure the
Subcommittee Chairman will love to look at this because we
should be making sure that this situation does not happen
anywhere in the Federal system.
So I am saying this very firmly because I do not want to
hear about anything coming out of there like Boston anymore. I
think we need to send a signal to the entire process that even
if you have been doing this in the past, you better keep your
nose clean because we are doing the deep dive and are going to
come looking for you.
Thank you very much. I appreciate it.
Mr. Murray, any comment you want to make on that, you are
obviously----
Mr. Murray. We are going to begin doing the deep dive on
our own, the three of us. You have the folks here at the table.
We are going to begin using our audit resources to do that deep
dive internally and we hope to be able to say that we made
great improvement in the future.
Mr. Mitchell. Again, I would like to thank all of you for
the work that you are doing. And as I said, you can expect a
followup on this.
And I appreciate the tools that you need and the financial
system, we have been told over and over. Hopefully that is
coming to an end, that you will get the IT systems that you
need so that you can do the job that is expected of you, which,
as we have said before, is expected in the private sector. They
would do it immediately and they have those resources.
We hope that you get those resources and I hope anything,
that we can do to help expedite that, but let us know. I will
give you a little warning ahead of time. We want to revisit
this early in the next Congress with another accountability
because I think not only you but also Ms. Daly said that
probably the best role that we can play is oversight and just
to make sure that people are doing what they should.
And, again, I want to thank you for being here and thank
you for what you are doing and working in the largest or second
largest government agency that we have and sometimes not
getting the tools that you need to be up to date. And I
appreciate that.
So thank you very much. And with that, that ends this
hearing.
[Whereupon, at 11:30 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
We are here today to examine an issue of great importance. The
Department of Veterans Affairs is the second largest in the Federal
Government. It is authorized to spend billions of dollars of the
taxpayers' money every year to care for those who bravely stepped
forward to defend our Nation.
We have an obligation to ensure that the VA uses these funds
appropriately and they are not lost through waste, fraud, or abuse. We
must also be sure that they use adequate internal financial controls
and management.
Unfortunately, the VA does not have adequate internal controls.
Worse, is that this problem is not new--VA's auditors yearly have found
material weaknesses in VA's financial management system functionality
and in financial management oversight.
We will hear from the Government Accountability Office that the VA
procured billions of dollars in goods and services by way of
``Miscellaneous Obligations'' that should not have been procured this
way. Improper use of Miscellaneous Obligations obscures how taxpayer
money is being spent. In addition, goods and services that should have
been procured competitively can be subverted using this process.
Even when Miscellaneous Obligations are properly used, GAO's review
disclosed significant defects in VA's internal financial controls and
reporting. For example, VA employees often failed to describe the
purpose of a Miscellaneous Obligation or used uncertain descriptions
like ``3rd quarter invoice,'' which would not adequately describe its
purpose to an unbiased audit.
GAO's review also disclosed serious failures in a bedrock principle
of financial management--the segregation of duties.
It is elementary that the person authorized to sign the checks
cannot be the same person that approves the expense. In 30 out of 42
transactions that GAO looked at, VA failed to ensure the proper
segregation of duties.
Just a few years ago, VA spent 350 million dollars on a failed
attempt to create a modern electronic financial system. VA has embarked
on redoing that project, but even if successful it is many years away
from completion. We cannot wait. Even with the imperfect financial and
procurement systems it has, VA must ensure compliance with basic
principles of financial control. We look forward to hearing today from
VA about how it is going to do this.
Prepared Statement of Hon. Brian P. Bilbray
Mr. Chairman,
Thank you for calling this hearing. Our fiduciary oversight
responsibility over the VA is important, particularly when we view the
budget each year and see billions of dollars spent by the VA
categorized as ``miscellaneous obligations.'' When questioned about
this line item in the budget, VA does not appear to have any clear
knowledge of exactly how this money is being spent. This is something
that gravely concerns me, as well as several of my colleagues on both
sides of the aisle, and I believe it is important to get to the root of
this problem.
On October 5, 2007, following a staff briefing by the Veterans
Health Administration, you and Ranking Member Brown-Waite sent a letter
over to the Government Accountability Office requesting an audit of VHA
procurement spending under miscellaneous obligations to determine
whether (1) procurement obligations and disbursements were properly
reported, (2) adequate budgetary and procurement controls are in place
for the underlying transactions, and (3) there are indications of fraud
or abuse in the underlying transactions. During the staff briefing, it
was noted by VHA officials that $4.8 billion (over 55 percent) of the
reported $8.6 billion in procurements through the third quarter of
fiscal year 2007 were based on miscellaneous obligating documents. I
appreciate both of your leadership on this issue.
Mr. Chairman, miscellaneous obligations represents an enormous
percentage of VHA procurements. I am concerned that VHA may not know
the full scope of what this money is purchasing. I question how VA can
plan the coming FY 2009 budget, not knowing where the needs are, and
how to best meet these needs if so much funding is being placed under
miscellaneous obligations. I understand that GAO has issued their
report based on our request this week, and I look forward to hearing
about their review and the results of the audit. I also would like to
hear from VA about what type of controls are currently in place,
whether VA believes these controls are working, what are they doing to
tighten the use of the miscellaneous obligations documents for
purchasing at VHA.
This is not the first time our Subcommittee has reviewed VHA
procurement issues. During the 108th Congress, we held a series of
three hearings both at the Subcommittee and the full Committee on
eliminating waste, fraud, and abuse and mismanagement in veterans'
programs at VA. Included in these hearings were discussions on VA's
purchase cards, as well as third party billing. I believe it is our
job, as the oversight Committee to help VA in getting a handle on this
issue, and finding solutions to the problems that exist.
While I do not want to say procurement at the Department of
Veterans Affairs is broken, it appears seriously dysfunctional and
decentralized to such a point that appropriate procurement oversight
does not adequately exist throughout the procurement chain. When you
don't know where the money is spent, how do you know where your
greatest needs arise?
Thank you again, Mr. Chairman and I yield back my time.
Prepared Statement of Kay L. Daly Acting Director, Financial
Management and Assurance, U.S. Government Accountability Office
GAO Highlights
Why GAO Did This Study
The Veterans Health Administration (VHA) has been using
miscellaneous obligations for over 60 years to record estimates of
obligations to be incurred at a later time. The large percentage of
procurements recorded as miscellaneous obligations in fiscal year 2007
raised questions about whether proper controls were in place over the
authorization and use of billions of dollars.
GAO's testimony provides preliminary findings related to (1) how
VHA used miscellaneous obligations during fiscal year 2007, and (2)
whether the Department of Veterans Affairs (VA) policies and procedures
were designed to provide adequate controls over their authorization and
use. GAO recently provided its related draft report to the Secretary of
Veterans Affairs for review and comment and plans to issue its final
report as a followup to this testimony. GAO obtained and analyzed
available VHA data on miscellaneous obligations, reviewed VA policies
and procedures, and reviewed a nongeneralizable sample of 42
miscellaneous obligations at three case study locations.
GAO's related draft report includes four recommendations to
strengthen internal controls governing the authorization and use of
miscellaneous obligations, in compliance with applicable Federal
appropriations law and internal control standards.
What GAO Found
VHA recorded over $6.9 billion of miscellaneous obligations for the
procurement of mission-related goods and services in fiscal year 2007.
According to VHA officials, miscellaneous obligations were used to
facilitate the payment for goods and services when the quantities and
delivery dates are not known. According to VHA data, almost $3.8
billion (55.1 percent) of VHA's miscellaneous obligations was for fee-
based medical services for veterans and another $1.4 billion (20.4
percent) was for drugs and medicines. The remainder funded, among other
things, state homes for the care of disabled veterans, transportation
of veterans to and from medical centers for treatment, and logistical
support and facility maintenance for VHA medical centers nationwide.
GAO's Standards for Internal Control in the Federal Government
states that agency management is responsible for developing detailed
policies and procedures for internal control suitable for their
agency's operations. However, based on GAO's preliminary results, VA
policies and procedures were not designed to provide adequate controls
over the authorization and use of miscellaneous obligations with
respect to oversight by contracting officials, segregation of duties,
and supporting documentation for the obligation of funds. Collectively,
these control design flaws increase the risk of fraud, waste, and abuse
(including employees converting government assets to their own use
without detection). These control design flaws were confirmed in the
case studies at Pittsburgh, Cheyenne, and Kansas City.
Summary of Control Design Deficiencies at Three Case Study Locations
----------------------------------------------------------------------------------------------------------------
Inadequate supporting documentation
Number of No documented Inadequate -----------------------------------------
obligations approval by segregation Incomplete Blank
reviewed contracting of duties purpose Blank vendor contract
official \a\ description \b\ field field \c\
----------------------------------------------------------------------------------------------------------------
Pittsburgh 14 14 9 3 6 3
----------------------------------------------------------------------------------------------------------------
Cheyenne 11 11 11 1 6 4
----------------------------------------------------------------------------------------------------------------
Kansas City \d\ 17 17 10 4 8 9
----------------------------------------------------------------------------------------------------------------
Totals 42 42 30 8 20 16
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of VHA data.
In May 2008, VA issued revised guidance concerning required
procedures for authorizing and using miscellaneous obligations. GAO
reviewed the revised guidance and found that while it offered some
improvement, it did not fully address the specific control design flaws
GAO identified. Furthermore, according to VA officials, VA's policies
governing miscellaneous obligations have not been subject to legal
review by VA's Office of General Counsel. Such a review is essential in
ensuring that the policies and procedures comply with applicable
Federal appropriations law and internal control standards.
__________
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to discuss the Veterans Health
Administration's (VHA) use of miscellaneous obligations. VHA officials
said that they have been using miscellaneous obligations for over 60
years to record estimates of obligations \1\ to be incurred at a later
time.\2\ According to the Department of Veterans Affairs (VA) policy,
\3\ miscellaneous obligations can be used to record estimated
obligations to facilitate the procurement of a variety of goods and
services, including fee-based medical and nursing services; beneficiary
travel; and for other purposes.
---------------------------------------------------------------------------
\1\ An obligation is a definite commitment that creates a legal
liability of the government for the payment of goods and services
ordered or received, or a legal duty on the part of the United States
that could mature into a legal liability by virtue of actions on the
part of the other party beyond the control of the United States.
Payment may be made immediately or in the future.
