[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




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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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \7\ 38 CFR 17.56.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.