\2\ A miscellaneous obligation can be used as a funds control
document to commit (reserve) funds that will be obligated under a
contract or other legal obligation at a later date. VA Office of
Finance Director, VA Controller Policy MP-4, Part V, Chapter 3, section
3 A.01 states in pertinent part that ``it will be noted that in many
instances an estimated miscellaneous obligation (VA Form 4-1358) is
authorized for use to record estimated monthly obligations to be
incurred for activities which are to be specifically authorized during
the month by the issuance of individual orders, authorization requests,
etc. These documents will be identified by the issuing officer with the
pertinent estimated obligation and will be posted by the accounting
section to such estimated obligation.''
\3\ VA Office of Finance Directives, VA Controller Policy, MP-4,
Part V, Chapter 3, section A, Paragraph 3A.02--Estimated Miscellaneous
Obligation or Change in Obligation (VA Form 4-1358).
---------------------------------------------------------------------------
VHA officials briefed your Subcommittee staff in September 2007
about various financial reporting weaknesses in the agency and
initiatives under way to address them. In the briefing, VHA officials
disclosed that $4.8 billion (56 percent) of the reported $8.6 billion
in procurements through the third quarter of fiscal year 2007 had been
done using funds categorized as miscellaneous obligations. In addition,
VA's Office of Inspector General (OIG) issued a report in May 2007 on
the alleged mismanagement of funds at the VA Boston Healthcare System.
According to OIG officials, they obtained documents showing that a
miscellaneous obligation for $200,000 was requested, approved, and
obligated by the same fiscal official, calling into question the
adequacy of the segregation of duty controls over miscellaneous
obligations.\4\ In light of these concerns, you requested that we
review whether the design of VHA's internal controls over the use of
miscellaneous obligations was adequate for fiscal year 2007.
---------------------------------------------------------------------------
\4\ Department of Veterans Affairs, Office of Inspector General,
Audit of Alleged Mismanagement of Government Funds at the VA Boston
Healthcare System, Report No. 06-00931-139 (Washington, D.C.: May 31,
2007).
---------------------------------------------------------------------------
Today, my testimony will focus on our preliminary observations
related to (1) how VHA used miscellaneous obligations during fiscal
year 2007, and (2) whether VA's policies and procedures are designed to
provide adequate controls over the authorization and use of
miscellaneous obligations. We recently provided our draft report,
including recommendations, on the results of our audit to the Secretary
of Veterans Affairs for review and comment. We plan to incorporate VA's
comments as appropriate and issue our final report as a followup to
this testimony. We conducted this audit from November 2007 through July
2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives. Details on
our scope and methodology are included in appendix I. Further
background information on VHA's operations is included in appendix II.
Summary
According to our preliminary analysis, in fiscal year 2007,
available information from the Integrated Funds Distribution, Control
Point Activity, Accounting and Procurement (IFCAP) database show that
VHA used miscellaneous obligations to record over $6.9 billion against
its appropriations for the procurement of mission-related goods and
services. According to the IFCAP data, almost $3.8 billion of this
total (55.1 percent) was for fee-based medical and dental services for
veterans and another $1.4 billion (20.4 percent) for drugs, medicines,
and hospital supplies. The remainder covered, among other things, state
homes for the care of disabled veterans, transportation of veterans to
and from medical centers for treatment, and logistical support and
facility maintenance for VHA medical centers nationwide. VHA officials
said they used miscellaneous obligations to administratively reserve
estimated funds required to facilitate the payments for goods and
services for which specific quantities and timeframes were uncertain.
Another cited benefit was that miscellaneous obligations simplify the
procurement process when no underlying contract or purchase order
exists. For example, VHA centers used miscellaneous obligations to
record estimated obligations for an umbrella agreement for fee-based
medical services that can then be used to fund the work performed by a
number of different physicians. Nonetheless, without effectively
designed mitigating controls, using miscellaneous obligations may also
expose VHA to increased risk of fraud, waste, and abuse.
Our preliminary findings indicate that VA policies and procedures
were not designed to provide adequate controls over the use of
miscellaneous obligations with respect to oversight by contracting
officials, segregation of duties, and supporting documentation for
recording the obligation of funds. Specifically, although VA's
September 29, 2006, policy required contracting officials to review
miscellaneous obligations to help ensure their proper use, the
supporting procedures did not describe how such reviews should be
carried out. Further, the design of the current control process did not
include detailed procedures for conducting either an automated or
manual review of miscellaneous obligations by contracting officials.
With regard to segregation of duties, the miscellaneous obligation
automated system and associated policies and procedures were not
designed to prevent one person from performing multiple roles in the
process of authorizing and executing miscellaneous obligations.
Finally, with regard to documentation, we found that current guidance
did not include detailed procedures on what was to be included in the
purpose field of the miscellaneous obligation authorization document
and did not require that the vendor name and contract number be
included. These control design flaws were confirmed in our case studies
at Pittsburgh, Cheyenne, and Kansas City. Such VHA-wide policy and
procedure design flaws increase the risk of fraud, waste, and abuse at
the 129 VHA stations using miscellaneous obligations in fiscal year
2007. New guidance for the use of miscellaneous obligations was issued
in May 2008. This guidance, while it offered some improvement, did not
fully address the three problem areas. Also, we understand that VA
attorneys have not reviewed these policies to help ensure compliance
with applicable appropriations law and other requirements.
Our draft report, recently provided to the Secretary for review and
comment, included four recommendations for actions that, if effectively
implemented, should reduce the risks associated with using
miscellaneous obligations.
Miscellaneous Obligations Used Extensively for Mission-Related
Activities in Fiscal Year 2007
According to the IFCAP database, in fiscal year 2007 nearly 132,000
miscellaneous obligations, with a total value of nearly $9.8 billion,
were created (see table 1). While VA's Central Office had $2.9 billion
in miscellaneous obligations during fiscal year 2007, our review
focused on the $6.9 billion in miscellaneous obligations used by VHA's
129 stations, \5\ located in every Veterans Integrated Services Network
(VISN) throughout the country, for a variety of mission-related
activities. (See app. III for a listing of the use of miscellaneous
obligations by VISN, and app. IV for a listing of the use of
miscellaneous obligations by station.)
---------------------------------------------------------------------------
\5\ The IFCAP database included 129 VHA stations. A VHA station may
include more than one medical center.
Table 1: Miscellaneous Obligations at VHA and VA for Fiscal Year 2007
(Dollars in billions)
----------------------------------------------------------------------------------------------------------------
Dollar amount of
Number of miscellaneous miscellaneous Percentage of
obligations obligations total dollar value
----------------------------------------------------------------------------------------------------------------
VHA \a\ 127,070 $6.9 70%
----------------------------------------------------------------------------------------------------------------
VA's Central Office \b\ 4,839 $2.9 30%
----------------------------------------------------------------------------------------------------------------
Total 131,909 $9.8 100%
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of IFCAP data.
\a\ Includes miscellaneous obligations for VISNs 1-12 and 15-23 (VISNs 13 and 14 were consolidated and
designated VISN 23).
\b\ VA's Central Office (VISN 0) is responsible for the administration of the Consolidated Mail Outpatient
Pharmacy (CMOP) initiative that provides mail order prescriptions to veterans using automated distribution
centers located throughout the country. In fiscal year 2007, VISN 0 obligated about $2.08 billion in
miscellaneous obligations for drugs, medicines, and other supplies, and almost $800 million for various fee-
based medical, dental, and other services.
According to available VHA data, VHA used miscellaneous obligations
to record estimated obligations of over $6.9 billion for mission-
related goods and services. As shown in figure 1, about $3.8 billion
(55.1 percent) was for fee-based medical and dental services for
veterans, and another $1.4 billion (20.4 percent) was for drugs,
medicines, and hospital supplies. The remainder was for, among other
things, state veterans homes, \6\ transportation of veterans to and
from medical centers for treatment, and logistical support and facility
maintenance for VHA medical centers nationwide.
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\6\ State veterans homes are established by individual states and
approved by VA for the care of disabled veterans. The homes include
facilities for domiciliary nursing home care and adult day healthcare.
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According to VHA contracting and fiscal service officials, using
miscellaneous obligations tends to reduce administrative workload and
facilitates the payment for contracted goods and services, such as
drugs, medicines, and transportation, and for goods and services for
which no pre-existing contracts exist, such as fee-basis medical and
dental services and utilities.
VHA officials stated that miscellaneous obligations facilitate the
payment for contracted goods and services when the quantities and
delivery dates are not known. A miscellaneous obligation can be created
for an estimated amount and then modified as specific quantities are
needed or specific delivery dates are set. When a purchase order is
created, however, the obligated amount cannot be changed without a
modification of the purchase order. According to VHA officials, the
need to prepare numerous modifications to purchase orders could place
an undue burden on the limited contracting personnel available at
individual centers and could also require additional work on the part
of fiscal services personnel.
Figure 1: VHA Miscellaneous Obligations for Fiscal Year 2007
Source: GAO analysis.
VHA officials stated that the use of miscellaneous obligations can
simplify the procurement process when no pre-existing contract or
purchase order exists. For example, providing medical care on a fee-
basis to veterans outside of VHA medical centers may involve the
services of thousands of private physicians nationwide. Attempting to
negotiate a separate agreement or contract with each of these
individuals would be a difficult task for VHA's contracting staff.
Under the policies and procedures in place during fiscal year 2007, VHA
centers could use miscellaneous obligations as umbrella authorizations
for fee-based medical services for work performed by a number of
different physicians. In effect, in cases for which there is no pre-
existing contract, the miscellaneous obligation form becomes the record
of an obligation. However, use of miscellaneous obligations may also
increase the risk of fraud, waste, and abuse. Consequently, mitigating
controls must be designed to help compensate for the lack of a
negotiated contract. Absent contractual terms, one risk area is the
authorized fee schedule for the medical services being provided. In
this case, Federal regulations call for payments to non-VA physician
services associated with outpatient and inpatient care provided at non-
VA facilities to be the lesser of the amount billed or the amount
calculated using the formula developed by the Department of Health and
Human Services under Medicare's participating physician fee schedule
for the period in which the service is provided.\7\ However, we did not
verify that VHA officials were properly following the fee schedule.
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\7\ 38 CFR 17.56.
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Deficiencies in Design of Controls over Miscellaneous Obligations
Increase the Risk of Fraud, Waste, and Abuse
Our preliminary observations on VA policies and procedures indicate
they were not designed to provide adequate controls over the use of
miscellaneous obligations. According to GAO's Standards for Internal
Control in the Federal Government, agency management is responsible for
developing detailed policies and procedures for internal control
suitable for their agency's operations and ensuring that they provide
for adequate monitoring by management, segregation of duties, and
supporting documentation for the need to acquire specific goods in the
quantities purchased. We identified control design flaws in each of
these oversight areas, and we confirmed that these weaknesses existed
at the three locations where we conducted case studies. Collectively,
these control design flaws increase the risk of fraud, waste, and abuse
(including employees converting government assets to their own use
without detection). New guidance for the use of miscellaneous
obligations was released in January 2008 and finalized in May 2008. We
reviewed the new guidance and found that while it offered some
improvement, it did not fully address the specific control design flaws
we identified. Furthermore, VA officials told us that this guidance was
not subject to any legal review. Such an analysis is essential to help
ensure that the design of policies and procedures comply with all
applicable Federal appropriations law and internal control standards.
We reviewed 42 miscellaneous obligations at the three case study
locations and developed illustrative, more detailed information on the
extent and nature of these control design flaws. Table 2 summarizes the
locations visited, the miscellaneous obligations reviewed at each
location, and the extent and nature of control design deficiencies
found.
Table 2: Summary of Case Study Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
Inadequate supporting documentation
Number of Dollar value of No documented Inadequate -----------------------------------------
obligations obligations approval by segregation Incomplete Blank
reviewed reviewed contracting of duties purpose Blank vendor contract
official \a\ description \b\ field field \c\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Pittsburgh 14 $ 6,694,853 14 9 3 6 3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cheyenne 11 $ 2,076,648 11 11 1 6 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Kansas City \d\ 17 $27,274,395 17 10 4 8 9
--------------------------------------------------------------------------------------------------------------------------------------------------------
Totals 42 $36,045,896 42 30 8 20 16
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: GAO analysis of VHA data.
\a\ In 30 of the 42 obligations we reviewed, one official performed two or more of the following functions: requesting, creating, approving or
obligating funds for the original miscellaneous obligations, or certifying delivery of goods and services and approving payment.
\b\ In 8 of 42 instances, we could not determine the nature, timing, or the extent of the goods and/or services being procured from the description in
the purpose field without reference to supporting invoices.
\c\ In these instances, we confirmed that contracts existed, but no contract number was listed on the miscellaneous obligation document.
\d\ Includes facilities located in Kansas City, KS; Wichita, KS; Columbia, MO; and eastern Kansas.
Inadequate Contracting Oversight of Miscellaneous Obligations
To help minimize the use of miscellaneous obligations, VA policy
stated that miscellaneous obligations would not be used as obligation
control documents unless the contracting authority for a station had
determined that purchase orders or contracts would not be required.
Furthermore, VA policy required review of miscellaneous obligations by
contracting officials to help ensure proper use in accordance with
Federal acquisition regulations, but did not address the intended
extent and nature of these reviews or how the reviews should be
documented. Contracting officials were unable to electronically
document their review of miscellaneous obligations and no manual
documentation procedures had been developed. Our review of 42
miscellaneous obligations prepared at three VHA stations showed that
contracting officers were at times familiar with specific miscellaneous
obligations at their facilities, but that they had no documented
approvals available for review. Furthermore, none of the three sites we
visited had procedures in place to document review of the miscellaneous
obligations by the appropriate contracting authorities.
Effective oversight and review by trained, qualified officials is a
key factor in identifying a potential risk for fraud, waste, or abuse.
Without control procedures to help ensure that contracting personnel
review and approve miscellaneous obligations prior to their creation,
VHA is at risk that procurements will not have safeguards established
through a contract approach. For example, in our case study at the VA
Pittsburgh Medical Center, we found 12 miscellaneous obligations,
totaling about $673,000, used to pay for laboratory services provided
by the University of Pittsburgh Medical Center (UPMC). The Chief of
Acquisition and Materiel Management for the VA Pittsburgh Medical
Center stated that she was not aware of the UPMC's laboratory testing
service procurements and would review these testing services to
determine whether a contract should be established for these
procurements. Subsequently, she stated that VISN 4, which includes the
VA Pittsburgh Medical Center, was going to revise procedures to procure
laboratory testing services through purchase orders backed by reviewed
and competitively awarded contracts, instead of funding them through
miscellaneous obligations.
Another Pittsburgh miscellaneous obligation for about $141,000 was
used to fund the procurement of livers for transplant patients. Local
officials said that there was a national contract for the services, and
that livers were provided at a standardized price of $21,800. However,
officials could not provide us with a copy of the contract, nor
documentation of the standardized pricing schedule. Therefore, we could
not confirm that VHA was properly billed for these services or that the
procurement was properly authorized.
Furthermore, in the absence of review by contracting officials,
controls were not designed to prevent miscellaneous obligations from
being used for unauthorized purposes, or for assets that could be
readily converted to personal use. Our analysis of the IFCAP database
for fiscal year 2007 identified 145 miscellaneous obligations for over
$30.2 million that appeared to be used in the procurement of such items
as passenger vehicles; furniture and fixtures; office equipment; and
medical, dental, and scientific equipment. Although the VA's
miscellaneous obligation policy did not address this issue, VA
officials stated that acquisition of such assets should be done by
contracting officials and not through miscellaneous obligations.
Without adequate controls to review and prevent miscellaneous
obligations from being used for the acquisition of such assets, it is
possible that the VHA may be exposing the agency to unnecessary risks
by using miscellaneous obligations to fund the acquisitions of goods or
services that should have been obtained under contract with
conventional controls built in.
Inadequate Segregation of Duties
One tenet of an effectively designed control system is that key
duties and responsibilities need to be divided or segregated among
different people to reduce the risk of error or fraud.\8\ These
controls should include separating the responsibilities for authorizing
transactions, processing and recording them, reviewing the
transactions, and accepting any acquired assets. The basic principle is
that no one individual should be permitted to control all key aspects
of a transaction or event, such as acquiring a good or service.
---------------------------------------------------------------------------
\8\ GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
---------------------------------------------------------------------------
However, IFCAP control design allows a single official to perform
multiple key roles in the process of creating and executing
miscellaneous obligations, and VA policies and procedures do not
specifically prohibit this practice. Control point officials are
authorized to create, edit, and approve requests for miscellaneous
obligations. In addition, these same individuals can certify the
delivery of goods and services and approve payment. Such weak control
design could enable a VHA employee to convert VHA assets to his or her
own use, without detection (such as the personal property acquired
through the use of miscellaneous obligations described in the previous
section).
Our review of the previously mentioned 42 miscellaneous obligations
at three case study locations indicated that controls in place at these
locations were not designed to ensure sufficient segregation of duties
for procurements. Specifically, as noted in table 3, we found
inadequate segregation of key duties in 30 of the 42 obligations we
reviewed. In these instances, controls were not designed to prevent one
official from performing two or more of the following key functions:
(1) requesting the miscellaneous obligation, (2) approving the
miscellaneous obligation, (3) recording the obligation of funds, or (4)
certifying delivery of goods and services and approving payment.
As noted in table 3, in 13 of the 42 obligations we examined, the
same official performed three of the four functions. In 11 of these
cases, the same official requested and approved the miscellaneous
obligations, and then certified receipt of goods and services. For
example, in one case in Pittsburgh, one official requested and approved
a miscellaneous obligation of over $140,000 for medical services and
then certified receipt and approved payment for at least $43,000 of
those services. In another case in Cheyenne, we found one miscellaneous
obligation for utilities where one official requested, approved, and
certified receipt and approved payment of over $103,000 in services.
Table 3: Case Study Analysis of Segregation of Duties
------------------------------------------------------------------------
Obligations
------------------------------------------------------------------------
One official performed two out of the four functions 15
------------------------------------------------------------------------
One official performed three out of the four functions 13
------------------------------------------------------------------------
One official performed all four functions 2
------------------------------------------------------------------------
Subtotal--Inadequate Segregation of Duties 30
------------------------------------------------------------------------
Adequate segregation of duties--different officials 12
performed each of the four functions
------------------------------------------------------------------------
Total 42
------------------------------------------------------------------------
Source: GAO analysis.
\a\ Agency officials performed various combinations of the following
four functions: (1) requesting the miscellaneous obligation, (2)
approving the miscellaneous obligation, (3) obligating funds, and (4)
certifying receipt of goods and services and approving payment.
In two instances in Cheyenne involving employee grievance
settlements for about $22,000, one official performed all four
functions. While our review found that these obligations were for
legitimate purposes, the fact that one official was able to perform
multiple functions is indicative of an inherent control system flaw.
One individual, controlling all of the key stages of the transaction,
leaves VHA vulnerable to potential fraud, waste, or abuse because of
the opportunity for the creation of inappropriate, perhaps fraudulent,
transactions.
The VA OIG noted a similar problem in its review of the alleged
mismanagement of funds at the VA Boston Healthcare System.\9\ According
to OIG officials, they obtained documents showing that a miscellaneous
obligation was used to obligate $200,000, and was requested, approved,
and obligated by the same fiscal official. The OIG officials said that
this transaction called into question the adequacy of segregation of
duty controls over funds obligated through miscellaneous obligations.
---------------------------------------------------------------------------
\9\ Department of Veterans Affairs, Office of Inspector General,
Audit of Alleged Mismanagement of Government Funds at the VA Boston
Healthcare System, Report No. 06-00931-139 (Washington, D.C.: May 31,
2007).
---------------------------------------------------------------------------
Similarly, a July 2007 report by an independent public accountant
(IPA) also found, among other things, the segregation of duties for
VA's miscellaneous obligation process was inadequate.\10\ The report
noted that control point officials at a VISN, VA's Central Office, and
two medical centers had the ability to act as the requester and
approving official for the same transaction. This condition was
observed at four of the six locations the IPA reviewed. The IPA
recommended that the medical centers update their local policies to
prevent control point officials from acting as a requester and
approving official on the same transaction. Similarly, in 23 of the 42
miscellaneous obligations we reviewed in our case studies, the same
individual served as the requester and approver for a miscellaneous
obligation.\11\
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\10\ Grant Thornton, Department of Veterans Affairs, OMB Circular
A-123, Appendix A--Findings and Recommendations Report (Procurement
Management), (July 18, 2007).
\11\ In 8 of the 23 cases, one official requested and approved a
miscellaneous obligation. For the remaining 15 cases, one official
performed those two tasks plus one or more other key tasks, such as
recording the obligation of funds and certifying receipt of goods and
services and approving payment.
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Lack of Adequate Supporting Documentation
Another tenet of an effectively designed control system is that all
transactions need to be clearly documented and all documentation and
records should be properly managed and maintained.\12\ Adequate
documentation is essential to support an effective funds control
system, is crucial in helping to ensure that a procurement represents a
bona fide need, and reduces the risk of fraud, waste, and abuse. When a
legal obligation is recorded, it must be supported by adequate
documentary evidence of the liability.\13\ An agency should use its
best estimate to reserve an amount for future obligation when the
amount of the government's final liability is undefined. Further, the
basis for the estimate and the computation must be documented. Although
VA's form entitled ``Estimated Miscellaneous Obligation or Change in
Obligation'' (VA Form 4-1358) includes three key fields--the purpose,
vendor, and contract number fields--that provide crucial supporting
documentation for the obligation, VA policies and procedures were not
sufficiently detailed to specifically require this type of information
needed to adequately document miscellaneous obligations. During the
period covered by our review, VA did not have specific guidance as to
what information should be included in the purpose field, including
such essential data as the nature and extent of the transaction.
Further, during our case studies, we found many instances where these
fields on the miscellaneous obligation form were left blank or did not
provide adequate information as a result of this control design flaw.
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\12\ GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
\13\ 31 U.S.C. Sec. 1501(a).
---------------------------------------------------------------------------
Specifically, in our case studies, we found that these control
design flaws resulted in the purpose field on 8 of the 42 miscellaneous
obligations having insufficient data to determine whether the
miscellaneous obligation represented a bona fide need. In many
instances, while the stated purposes may have been adequate for the
requesters and approving officials in the using services, this level of
documentation was not sufficient for an independent reviewer to
determine from the purpose field what items were procured and whether
the appropriate budget object code was charged. As a result of these
deficiencies in the design of controls, in several cases we had to rely
on invoices to determine the probable purpose of the miscellaneous
obligation and whether it represented a bona fide need. For example, in
Kansas City, we found one miscellaneous obligation for over $1.3
million whose purpose was listed as ``To obligate funds for the Oct 06
payment,'' while the associated invoices showed that the miscellaneous
obligation was used to cover the services of medical resident staff. In
another instance, we found a miscellaneous obligation for over $53,000
whose purpose was listed as ``October billing,'' while the associated
invoices showed that the miscellaneous obligation was used for the
automated prescription services provided at the Kansas Soldiers Home in
October 2007. In another case in Pittsburgh, we found a miscellaneous
obligation for over $45,000 whose purpose was listed as ``LABCORP 5/1-
5/31/07,'' while the associated invoices showed that the obligation was
for laboratory testing services. Without procedures calling for more
definitive descriptions of the purpose, we could not confirm that these
miscellaneous obligations were for bona fide needs or that the invoices
reflected a legitimate use of Federal funds.
Although appropriation law provides that the basis for the amount
obligated should be documented, we found deficient VA control design
resulted in several miscellaneous obligations at one location with
inadequate support for the recorded obligations.\14\ For example,
according to our analysis of the IFCAP database, 12 miscellaneous
obligations, for a total of almost $1.3 million, were created using no-
year funds \15\ by the VA Pittsburgh Medical Center on September 28,
2007, to support the St. Clairsville community-based outpatient clinic.
One miscellaneous obligation for $106,400 covered March 2008 services,
and another miscellaneous obligation for $108,400 covered April 2008
services by the clinic. The purpose fields for the two miscellaneous
obligations did not provide an explanation of how the estimates were
calculated. When asked, medical center officials stated that the
estimates were based on historical trends or calculations, but they did
not provide any documentation to support the estimates. Furthermore,
established control procedures did not require them to do so. In
another instance, the VA Kansas City Medical Center obligated $200,000
for ``patient care services at the Kirksville community-based
outpatient clinic from 10/01/06 to 12/31/06.'' The purpose field did
not provide an explanation of how the estimate was calculated.
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\14\ GAO, Principles of Federal Appropriations Law: Third Edition,
Volume II, GAO-06-382SP (Washington, D.C.: Feb. 1, 2006).
\15\ No-year funds are appropriations for which budget authority
remains available for obligation for an indefinite period of time. A
no-year appropriation is usually identified by language such as ``to
remain available until expended.''
---------------------------------------------------------------------------
Further, in the absence of explicit documentation requirements,
data fields were left blank on a number of the miscellaneous
obligations we examined. For example, the vendor field was left blank
in 20 of the 42 miscellaneous obligations we reviewed. Current VA
guidance states that the vendor field is to be left blank when multiple
vendors exist since the IFCAP system allows only one vendor to be
listed; however, we observed several cases where the field was left
blank even when there was only one vendor. For example, in Kansas City
we found obligations for electricity and natural gas where only one
vendor historically had been used, but the vendor field was left blank.
Similarly, in Kansas City another miscellaneous obligation was used in
the procurement of $8.6 million in services at the Warrensburg
Veteran's Home in Warrensburg, Missouri, but the vendor field was left
blank. While payment was made to the vendor that invoiced VA in these
instances, leaving the vendor field blank poses several problems for
agency management, including establishing that the vendor is
appropriate for the purpose of the miscellaneous obligation and
verifying that the correct, authorized vendor is paid.
We also found the contract number field left blank in 16 of the 42
miscellaneous obligations reviewed, even though supporting contracts
did exist for these miscellaneous obligations. VA guidance did not
require that the contract number be included in order to process the
miscellaneous obligation. However, missing contract numbers make it
difficult to determine whether VA is receiving the appropriate type and
quantity of goods and services at the correct price.
Inadequate control requirements for supporting documentation and
completing data fields concerning the purpose, vendor information, and
contract numbers can hinder oversight by senior VA management
officials. The Deputy Assistant Secretary for Logistics and Acquisition
\16\ said that he and other VHA officials use the IFCAP database to
monitor the extent and nature of miscellaneous obligations nationwide,
including analyzing the number and dollar amounts of miscellaneous
obligations and identifying the types of goods and services procured
using miscellaneous obligations. He told us that he was concerned with
the extent and nature of the use of miscellaneous obligations at VA
that he lacked adequate oversight or control over procurements made
through miscellaneous obligations and that he often did not know what
was being bought or who it was being bought from. Our analysis of the
IFCAP database found that over 88,000 (69 percent) of 127,070
miscellaneous obligations did not include vendor information,
accounting for over $5 billion of the $6.9 billion in recorded
miscellaneous obligations in fiscal year 2007. Similarly, the IFCAP
database did not have information on the quantities purchased or a
description of what was purchased. As a result, important management
information was not available to senior VA procurement officials.
---------------------------------------------------------------------------
\16\ This official acts as VA's Senior Procurement Executive and
oversees the development and implementation of policies and procedures
for departmentwide acquisition and logistics programs supporting all VA
facilities.
---------------------------------------------------------------------------
New Guidance Does Not Address All Control Weaknesses
In January 2008, VA issued interim guidance effective for all
miscellaneous obligations created after January 30, 2008, concerning
required procedures for using miscellaneous obligations.\17\ The
guidance provides that prior to creating a miscellaneous obligation,
fiscal service staff are required to check with the contracting
activity to ensure that a valid contract is associated with the
miscellaneous obligation, except in specific, itemized cases. Under
this guidance, the using service is to have the contracting activity
determine (1) if a valid procurement authority exists, (2) if a
procurement needs to be initiated, and (3) the appropriate method of
obligation. Also, this guidance requires that a copy of the head
contracting official's approval be kept with a copy of the
miscellaneous obligation for future audit purposes. In addition, the
guidance provides that the fiscal service may not create a
miscellaneous obligation without appropriate information recorded in
the purpose, vendor, and contract number fields on the document. The
guidance specifically cites a number of invalid uses for miscellaneous
obligations, including contract ambulance, lab tests, blood products,
and construction, but did not always specify a procurement process to
be used for these items.
---------------------------------------------------------------------------
\17\ Department of Veterans Affairs Memorandum, Interim Guidance on
Miscellaneous Obligations, VA Form 4-1358, dated January 30, 2008.
---------------------------------------------------------------------------
In May 2008, VHA management finalized the interim guidance.\18\
This guidance represents a step in the right direction. It includes a
manual process for documenting contracting approval of miscellaneous
obligations and specifically states that a miscellaneous obligation
cannot be created if the vendor, contract number, and purpose fields
are incomplete. However, the new guidance does not address the
segregation of duties issues we and others have identified and does not
establish an oversight mechanism to ensure that control procedures
outlined are properly implemented.
---------------------------------------------------------------------------
\18\ Department of Veterans Affairs Memorandum, Revised Guidance
for Processing of Miscellaneous Obligations, VA Form 4-1358, dated May
18, 2008.
---------------------------------------------------------------------------
In our view, VHA has missed an opportunity to obtain an important
legal perspective on this matter. According to VA officials, these
policies have not been subject to any legal review. Such a review is
essential in ensuring that the policies and procedures comply with
Federal funds control laws and regulations and any other relevant VA
policies or procedures dealing with budgetary or procurement matters.
For example, such a review would help ensure that the guidance
adequately addresses Federal Acquisition Regulations, requiring that no
contract shall be entered into unless the contracting officer ensures
that all requirements of law, executive orders, regulations, and all
other applicable procedures, including clearances and approvals, have
been met.\19\ In addition, a review could help to ensure that this
guidance (1) provides that all legal obligations of VA are supported by
adequate documentation to meet the requirements of the recording
statute 31 U.S.C. Sec. 71501(a) and (2) prevents any individual from
committing the government for purchases of supplies, equipment, or
services without being delegated contracting authority as a contracting
officer, purchase card holder, or as a designated representative of a
contracting officer.\20\ The absence of a legal review to determine the
propriety of VA's miscellaneous obligations policies and procedures
places VA at risk of not complying with important laws and regulations.
---------------------------------------------------------------------------
\19\ 48 C.F.R. 1.602-1 (b).
\20\ 48 C.F.R. 801.601 (b).
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In conclusion, Mr. Chairman, without basic controls in place over
billions of dollars in miscellaneous obligations, VA is at significant
risk of fraud, waste, and abuse. Effectively designed internal controls
serve as the first line of defense for preventing and detecting fraud,
and they help ensure that an agency effectively and efficiently meets
its missions, goals, and objectives; complies with laws and
regulations; and is able to provide reliable financial and other
information concerning its programs, operations, and activities.
Although miscellaneous obligations can facilitate and streamline the
procurement process, they require effectively designed mitigating
controls to avoid impairing full accountability and transparency. In
the absence of effectively designed key funds and acquisition controls,
VA has limited assurance that its use of miscellaneous obligations is
kept to a minimum, for bona fide needs, in the correct amount, and to
the correct vendor. Improved controls in the form of detailed policies
and procedures, along with a management oversight mechanism, will be
critical to reducing the government's risks from VA's use of
miscellaneous obligations.
To that end, our draft report includes specific recommendations,
including a number of preventive actions that, if effectively
implemented, should reduce the risks associated with the use of
miscellaneous obligations. We are making recommendations to VA to
modify its policies and procedures, in conjunction with VA's Office of
General Counsel, to better ensure adequate oversight of miscellaneous
obligations by contracting officials, segregation of duties throughout
the process, and sufficient supporting documentation for miscellaneous
obligations.
Mr. Chairman, this completes my prepared statement. I would be
happy to respond to any questions you or other Members of the
Subcommittee may have at this time.
GAO Contact
For more information regarding this testimony, please contact Kay
Daly, Acting Director, Financial Management and Assurance, at (202)
512-9095 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this testimony.
Appendix I: Scope and Methodology
In order to determine how VHA used miscellaneous obligations during
fiscal year 2007, we obtained and analyzed a copy of VHA's Integrated
Funds Distribution, Control Point Activity, Accounting and Procurement
(IFCAP) database of miscellaneous obligations for that year. IFCAP is
used to create miscellaneous obligations (VA Form 4-1358) at VA, and
serves as a feeder system for VA's Financial Management System (FMS)--
the department's financial reporting system of record. According to VA
officials, FMS cannot be used to identify the universe of miscellaneous
obligations at VHA in fiscal year 2007 because FMS does not identify
the procurement method used for transactions (i.e., miscellaneous
obligations, purchase card, purchase order). Furthermore, FMS does not
capture the contract number, requester, approving official, and
obligating official for obligations. However, according to senior
agency officials, the IFCAP database is the most complete record of
miscellaneous obligations available at VHA and can be used to provide
an assessment of how miscellaneous obligations were used during fiscal
year 2007.
IFCAP's data included information on the appropriation codes,
vendors, budget object codes (BOC), date and amount of obligations,
obligation numbers, approving officials, and VISN and VHA station for
VHA miscellaneous obligations. We converted the database to a
spreadsheet format and sorted the data by VISN, station, and BOC to
determine where and how miscellaneous obligations were used in fiscal
year 2007 (see app. III and IV).
To determine whether VHA's polices and procedures are designed to
provide adequate controls over the use of miscellaneous obligations, we
first reviewed VHA's policies and procedures governing the use of
miscellaneous obligations at VA. Specifically, we reviewed the VA
Controller Policy, MP-4, Part V, Chapter 3, Section A, Paragraph
3A.02--Estimated Miscellaneous Obligation or Change in Obligation (VA
Form 4-1358); the VA Office of Finance Bulletin 06GA1.05, Revision to
MP-4, Part V, Chapter 3, Section A, Paragraph 3A.02--Estimated
Miscellaneous Obligation or Change in Obligation (VA Form 4-1358),
dated September 29, 2006; VA Interim Guidance on Miscellaneous
Obligations, VA Form 1358, dated January 30, 2008; VHA Revised Guidance
for Processing of Miscellaneous Obligations, VA Form 1358, dated May
18, 2008; and other VA and VHA directives, policies, and procedures. We
also used relevant sections of the Federal Acquisition Regulations
(FAR); VA's Acquisition Regulations; appropriation law; and GAO's
Standards for Internal Control in the Federal Government in assessing
the design of VA's policies and procedures, and we met with VA and VHA
officials in Washington, D.C., and coordinated with VHA's Office of
Inspector General staff to identify any previous audit findings
relevant to our audit work. We also interviewed representatives of VA's
independent public accounting firm and reviewed copies of their
reports.
In order to better understand the extent and nature of VA policy
and procedure design deficiencies related to miscellaneous obligations,
we conducted case studies at three VHA stations in Cheyenne, Wyoming;
Kansas City, Missouri; and Pittsburgh, Pennsylvania.\21\ The stations
in Kansas City and Pittsburgh were selected because they had a high
volume of miscellaneous obligation activity, and they were located in
different regions of the country. We conducted field work at the
Cheyenne, Wyoming, station during the design phase of our review to
better understand the extent and nature of miscellaneous obligation
control design deficiencies at a small medical center. Inclusion of the
Cheyenne facility in our review increased the geographic diversity of
our analysis and allowed us to compare the extent and nature of
miscellaneous obligation design deficiencies at medical centers in the
eastern, midwestern, and western portions of the United States.
---------------------------------------------------------------------------
\21\ We visited the Cheyenne VA Medical Center in Cheyenne,
Wyoming; the Kansas City VA Medical Center in Kansas City, Missouri;
and the VA Pittsburgh Healthcare System, H. John Heinz III Progressive
Care Center in Pittsburgh, Pennsylvania.
---------------------------------------------------------------------------
During the case studies, we met with senior medical center
administrative, procurement, and financial management officials to
discuss how VA policies and procedures were designed with regard to
specific obligations, and assess the control environment design for
using miscellaneous obligations at the local level. We discussed how
miscellaneous obligations were used as part of the procurement process
and the effect of new VHA guidance on medical center operations. We
also reviewed the design of local policies and procedures for executing
miscellaneous obligations and conducted walk-throughs of the processes.
To provide more detailed information on the extent and nature of
the control design deficiencies we found at our case study locations,
we identified a nongeneralizable sample of obligations for further
review at each site. Through data mining techniques, we identified a
total of 42 miscellaneous obligations for more detailed examination at
our case studies: 11 from Cheyenne, 17 from Kansas City, and 14 from
Pittsburgh. We based our selection on the nature, dollar amount, date,
and other identifying characteristics of the obligations. For each
miscellaneous obligation selected, we accumulated information on the
extent and nature of control design weaknesses concerning miscellaneous
obligations:
review and documentation by contracting officials;
segregation of duties during the procurement process;
and
the purpose, timing, and documentation for obligations.
Concerning the adequacy of control design with respect to
contracting review, we reviewed miscellaneous obligations for evidence
of review by contracting officials and, for selected miscellaneous
obligations, followed up with contracting officials to discuss
contracts in place for miscellaneous obligations, whether review by
contracting officials was needed, and when and how this review could
occur and be documented.
Concerning the control design deficiencies with respect to
segregation of duties, we reviewed miscellaneous obligation documents
to determine which officials requested, approved, and obligated funds
for the original miscellaneous obligations and then which officials
certified delivery of goods and services and approved payment. We noted
those instances where control design deficiencies permitted one
official to perform multiple functions.
With respect to control design deficiencies relating to the
supporting documentation for the miscellaneous obligations, we reviewed
the purpose, vendor, and contract number fields for each obligation.
For the purpose field, we assessed whether the required description was
adequate to determine the nature, timing, and extent of the goods and/
or services being procured and whether controls provided for an
adequate explanation for any estimated miscellaneous obligation
amounts. For the vendor and contract number fields, we assessed whether
controls were designed to ensure entered information was correct, and
we identified those instances where control deficiencies permitted
fields to be left blank.
Because of time limitations, we did not review VHA's procurement or
service authorization processes. In addition, in our case study
approach, we were unable to analyze a sufficient number of obligations
to allow us to generalize our conclusions to the sites visited, nor to
the universe of VHA medical centers. The 42 obligations represented a
total of approximately $36.0 million; however, the results cannot be
projected to the overall population of miscellaneous obligations in
fiscal year 2007. While we found no examples of fraudulent or otherwise
improper purchases made by VHA, our work was not specifically designed
to identify such cases or estimate its full extent.
Data Reliability Assessment
We assessed the reliability of the IFCAP data provided by (1)
performing various testing of required data elements, (2) reviewing
related policies and procedures, (3) performing walkthroughs of the
system, (4) interviewing VA officials knowledgeable about the data, and
(5) tracing selected transactions from source documents to the
database. In addition, we verified that totals from the fiscal year
2007 IFCAP database agreed with a method of procurement compliance
report provided to Subcommittee staff during a September 7, 2007
briefing. We did not reconcile the IFCAP miscellaneous obligations
reported to us to FMS--the VA system of record--and published VA
financial statements because FMS does not identify the procurement
method used for transactions (i.e., miscellaneous obligations, purchase
card, purchase order). We determined that the data were sufficiently
reliable for the purposes of our report and that they can be used to
provide an assessment of how miscellaneous obligations were used during
fiscal year 2007.
We briefed VA and VHA headquarter officials, including the Deputy
Assistant Secretary for Logistics and Acquisition, as well as VHA
officials at the three case study locations, on the details of our
audit, including our findings and their implications. During the
briefings officials generally agreed with our findings and said that
they provided useful insights into problems with the miscellaneous
obligation process and corrective actions that could be taken to
address them. We conducted this audit from November 2007 through July
2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives. We recently
provided our draft report to the Secretary of Veterans Affairs for
review and comment. Following this testimony, we plan to issue a
report, which will incorporate VA's comments as appropriate and include
recommendations for improving internal controls over miscellaneous
obligations.
Appendix II: Background
The Department of Veterans Affairs (VA) is responsible for
providing Federal benefits to veterans. Headed by the Secretary of
Veterans Affairs, VA operates nationwide programs for healthcare,
financial assistance, and burial benefits. In fiscal year 2007, VA
received appropriations of over $77 billion, including over $35 billion
for healthcare and approximately $41.4 billion for other benefits. The
Congress appropriated more than $87 billion for VA in fiscal year 2008.
The Veterans Health Administration (VHA) is responsible for
implementing the VA medical assistance programs. In fiscal year 2007,
VHA operated more than 1,200 sites of care, including 155 medical
centers, 135 nursing homes, 717 ambulatory care and community-based
outpatient clinics, and 209 Readjustment Counseling Centers. VHA
healthcare centers provide a broad range of primary care, specialized
care, and related medical and social support services. The number of
patients treated increased by 47.4 percent from 3.8 million in 2000 to
nearly 5.6 million in 2007 due to an increased number of veterans
eligible to receive care.
As shown in figure 2, VHA has organized its healthcare centers
under 21 Veterans Integrated Services Networks (VISN),\22\ which
oversee the operations of the various medical centers and treatment
facilities within their assigned geographic areas. During fiscal year
2007, these networks provided more medical services to a greater number
of veterans than at any time during VA's long history.
---------------------------------------------------------------------------
\22\ VISNs 13 and 14 were consolidated and designated VISN 23.
---------------------------------------------------------------------------
Figure 2: Veterans Integrated Services Networks (VISN)
Source: U.S. Department of Veterans Affairs
VA Policies and Procedures Concerning the Use of Miscellaneous
Obligations
VA has used ``Estimated Miscellaneous Obligation or Change in
Obligation'' (VA Form 4-1358) to record estimated obligations for goods
and services for over 60 years. According to VA policy,\23\
miscellaneous obligations can be used to record obligations against
appropriations for the procurement of a variety of goods and services,
including fee-based medical, dental, and nursing services; non-VA
hospitalization; nursing home care; beneficiary travel; rent;
utilities; and other purposes. The policy states that miscellaneous
obligations should be used as obligation control documents when a
formal purchase order or authorization is not required, and when
necessary to record estimated obligations to be incurred by the
subsequent issue of purchase orders. The policy also states that the
use of miscellaneous obligations should be kept to an absolute minimum,
consistent with sound financial management policies regarding the
control of funds, and should only be used in cases where there was a
bona fide need for the goods and services being procured.
---------------------------------------------------------------------------
\23\ VA Office of Finance Directives, VA Controller Policy, MP-4,
Part V, Chapter 3, section A, Paragraph 3A.02--Estimated Miscellaneous
Obligation or Change in Obligation (VA Form 4-1358), accessed from
www.va.gov on 12/12/2007.
---------------------------------------------------------------------------
In September 2006, VA policy for miscellaneous obligations was
revised in an attempt to minimize the use of miscellaneous obligations
as an obligation control document.\24\ The revision states that
miscellaneous obligations should not be used as an obligation control
document unless the head contracting official for the station has
determined that a purchase order \25\ or contract will not be required.
However, the policy provides that fiscal staff can use miscellaneous
obligations as a tracking mechanism for obligations of variable
quantity contracts,\26\ as well as for public utilities. In January
2008, VA issued interim guidance regarding the use of miscellaneous
obligations; \27\ however, the guidance did not apply to the fiscal
year 2007 miscellaneous obligations we reviewed.
---------------------------------------------------------------------------
\24\ VA Office of Finance Bulletin 06GA1.05, Revision to MP-4, Part
V, Chapter 3, section A, Paragraph 3A.02--Estimated Miscellaneous
Obligation or Change in Obligation (VA Form 4-1358), dated September
29, 2006.
\25\ A purchase order is written authorization for a supplier to
ship products to an agency at a specified price. Purchase orders may be
supported by an underlying contract or function as the sole legally
binding document.
\26\ In variable quantity contracts, the quantity of goods to be
furnished or services to be performed may vary. Variations may be at
the option of VA or the contractor. Under variable quantity contracts,
normally no amount is obligated at the time the contract is signed. The
order, which comes after the contract, obligates VA for goods or
services and the obligation must be recorded for the exact amount, or a
reasonable estimate of the order.
\27\ Department of Veterans Affairs Memorandum, Interim Guidance on
Miscellaneous Obligations, VA Form 1358, dated January 30, 2008.
---------------------------------------------------------------------------
In recent years VHA has attempted to improve its oversight of
miscellaneous obligations. For example, VHA's Clinical Logistics Group
created the Integrated Funds Distribution, Control Point Activity,
Accounting and Procurement (IFCAP) system database in April 2006 to
analyze the use of miscellaneous obligations agencywide. The database
is updated on a monthly basis and contains information on the
miscellaneous obligations created monthly by the 21 VISN offices and
their associated stations. VHA officials are using the IFCAP database
to (1) analyze the number and dollar amounts of procurements being done
using contracts and purchase cards, and recorded using miscellaneous
obligations, and (2) identify the types of goods and services recorded
as miscellaneous obligations. Prior to the creation of the IFCAP
database, such information on the use of the miscellaneous obligations
nationwide was not readily available to VHA upper level management.
Figure 3: VA's Miscellaneous Obligation Process
Source: GAO analysis of VA policy and procedures.
\a\ In many transactions, the amount recorded reflects an
administrative reservations of funds for which no obligations have yet
been incurred.
\b\ Our review did not include the processes VHA officials may use
to incur legal obligations such as the issuance of purchase orders,
delivery orders, or by other means.
VHA's Current Miscellaneous Obligation Process
The creation and processing of miscellaneous obligations (VA Form
4-1358) is documented in IFCAP--a component of VA's Veterans Health
Information System and Technology Architecture (VISTA). The
miscellaneous obligation request passes through several stages
illustrated in figure 3.\28\
---------------------------------------------------------------------------
\28\ Further details on processes in place are described in the
Integrated Funds Distribution Control Point Activity, Account and
Procurement (IFCAP) PPM Accountable Officer User's Guide, Version 5.1,
Revised May 2007.
Appendix III: Miscellaneous Obligations by VISN in Fiscal Year 2007
----------------------------------------------------------------------------------------------------------------
Percent
Number Dollar Amount of Total
----------------------------------------------------------------------------------------------------------------
1 New England Healthcare System 6,638 $ 360,762,340 5.2%
----------------------------------------------------------------------------------------------------------------
2 VA Healthcare Network Upstate New York 2,910 $ 160,799,144 2.3%
----------------------------------------------------------------------------------------------------------------
3 VA New York/New Jersey Veterans Healthcare 7,248 $ 256,453,022 3.7%
Network
----------------------------------------------------------------------------------------------------------------
4 Stars and Stripes Healthcare Network 12,321 $ 328,355,399 4.8%
----------------------------------------------------------------------------------------------------------------
5 Capitol Health Care Network 2,024 $ 185,679,821 2.7%
----------------------------------------------------------------------------------------------------------------
6 The Mid-Atlantic Network 2,808 $ 304,500,111 4.4%
----------------------------------------------------------------------------------------------------------------
7 The Atlanta Network 4,548 $ 440,137,101 6.4%
----------------------------------------------------------------------------------------------------------------
8 VA Sunshine Healthcare Network 9,985 $ 496,497,019 7.2%
----------------------------------------------------------------------------------------------------------------
9 Mid South Veterans Healthcare Network 4,461 $ 356,353,797 5.2%
----------------------------------------------------------------------------------------------------------------
10 VA Healthcare System of Ohio 5,093 $ 247,515,982 3.6%
----------------------------------------------------------------------------------------------------------------
11 Veterans Integrated Service Network 3,947 $ 261,290,926 3.8%
----------------------------------------------------------------------------------------------------------------
12 The Great Lakes 4,284 Care$ 293,466,391 4.2%
----------------------------------------------------------------------------------------------------------------
15 VA Heartland Network 5,941 $ 300,314,177 4.3%
----------------------------------------------------------------------------------------------------------------
16 South Central Healthcare Network 9,859 $ 551,236,444 8.0%
----------------------------------------------------------------------------------------------------------------
17 VA Heart of Texas Health Care Network 2,388 $ 292,273,521 4.2%
----------------------------------------------------------------------------------------------------------------
18 VA Southwest Healthcare Network 6,308 $ 346,135,243 5.0%
----------------------------------------------------------------------------------------------------------------
19 Rocky Mountain Network 3,332 $ 220,514,581 3.2%
----------------------------------------------------------------------------------------------------------------
20 Northwest Network 9,370 $ 360,007,803 5.2%
----------------------------------------------------------------------------------------------------------------
21 Sierra Pacific Network 11,262 $ 403,378,623 5.8%
----------------------------------------------------------------------------------------------------------------
22 Desert Pacific Healthcare Network 1,906 $ 388,244,689 5.6%
----------------------------------------------------------------------------------------------------------------
23 Minneapolis & Linco 10,437ces $ 354,911,219 5.1%
----------------------------------------------------------------------------------------------------------------
Total 127,070 $6,908,827,084 100%
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of IFCAP database.
\a\ VISNs 13 and 14 were consolidated and designated as VISN 23.
Appendix IV: VHA Stations Ranked by Use of Miscellaneous Obligations
----------------------------------------------------------------------------------------------------------------
Facility
Number VISN Number Amount
----------------------------------------------------------------------------------------------------------------
1 Omaha 636 23 6,832 $158,912,717
----------------------------------------------------------------------------------------------------------------
2 North Florida/South Georgia 573 8 4,131 145,875,702
VHA
----------------------------------------------------------------------------------------------------------------
3 Kansas City 589 15 3,603 171,613,075
----------------------------------------------------------------------------------------------------------------
4 Pittsburgh HCS-University 646 4 3,567 69,880,889
Drive
----------------------------------------------------------------------------------------------------------------
5 VA New York Harbor HCS-NY CA 630 3 3,280 85,275,329
----------------------------------------------------------------------------------------------------------------
6 San Francisco 662 21 3,200 89,361,982
----------------------------------------------------------------------------------------------------------------
7 N. California HCS-Martinez 612 21 3,166 88,567,989
----------------------------------------------------------------------------------------------------------------
8 Upstate New York HCS 528 2 2,910 160,779,144
----------------------------------------------------------------------------------------------------------------
9 Philadelphia 642 4 2,536 77,015,657
----------------------------------------------------------------------------------------------------------------
10 VA Boston HCS-Boston Div. 523 1 2,351 102,803,146
----------------------------------------------------------------------------------------------------------------
11 St. Louis-John 657hran 15 2,338 128,701,102
----------------------------------------------------------------------------------------------------------------
12 Seattle 663 20 2,030 110,264,551
----------------------------------------------------------------------------------------------------------------
13 G.V. (Sonny) Montgomery VAMC 586 16 1,964 84,782,426
----------------------------------------------------------------------------------------------------------------
14 VAMC Bronx 526 3 1,743 37,336,434
----------------------------------------------------------------------------------------------------------------
15 Northern Arizona HCS 649 18 1,706 30,897,276
----------------------------------------------------------------------------------------------------------------
16 Miami 546 8 1,686 64,028,264
----------------------------------------------------------------------------------------------------------------
17 Middle Tennessee HCS 626 9 1,644 102,901,107
----------------------------------------------------------------------------------------------------------------
18 Cleveland-Wade Park 541 10 1,642 119,323,832
----------------------------------------------------------------------------------------------------------------
19 Portland 648 20 1,602 88,110,706
----------------------------------------------------------------------------------------------------------------
20 VA Palo Alto HCS-Palo Alto 640 21 1,498 100,993,614
----------------------------------------------------------------------------------------------------------------
21 Clarksburg 540 4 1,470 25,244,100
----------------------------------------------------------------------------------------------------------------
22 Amarillo HCS 504 18 1,453 32,694,257
----------------------------------------------------------------------------------------------------------------
23 Central California HCS 570 21 1,403 30,528,159
(Fresno)
----------------------------------------------------------------------------------------------------------------
24 Fayetteville AR 564 16 1,386 42,468,351
----------------------------------------------------------------------------------------------------------------
25 Boise 531 20 1,385 35,371,800
----------------------------------------------------------------------------------------------------------------
26 New Orleans 629 16 1,369 57,125,143
----------------------------------------------------------------------------------------------------------------
27 VA New Jersey HCS 561 3 1,366 65,538,526
----------------------------------------------------------------------------------------------------------------
28 W Palm Beach 548 8 1,318 56,059,142
----------------------------------------------------------------------------------------------------------------
29 Dayton 552 10 1,306 43,574,791
----------------------------------------------------------------------------------------------------------------
30 Fort Meade 568 23 1,284 28,139,258
----------------------------------------------------------------------------------------------------------------
31 Bay Pines 516 8 1,128 76,081,613
----------------------------------------------------------------------------------------------------------------
32 Lebanon 595 4 1,105 29,330,151
----------------------------------------------------------------------------------------------------------------
33 Alaska HCS 463 20 1,090 55,377,371
----------------------------------------------------------------------------------------------------------------
34 Togus 402 1 1,085 52,777,782
----------------------------------------------------------------------------------------------------------------
35 Baltimore 512 5 1,060 92,856,732
----------------------------------------------------------------------------------------------------------------
36 Chillicothe 538 10 1,037 16,704,890
----------------------------------------------------------------------------------------------------------------
37 Oklahoma City 635 16 1,020 80,419,697
----------------------------------------------------------------------------------------------------------------
38 Roseburg HCS 653 20 996 21,172,773
----------------------------------------------------------------------------------------------------------------
39 Lexington-L596town 9 987 48,090,092
----------------------------------------------------------------------------------------------------------------
40 Milwaukee WI 695 12 974 59,113,209
----------------------------------------------------------------------------------------------------------------
41 Walla Walla 687 20 964 13,199,190
----------------------------------------------------------------------------------------------------------------
42 Dallas VAMC 549 17 942 100,556,097
----------------------------------------------------------------------------------------------------------------
43 Fargo 437 23 937 26,988,919
----------------------------------------------------------------------------------------------------------------
44 Wilmington 460 4 923 24,534,375
----------------------------------------------------------------------------------------------------------------
45 Providence 650 1 900 31,961,444
----------------------------------------------------------------------------------------------------------------
46 Pacific Islands HCS 459 21 894 57,759,481
(Honolulu)
----------------------------------------------------------------------------------------------------------------
47 Southern Oregon 692 20 883 11,294,874
Rehabilitation
----------------------------------------------------------------------------------------------------------------
48 Phoenix 644 18 879 84,069,252
----------------------------------------------------------------------------------------------------------------
49 Columbia SC 544 7 870 70,594,890
----------------------------------------------------------------------------------------------------------------
50 Wilkes Barre 693 4 861 26,987,646
----------------------------------------------------------------------------------------------------------------
51 Houston 580 16 855 67,739,913
----------------------------------------------------------------------------------------------------------------
52 Augusta 509 7 846 53,390,674
----------------------------------------------------------------------------------------------------------------
53 Tampa 673 8 838 116,270,986
----------------------------------------------------------------------------------------------------------------
54 Alexandria 502 16 830 25,417,175
----------------------------------------------------------------------------------------------------------------
55 Gulf Coast HCS 520 16 823 46,044,544
----------------------------------------------------------------------------------------------------------------
56 Hines 578 12 813 72,402,760
----------------------------------------------------------------------------------------------------------------
57 Eastern Colorado HCS 554 19 803 82,599,599
----------------------------------------------------------------------------------------------------------------
58 Salt Lake City H660 19 803 68,390,644
----------------------------------------------------------------------------------------------------------------
59 San Antonio VAMC 671 17 801 113,175,496
----------------------------------------------------------------------------------------------------------------
60 Butler 529 4 792 15,272,087
----------------------------------------------------------------------------------------------------------------
61 West Haven 689 1 731 80,337,724
----------------------------------------------------------------------------------------------------------------
62 Ann Arbor HCS 506 11 715 50,017,830
----------------------------------------------------------------------------------------------------------------
63 N. Indiana HCS-Marion 610 11 706 33,501,439
----------------------------------------------------------------------------------------------------------------
64 Coatesville 542 4 702 17,933,344
----------------------------------------------------------------------------------------------------------------
65 Chicago HCS 537 12 700 53,085,848
----------------------------------------------------------------------------------------------------------------
66 El Paso HCS 756 18 699 24,242,716
----------------------------------------------------------------------------------------------------------------
67 Madison WI 607 12 696 46,845,867
----------------------------------------------------------------------------------------------------------------
68 VA Sierra Nevada HCS 654 21 691 31,948,186
----------------------------------------------------------------------------------------------------------------
69 Huntington 581 9 690 32,256,564
----------------------------------------------------------------------------------------------------------------
70 Greater Los Angeles691S 22 670 113,284,821
----------------------------------------------------------------------------------------------------------------
71 Detroit (John D. Dingell) 553 11 667 41,810,942
----------------------------------------------------------------------------------------------------------------
72 New Mexico HCS 501 18 666 84,082,667
----------------------------------------------------------------------------------------------------------------
73 Tuscaloosa 679 7 650 20,128,372
----------------------------------------------------------------------------------------------------------------
74 Temple VAMC 674 17 645 78,541,658
----------------------------------------------------------------------------------------------------------------
75 Indianapolis 583 11 645 54,906,324
----------------------------------------------------------------------------------------------------------------
76 Muskogee 623 16 645 39,781,639
----------------------------------------------------------------------------------------------------------------
77 Montana HCS 436 19 645 32,278,047
----------------------------------------------------------------------------------------------------------------
78 Durham 558 6 639 61,960,744
----------------------------------------------------------------------------------------------------------------
79 Sheridan 666 19 629 12,501,607
----------------------------------------------------------------------------------------------------------------
80 Manchester 608 1 606 27,003,396
----------------------------------------------------------------------------------------------------------------
81 White River Jct 405 1 580 28,279,283
----------------------------------------------------------------------------------------------------------------
82 S. Arizona HCS 678 18 578 69,574,532
----------------------------------------------------------------------------------------------------------------
83 Columbus 757 10 570 25,461,020
----------------------------------------------------------------------------------------------------------------
84 Central AR. Veterans HCS LR 598 16 564 70,779,560
----------------------------------------------------------------------------------------------------------------
85 Washington 688 5 563 65,013,443
----------------------------------------------------------------------------------------------------------------
86 Illiana HCS (Danville) 550 11 543 19,659,628
----------------------------------------------------------------------------------------------------------------
87 Cincinnati 539 10 538 42,451,450
----------------------------------------------------------------------------------------------------------------
88 Minneapolis 618 23 534 93,816,762
----------------------------------------------------------------------------------------------------------------
89 Mountain Home 621 9 517 57,849,934
----------------------------------------------------------------------------------------------------------------
90 Orlando 675 8 505 9,342,539
----------------------------------------------------------------------------------------------------------------
91 San Diego HCS 664 22 503 76,890,097
----------------------------------------------------------------------------------------------------------------
92 Decatur 508 7 494 103,798,914
----------------------------------------------------------------------------------------------------------------
93 Richmond 652 6 490 50,242,036
----------------------------------------------------------------------------------------------------------------
94 Montgomery 619 7 488 33,582,736
----------------------------------------------------------------------------------------------------------------
95 Birmingham 521 7 481 75,609,201
----------------------------------------------------------------------------------------------------------------
96 Iron Mountain MI 585 12 459 16,882,679
----------------------------------------------------------------------------------------------------------------
97 St. Cloud 656 23 456 17,539,831
----------------------------------------------------------------------------------------------------------------
98 Louisville 603 9 438 51,080,527
----------------------------------------------------------------------------------------------------------------
99 W.G. (Bill) Hefner Salisbury 659 6 438 50,753,235
V
----------------------------------------------------------------------------------------------------------------
100 VAMC Nortport 632 3 433 45,155,858
----------------------------------------------------------------------------------------------------------------
101 VA Hudson Valley HCS-Montrose 620 3 426 23,146,875
----------------------------------------------------------------------------------------------------------------
102 Spokane 668 20 420 25,216,539
----------------------------------------------------------------------------------------------------------------
103 Manila 358 21 410 4,219,213
----------------------------------------------------------------------------------------------------------------
104 Charleston 534 7 407 44,239,266
----------------------------------------------------------------------------------------------------------------
105 Overton Brooks VAMC 667 16 403 36,677,997
----------------------------------------------------------------------------------------------------------------
106 Martinsburg 613 5 401 27,809,646
----------------------------------------------------------------------------------------------------------------
107 Sioux Falls 438 23 394 29,513,732
----------------------------------------------------------------------------------------------------------------
108 San Juan 672 8 379 28,838,772
----------------------------------------------------------------------------------------------------------------
109 North Chicago IL 556 12 353 31,553,133
----------------------------------------------------------------------------------------------------------------
110 Battle Creek 515 11 337 43,990,975
----------------------------------------------------------------------------------------------------------------
111 Saginaw 655 11 334 17,403,788
----------------------------------------------------------------------------------------------------------------
112 West Texas HCS 519 18 327 20,574,543
----------------------------------------------------------------------------------------------------------------
113 Salem 658 6 326 30,946,603
----------------------------------------------------------------------------------------------------------------
114 Dublin 557 7 312 38,793,048
----------------------------------------------------------------------------------------------------------------
115 Loma Linda 605C 22 298 64,213,454
----------------------------------------------------------------------------------------------------------------
116 Tomah 676 12 289 13,582,895
----------------------------------------------------------------------------------------------------------------
117 Beckley 517 6 274 11,949,194
----------------------------------------------------------------------------------------------------------------
118 Cheyenne 442 19 250 13,484,935
----------------------------------------------------------------------------------------------------------------
119 Fayetteville NC 565 6 243 42,688,173
----------------------------------------------------------------------------------------------------------------
120 Southern Nevada HCS 593 22 236 95,628,301
----------------------------------------------------------------------------------------------------------------
121 Bedford 518 1 229 13,576,881
----------------------------------------------------------------------------------------------------------------
122 Asheville-Oteen 637 6 203 28,266,374
----------------------------------------------------------------------------------------------------------------
123 Grand Junction 575 19 202 11,259,749
----------------------------------------------------------------------------------------------------------------
124 Long Beach 600 22 199 38,228,015
----------------------------------------------------------------------------------------------------------------
125 Hampton 590 6 195 27,693,752
----------------------------------------------------------------------------------------------------------------
126 Erie 562 4 191 15,333,253
----------------------------------------------------------------------------------------------------------------
127 Memphis 614 9 185 64,175,573
----------------------------------------------------------------------------------------------------------------
128 James E. Van Zandt VA 503 4 174 26,823,897
(Altoona)
----------------------------------------------------------------------------------------------------------------
129 Northampton 631 1 156 24,022,684
----------------------------------------------------------------------------------------------------------------
Total 127,070 $6,908,827,084
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of IFCAP database.
Prepared Statement of Hon. Robert J. Henke, Assistant Secretary
for Management, U.S. Department of Veterans Affairs, as presented
by Edward J. Murray, Deputy Assistant Secretary for Finance,
Deputy Chief Financial Officer, Office of Management,
U.S. Department of Veterans Affairs
Mr. Chairman and Members of the Subcommittee, I am pleased to have
the opportunity to provide written testimony on the draft Government
Accountability Office (GAO) report entitled ``Veterans Health
Administration: Improvements Needed in Design of Controls over
Miscellaneous Obligations.'' Testifying on my behalf today and
representing the Office of Management is Mr. Edward Murray, VA's Deputy
Assistant Secretary for Finance. In 2007 the Department of Veterans
Affairs (VA), Veterans Health Administration (VHA), used miscellaneous
obligations to record over $6.9 billion against its appropriations that
directly provide veteran care and support. Seventy-five percent of
those obligations were related to providing medical and dental care,
pharmaceuticals, and hospital supplies for veterans.
We agree with all four of GAO's recommendations and we are prepared
to discuss the various initiatives planned or currently underway that
support those recommendations to reduce the internal control risks
associated with the use of miscellaneous obligations and to minimize
their use. Our leadership is committed to clearly articulating the
expectation that VA will work to improve the guidance, oversight, and
business processes associated with the use of miscellaneous obligations
in the delivery of services to our veterans.
We are issuing additional policy and guidance, which will result in
improved accountability of the miscellaneous obligations process. We
have reports that will enable us to track these improvements. Interim
guidance was issued in January 2008 and was further refined in May 2008
by VHA since they are the predominant user of this method of financial
obligation. The Office of General Counsel has reviewed the interim
guidance and has determined that the new guidelines, coupled with
existing VA accounting policy, meet legal recording requirements. A
Department level policy will be issued in the near future.
I would like to begin by addressing VA's efforts to strengthen its
policies and oversight related to the use of miscellaneous obligations
while continuing to provide medical services and supplies for veterans.
My Office of Finance has been collaborating with VHA to develop
policies to achieve those recommendations. We will also coordinate with
the Office of General Counsel. I would like to discuss the plan of
action to address the four GAO recommendations:
GAO Recommendation 1. Establish a process for the review of
miscellaneous obligations by contracting officials, including
requiring appropriate documentation that the review has
occurred.
The current process in the interim VHA guidance requires new
requests for miscellaneous obligations be routed for review by the
appropriate contracting official and documentation of this review be
documented by e-mail and included in the record for the obligation.
This interim process will be used until a system change can be made to
accomplish this electronically in the Integrated Funds Distribution,
Control Point Activity, Accounting and Procurement (IFCAP) system. The
ability to create an electronic workflow, which allows the system to
route documents through predefined reviews, is already a documented
requirement for the Integrated Financial Accounting System (IFAS), the
financial component of the Financial and Logistics Integrated
Technology Enterprise (FLITE) Program.
GAO Recommendation 2. Segregate duties for (1) creating, approving, and
recording miscellaneous obligations, (2) the certification and
payment of invoices, and (3) the receipt of the resulting goods
or services.
Miscellaneous obligation forms are used for both procurement and
non-procurement expenditure obligations. If the miscellaneous
obligation is for goods or services not required to follow formal
procurement procedures (non-procurement items), such as fee basis
medical or dental services, authorizations for individual patients are
tracked in the Fee Basis software system, which includes the
appropriate approval requirements by the Requesting Service Approving
Official, and payment of invoices is approved by a Fiscal Office
employee, which provides appropriate segregation of duties. Receipt for
medical or dental services is documented by either an industry standard
billing abstract document (UB04 or CMS 1500) or clinical information
from the non-VA provider. Fee Basis obligations totaled approximately
$3.8 billion in fiscal year (FY) 2007. Other non-procurement
obligations, such as services from other Federal Government agencies,
employee travel and tuition, residency agreements with affiliated
universities, tort claims/settlements, and regulated utilities are all
documented with backup source documents supporting the associated
miscellaneous obligation document.
If the miscellaneous obligation is for one of the few procurement
items approved to be documented by use of a miscellaneous obligation,
such as nursing homes or home oxygen, separate software programs in the
Veterans Health Information Systems Technology Architecture (VistA) are
used to track all individual expenditures, which includes the
appropriate approval by the Requesting Service Approving Official and
the payment of invoices by Finance Service employees. Verification that
goods and services were received is made by the designated Contracting
Officer Technical Representative (COTR) for the individual contracts.
Contracting officers perform all procurement duties for awarding the
Indefinite Delivery/Indefinite Quantity (IDIQ) contracts, and delegate
authority to the COTR to place delivery or task orders against those
established contracts and obligate the funds using a miscellaneous
obligation method.
Future enhancements under IFAS include replacement of the de-
centralized IFCAP system. The resulting centralized system will have
one point for controlling user provisioning that precludes individual
stations from granting users multiple accesses to various functions.
This will improve and ensure segregation of actions.
One of the largest expenditures ($1.3 billion in FY 2007) obligated
through miscellaneous obligation forms is for Pharmaceutical Prime
Vendor drug purchases. These expenditures are made against an
established Prime Vendor contract, which was competitively awarded by a
contracting team. Between June 2 and July 2, 2008, ten web seminar
training sessions were conducted for pharmacy and fiscal employees to
establish a new mandatory process for documenting individual order
information, using the electronic miscellaneous obligation form (VA
Form 4-1358). This new process provides a check and balance between the
ordering and payment processes. Receiving duties are performed by
separate individuals.
GAO Recommendation 3. Document the purpose, vendor, and contract number
for miscellaneous obligations.
The interim VHA guidance specifically requires that miscellaneous
obligations not included on the exception list are documented with the
purpose, vendor and contract number (if applicable). All exceptions for
the use of miscellaneous obligations are stipulated in VHA ``Revised
Guidance on Miscellaneous Obligations, VA Form 4-1358'' which specifies
the authority to be provided when using that exception. These same
requirements will be included in the official Departmental policy when
it is issued. Under the IFAS system, these three fields will be
required to be completed in order to process the miscellaneous
obligation. Going forward the IFAS system which precludes processing of
the miscellaneous obligation unless the 3 required fields are
completed.
GAO Recommendation 4. Establish an oversight mechanism to ensure that
these control policies and procedures are fully and effectively
implemented.
VHA will now track and trend the number and dollar amount of funds
obligated using miscellaneous obligations in VHA by Budget Object Code
every month. This will enable VHA to determine whether our facilities
are adhering to VA and VHA policy. At this time, VHA is pursuing a new
IFCAP patch that will provide an automated method for verifying that
the purpose, vendor and contract number fields have been recorded on
the miscellaneous obligation. My Office of Business Oversight (OBO)
will also review miscellaneous obligations during field reviews, with
special emphasis on reviewing adherence to control policies and
procedures in the use of miscellaneous obligations.
Summary
VA is taking meaningful steps to resolve the current challenges
concerning the use of miscellaneous obligations. 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. I assure you: VA understands our challenges and is dedicated
to improvement.
This concludes my statement. The witnesses would be pleased to
answer any questions the Subcommittee may have.
Statement of Hon. Cliff Stearns, a Representative
in Congress from the State of Florida
Mr. Chairman,
I thank you for holding this hearing today to re-evaluate the
quality of the system of controls in the VA's internal contracting
process and its fervent use of Miscellaneous Obligations (MOs). The VA
uses MOs to obligate funds when the amount to be spent on large
expenditures--such as fee-basis care--is uncertain. The GAO has
recently found that the VA procured billions through the use of MOs in
FY2007. At a hearing last year, we also heard about cases of
mismanagement of funds and circumventions of the control procedures in
the contracting system. It's therefore no secret that the VA has a
history of inadequate oversight of its procurement process, and it's
important that we re-visit this issue today.
Last year, the Secretary of Veterans Affairs stressed, in a
memorandum to key VA officials, the need for stronger internal
controls. He said, ``It is extremely important to me and to our
constituents that we have effective internal controls in place to
enhance the stewardship of taxpayers' assets and programs. It is
imperative that we approach this responsibility as a Department wide
initiative.''
Significant time has passed since this memorandum was issued, and
we are here today to determine if the VA has made adequate progress. In
January 2008 the VA issued new guidance for the use of miscellaneous
obligations; the VA subsequently finalized this new guidance in May.
The GAO has reviewed this new guidance and has stated that ``while it
offered some improvement, it did not fully address the specific control
design flaws'' that GAO had previously identified and concluded that
there were ``serious deficiencies in internal financial control
reporting.''
The GAO has now made four rather basic recommendations for the VA
to consider and hopefully implement, and I am encouraged to know that
the VA agrees with all four of the recommendations. I personally
believe that the VA shouldn't have any problem implementing such
things, for example, as GAO Recommendation #3--``documenting the
purpose, vendor, and contract number for miscellaneous obligations.'' I
am astonished, as a former business owner, to know that the VA is not
properly keeping track of such an important practice that utilizes
taxpayers' dollars.
The bottom line, Mr. Chairman, is that the VA does not have
adequate controls over its excessive use of miscellaneous obligations,
and the VA has shown us that there are clearly risks associated with
their excessive use of MOs.
I therefore look forward to hearing from our panel of witnesses,
and I hope to see the VA fully implement all four of the GAO's
recommendations, which will significantly reduce the internal risks
associated with the use of miscellaneous obligations.